WEBVTT - Crypto Miners Test Texas’ Limits 0:00:02.480 --> 0:00:05.480 This is Bloomberg Crypto, a daily Bloomberg I Heart podcast, 0:00:05.680 --> 0:00:08.559 and I'm Stacy Marie Ishmael, Managing editor of Crypto for 0:00:08.600 --> 0:00:27.200 Bloomberg News. It's Thursday, November three. As my colleague David 0:00:27.200 --> 0:00:30.080 Pan has been reporting, bitcoin miners have been having a 0:00:30.240 --> 0:00:33.680 very rough time. To paraphrase one of his recent stories, 0:00:34.040 --> 0:00:37.680 falling bitcoin prices and rising energy costs lead to combined 0:00:37.840 --> 0:00:42.559 second quarter losses of more than one billion dollars for 0:00:42.640 --> 0:00:45.960 the top three publicly traded players in the US Core, 0:00:46.040 --> 0:00:52.040 Scientific Marathon, Digital and Riot Box Chain. Yikes. This crunch 0:00:52.080 --> 0:00:54.320 has led to miners trying to raise cash by selling 0:00:54.320 --> 0:00:58.120 off their emergency stockpiles of bitcoin right into the teeth 0:00:58.240 --> 0:01:01.680 of a down market. But at the same time, and 0:01:01.720 --> 0:01:04.600 here's where you'll hear from my colleague Michael Smith, miners 0:01:04.600 --> 0:01:08.160 continue to flock to places like Texas, where not everyone 0:01:08.240 --> 0:01:12.800 is a fan of those recent arrivals. Why well, Texas 0:01:12.840 --> 0:01:15.319 isn't known for having the world's most stable power grid, 0:01:15.600 --> 0:01:18.000 so miners and state officials have had the pilot ways 0:01:18.040 --> 0:01:21.679 to address concerns about this rising energy consumption. We're going 0:01:21.760 --> 0:01:23.959 to turn now to Bloomberg Reports. Is David Pan and 0:01:24.000 --> 0:01:36.880 Michael Smith. David, Michael, good to have you on the show. 0:01:37.240 --> 0:01:39.080 Probably not so good for the people who are going 0:01:39.120 --> 0:01:44.760 to be talking about today, who are the bitcoin miners. David. 0:01:44.760 --> 0:01:47.039 I'd love to start with you because you've been reporting 0:01:47.200 --> 0:01:52.000 extensively on the state of the industry, which seems from 0:01:52.040 --> 0:01:57.240 reading your reporting not to be great right now. Yeah, definitely. 0:01:57.440 --> 0:01:59.840 Um so when you when you look at a mining 0:02:00.000 --> 0:02:04.280 avenue for all the bigcoin mining companies, uh, we are 0:02:04.320 --> 0:02:08.600 seeing like record lows constantly in recent weeks. And um 0:02:08.639 --> 0:02:11.920 there are three major reasons. The first one is apparently 0:02:11.960 --> 0:02:15.560 the low biitcoin prices. You know it started from earlier 0:02:15.600 --> 0:02:18.960 this year the market crashed. The second reason is the 0:02:19.040 --> 0:02:23.000 soaring energy costs, and earlier this year we have you know, 0:02:23.080 --> 0:02:27.079 the rushing invasion into Ukraine that kind of increased the 0:02:27.600 --> 0:02:32.560 guest prices um for the whole energy market. Later this year, 0:02:32.680 --> 0:02:36.160 we see the heat waves across the Southern States in 0:02:36.200 --> 0:02:40.000 the US, and nearly all industrial scale bitcoin miners in 0:02:40.040 --> 0:02:43.320 Texas have shut off their machines. That's as the company's 0:02:43.360 --> 0:02:45.399 brace for a heat wave that is expected to push 0:02:45.480 --> 0:02:48.320 the state's power grid near its breaking point. The state 0:02:48.320 --> 0:02:50.800 has become one of the world, and then we're seeing 0:02:51.360 --> 0:02:55.760 more competition because which is a little bit contraintuitive because 0:02:55.840 --> 0:02:59.960 we see low prices with the high energy prices. Uh. 0:03:00.280 --> 0:03:03.839 But at the same time, miners continue to install their 0:03:03.880 --> 0:03:07.520 mining machines. So a very big reason for that is 0:03:07.560 --> 0:03:11.720 because they bought so many machines um during during the 0:03:11.760 --> 0:03:16.639 boom market, starting from last December last November, and now 0:03:16.720 --> 0:03:19.880 they finally got the machines and the price of the 0:03:19.960 --> 0:03:22.360 prices are crashing. But at the same time they have 0:03:22.520 --> 0:03:26.840 to install or to continue to build up the capacity 0:03:26.919 --> 0:03:30.080 because they've already invested like tens of millions of dollars 0:03:30.160 --> 0:03:32.920 into the infrastructure. They have to finish it so that 0:03:33.040 --> 0:03:38.040 they can actually prevent further losses in displayer market. The 0:03:38.160 --> 0:03:41.080 very definition of some cost fallacy, it sounds to me. 0:03:41.240 --> 0:03:43.760 But you know, Mike, you spent a bunch of time 0:03:44.600 --> 0:03:48.880 interviewing miners in Texas and you you sort of like 0:03:49.000 --> 0:03:51.360 written about what that experience wasn't And one thing that 0:03:51.400 --> 0:03:56.160 struck me from your reporting was like this fundamental optimism 0:03:56.200 --> 0:03:58.880 about a lot of those folks despite the conditions that 0:03:58.960 --> 0:04:03.600 David are describing. Yeah, it's kind of interesting. Um, I've 0:04:03.600 --> 0:04:05.240 met a lot of a lot of folks who are 0:04:05.120 --> 0:04:08.880 actually building out mines or certainly all have dreams of 0:04:08.920 --> 0:04:12.520 building minds, and those dreams really haven't been diminished or 0:04:12.560 --> 0:04:16.280 what I can tell. It's kind of like the psychology 0:04:16.400 --> 0:04:19.440 of oil. People who are looking for oil and gas, 0:04:19.480 --> 0:04:23.960 they're always looking to strike it rich, and Texas is 0:04:24.000 --> 0:04:26.280 by definition the kind of place that invites that kind 0:04:26.279 --> 0:04:29.960 of sort of enthusiasm. We've seen in you know, the 0:04:30.040 --> 0:04:32.720 last few weeks of October that gas prices and in 0:04:32.720 --> 0:04:36.480 Texas are actually like declining significantly. There are supply problems. 0:04:36.520 --> 0:04:39.440 It's a complicated story. It's always complicated story. But some 0:04:39.600 --> 0:04:43.240 of the costs are coming down, but at the same time, 0:04:43.440 --> 0:04:46.080 miners are trying to cover those costs by selling their 0:04:46.080 --> 0:04:51.200 bitcoin into a market in which bitcoin is hovering like blue. 0:04:51.680 --> 0:04:54.359 What are what like what are the analysts projections for 0:04:54.400 --> 0:04:56.799 how this is going to play out? In Q three earnings? 0:04:56.800 --> 0:04:59.880 In Q four you will see like the you know, 0:05:00.000 --> 0:05:04.120 the negative impacts from the climate because you know, they 0:05:04.279 --> 0:05:06.800 kind of like scaled back a lot of mining operations 0:05:06.880 --> 0:05:11.200 during the summers. That will directly affect their revenue for 0:05:11.279 --> 0:05:14.480 the third quarter and for the fourth quarter. I think 0:05:14.600 --> 0:05:18.200 that is a very interesting time for us to see because, 0:05:18.680 --> 0:05:22.599 as Michael said, some part of the costs are decreasing, 0:05:23.000 --> 0:05:26.799 for example, like the energy prices because it's getting cooler 0:05:27.279 --> 0:05:30.560 and and the mining ranks are getting cheaper. But at 0:05:30.600 --> 0:05:34.080 the same time we are seeing increasing costs in other areas, 0:05:34.120 --> 0:05:36.919 for example, the borrowing costs, like you know, the lenders 0:05:36.920 --> 0:05:40.640 are scaling back, and interest rates arising generally exactly, and 0:05:40.880 --> 0:05:44.760 people lenders generally just like have less trusting bitcoin miners 0:05:44.800 --> 0:05:49.839 because fair and and then we also have this like 0:05:49.880 --> 0:05:53.680 a very wonky but super important gauge, which is the 0:05:53.720 --> 0:05:56.960 mining difficulty. You know that that is the measure of 0:05:57.080 --> 0:06:01.560 computing power used for bitcoin mining. Uh So, previously we 0:06:01.640 --> 0:06:04.760 mentioned that there are a lot more miners, they are 0:06:04.800 --> 0:06:08.240 forced to continue to build out their capacity. That would 0:06:08.240 --> 0:06:11.880 actually increase the mining difficulty for everyone who's the mining biwcoin, 0:06:12.200 --> 0:06:15.279 which means this will lower the revenue for each miner. 0:06:15.520 --> 0:06:17.480 So this is sort of like a zero stump game. 0:06:17.960 --> 0:06:21.360 So the more miners there are, the more mining power 0:06:21.400 --> 0:06:29.040 there is, the less revenue each minor we have. Mike, 0:06:29.080 --> 0:06:30.680 can you talk about some of the specific things that 0:06:30.720 --> 0:06:34.160 folks in Texas are doing to handle like this kind 0:06:34.160 --> 0:06:38.200 of confluence of events, especially on the Responding to the 0:06:38.240 --> 0:06:40.880 concerns that many people have identified about the strain on 0:06:40.920 --> 0:06:44.839 Texas is power grid the regulators in Texas, which is 0:06:45.200 --> 0:06:49.800 quite likely lightly regulated. Uh, basically they should come to 0:06:49.800 --> 0:06:54.479 grips with the fact that there's this enormous potential power 0:06:54.560 --> 0:06:58.000 drain to bitcoin mines on the on the grid which 0:06:58.040 --> 0:07:01.960 is quite fragile, So they are trying to um accommodate 0:07:02.040 --> 0:07:04.880 it in a way that doesn't short out their grid. 0:07:05.400 --> 0:07:08.039 And the main thing that they're relying on is for 0:07:08.279 --> 0:07:14.080 bitcoin miners to turn off their computers when electricity is 0:07:14.120 --> 0:07:17.080 peaking so much that there might be blackouts. And right 0:07:17.120 --> 0:07:19.160 now there are a lot of incentives in place in 0:07:19.200 --> 0:07:21.720 Texas for them to do that. Mainly they get paid 0:07:21.760 --> 0:07:25.120 to do it um but it's still a voluntary program. 0:07:25.480 --> 0:07:27.800 Bitcoin miners in Texas are taking the week off to 0:07:27.880 --> 0:07:31.480 keep the state's energy grid intact. Whether the war in Ukraine, 0:07:31.520 --> 0:07:35.560 supply chain bottlenecks are sending energy costs higher, and that's 0:07:35.600 --> 0:07:37.800 beginning to might give me the point that like mining 0:07:37.800 --> 0:07:40.400 in Texas has you know, consistently increased year on year, 0:07:40.960 --> 0:07:45.480 but a lot of the demand management programs that you know, 0:07:45.640 --> 0:07:48.160 the Texas pol Grid operates, air air coots and others 0:07:48.160 --> 0:07:53.040 have put in place, have happened with mostly declining prices. 0:07:53.240 --> 0:07:55.320 There were absolutely a few folks who will operating when 0:07:55.360 --> 0:07:58.360 Bitcoin was treating, you know, above sixty dollars. But I 0:07:58.400 --> 0:08:01.560 would say just from a time basis, like a majority 0:08:01.640 --> 0:08:04.600 of these plants have been rolled out when prices are 0:08:04.640 --> 0:08:07.960 either falling or kind of like range bound. And so, David, 0:08:08.000 --> 0:08:10.480 it's like, if we are having a conversation and Bitcoin 0:08:10.720 --> 0:08:13.520 prices are back up at sixty dollars, what we may 0:08:13.600 --> 0:08:18.440 find is like less pseudo altruistic willingness from folks to 0:08:18.480 --> 0:08:21.040 be like, of course we will unplug our computers like 0:08:21.160 --> 0:08:24.040 no problem. Um. That will certainly be an interesting and 0:08:24.120 --> 0:08:28.160 interesting things and you're gonna see more underground mining operations 0:08:28.320 --> 0:08:30.600 if that happens. Well, I remember one of the things 0:08:30.600 --> 0:08:32.560 that you told me, David, is that like China was 0:08:32.600 --> 0:08:35.559 just very good at identifying where there were these large 0:08:35.559 --> 0:08:37.360 farms because they're like, hmm, it seems like a lot 0:08:37.360 --> 0:08:39.880 of people using a lot of electricity over there. Mike, 0:08:39.920 --> 0:08:43.280 do you get any sense from the operators in Texas 0:08:43.400 --> 0:08:45.320 or any other places that even reports it from that 0:08:45.400 --> 0:08:49.280 they have that kind of monitoring infrastructure or they really 0:08:49.320 --> 0:08:53.120 relying on like word of mouth and goodwill. Uh, they 0:08:53.200 --> 0:08:56.760 certainly had the infrastructure to to monitor it. But I 0:08:56.760 --> 0:09:00.400 think what you have in Texas is that they want 0:09:00.520 --> 0:09:03.240 bitcoin miners to move in. They want them to plug 0:09:03.280 --> 0:09:05.680 into the grid. They're doing everything they can to facilitate it, 0:09:06.280 --> 0:09:11.959 as opposed to sort of watch over it and regulate it. Um. 0:09:12.040 --> 0:09:15.760 So they don't need to go underground as long as 0:09:15.760 --> 0:09:19.160 they can convince a utility to give them the electricity 0:09:19.200 --> 0:09:21.800 they want. Uh, you know, they do have to technically 0:09:21.800 --> 0:09:24.319 have the capacity. Uh, they can do whatever they want. 0:09:24.400 --> 0:09:28.040 There's no restrictions coming up. You'll hear more from Bloomberg 0:09:28.080 --> 0:09:30.800 Reports David Pan and Michael Smith. We'll be right back. 0:09:42.160 --> 0:09:46.200 Let's talk about John who quickly who you know, is 0:09:46.800 --> 0:09:51.600 at Deer Technologies and has come out with an interesting 0:09:51.960 --> 0:09:57.559 plan to get more involved in shall we see salvaging 0:09:58.240 --> 0:10:00.599 some of what's happening with my named David. Can you 0:10:00.640 --> 0:10:02.640 tell us a little bit more about this. The company 0:10:02.760 --> 0:10:07.319 set up a distressed font four bitcoin miners, which essentially 0:10:07.360 --> 0:10:11.000 means that they're setting up two hundred and fifty million 0:10:11.040 --> 0:10:16.079 dollar fund to buy distressed assets for other mining companies. 0:10:16.400 --> 0:10:20.200 It's almost like vulture capitalists, like they're buying cheap assets, 0:10:20.840 --> 0:10:23.240 like you know, in their later time they will benefit 0:10:23.280 --> 0:10:27.200 from it. How do those other companies feel about but 0:10:27.320 --> 0:10:29.600 they're building this up and basically just like waiting for 0:10:29.640 --> 0:10:33.320 them to have some trouble. Those companies, Uh, I feel like, 0:10:33.400 --> 0:10:37.760 you know, they they're probably looking for opportunities to sell 0:10:37.880 --> 0:10:40.720 their machines. Maybe they'll get in touch with the fund 0:10:40.840 --> 0:10:44.160 and see if they can actually sell some machines to 0:10:44.160 --> 0:10:47.640 to uh deal have was fond but um at the 0:10:47.679 --> 0:10:50.920 same time, I think it's almost like a music chair situation. 0:10:51.800 --> 0:10:55.319 You know, everybody's hanging hanging in there, and then when 0:10:55.360 --> 0:10:59.920 the music stops, they just hope that that won't be me, 0:11:00.240 --> 0:11:02.520 you know, that won't be themselves, and and then they 0:11:02.520 --> 0:11:06.239 would just like survive these cycle and make huge profits 0:11:06.400 --> 0:11:10.560 later when the market comes back. David, you are planning 0:11:10.600 --> 0:11:13.640 to be to be spending some time in Texas again 0:11:14.440 --> 0:11:17.440 for another conference relates to mining, and you know in 0:11:17.640 --> 0:11:20.680 in the newsletter subscribed to the Boomboo Crypto newsletter, UM. 0:11:20.720 --> 0:11:23.040 In the newsletter that you wrote about this, you mentioned 0:11:23.200 --> 0:11:26.640 that a group of miners are having like a a 0:11:26.720 --> 0:11:31.120 commiserative drinks session where they're like, hey, guys, it's rough 0:11:31.160 --> 0:11:34.240 out here, let's get together and share our sorrows, you know, 0:11:34.280 --> 0:11:36.439 which which is really interesting to me because you know, Mike, 0:11:36.480 --> 0:11:41.200 you described like this fierce competition, this potentially challenging UM 0:11:41.400 --> 0:11:43.679 pricing environment, and David you're like, there are people who 0:11:43.720 --> 0:11:45.400 are waiting for other people to kind of go bust, 0:11:45.440 --> 0:11:47.560 and yet there they seem to still have this sort 0:11:47.600 --> 0:11:52.840 of collaborative relationship. Yes, it's it's a very small circle. 0:11:53.200 --> 0:11:58.160 So the event is called Support Group for Executives from 0:11:58.200 --> 0:12:02.600 Mining Companies. Of I think it is a very small 0:12:02.640 --> 0:12:06.040 but very interesting circle because like you have Marathon Riot, 0:12:06.640 --> 0:12:09.680 I mean, all of these companies, they have their the 0:12:09.760 --> 0:12:13.240 mining stocks are essentially like very similar to Meme stocks. 0:12:13.559 --> 0:12:17.079 They are driven by publicity and everything. So so like 0:12:17.200 --> 0:12:19.720 what you see is actually in the circle, you see 0:12:19.720 --> 0:12:22.760 a lot of big personalities, especially in the c suite 0:12:23.120 --> 0:12:26.720 of these mining companies, and then they don't really want 0:12:26.720 --> 0:12:29.440 to make their making mistakes and they don't want to 0:12:29.480 --> 0:12:32.959 see their companies failing, you know, like in front of 0:12:33.000 --> 0:12:36.000 their peers or something like that. So um, I think 0:12:36.000 --> 0:12:38.600 that would be really interesting to see, you know, who 0:12:38.640 --> 0:12:41.680 will be able to survive. But at the same time, 0:12:41.720 --> 0:12:44.800 it's the sad moment for from mining companies because they're 0:12:44.840 --> 0:12:47.199 not doing really well. Yeah, what an interesting time and 0:12:47.240 --> 0:12:49.120 come to Yeah, I was gonna say, just to add 0:12:49.160 --> 0:12:51.600 to that, UM, I've been to a ton of these. 0:12:51.640 --> 0:12:54.880 They have meetups every every every month in Houston for example, 0:12:54.880 --> 0:12:57.600 in other places. And what's interesting to me about the 0:12:57.640 --> 0:13:01.679 culture is that it really is egalitarian in a way, 0:13:01.720 --> 0:13:04.760 like and they like to play that up. So you 0:13:04.800 --> 0:13:06.800 go to these meetings and I'm sure you'll see this 0:13:06.880 --> 0:13:10.600 at the support group where you'll have the CEO of Riot, 0:13:10.840 --> 0:13:13.719 you know, the mind they have in Texas hanging out 0:13:13.760 --> 0:13:15.760 with this guy, you know, this twenty two year old 0:13:15.880 --> 0:13:18.600 kid who has no money, no no stake in thinking, 0:13:18.600 --> 0:13:20.680 but has a really cool idea. And they really do 0:13:20.920 --> 0:13:24.440 like to let anyone talk about their dreams, so to speak. 0:13:24.640 --> 0:13:26.920 I think because a lot of them come from that 0:13:27.040 --> 0:13:30.600 background and they've had this meteoric rise and and they 0:13:30.640 --> 0:13:33.040 really respect it. But it's also because of the philosophy 0:13:33.080 --> 0:13:36.160 behind bitcoin. A lot of these folks are very ideologically 0:13:36.200 --> 0:13:39.640 faithful to bitcoin and they believe it's like a way 0:13:39.679 --> 0:13:43.800 of life, and you see that in the enthusiasm they 0:13:43.840 --> 0:13:45.320 had for the business and the way they like to 0:13:45.320 --> 0:13:47.960 listen to all ideas, but also in the way, you know, 0:13:48.040 --> 0:13:50.320 it's quite Darwinian like a lot of them are waiting 0:13:50.360 --> 0:13:53.120 to swoop in like bit DearS doing with that fun 0:13:53.760 --> 0:13:56.000 and buy out a guy who's who's gone broke or 0:13:56.000 --> 0:13:59.600 a woman's gone person has gone broke. Um. All this 0:13:59.679 --> 0:14:03.560 sort of philosophical foundation to bitcoin and the kind of 0:14:03.720 --> 0:14:08.920 folks that attracts and convert to the tracts feeds these 0:14:08.920 --> 0:14:11.719 phenomena we're talking about. It feeds into the way the 0:14:11.760 --> 0:14:14.480 businesses are run and the way they're reacting now. And 0:14:14.600 --> 0:14:17.839 it also explains a lot about why they're flocking to 0:14:17.960 --> 0:14:20.160 Texas because they can do whatever they want and they 0:14:20.200 --> 0:14:25.480 have the actual systems supporting them. So much of crypto 0:14:25.800 --> 0:14:28.160 is a tech story, and so much of every tech 0:14:28.200 --> 0:14:32.240 story is a culture story, and how the culture of 0:14:32.320 --> 0:14:36.120 the beliefs, the norms, the practices, as you say, don't 0:14:36.120 --> 0:14:39.320 just inform how things happen, but in some cases determine 0:14:40.040 --> 0:14:43.000 what's what those outcomes are. Well, thank you both for 0:14:43.080 --> 0:14:45.440 joining me. It was a pleasure as always, and happy 0:14:45.440 --> 0:14:48.760 to have you back in the podcast anytime, any time wonderful. 0:14:50.040 --> 0:14:52.320 You can find more of their reporting on the Bloomberg Terminal, 0:14:52.360 --> 0:14:55.560 on Bloomberg dot com or on Twitter. Mike is at 0:14:55.600 --> 0:14:58.280 Smith Markets that's m A r K E T S. 0:14:58.320 --> 0:15:02.560 And David Pan is at David Pan Underscore One. That's 0:15:02.680 --> 0:15:05.720 d A v I D P A N Underscore the 0:15:05.880 --> 0:15:17.040 Lumber One. On the next episode of Bloomberg Crypto, we'll 0:15:17.040 --> 0:15:20.520 tackle crypto company earnings, doage coin and Elon Musk, and 0:15:20.520 --> 0:15:23.280 who the must read Bloomberg opinion columnists are for all 0:15:23.280 --> 0:15:26.960 things digital assets. Spoiler alert, yes, one of them is 0:15:27.040 --> 0:15:34.720 Matt Levine. This is Bloomberg Crypto, a daily podcast from 0:15:34.760 --> 0:15:37.800 Bloomberg and I Heart Radio. For more shows from I 0:15:37.880 --> 0:15:41.160 Heart Radio, visit the I Heart Radio app, Apple Podcasts, 0:15:41.320 --> 0:15:45.240 or wherever you get your podcasts. Send us your comments, questions, 0:15:45.320 --> 0:15:48.160 or suggestions for the show to Crypto at Bloomberg dot 0:15:48.200 --> 0:15:52.760 net or find us on Twitter. We're at Crypto. The 0:15:52.800 --> 0:15:56.760 supervising producer of Bloomberg Crypto is Vicky Verglina. Our senior 0:15:56.800 --> 0:16:00.400 producer is Janet Babin. Our producers are Mohammed Rouke and 0:16:00.400 --> 0:16:04.120 Sharon barriro Our Associate producers are Ty Butler and Moses 0:16:04.160 --> 0:16:08.440 on them. Desta wonder At is our engineer. Original music 0:16:08.560 --> 0:16:13.600 by Leo Sidron. I'm Stacy Marie Shmal. We'll be back tomorrow.