WEBVTT - Bitcoin Miners Are In Distress

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

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<v Speaker 1>and this is Bloomberg Crypto at Daily Bloomberg. I heard podcast.

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

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<v Speaker 1>are hearing that our province in China plans to raise

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<v Speaker 1>penalties for crypto mining. Of course, this is a continuation

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<v Speaker 1>of the mining crackdown that we've seen in China already.

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<v Speaker 1>In our Mongolia has banned cryptocurrency mining and Declarity will

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<v Speaker 1>shut all such projects. In late spring of China banned

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<v Speaker 1>all bitcoin mining as part of an ongoing crackdown on

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<v Speaker 1>crypto in the country. In response, many Chinese miners pack

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<v Speaker 1>their bags and headed to the state of Texas. Texas

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<v Speaker 1>offers what I'll describe as a relaxed approach to regulation,

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<v Speaker 1>a unique par grid, and relatively attractive energy prices, all

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<v Speaker 1>things that seemed ideal for these miners looking for a

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<v Speaker 1>new home. And then two happened. The situation in Texas

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<v Speaker 1>got slightly more complicated, to say the least. That unique

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<v Speaker 1>energy grid is prone to power outages, made worse by

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<v Speaker 1>extreme temperatures. Those extreme temperatures make it even harder to

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<v Speaker 1>keep expensive mining equipment cool, and crypto minors are already

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<v Speaker 1>facing financial difficulties brought on by declining bitcoin prices. So

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<v Speaker 1>the miners actually they are coping with the situation by

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<v Speaker 1>selling some of the electricity they bought earlier back to

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<v Speaker 1>the grid and at a at a premium. That's Bloomberg

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<v Speaker 1>reports that David Patton, who covers crypto mining, he and

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<v Speaker 1>Ethan vera CEO and co founder of Lockstair Technology, which

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<v Speaker 1>is a crypto software and services company, both attended a

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<v Speaker 1>recent bitcoin mining conference in Miami. They joined me now

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<v Speaker 1>to share some takeaways from the conference, as well as

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<v Speaker 1>their perspectives on how miners are trying to survive this

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<v Speaker 1>complicated crypto winds it. David, Ethan thank you both so

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<v Speaker 1>very much for being here. Now. One of the things

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<v Speaker 1>I would love for us to do is just explain

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

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<v Speaker 1>What is bitcoin mining and why are their bitcoin miners

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

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<v Speaker 1>kind of like very industrialized, um, like skilled up industry

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<v Speaker 1>right now. Bitcoin miners, Uh, they try to use very

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<v Speaker 1>energy intensive and very powerful machines and to mind so

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<v Speaker 1>called quote uncom mine bitcoin, which means like the compute

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<v Speaker 1>mathematical questions like um too to get a bitcoin in

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<v Speaker 1>rewards UM. And it's a very interesting UM process because

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<v Speaker 1>it consumes a lot of energy at the same time

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<v Speaker 1>you earned this digital assets UM, which is worth like

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<v Speaker 1>millions millions of dollars, and that means millions of millions

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<v Speaker 1>of dollars in revenue for bigcoin mining companies. And one

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<v Speaker 1>of the things that you've been reporting on is the

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<v Speaker 1>fact that when China banned bitcoin mining band crypto mining

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<v Speaker 1>broadly ban various types of crypto transactions, various of these

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<v Speaker 1>miners left China and moved to other countries as well

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<v Speaker 1>as the states in the US, like Texas. Why was that?

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<v Speaker 1>Why did they move to Texas? First of all, I

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<v Speaker 1>think a lot of the Chinese miners they were very

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<v Speaker 1>very scared of, you know, any kind of like regulatory

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<v Speaker 1>challenges because like when China banned crypto mining, and the

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<v Speaker 1>miners really didn't know where to go. They were caught

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<v Speaker 1>off guard. And um Texas actually it has a very

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<v Speaker 1>liberal crypto regulation. So that's actually one of the major

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<v Speaker 1>reasons why bitcoin miners were flocking to Texas. The secondly,

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<v Speaker 1>I think it's because the cheap energy in the state.

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<v Speaker 1>I would say the relatively cheap energy because energy prices

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<v Speaker 1>arising around the world. We have, you know, a conflict

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<v Speaker 1>in Ukraine, we have intense weather. But Texas, for a

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<v Speaker 1>whole host of reasons that my colleagues have reported on,

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<v Speaker 1>still offers fairly attractive rates, especially if you're benefiting from

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

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<v Speaker 1>You also have like a very very interesting energy marketing

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<v Speaker 1>in Texas also because of the way the energy market

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<v Speaker 1>was set up and and because they're they're are a

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<v Speaker 1>variety of demand response so called humanity response programs where

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<v Speaker 1>bigcoin miners as as large energy consumers in the state

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<v Speaker 1>had the advantage to nego ship with the state's power

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<v Speaker 1>operated are cut because they use a lot of energy,

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<v Speaker 1>a lot of electricity from the grid. Nearly all industrial

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<v Speaker 1>scale bitcoin miners in Texas have shut off their machines.

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<v Speaker 1>That's as the company's brace for a heat wave that

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<v Speaker 1>is expected to push the state's power grid near its

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<v Speaker 1>breaking point. The state it has become one of the

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<v Speaker 1>world's largest crypto mining hubs thanks to its low energy

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<v Speaker 1>costs and liberal regulations on crypto mining, so they can

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<v Speaker 1>actually have this um power purchase agreements with with the

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

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<v Speaker 1>that all sounds great so far, so even I'm going

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<v Speaker 1>to ask you to talk a little bit about what

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<v Speaker 1>some of the complications that miners in Texas but really

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<v Speaker 1>around the world have been encountering in this market environment

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<v Speaker 1>of falling crypto prices. I'll start with the idea that

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<v Speaker 1>they're getting squeezed in two directions right now. They're getting

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<v Speaker 1>squeezed on lower mining revenue at the same time as

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<v Speaker 1>higher cost and so on the lower mining revenue side.

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<v Speaker 1>That that's largely a function of decreasing bitcoin price that

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<v Speaker 1>we've seen in the past few months here. Bitcoin obviously

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<v Speaker 1>peaked above sixty six thousand dollars there and now trading

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<v Speaker 1>it kind of in the mid twenties range for the

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<v Speaker 1>past few weeks. And then on in tandem with that

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<v Speaker 1>is their operating costs, which, as you mentioned earlier, is

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<v Speaker 1>a function largely of electricity costs, and so as electricity

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

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<v Speaker 1>Miners for the most part, and specifically in Texas, didn't

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<v Speaker 1>lock in long term power purchase agreements known as p

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<v Speaker 1>p a s. The reason they didn't lock those in

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<v Speaker 1>is because the Ford pricing curve on electricity looked like

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<v Speaker 1>it was decreasing over time, and so miners expected their

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<v Speaker 1>electricity costs to decrease last year. Just to just to

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<v Speaker 1>ask one questions, So when you say the forward pricing curve,

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<v Speaker 1>what you mean is like the projection for what energy

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<v Speaker 1>prices would be over the next twelve months and on. Yes. Correct.

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<v Speaker 1>So when miners were setting up shop in Texas last year,

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<v Speaker 1>they were looking towards UH Energy analysts to determine will

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<v Speaker 1>power prices be lower in the future than they are today?

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<v Speaker 1>And because the analysts told them that it would be lower,

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<v Speaker 1>they decided not to lock in long term rates and

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<v Speaker 1>kind of play out to see how the market would trade.

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<v Speaker 1>UH ended up being that the trade went against them

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<v Speaker 1>quite significantly there, and electric city prices are higher today

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<v Speaker 1>than they were last year. David. One of the things

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<v Speaker 1>that you have mentioned and you know are reporting on

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<v Speaker 1>is the fact that this exact type of forecasting that

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<v Speaker 1>Ethan has described is getting harder and harder in the

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<v Speaker 1>context of like climate change and just uncertainty around whether

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<v Speaker 1>how are miners responding to this increased uncertainty in every

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<v Speaker 1>element of their business. So the miners actually they are

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<v Speaker 1>coping with the situation by selling some of the electricity

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<v Speaker 1>they bought earlier back to the grid and at a

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<v Speaker 1>at a premium. So recently we have seen Ride Blockchain,

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<v Speaker 1>which one of the largest mining companies in Texas do

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<v Speaker 1>through a demand response programs and also other purchased power

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<v Speaker 1>purchase agreements. UM they were able to earn nine nine

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<v Speaker 1>and a half million dollars UM in power credits and

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<v Speaker 1>which is um which is like a very profitable way

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<v Speaker 1>to make money um, rather than mining a coin at

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<v Speaker 1>the time. And even I'm gonna throw the stew giving

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<v Speaker 1>your background in investment banking and what you do at

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<v Speaker 1>lux Or right now, Well, actually tell us what you

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<v Speaker 1>do at lux Or right now. Yeah, that's a that's

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<v Speaker 1>a good question something asked myself every day. But so

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<v Speaker 1>so lux there is a focus on bitcoin and cryptocurrency mining,

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<v Speaker 1>and we run software and services. So um, we have

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<v Speaker 1>a number of products, including a mining pool that represents

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<v Speaker 1>about six percent of the bitcoin network. We run an

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<v Speaker 1>a sic trading desk, so we buy and sell the

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<v Speaker 1>specialized hardware used to mind bitcoin UM, and my day

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<v Speaker 1>to day is the CEO, so keeping the lights on

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<v Speaker 1>working directly with our our clients to help them grow

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<v Speaker 1>their business and bring them onto our services UM as

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<v Speaker 1>well as a number of other functions on the operations

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<v Speaker 1>and finance side of the business. And given the work

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<v Speaker 1>that you do, that gives you a pretty unique vantage

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<v Speaker 1>point to understand what miners dealing are dealing with, especially

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<v Speaker 1>as it relates to financing, especially as it relates to say,

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<v Speaker 1>the costs of some of those machines. What are some

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<v Speaker 1>of the financialization trends that you're seeing related to what

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<v Speaker 1>David described about how folks are trying to make money

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

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<v Speaker 1>First is the ASIC backed financing that started to come

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<v Speaker 1>on the scene in early but is really proliviated in

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<v Speaker 1>the past couple of years, and so that's allowed miners

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<v Speaker 1>to leverage their balance sheet and the purchases they're making

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<v Speaker 1>on equipment to get extra purchasing power. It comes with

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<v Speaker 1>a whole new set of challenges as well that we

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

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<v Speaker 1>one interesting trend that The second would be how miners

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<v Speaker 1>are playing the energy markets UM as as David mentioned

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<v Speaker 1>with the case and Riot blockchain. There UM we noticed

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<v Speaker 1>that the companies that are straddling the bitcoin mining and

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<v Speaker 1>energy side UH typically are much more defensible businesses than

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<v Speaker 1>if you're only in operating on one of those sides.

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<v Speaker 1>The re and being that during times that bitcoin mining

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<v Speaker 1>isn't as profitable, which it looks like today, but energy

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<v Speaker 1>markets are profitable, you can spend more time acting as

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<v Speaker 1>an energy company, and then when that trend reverses, you

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<v Speaker 1>can spend more time mining bitcoin. So UM, I think

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<v Speaker 1>there's a rapid UH push for companies to become vertically

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<v Speaker 1>integrated onto the energy side so that they can play

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<v Speaker 1>into both markets. There. We'll be right back with more

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<v Speaker 1>from Bloomberg Reports at David Pan and Ethan Vera of

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<v Speaker 1>Luxor Technology on the current states of crypto mining the wait.

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<v Speaker 1>We saw what happened with regard to the natural gas

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<v Speaker 1>system in Texas. Not only did that break down electricity

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<v Speaker 1>and that obviously caused blackcots, caused enormous amounts of costs

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<v Speaker 1>for consumers, it also raised natural gas prices in the

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<v Speaker 1>entire region, and consumers in Colorado, consumers in Kansas, consumers

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<v Speaker 1>in Oklahoma and elsewhere, how to pay for that? And

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<v Speaker 1>they're still paying for that exorbitant rates in large part

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<v Speaker 1>because of the supply and demand system was out of whack.

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<v Speaker 1>There wasn't enough natural gas to go around. That was

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<v Speaker 1>Richard Glick, the chairman of the Federal Energy Regulatory Commission.

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<v Speaker 1>He was speaking last January during a House subcommittee hearing

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<v Speaker 1>on energy infrastructure efficiency. David, you've reported on, you know,

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<v Speaker 1>some big successes in terms of that, you know, playing

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<v Speaker 1>playing both sides. I think your story was about Riot blockchain,

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<v Speaker 1>which you said or nearly ten million dollars in credits

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<v Speaker 1>from you know, playing that energy market effectively. How does

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<v Speaker 1>that work? Like what does it mean to be on

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<v Speaker 1>the energy side of things? Um? I wish I could

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<v Speaker 1>give you a perfect answer to that question. But like,

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<v Speaker 1>you know, like the nature of the energy market, especially

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<v Speaker 1>in states like Texas, it's um it lacks transparency. I

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<v Speaker 1>think the way the energy market is set up is

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<v Speaker 1>like we don't see, we don't have a lot of

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<v Speaker 1>visibility into the market. One of the biggest criticisms of

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<v Speaker 1>crypto mining, and I think it's a kind of a

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<v Speaker 1>self aware of criticism. I am I no longer here

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<v Speaker 1>people involved in crypto mining try to argue that there

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<v Speaker 1>was no environmental cost. What they try to defend is

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<v Speaker 1>that environmental costs in different ways. But are any of

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<v Speaker 1>these companies thinking about creating, you know, more climate friendly

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<v Speaker 1>mining operations and what would that look like in your

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<v Speaker 1>from your perspective. So, I think the public companies that

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<v Speaker 1>are listed in New York Stock Exchange, Canadian Stock Exchange,

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<v Speaker 1>etcetera have a lot more pressure from shareholders and generally

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<v Speaker 1>stakeholders to become more environmentally friendly. And so we we

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<v Speaker 1>have seen a trend in the past year and a

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<v Speaker 1>half of mining companies moving away from fossil fuel based

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<v Speaker 1>energy sources to renewable um. That transition doesn't happen overnight

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<v Speaker 1>because there are a lot of kind of legacy mining

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<v Speaker 1>farms set up on power plants fueled by coal and

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

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<v Speaker 1>up like the Bitcoin Mining Council, where there's peer pressure

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<v Speaker 1>from other miners to UH use renewable any eschie friendly

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<v Speaker 1>UH power sources because it really puts a bad light

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<v Speaker 1>on the industry on everyone over all, and so if

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<v Speaker 1>one company uses UH fossil fuels, the rest of the

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<v Speaker 1>renowable energy companies will put pressure on them. So I

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<v Speaker 1>would say that's very prevalent in the public markets. Private

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<v Speaker 1>not as much, just given they don't have as you know,

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<v Speaker 1>a lens on them UH like the public house do. Also,

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<v Speaker 1>overseas companies, I would say are less focused on that

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<v Speaker 1>than we are in kind of North America, Norway and

0:13:23.280 --> 0:13:26.440
<v Speaker 1>some of the western world. I gotta thank you. That's

0:13:26.520 --> 0:13:30.319
<v Speaker 1>very helpful. And then David, just the last question for you.

0:13:30.320 --> 0:13:35.480
<v Speaker 1>You attended a mining conference last July, so July, then

0:13:35.520 --> 0:13:41.640
<v Speaker 1>you attended the mining conference this July, in two what

0:13:41.720 --> 0:13:44.400
<v Speaker 1>was your biggest takeaway about what if anything had changed

0:13:44.559 --> 0:13:47.280
<v Speaker 1>in that time. I think my biggest takeaway is just

0:13:47.360 --> 0:13:51.360
<v Speaker 1>a generous sentiment of of the conferences. You know, last year,

0:13:51.440 --> 0:13:55.200
<v Speaker 1>people were so excited. You can see hope in people's

0:13:55.200 --> 0:13:58.560
<v Speaker 1>eyes because that was two months after the China band.

0:13:58.720 --> 0:14:01.160
<v Speaker 1>So like people were scraam a link to see to

0:14:01.280 --> 0:14:05.160
<v Speaker 1>search every corner literally of four machines to mind bit coin.

0:14:05.280 --> 0:14:08.280
<v Speaker 1>But like this year, it's like a lot of companies

0:14:08.320 --> 0:14:11.679
<v Speaker 1>offering hosting services, which means like they have the machines,

0:14:11.720 --> 0:14:14.680
<v Speaker 1>they have the infrastructure, but like they don't want to

0:14:14.720 --> 0:14:17.439
<v Speaker 1>mind the bitcoin of themselves. And then they were looking

0:14:17.480 --> 0:14:20.240
<v Speaker 1>for people who can take the risk and you know,

0:14:20.320 --> 0:14:22.720
<v Speaker 1>like mind be a coin, so please come to my

0:14:22.800 --> 0:14:26.120
<v Speaker 1>side and mind the coin. So you see this kind

0:14:26.120 --> 0:14:30.440
<v Speaker 1>of like a very big shift in terms of risk appetite,

0:14:30.560 --> 0:14:33.840
<v Speaker 1>risk tolerance, and also like you know, people's outlow com

0:14:33.880 --> 0:14:38.000
<v Speaker 1>bitcoin prices. It seems like if you are scaling back,

0:14:38.120 --> 0:14:41.400
<v Speaker 1>if you are kind of like trying to pass the

0:14:41.520 --> 0:14:44.040
<v Speaker 1>cost to a third party who who is willing to

0:14:44.120 --> 0:14:46.640
<v Speaker 1>mind the coin in the near future, that means like

0:14:46.680 --> 0:14:49.520
<v Speaker 1>you have a bearish all look, right, Yeah, And Ethan,

0:14:49.600 --> 0:14:52.760
<v Speaker 1>is that sort of short term embarrass outlook consistent with

0:14:52.800 --> 0:14:56.280
<v Speaker 1>what you're seeing on your end? It is We've been

0:14:56.320 --> 0:14:58.720
<v Speaker 1>operating Luxury for five years, so we've seen a couple

0:14:58.760 --> 0:15:01.880
<v Speaker 1>of these cycles. Now, um so, I wouldn't say this

0:15:01.960 --> 0:15:03.880
<v Speaker 1>bear market is much different than the one we saw

0:15:03.920 --> 0:15:07.440
<v Speaker 1>in where a lot of the new entrants get a

0:15:07.480 --> 0:15:12.320
<v Speaker 1>bit rattled about the decreasing mining economics and skiddish. So um,

0:15:12.640 --> 0:15:14.560
<v Speaker 1>I think there certainly will be a lot of mining

0:15:14.600 --> 0:15:18.480
<v Speaker 1>companies or prospective mining companies deciding not to build a

0:15:18.480 --> 0:15:21.600
<v Speaker 1>business anymore given the economics. But the ones that do

0:15:21.680 --> 0:15:24.560
<v Speaker 1>have conviction will be able to place a large bet now.

0:15:24.600 --> 0:15:27.640
<v Speaker 1>And if bull run ends up coming about in the

0:15:27.800 --> 0:15:29.880
<v Speaker 1>in the near term, then I did they will profit

0:15:29.960 --> 0:15:32.600
<v Speaker 1>from that. So I think the high conviction miners are

0:15:32.600 --> 0:15:34.720
<v Speaker 1>the ones that have profited in the past few cycles,

0:15:34.760 --> 0:15:38.560
<v Speaker 1>at least from from our perspective. Terrific. Well, thank you

0:15:38.600 --> 0:15:40.480
<v Speaker 1>both so much for joining us on the Crypto podcast.

0:15:40.600 --> 0:15:43.440
<v Speaker 1>Really appreciate you taking the time. Thank you for having us.

0:15:44.720 --> 0:15:46.480
<v Speaker 1>You can find more of David Pan's reporting on the

0:15:46.480 --> 0:15:50.120
<v Speaker 1>Bloomberg Terminal on Bloomberg dot com or follow him on Twitter.

0:15:50.440 --> 0:15:56.800
<v Speaker 1>He's at David Pan Underscore one. On the next episode

0:15:56.840 --> 0:16:00.880
<v Speaker 1>of Bloomberg Crypto. In late July, alexation surface that some

0:16:01.040 --> 0:16:05.600
<v Speaker 1>North Koreans were plagiarizing online resumes and tricking companies, including

0:16:05.640 --> 0:16:09.400
<v Speaker 1>crypto companies, into hiring them for jobs. It's all part

0:16:09.400 --> 0:16:11.560
<v Speaker 1>of a broader effort to raise money for North Korea's

0:16:11.560 --> 0:16:14.560
<v Speaker 1>government weapons program, and it can also help the authoritarian

0:16:14.640 --> 0:16:18.040
<v Speaker 1>nation evade globle sanctions. But how did North Korea get

0:16:18.080 --> 0:16:20.640
<v Speaker 1>so good at tricking crypto employees and what does this

0:16:20.680 --> 0:16:24.120
<v Speaker 1>all mean for the security of crypto companies. To better explain,

0:16:24.240 --> 0:16:31.000
<v Speaker 1>I'll be joined by Bloomberg Report Jeff Stone. This is

0:16:31.040 --> 0:16:34.680
<v Speaker 1>Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio.

0:16:35.400 --> 0:16:37.520
<v Speaker 1>For more shows from I Heart Radio, visit the I

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<v Speaker 1>Heart Radio app, Apple Podcasts, or wherever you get your podcasts.

0:16:42.360 --> 0:16:44.920
<v Speaker 1>Send us your comments, questions, or suggestions for the show

0:16:45.080 --> 0:16:48.360
<v Speaker 1>to Crypto at Bloomberg dot net or find us on Twitter.

0:16:48.600 --> 0:16:54.280
<v Speaker 1>We're at Crypto. The supervising producer of Bloomberg Crypto is

0:16:54.360 --> 0:16:58.600
<v Speaker 1>Vicky Vergelina. Our senior producer is Janet Babin. Our producers

0:16:58.600 --> 0:17:02.720
<v Speaker 1>are Mohammed Faruk and Sharon Barrio. Associate producer is Zanab Sidiki.

0:17:03.120 --> 0:17:06.800
<v Speaker 1>Dasta wonder At is our engineer. Original music by Leo Sidrin.

0:17:08.720 --> 0:17:11.120
<v Speaker 1>I'm Stacy Maria Schml. We'll be back tomorrow