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Speaker 1: I'm Stacy Marie Ishmael, Managing editor of Crypto for Bloomberg News,

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Speaker 1: and this is Bloomberg Crypto at Daily Bloomberg. I heard podcast.

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Speaker 1: It's Monday, August fifteen. Breaking news. At the moment, we

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Speaker 1: are hearing that our province in China plans to raise

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Speaker 1: penalties for crypto mining. Of course, this is a continuation

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Speaker 1: of the mining crackdown that we've seen in China already.

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Speaker 1: In our Mongolia has banned cryptocurrency mining and Declarity will

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Speaker 1: shut all such projects. In late spring of China banned

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Speaker 1: all bitcoin mining as part of an ongoing crackdown on

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Speaker 1: crypto in the country. In response, many Chinese miners pack

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Speaker 1: their bags and headed to the state of Texas. Texas

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Speaker 1: offers what I'll describe as a relaxed approach to regulation,

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Speaker 1: a unique par grid, and relatively attractive energy prices, all

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Speaker 1: things that seemed ideal for these miners looking for a

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Speaker 1: new home. And then two happened. The situation in Texas

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Speaker 1: got slightly more complicated, to say the least. That unique

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Speaker 1: energy grid is prone to power outages, made worse by

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Speaker 1: extreme temperatures. Those extreme temperatures make it even harder to

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Speaker 1: keep expensive mining equipment cool, and crypto minors are already

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Speaker 1: facing financial difficulties brought on by declining bitcoin prices. So

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Speaker 1: the miners actually they are coping with the situation by

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Speaker 1: selling some of the electricity they bought earlier back to

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Speaker 1: the grid and at a at a premium. That's Bloomberg

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Speaker 1: reports that David Patton, who covers crypto mining, he and

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Speaker 1: Ethan vera CEO and co founder of Lockstair Technology, which

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Speaker 1: is a crypto software and services company, both attended a

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Speaker 1: recent bitcoin mining conference in Miami. They joined me now

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Speaker 1: to share some takeaways from the conference, as well as

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Speaker 1: their perspectives on how miners are trying to survive this

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Speaker 1: complicated crypto winds it. David, Ethan thank you both so

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Speaker 1: very much for being here. Now. One of the things

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Speaker 1: I would love for us to do is just explain

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Speaker 1: two things to our audiences. And David, I'll start with you.

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Speaker 1: What is bitcoin mining and why are their bitcoin miners

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Speaker 1: in Texas? Sure? Um, so, bitcoin mining is um it's

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Speaker 1: kind of like very industrialized, um, like skilled up industry

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Speaker 1: right now. Bitcoin miners, Uh, they try to use very

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Speaker 1: energy intensive and very powerful machines and to mind so

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Speaker 1: called quote uncom mine bitcoin, which means like the compute

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Speaker 1: mathematical questions like um too to get a bitcoin in

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Speaker 1: rewards UM. And it's a very interesting UM process because

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Speaker 1: it consumes a lot of energy at the same time

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Speaker 1: you earned this digital assets UM, which is worth like

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Speaker 1: millions millions of dollars, and that means millions of millions

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Speaker 1: of dollars in revenue for bigcoin mining companies. And one

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Speaker 1: of the things that you've been reporting on is the

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Speaker 1: fact that when China banned bitcoin mining band crypto mining

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Speaker 1: broadly ban various types of crypto transactions, various of these

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Speaker 1: miners left China and moved to other countries as well

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Speaker 1: as the states in the US, like Texas. Why was that?

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Speaker 1: Why did they move to Texas? First of all, I

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Speaker 1: think a lot of the Chinese miners they were very

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Speaker 1: very scared of, you know, any kind of like regulatory

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Speaker 1: challenges because like when China banned crypto mining, and the

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Speaker 1: miners really didn't know where to go. They were caught

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Speaker 1: off guard. And um Texas actually it has a very

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Speaker 1: liberal crypto regulation. So that's actually one of the major

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Speaker 1: reasons why bitcoin miners were flocking to Texas. The secondly,

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Speaker 1: I think it's because the cheap energy in the state.

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Speaker 1: I would say the relatively cheap energy because energy prices

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Speaker 1: arising around the world. We have, you know, a conflict

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Speaker 1: in Ukraine, we have intense weather. But Texas, for a

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Speaker 1: whole host of reasons that my colleagues have reported on,

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Speaker 1: still offers fairly attractive rates, especially if you're benefiting from

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Speaker 1: industrial pricing, which is what these miners get. Is that correct?

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Speaker 1: You also have like a very very interesting energy marketing

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Speaker 1: in Texas also because of the way the energy market

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Speaker 1: was set up and and because they're they're are a

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Speaker 1: variety of demand response so called humanity response programs where

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Speaker 1: bigcoin miners as as large energy consumers in the state

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Speaker 1: had the advantage to nego ship with the state's power

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Speaker 1: operated are cut because they use a lot of energy,

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Speaker 1: a lot of electricity from the grid. Nearly all industrial

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Speaker 1: scale bitcoin miners in Texas have shut off their machines.

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Speaker 1: That's as the company's brace for a heat wave that

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Speaker 1: is expected to push the state's power grid near its

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Speaker 1: breaking point. The state it has become one of the

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Speaker 1: world's largest crypto mining hubs thanks to its low energy

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Speaker 1: costs and liberal regulations on crypto mining, so they can

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Speaker 1: actually have this um power purchase agreements with with the

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Speaker 1: suppliers UM and got a favorable rate in the first place. Well,

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Speaker 1: that all sounds great so far, so even I'm going

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Speaker 1: to ask you to talk a little bit about what

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Speaker 1: some of the complications that miners in Texas but really

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Speaker 1: around the world have been encountering in this market environment

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Speaker 1: of falling crypto prices. I'll start with the idea that

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Speaker 1: they're getting squeezed in two directions right now. They're getting

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Speaker 1: squeezed on lower mining revenue at the same time as

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Speaker 1: higher cost and so on the lower mining revenue side.

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Speaker 1: That that's largely a function of decreasing bitcoin price that

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Speaker 1: we've seen in the past few months here. Bitcoin obviously

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Speaker 1: peaked above sixty six thousand dollars there and now trading

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Speaker 1: it kind of in the mid twenties range for the

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Speaker 1: past few weeks. And then on in tandem with that

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Speaker 1: is their operating costs, which, as you mentioned earlier, is

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Speaker 1: a function largely of electricity costs, and so as electricity

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Speaker 1: costs rise in this macro environment, that's also causing decreasing economics.

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Speaker 1: Miners for the most part, and specifically in Texas, didn't

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Speaker 1: lock in long term power purchase agreements known as p

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Speaker 1: p a s. The reason they didn't lock those in

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Speaker 1: is because the Ford pricing curve on electricity looked like

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Speaker 1: it was decreasing over time, and so miners expected their

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Speaker 1: electricity costs to decrease last year. Just to just to

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Speaker 1: ask one questions, So when you say the forward pricing curve,

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Speaker 1: what you mean is like the projection for what energy

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Speaker 1: prices would be over the next twelve months and on. Yes. Correct.

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Speaker 1: So when miners were setting up shop in Texas last year,

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Speaker 1: they were looking towards UH Energy analysts to determine will

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Speaker 1: power prices be lower in the future than they are today?

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Speaker 1: And because the analysts told them that it would be lower,

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Speaker 1: they decided not to lock in long term rates and

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Speaker 1: kind of play out to see how the market would trade.

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Speaker 1: UH ended up being that the trade went against them

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Speaker 1: quite significantly there, and electric city prices are higher today

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Speaker 1: than they were last year. David. One of the things

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Speaker 1: that you have mentioned and you know are reporting on

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Speaker 1: is the fact that this exact type of forecasting that

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Speaker 1: Ethan has described is getting harder and harder in the

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Speaker 1: context of like climate change and just uncertainty around whether

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Speaker 1: how are miners responding to this increased uncertainty in every

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Speaker 1: element of their business. So the miners actually they are

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Speaker 1: coping with the situation by selling some of the electricity

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Speaker 1: they bought earlier back to the grid and at a

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Speaker 1: at a premium. So recently we have seen Ride Blockchain,

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Speaker 1: which one of the largest mining companies in Texas do

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Speaker 1: through a demand response programs and also other purchased power

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Speaker 1: purchase agreements. UM they were able to earn nine nine

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Speaker 1: and a half million dollars UM in power credits and

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Speaker 1: which is um which is like a very profitable way

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Speaker 1: to make money um, rather than mining a coin at

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Speaker 1: the time. And even I'm gonna throw the stew giving

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Speaker 1: your background in investment banking and what you do at

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Speaker 1: lux Or right now, Well, actually tell us what you

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Speaker 1: do at lux Or right now. Yeah, that's a that's

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Speaker 1: a good question something asked myself every day. But so

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Speaker 1: so lux there is a focus on bitcoin and cryptocurrency mining,

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Speaker 1: and we run software and services. So um, we have

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Speaker 1: a number of products, including a mining pool that represents

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Speaker 1: about six percent of the bitcoin network. We run an

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Speaker 1: a sic trading desk, so we buy and sell the

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Speaker 1: specialized hardware used to mind bitcoin UM, and my day

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Speaker 1: to day is the CEO, so keeping the lights on

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Speaker 1: working directly with our our clients to help them grow

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Speaker 1: their business and bring them onto our services UM as

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Speaker 1: well as a number of other functions on the operations

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Speaker 1: and finance side of the business. And given the work

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Speaker 1: that you do, that gives you a pretty unique vantage

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Speaker 1: point to understand what miners dealing are dealing with, especially

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Speaker 1: as it relates to financing, especially as it relates to say,

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Speaker 1: the costs of some of those machines. What are some

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Speaker 1: of the financialization trends that you're seeing related to what

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Speaker 1: David described about how folks are trying to make money

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Speaker 1: in this environment. Yeah, there's a few really interesting trends here.

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Speaker 1: First is the ASIC backed financing that started to come

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Speaker 1: on the scene in early but is really proliviated in

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Speaker 1: the past couple of years, and so that's allowed miners

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Speaker 1: to leverage their balance sheet and the purchases they're making

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Speaker 1: on equipment to get extra purchasing power. It comes with

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Speaker 1: a whole new set of challenges as well that we

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Speaker 1: can get into a bit later. Probably but UM, that's

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Speaker 1: one interesting trend that The second would be how miners

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Speaker 1: are playing the energy markets UM as as David mentioned

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Speaker 1: with the case and Riot blockchain. There UM we noticed

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Speaker 1: that the companies that are straddling the bitcoin mining and

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Speaker 1: energy side UH typically are much more defensible businesses than

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Speaker 1: if you're only in operating on one of those sides.

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Speaker 1: The re and being that during times that bitcoin mining

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Speaker 1: isn't as profitable, which it looks like today, but energy

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Speaker 1: markets are profitable, you can spend more time acting as

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Speaker 1: an energy company, and then when that trend reverses, you

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Speaker 1: can spend more time mining bitcoin. So UM, I think

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Speaker 1: there's a rapid UH push for companies to become vertically

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Speaker 1: integrated onto the energy side so that they can play

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Speaker 1: into both markets. There. We'll be right back with more

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Speaker 1: from Bloomberg Reports at David Pan and Ethan Vera of

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Speaker 1: Luxor Technology on the current states of crypto mining the wait.

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Speaker 1: We saw what happened with regard to the natural gas

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Speaker 1: system in Texas. Not only did that break down electricity

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Speaker 1: and that obviously caused blackcots, caused enormous amounts of costs

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Speaker 1: for consumers, it also raised natural gas prices in the

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Speaker 1: entire region, and consumers in Colorado, consumers in Kansas, consumers

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Speaker 1: in Oklahoma and elsewhere, how to pay for that? And

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Speaker 1: they're still paying for that exorbitant rates in large part

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Speaker 1: because of the supply and demand system was out of whack.

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Speaker 1: There wasn't enough natural gas to go around. That was

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Speaker 1: Richard Glick, the chairman of the Federal Energy Regulatory Commission.

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Speaker 1: He was speaking last January during a House subcommittee hearing

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Speaker 1: on energy infrastructure efficiency. David, you've reported on, you know,

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Speaker 1: some big successes in terms of that, you know, playing

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Speaker 1: playing both sides. I think your story was about Riot blockchain,

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Speaker 1: which you said or nearly ten million dollars in credits

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Speaker 1: from you know, playing that energy market effectively. How does

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Speaker 1: that work? Like what does it mean to be on

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Speaker 1: the energy side of things? Um? I wish I could

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Speaker 1: give you a perfect answer to that question. But like,

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Speaker 1: you know, like the nature of the energy market, especially

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Speaker 1: in states like Texas, it's um it lacks transparency. I

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Speaker 1: think the way the energy market is set up is

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Speaker 1: like we don't see, we don't have a lot of

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Speaker 1: visibility into the market. One of the biggest criticisms of

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Speaker 1: crypto mining, and I think it's a kind of a

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Speaker 1: self aware of criticism. I am I no longer here

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Speaker 1: people involved in crypto mining try to argue that there

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Speaker 1: was no environmental cost. What they try to defend is

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Speaker 1: that environmental costs in different ways. But are any of

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Speaker 1: these companies thinking about creating, you know, more climate friendly

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Speaker 1: mining operations and what would that look like in your

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Speaker 1: from your perspective. So, I think the public companies that

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Speaker 1: are listed in New York Stock Exchange, Canadian Stock Exchange,

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Speaker 1: etcetera have a lot more pressure from shareholders and generally

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Speaker 1: stakeholders to become more environmentally friendly. And so we we

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Speaker 1: have seen a trend in the past year and a

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Speaker 1: half of mining companies moving away from fossil fuel based

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Speaker 1: energy sources to renewable um. That transition doesn't happen overnight

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Speaker 1: because there are a lot of kind of legacy mining

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Speaker 1: farms set up on power plants fueled by coal and

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Speaker 1: natural gas. At the same time, there's been organizations set

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Speaker 1: up like the Bitcoin Mining Council, where there's peer pressure

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Speaker 1: from other miners to UH use renewable any eschie friendly

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Speaker 1: UH power sources because it really puts a bad light

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Speaker 1: on the industry on everyone over all, and so if

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Speaker 1: one company uses UH fossil fuels, the rest of the

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Speaker 1: renowable energy companies will put pressure on them. So I

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Speaker 1: would say that's very prevalent in the public markets. Private

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Speaker 1: not as much, just given they don't have as you know,

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Speaker 1: a lens on them UH like the public house do. Also,

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Speaker 1: overseas companies, I would say are less focused on that

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Speaker 1: than we are in kind of North America, Norway and

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Speaker 1: some of the western world. I gotta thank you. That's

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Speaker 1: very helpful. And then David, just the last question for you.

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Speaker 1: You attended a mining conference last July, so July, then

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Speaker 1: you attended the mining conference this July, in two what

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Speaker 1: was your biggest takeaway about what if anything had changed

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Speaker 1: in that time. I think my biggest takeaway is just

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Speaker 1: a generous sentiment of of the conferences. You know, last year,

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Speaker 1: people were so excited. You can see hope in people's

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Speaker 1: eyes because that was two months after the China band.

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Speaker 1: So like people were scraam a link to see to

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Speaker 1: search every corner literally of four machines to mind bit coin.

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Speaker 1: But like this year, it's like a lot of companies

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Speaker 1: offering hosting services, which means like they have the machines,

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Speaker 1: they have the infrastructure, but like they don't want to

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Speaker 1: mind the bitcoin of themselves. And then they were looking

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Speaker 1: for people who can take the risk and you know,

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Speaker 1: like mind be a coin, so please come to my

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Speaker 1: side and mind the coin. So you see this kind

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Speaker 1: of like a very big shift in terms of risk appetite,

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Speaker 1: risk tolerance, and also like you know, people's outlow com

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Speaker 1: bitcoin prices. It seems like if you are scaling back,

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Speaker 1: if you are kind of like trying to pass the

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Speaker 1: cost to a third party who who is willing to

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Speaker 1: mind the coin in the near future, that means like

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Speaker 1: you have a bearish all look, right, Yeah, And Ethan,

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Speaker 1: is that sort of short term embarrass outlook consistent with

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Speaker 1: what you're seeing on your end? It is We've been

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Speaker 1: operating Luxury for five years, so we've seen a couple

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Speaker 1: of these cycles. Now, um so, I wouldn't say this

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Speaker 1: bear market is much different than the one we saw

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Speaker 1: in where a lot of the new entrants get a

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Speaker 1: bit rattled about the decreasing mining economics and skiddish. So um,

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Speaker 1: I think there certainly will be a lot of mining

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Speaker 1: companies or prospective mining companies deciding not to build a

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Speaker 1: business anymore given the economics. But the ones that do

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Speaker 1: have conviction will be able to place a large bet now.

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Speaker 1: And if bull run ends up coming about in the

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Speaker 1: in the near term, then I did they will profit

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Speaker 1: from that. So I think the high conviction miners are

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Speaker 1: the ones that have profited in the past few cycles,

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Speaker 1: at least from from our perspective. Terrific. Well, thank you

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Speaker 1: both so much for joining us on the Crypto podcast.

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Speaker 1: Really appreciate you taking the time. Thank you for having us.

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Speaker 1: You can find more of David Pan's reporting on the

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Speaker 1: Bloomberg Terminal on Bloomberg dot com or follow him on Twitter.

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Speaker 1: He's at David Pan Underscore one. On the next episode

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Speaker 1: of Bloomberg Crypto. In late July, alexation surface that some

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Speaker 1: North Koreans were plagiarizing online resumes and tricking companies, including

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Speaker 1: crypto companies, into hiring them for jobs. It's all part

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Speaker 1: of a broader effort to raise money for North Korea's

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Speaker 1: government weapons program, and it can also help the authoritarian

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Speaker 1: nation evade globle sanctions. But how did North Korea get

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Speaker 1: so good at tricking crypto employees and what does this

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Speaker 1: all mean for the security of crypto companies. To better explain,

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Speaker 1: I'll be joined by Bloomberg Report Jeff Stone. This is

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Speaker 1: Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio.

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Speaker 1: For more shows from I Heart Radio, visit the I

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Speaker 1: Heart Radio app, Apple Podcasts, or wherever you get your podcasts.

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Speaker 1: Send us your comments, questions, or suggestions for the show

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Speaker 1: to Crypto at Bloomberg dot net or find us on Twitter.

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Speaker 1: We're at Crypto. The supervising producer of Bloomberg Crypto is

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Speaker 1: Vicky Vergelina. Our senior producer is Janet Babin. Our producers

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Speaker 1: are Mohammed Faruk and Sharon Barrio. Associate producer is Zanab Sidiki.

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Speaker 1: Dasta wonder At is our engineer. Original music by Leo Sidrin.

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Speaker 1: I'm Stacy Maria Schml. We'll be back tomorrow