WEBVTT - Bitcoin Miners Are Back Amid Crypto Rally 0:00:02.920 --> 0:00:06.120 This is Bloomberg Crypto and daily Bloomberg Ihad Podcast, and 0:00:06.160 --> 0:00:09.680 I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News. 0:00:10.200 --> 0:00:30.760 It's Wednesday, February eighth. Crypto markets and bitcoin especially have 0:00:30.880 --> 0:00:33.839 had a strong start to the year so far. That's 0:00:33.840 --> 0:00:36.120 had a couple of interesting consequences for some of the 0:00:36.320 --> 0:00:40.000 more important players in the market. The bitcoin miners themselves 0:00:41.440 --> 0:00:44.240 has also seen a lot of pretty significant weather events 0:00:44.240 --> 0:00:47.680 that have affected the United States, including recent ice storms 0:00:47.680 --> 0:00:51.800 in Texas that left hundreds of thousands of people without power. Again, 0:00:52.720 --> 0:00:55.240 energy is one of the most important costs that bitcoin 0:00:55.320 --> 0:00:58.080 miners must absorb, and of course they can't run all 0:00:58.120 --> 0:01:01.640 those machines in their data centers if there's electricity. Now, 0:01:01.920 --> 0:01:04.520 we've talked on this show a few times about the 0:01:04.600 --> 0:01:08.240 challenging conditions that bitcoin miners in the US and around 0:01:08.240 --> 0:01:10.680 the world have been facing in recent months and years. 0:01:11.560 --> 0:01:13.160 Today we're going to discuss how some of them have 0:01:13.280 --> 0:01:15.800 been able to adapt, or at least try to take 0:01:15.840 --> 0:01:19.080 advantage of current market conditions to put themselves on slightly 0:01:19.120 --> 0:01:22.560 more stable financial footing. Joining me today is David Pan, 0:01:22.760 --> 0:01:35.800 a Bloomberg Reports who follows bitcoin mining very closely. David, 0:01:35.920 --> 0:01:37.959 welcome back to the show. Thank you, thank you for 0:01:38.000 --> 0:01:40.840 having me back. I have to admit that every time 0:01:41.000 --> 0:01:44.320 I read one of your stories, and then I read 0:01:44.400 --> 0:01:46.320 another one of your stories, and then like a fourth 0:01:46.440 --> 0:01:49.280 or fifth one, I'm like, wow, bitcoin mining seems like 0:01:49.320 --> 0:01:53.760 a complicated industry. So what we're gonna do today is 0:01:53.840 --> 0:01:56.680 break down a little bit what we mean when we 0:01:56.680 --> 0:02:00.040 say bitcoin miners, who some of these players are, and 0:02:00.080 --> 0:02:02.559 what's been happening to them over the past several months 0:02:02.560 --> 0:02:07.600 and especially coming into the beginning of So just to 0:02:07.640 --> 0:02:13.000 get started, can you remind our listeners what exactly it 0:02:13.200 --> 0:02:16.240 is the bitcoin miners do and why these companies are 0:02:16.240 --> 0:02:20.360 an important part of the ecosystem. Yeah. Sure, the bitcoin 0:02:20.400 --> 0:02:26.480 mining companies they buy very expensive specialized computers produced by 0:02:26.520 --> 0:02:31.880 manufacturers like Main or Canaan. So they buy these computers 0:02:31.919 --> 0:02:36.399 to solve mathematical problems on the blockchain, to actually validate 0:02:36.440 --> 0:02:40.720 the transaction data for people who are doing transactions on 0:02:40.800 --> 0:02:45.440 the blockchain. In return, they will get block rewards from 0:02:45.480 --> 0:02:49.480 the network currently it is about six and have bitcoin 0:02:49.880 --> 0:02:53.520 as a reward to the miners. They are important because 0:02:53.720 --> 0:02:58.840 they are securing the network Essentially because bitcoin network is permissionist, 0:02:58.960 --> 0:03:02.639 is decentralized, that there's no middleman to guarantee that the 0:03:02.720 --> 0:03:08.280 transaction is valid between two parties. But miners can do that. 0:03:08.280 --> 0:03:11.840 That's where they step in. So it sounds to me, 0:03:12.400 --> 0:03:18.360 based on what you're saying, the bitcoin blockchain wouldn't work effectively, safely, 0:03:18.680 --> 0:03:23.720 scalably without the participation of these bitcoin miners exactly. So 0:03:23.760 --> 0:03:27.440 that's actually the very first point of bitcoin mining, you know, 0:03:27.480 --> 0:03:30.320 which is to secure the network, to validate the data 0:03:30.360 --> 0:03:33.679 on the network so that this can be a very 0:03:33.760 --> 0:03:36.800 trustworthy peer to peer payment network. But later, you know, 0:03:36.920 --> 0:03:40.720 it has another meaning, which is their financial abilities. For example, 0:03:40.920 --> 0:03:44.559 you know, at the very beginning of the bitcoin blockchain, 0:03:44.760 --> 0:03:48.160 you can just use a personal computers to mind bitcoin. 0:03:48.520 --> 0:03:51.920 But later as more and more people get into this 0:03:52.120 --> 0:03:55.800 process with you know, bitcoin rising, so it becomes a 0:03:55.880 --> 0:03:59.520 very industrialized sector. You know a lot of companies they're 0:03:59.560 --> 0:04:03.960 investing millions of dollars to actually design a specialized computer 0:04:04.120 --> 0:04:08.600 to compute the problems m bitcoin network. That actually leads 0:04:08.640 --> 0:04:12.840 to increasing competition on the network to compete for a 0:04:12.960 --> 0:04:17.920 limited supply of block rewords in bitcoin. And so it 0:04:17.960 --> 0:04:23.200 has grown from personal computers to warehouses of specialized the 0:04:23.240 --> 0:04:26.120 computer stacking on top of each other in the middle 0:04:26.120 --> 0:04:29.560 of nowhere, probably close to a power grid. So that's 0:04:29.560 --> 0:04:33.320 basically the evolution of bitcoin mining industry. And there are 0:04:33.520 --> 0:04:36.400 it sounds like two important consequences of that evolution that 0:04:36.440 --> 0:04:40.400 you've identified right. One is that it's very capital intensive. 0:04:40.440 --> 0:04:45.960 It's expensive to run these big data centers. It's expensive 0:04:46.000 --> 0:04:48.680 to buy these machines, to maintain these machines, to pay 0:04:48.680 --> 0:04:52.880 for the electricity that these machines may need. And it 0:04:52.920 --> 0:04:54.919 looks like, you know, based on your reporting over the 0:04:54.920 --> 0:04:58.360 past twelve months, that various of the companies in the space, 0:04:58.440 --> 0:05:01.920 even the biggest ones, running too a lot of financial difficulty. 0:05:02.080 --> 0:05:06.320 In two call Scientific, one of the biggest publicly traded 0:05:06.360 --> 0:05:10.280 companies creating or mining cryptoccurrences in the US filed from 0:05:10.320 --> 0:05:14.400 bankruptcy protection blamed slumping bitcoin prices. But some of them 0:05:14.440 --> 0:05:17.640 seem to have started three in a much better situation 0:05:17.920 --> 0:05:20.600 than just a few months ago. So what's going on there? 0:05:21.279 --> 0:05:24.279 They're actually a variety of reasons why, you know, we're 0:05:24.360 --> 0:05:28.760 seeing a mixed performance from like different miners. But stepping 0:05:28.800 --> 0:05:30.640 back a little bit, we have to talk about the 0:05:30.680 --> 0:05:33.719 size of the loans the mining companies are taking. I 0:05:33.720 --> 0:05:38.279 mean just looking at the public filings and also talking 0:05:38.320 --> 0:05:41.560 to private mining companies, we have as much as four 0:05:41.600 --> 0:05:45.520 billion dollars, just like in bitcoin mining machine backed loans. 0:05:45.560 --> 0:05:48.400 And then you have bigcoin backed loans, which is actually 0:05:48.400 --> 0:05:52.320 a more common and popular financial tool for bitcoin miners 0:05:52.360 --> 0:05:56.800 to raise money. And then you also have family office 0:05:56.839 --> 0:06:00.200 and and the people from the RAT five sector are 0:06:00.279 --> 0:06:04.599 funneling money into the sector by traditional financial channels. The 0:06:04.640 --> 0:06:07.880 miners have a variety of ways to raise money. And 0:06:07.920 --> 0:06:10.040 then we can talk about why some of them are 0:06:10.080 --> 0:06:14.040 doing better than others. It is because the leverage leverage 0:06:14.120 --> 0:06:17.440 is in the debt that they're exactly looking at the 0:06:17.480 --> 0:06:20.400 balance sheet of the miners and you can actually see 0:06:20.520 --> 0:06:22.680 they actually have a lot of debt. Their debt to 0:06:22.800 --> 0:06:26.600 equity ratio is very high. And then you have some 0:06:26.680 --> 0:06:31.520 other relatively healthy miners, for example Hoidad, and they keep 0:06:31.600 --> 0:06:35.839 their operations in general very lean, so like they don't 0:06:35.880 --> 0:06:40.760 actually want to expand very large projects. They don't want 0:06:40.800 --> 0:06:43.159 to have like one giggle, what mining side in the 0:06:43.200 --> 0:06:45.159 next few years and then one giggle, what is that 0:06:45.279 --> 0:06:48.720 very big? That is very very big? And another reason 0:06:49.120 --> 0:06:52.120 is that the timing of the debt. You know, for example, 0:06:52.720 --> 0:06:55.760 one of the best examples will be Marathon Digital Holdings. 0:06:56.120 --> 0:06:59.640 They actually borrowed money at a very low rate from 0:06:59.680 --> 0:07:03.960 civil date through a feel of credit facilities, so they're 0:07:04.040 --> 0:07:07.680 definitely less burdened with interest the payments over time just 0:07:07.720 --> 0:07:10.760 because the timing when they took out the debt, the 0:07:10.840 --> 0:07:14.000 rate was really really low. So that's another reason why 0:07:14.120 --> 0:07:17.440 you know, some miners are doing better than others. Up next, 0:07:17.600 --> 0:07:20.480 you'll hear more from Bloomberg reposted David pan on what 0:07:20.560 --> 0:07:24.440 will likely affect the prospects for bitcoin miners in three 0:07:34.280 --> 0:07:37.040 So one question that I have for you is why 0:07:37.240 --> 0:07:43.120 would very very traditional, as we say trad fi entities 0:07:43.760 --> 0:07:48.200 like an Apollo or a black Rock find themselves lending 0:07:48.240 --> 0:07:53.360 money to extremely non traditional companies like bitcoin miners. Yeah, 0:07:53.520 --> 0:07:56.720 I think crypto money is kind of like was regarded 0:07:56.840 --> 0:07:59.360 as as a way for people to get exposure to 0:08:00.000 --> 0:08:05.200 cryptole and especially for these traditional financial services companies, it's 0:08:05.480 --> 0:08:09.680 harder for them to directly hold crypto assets just because 0:08:09.720 --> 0:08:13.440 of the compliance and regulatory raisins. But getting into crypto 0:08:13.480 --> 0:08:18.280 mining companies who are publicly traded, that is much easier, 0:08:18.280 --> 0:08:22.520 for example, to convertible bond is a very conventional financial 0:08:22.600 --> 0:08:27.440 channel for for big companies to tracify companies to get 0:08:27.480 --> 0:08:31.640 involved in cryptole and kind of looking forward, one of 0:08:31.680 --> 0:08:34.400 the things that has been true of January going into 0:08:34.440 --> 0:08:40.760 February is that crypto related stocks, whether it is banks, 0:08:40.960 --> 0:08:44.520 whether it is the exchanges, and to some extent the 0:08:44.559 --> 0:08:48.640 miners that really got i'll use the scientific term hammered 0:08:49.240 --> 0:08:52.320 in two have you know, kind of started the year 0:08:52.440 --> 0:08:56.600 with a rally, and various folks, analysts, investors are kind 0:08:56.640 --> 0:08:59.160 of asking like, is this sustainable? Right? Is there something 0:08:59.200 --> 0:09:02.319 fundamental that shifted about the market, or it's just people 0:09:02.360 --> 0:09:05.320 just being like, who finally is not the worst news 0:09:05.320 --> 0:09:07.720 in the world. What are what are you hearing on 0:09:08.000 --> 0:09:13.400 the mining side of this conversation? Yeah, so the miners um. 0:09:13.679 --> 0:09:17.120 So there's a term called a miner's competulation when the 0:09:17.160 --> 0:09:19.760 bigcoin price is going down at the same time the 0:09:19.880 --> 0:09:22.480 hash rate is going down and along with a few 0:09:22.480 --> 0:09:26.000 other conditions. When it hits those conditions, there will be 0:09:26.240 --> 0:09:29.560 a situation called a minor competulation, which means the market 0:09:29.559 --> 0:09:32.400 has hit the bottom. So, and to be clear, that's 0:09:32.440 --> 0:09:35.079 not minor capitulation like M I, N O are small. 0:09:35.160 --> 0:09:39.520 It's like minor compitulation, Like the miners themselves are are 0:09:39.600 --> 0:09:43.560 flying a white flag of defeat. Yeah, the sector's compitulation. Yeah. 0:09:43.720 --> 0:09:46.480 So basically what it means, like, you know, the low 0:09:46.559 --> 0:09:49.720 price have been going on for so long, it has 0:09:49.800 --> 0:09:53.440 driven out some of the miners. So historically it was 0:09:53.679 --> 0:09:58.080 a pretty good indicator that shows the market is hitting 0:09:58.280 --> 0:10:01.440 the bottom. But like, not so sure this in this 0:10:01.640 --> 0:10:05.680 cycle because in the last cycles, miners were actually more 0:10:05.760 --> 0:10:10.040 powerful with larger bitcoin holdings because when they were facing 0:10:10.080 --> 0:10:14.600 financial pressure, they needed to sell their coin reserves, so 0:10:14.679 --> 0:10:17.400 that would create and they were selling in a down market, right, 0:10:17.880 --> 0:10:20.040 like actually getting a lot of money from them, got it. Yeah, 0:10:20.120 --> 0:10:23.680 And then like they were imposing more selling pressure into 0:10:23.720 --> 0:10:27.160 the market just because their coin holdings were still large 0:10:27.480 --> 0:10:30.360 in the previous cycles. But in this cycle, a lot 0:10:30.400 --> 0:10:33.880 of the miners already emptied their bitcoin on the balance sheet, 0:10:34.200 --> 0:10:38.719 so they actually don't have a lot of power or 0:10:38.880 --> 0:10:42.840 like influence over the market because they don't have as 0:10:42.920 --> 0:10:45.640 many coins as before. And I think you had just 0:10:45.679 --> 0:10:48.520 reported that one miner sold tokens for the very first 0:10:48.520 --> 0:10:52.120 time this year. Marathon Firstly, I think, like the company 0:10:52.400 --> 0:10:56.840 do need to capture the higher prices because I think 0:10:56.840 --> 0:10:59.680 they've learned the lesson along with so many other miners 0:10:59.679 --> 0:11:03.760 that maybe, like, you need to sell some of these coins. 0:11:04.000 --> 0:11:06.280 I mean, you can be a hoddler, you know, you 0:11:06.720 --> 0:11:10.320 can't hold hold on, hold on forever, like hold on 0:11:10.480 --> 0:11:13.200 dear life. But at the same time, I mean, is 0:11:13.240 --> 0:11:17.880 that a rational like decision for for a bitcoin minor. 0:11:18.320 --> 0:11:20.600 I mean, it has turned a lot of the miners 0:11:20.800 --> 0:11:24.120 have realized that that wasn't the best interest, you know, 0:11:24.160 --> 0:11:26.760 to just keep all the coins, so like they decided 0:11:26.840 --> 0:11:29.800 to sell some of the coins rather than selling them 0:11:29.960 --> 0:11:33.000 in a bear market. And if they can sell them 0:11:33.080 --> 0:11:35.679 in a in a rally like this, you know, like uh, 0:11:36.160 --> 0:11:39.679 relatively longer rally in the crypto market, if they can 0:11:39.720 --> 0:11:42.960 capture some of the prices, they'll be good, you know, 0:11:43.000 --> 0:11:45.679 for their for their balance sheet, especially now they are 0:11:45.760 --> 0:11:48.240 burning cash. So I think that's that's one of the 0:11:48.280 --> 0:11:51.840 reasons why Marathon was doing that in January. And then 0:11:51.880 --> 0:11:55.800 another reason might be they are increasing their production. They 0:11:55.800 --> 0:12:00.679 are producing more bitcoins just because you know, they're operations 0:12:00.720 --> 0:12:05.040 have been growing over the last year, so they figured 0:12:05.040 --> 0:12:07.520 that you know, like by selling some of those coins, 0:12:07.679 --> 0:12:10.560 I wouldn't affect their holdings that much because they're like 0:12:10.679 --> 0:12:13.120 adding to their holdings at a faster rate than they're 0:12:13.120 --> 0:12:15.480 selling them. All. Yeah. Well, I'm going to end with 0:12:15.520 --> 0:12:17.760 one of the things that we say on the team 0:12:17.800 --> 0:12:19.720 all the time, which is like never a dull moment. 0:12:20.440 --> 0:12:22.800 So thank you as always for coming on the show. 0:12:23.200 --> 0:12:27.600 Thank you. That was Bloomberg, reported David Panton. You can 0:12:27.600 --> 0:12:29.760 find more of his reporting on the Bloomberg Terminal and 0:12:29.800 --> 0:12:32.319 on Bloomberg dot com, and be sure to check out 0:12:32.320 --> 0:12:40.120 our twice weekly news less of Bloomberg Crypto. This is 0:12:40.160 --> 0:12:43.800 Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. 0:12:44.520 --> 0:12:46.640 For more shows from I Heart Radio, visit the I 0:12:46.720 --> 0:12:50.679 Heart Radio app, Apple Podcasts, or wherever you get your podcasts. 0:12:51.480 --> 0:12:54.040 Send us your comments, questions, or suggestions for the show 0:12:54.200 --> 0:13:00.840 to Crypto at Bloomberg dot net. The supervisingducer of Bloomberg 0:13:00.880 --> 0:13:04.600 Crypto is Vicky Vergolina. Our senior producer is Janet Babin. 0:13:05.200 --> 0:13:08.840 Our producers are Mohammed Farouk and Sharon Barriro. Our associate 0:13:08.840 --> 0:13:12.640 producers are Ty Butler and Moses on Them Desta wonder 0:13:12.679 --> 0:13:17.840 at is our engineer. Original music by Leo Sidron. I'm 0:13:17.840 --> 0:13:20.079 Stacy Marie schmal We'll be back tomorrow.