Speaker 1: This is Bloomberg Crypto, a daily Bloomberg I Heart podcast,
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Thursday, November three. As my colleague David
Speaker 1: Pan has been reporting, bitcoin miners have been having a
Speaker 1: very rough time. To paraphrase one of his recent stories,
Speaker 1: falling bitcoin prices and rising energy costs lead to combined
Speaker 1: second quarter losses of more than one billion dollars for
Speaker 1: the top three publicly traded players in the US Core,
Speaker 1: Scientific Marathon, Digital and Riot Box Chain. Yikes. This crunch
Speaker 1: has led to miners trying to raise cash by selling
Speaker 1: off their emergency stockpiles of bitcoin right into the teeth
Speaker 1: of a down market. But at the same time, and
Speaker 1: here's where you'll hear from my colleague Michael Smith, miners
Speaker 1: continue to flock to places like Texas, where not everyone
Speaker 1: is a fan of those recent arrivals. Why well, Texas
Speaker 1: isn't known for having the world's most stable power grid,
Speaker 1: so miners and state officials have had the pilot ways
Speaker 1: to address concerns about this rising energy consumption. We're going
Speaker 1: to turn now to Bloomberg Reports. Is David Pan and
Speaker 1: Michael Smith. David, Michael, good to have you on the show.
Speaker 1: Probably not so good for the people who are going
Speaker 1: to be talking about today, who are the bitcoin miners. David.
Speaker 1: I'd love to start with you because you've been reporting
Speaker 1: extensively on the state of the industry, which seems from
Speaker 1: reading your reporting not to be great right now. Yeah, definitely.
Speaker 1: Um so when you when you look at a mining
Speaker 1: avenue for all the bigcoin mining companies, uh, we are
Speaker 1: seeing like record lows constantly in recent weeks. And um
Speaker 1: there are three major reasons. The first one is apparently
Speaker 1: the low biitcoin prices. You know it started from earlier
Speaker 1: this year the market crashed. The second reason is the
Speaker 1: soaring energy costs, and earlier this year we have you know,
Speaker 1: the rushing invasion into Ukraine that kind of increased the
Speaker 1: guest prices um for the whole energy market. Later this year,
Speaker 1: we see the heat waves across the Southern States in
Speaker 1: the US, and nearly all industrial scale bitcoin miners in
Speaker 1: Texas have shut off their machines. That's as the company's
Speaker 1: brace for a heat wave that is expected to push
Speaker 1: the state's power grid near its breaking point. The state
Speaker 1: has become one of the world, and then we're seeing
Speaker 1: more competition because which is a little bit contraintuitive because
Speaker 1: we see low prices with the high energy prices. Uh.
Speaker 1: But at the same time, miners continue to install their
Speaker 1: mining machines. So a very big reason for that is
Speaker 1: because they bought so many machines um during during the
Speaker 1: boom market, starting from last December last November, and now
Speaker 1: they finally got the machines and the price of the
Speaker 1: prices are crashing. But at the same time they have
Speaker 1: to install or to continue to build up the capacity
Speaker 1: because they've already invested like tens of millions of dollars
Speaker 1: into the infrastructure. They have to finish it so that
Speaker 1: they can actually prevent further losses in displayer market. The
Speaker 1: very definition of some cost fallacy, it sounds to me.
Speaker 1: But you know, Mike, you spent a bunch of time
Speaker 1: interviewing miners in Texas and you you sort of like
Speaker 1: written about what that experience wasn't And one thing that
Speaker 1: struck me from your reporting was like this fundamental optimism
Speaker 1: about a lot of those folks despite the conditions that
Speaker 1: David are describing. Yeah, it's kind of interesting. Um, I've
Speaker 1: met a lot of a lot of folks who are
Speaker 1: actually building out mines or certainly all have dreams of
Speaker 1: building minds, and those dreams really haven't been diminished or
Speaker 1: what I can tell. It's kind of like the psychology
Speaker 1: of oil. People who are looking for oil and gas,
Speaker 1: they're always looking to strike it rich, and Texas is
Speaker 1: by definition the kind of place that invites that kind
Speaker 1: of sort of enthusiasm. We've seen in you know, the
Speaker 1: last few weeks of October that gas prices and in
Speaker 1: Texas are actually like declining significantly. There are supply problems.
Speaker 1: It's a complicated story. It's always complicated story. But some
Speaker 1: of the costs are coming down, but at the same time,
Speaker 1: miners are trying to cover those costs by selling their
Speaker 1: bitcoin into a market in which bitcoin is hovering like blue.
Speaker 1: What are what like what are the analysts projections for
Speaker 1: how this is going to play out? In Q three earnings?
Speaker 1: In Q four you will see like the you know,
Speaker 1: the negative impacts from the climate because you know, they
Speaker 1: kind of like scaled back a lot of mining operations
Speaker 1: during the summers. That will directly affect their revenue for
Speaker 1: the third quarter and for the fourth quarter. I think
Speaker 1: that is a very interesting time for us to see because,
Speaker 1: as Michael said, some part of the costs are decreasing,
Speaker 1: for example, like the energy prices because it's getting cooler
Speaker 1: and and the mining ranks are getting cheaper. But at
Speaker 1: the same time we are seeing increasing costs in other areas,
Speaker 1: for example, the borrowing costs, like you know, the lenders
Speaker 1: are scaling back, and interest rates arising generally exactly, and
Speaker 1: people lenders generally just like have less trusting bitcoin miners
Speaker 1: because fair and and then we also have this like
Speaker 1: a very wonky but super important gauge, which is the
Speaker 1: mining difficulty. You know that that is the measure of
Speaker 1: computing power used for bitcoin mining. Uh So, previously we
Speaker 1: mentioned that there are a lot more miners, they are
Speaker 1: forced to continue to build out their capacity. That would
Speaker 1: actually increase the mining difficulty for everyone who's the mining biwcoin,
Speaker 1: which means this will lower the revenue for each miner.
Speaker 1: So this is sort of like a zero stump game.
Speaker 1: So the more miners there are, the more mining power
Speaker 1: there is, the less revenue each minor we have. Mike,
Speaker 1: can you talk about some of the specific things that
Speaker 1: folks in Texas are doing to handle like this kind
Speaker 1: of confluence of events, especially on the Responding to the
Speaker 1: concerns that many people have identified about the strain on
Speaker 1: Texas is power grid the regulators in Texas, which is
Speaker 1: quite likely lightly regulated. Uh, basically they should come to
Speaker 1: grips with the fact that there's this enormous potential power
Speaker 1: drain to bitcoin mines on the on the grid which
Speaker 1: is quite fragile, So they are trying to um accommodate
Speaker 1: it in a way that doesn't short out their grid.
Speaker 1: And the main thing that they're relying on is for
Speaker 1: bitcoin miners to turn off their computers when electricity is
Speaker 1: peaking so much that there might be blackouts. And right
Speaker 1: now there are a lot of incentives in place in
Speaker 1: Texas for them to do that. Mainly they get paid
Speaker 1: to do it um but it's still a voluntary program.
Speaker 1: Bitcoin miners in Texas are taking the week off to
Speaker 1: keep the state's energy grid intact. Whether the war in Ukraine,
Speaker 1: supply chain bottlenecks are sending energy costs higher, and that's
Speaker 1: beginning to might give me the point that like mining
Speaker 1: in Texas has you know, consistently increased year on year,
Speaker 1: but a lot of the demand management programs that you know,
Speaker 1: the Texas pol Grid operates, air air coots and others
Speaker 1: have put in place, have happened with mostly declining prices.
Speaker 1: There were absolutely a few folks who will operating when
Speaker 1: Bitcoin was treating, you know, above sixty dollars. But I
Speaker 1: would say just from a time basis, like a majority
Speaker 1: of these plants have been rolled out when prices are
Speaker 1: either falling or kind of like range bound. And so, David,
Speaker 1: it's like, if we are having a conversation and Bitcoin
Speaker 1: prices are back up at sixty dollars, what we may
Speaker 1: find is like less pseudo altruistic willingness from folks to
Speaker 1: be like, of course we will unplug our computers like
Speaker 1: no problem. Um. That will certainly be an interesting and
Speaker 1: interesting things and you're gonna see more underground mining operations
Speaker 1: if that happens. Well, I remember one of the things
Speaker 1: that you told me, David, is that like China was
Speaker 1: just very good at identifying where there were these large
Speaker 1: farms because they're like, hmm, it seems like a lot
Speaker 1: of people using a lot of electricity over there. Mike,
Speaker 1: do you get any sense from the operators in Texas
Speaker 1: or any other places that even reports it from that
Speaker 1: they have that kind of monitoring infrastructure or they really
Speaker 1: relying on like word of mouth and goodwill. Uh, they
Speaker 1: certainly had the infrastructure to to monitor it. But I
Speaker 1: think what you have in Texas is that they want
Speaker 1: bitcoin miners to move in. They want them to plug
Speaker 1: into the grid. They're doing everything they can to facilitate it,
Speaker 1: as opposed to sort of watch over it and regulate it. Um.
Speaker 1: So they don't need to go underground as long as
Speaker 1: they can convince a utility to give them the electricity
Speaker 1: they want. Uh, you know, they do have to technically
Speaker 1: have the capacity. Uh, they can do whatever they want.
Speaker 1: There's no restrictions coming up. You'll hear more from Bloomberg
Speaker 1: Reports David Pan and Michael Smith. We'll be right back.
Speaker 1: Let's talk about John who quickly who you know, is
Speaker 1: at Deer Technologies and has come out with an interesting
Speaker 1: plan to get more involved in shall we see salvaging
Speaker 1: some of what's happening with my named David. Can you
Speaker 1: tell us a little bit more about this. The company
Speaker 1: set up a distressed font four bitcoin miners, which essentially
Speaker 1: means that they're setting up two hundred and fifty million
Speaker 1: dollar fund to buy distressed assets for other mining companies.
Speaker 1: It's almost like vulture capitalists, like they're buying cheap assets,
Speaker 1: like you know, in their later time they will benefit
Speaker 1: from it. How do those other companies feel about but
Speaker 1: they're building this up and basically just like waiting for
Speaker 1: them to have some trouble. Those companies, Uh, I feel like,
Speaker 1: you know, they they're probably looking for opportunities to sell
Speaker 1: their machines. Maybe they'll get in touch with the fund
Speaker 1: and see if they can actually sell some machines to
Speaker 1: to uh deal have was fond but um at the
Speaker 1: same time, I think it's almost like a music chair situation.
Speaker 1: You know, everybody's hanging hanging in there, and then when
Speaker 1: the music stops, they just hope that that won't be me,
Speaker 1: you know, that won't be themselves, and and then they
Speaker 1: would just like survive these cycle and make huge profits
Speaker 1: later when the market comes back. David, you are planning
Speaker 1: to be to be spending some time in Texas again
Speaker 1: for another conference relates to mining, and you know in
Speaker 1: in the newsletter subscribed to the Boomboo Crypto newsletter, UM.
Speaker 1: In the newsletter that you wrote about this, you mentioned
Speaker 1: that a group of miners are having like a a
Speaker 1: commiserative drinks session where they're like, hey, guys, it's rough
Speaker 1: out here, let's get together and share our sorrows, you know,
Speaker 1: which which is really interesting to me because you know, Mike,
Speaker 1: you described like this fierce competition, this potentially challenging UM
Speaker 1: pricing environment, and David you're like, there are people who
Speaker 1: are waiting for other people to kind of go bust,
Speaker 1: and yet there they seem to still have this sort
Speaker 1: of collaborative relationship. Yes, it's it's a very small circle.
Speaker 1: So the event is called Support Group for Executives from
Speaker 1: Mining Companies. Of I think it is a very small
Speaker 1: but very interesting circle because like you have Marathon Riot,
Speaker 1: I mean, all of these companies, they have their the
Speaker 1: mining stocks are essentially like very similar to Meme stocks.
Speaker 1: They are driven by publicity and everything. So so like
Speaker 1: what you see is actually in the circle, you see
Speaker 1: a lot of big personalities, especially in the c suite
Speaker 1: of these mining companies, and then they don't really want
Speaker 1: to make their making mistakes and they don't want to
Speaker 1: see their companies failing, you know, like in front of
Speaker 1: their peers or something like that. So um, I think
Speaker 1: that would be really interesting to see, you know, who
Speaker 1: will be able to survive. But at the same time,
Speaker 1: it's the sad moment for from mining companies because they're
Speaker 1: not doing really well. Yeah, what an interesting time and
Speaker 1: come to Yeah, I was gonna say, just to add
Speaker 1: to that, UM, I've been to a ton of these.
Speaker 1: They have meetups every every every month in Houston for example,
Speaker 1: in other places. And what's interesting to me about the
Speaker 1: culture is that it really is egalitarian in a way,
Speaker 1: like and they like to play that up. So you
Speaker 1: go to these meetings and I'm sure you'll see this
Speaker 1: at the support group where you'll have the CEO of Riot,
Speaker 1: you know, the mind they have in Texas hanging out
Speaker 1: with this guy, you know, this twenty two year old
Speaker 1: kid who has no money, no no stake in thinking,
Speaker 1: but has a really cool idea. And they really do
Speaker 1: like to let anyone talk about their dreams, so to speak.
Speaker 1: I think because a lot of them come from that
Speaker 1: background and they've had this meteoric rise and and they
Speaker 1: really respect it. But it's also because of the philosophy
Speaker 1: behind bitcoin. A lot of these folks are very ideologically
Speaker 1: faithful to bitcoin and they believe it's like a way
Speaker 1: of life, and you see that in the enthusiasm they
Speaker 1: had for the business and the way they like to
Speaker 1: listen to all ideas, but also in the way, you know,
Speaker 1: it's quite Darwinian like a lot of them are waiting
Speaker 1: to swoop in like bit DearS doing with that fun
Speaker 1: and buy out a guy who's who's gone broke or
Speaker 1: a woman's gone person has gone broke. Um. All this
Speaker 1: sort of philosophical foundation to bitcoin and the kind of
Speaker 1: folks that attracts and convert to the tracts feeds these
Speaker 1: phenomena we're talking about. It feeds into the way the
Speaker 1: businesses are run and the way they're reacting now. And
Speaker 1: it also explains a lot about why they're flocking to
Speaker 1: Texas because they can do whatever they want and they
Speaker 1: have the actual systems supporting them. So much of crypto
Speaker 1: is a tech story, and so much of every tech
Speaker 1: story is a culture story, and how the culture of
Speaker 1: the beliefs, the norms, the practices, as you say, don't
Speaker 1: just inform how things happen, but in some cases determine
Speaker 1: what's what those outcomes are. Well, thank you both for
Speaker 1: joining me. It was a pleasure as always, and happy
Speaker 1: to have you back in the podcast anytime, any time wonderful.
Speaker 1: You can find more of their reporting on the Bloomberg Terminal,
Speaker 1: on Bloomberg dot com or on Twitter. Mike is at
Speaker 1: Smith Markets that's m A r K E T S.
Speaker 1: And David Pan is at David Pan Underscore One. That's
Speaker 1: d A v I D P A N Underscore the
Speaker 1: Lumber One. On the next episode of Bloomberg Crypto, we'll
Speaker 1: tackle crypto company earnings, doage coin and Elon Musk, and
Speaker 1: who the must read Bloomberg opinion columnists are for all
Speaker 1: things digital assets. Spoiler alert, yes, one of them is
Speaker 1: Matt Levine. This is Bloomberg Crypto, a daily podcast from
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