Daniel Kauffman - Bitcoin Changing Energy Industry

JohnPaul: [00:00:00] Hey everyone, welcome to the podcast. I’m your host JohnPaul and this is Digital Gold. Known to many as the Bitcoin Kid, I started my own cryptocurrency out of my parents’ basement back in 2013. The goal of this show is to simplify the crypto world and explore how it changes the way the world thinks about money through conversations with thought leaders [00:00:16] in this space.

[00:00:17] JohnPaul is the founder and CEO of Orm Capital Ventures. All opinions expressed by JP and podcast guests are solely their own and do not reflect the opinions of Orm Capital Ventures. This podcast is intended for informational purposes only and should not be relied upon for investment decisions.

JohnPaul: [00:00:31] Today I’m very excited to be joined by Daniel Kaufman, an entrepreneur and management consultant serving energy sector companies, service providers and investors. Daniel is the founder and CEO of Empira, a software company providing analysis and data services to electric utilities and building portfolios. Daniel has worked for Fortune 500 companies and large consulting [00:00:49] firms, helping to solve challenges at the intersection of energy, technology and business. Daniel’s work has spanned the energy sector from oil and gas to smart grid, power generation and energy efficient consumption. Daniel has degrees from Duke University in the War and School. We are thrilled to have Daniel on to help explain the connection between mining

JohnPaul: [00:01:07] and energy in the future of cryptocurrencies. Daniel, welcome to the show.

Daniel: [00:01:12] Thanks for having me on JP. Of course, I’m glad you’re here. I’m glad we’re actually able to put this conversation now in front of an audience and to dig into some of the details that we need to talk about

JohnPaul: [00:01:21] on a regular basis. My first question for you, Daniel, is how did you find out about

Daniel: [00:01:26] Bitcoin and what are you interested in this space? I first found out about Bitcoin around 2013. That’s when the first articles were coming out in mainstream media and energy sector rags around Bitcoin mining. I remember thinking that there’s this whole new industry, which at the time looked a lot like a derivative [00:01:48] of data centers, which is an area I’ve done a little work in. But the output was this obscure commodity type instrument called Bitcoin. I remember thinking this is very intriguing and something that I really need to pay attention to. After that, I would say that the chatter in the energy sector really started around 2016

Daniel: [00:02:12] and really in 2017 as Bitcoin prices rose, there was an increased awareness of the potential for blockchain technologies in energy sector applications. The first thing I thought of was for making it easier to trade land rights and mineral rights with oil and gas. It can be very troublesome to figure out who owns rights and to acquire them. It struck me [00:02:39] as a natural application, or needless to say, actually executing the real world would have its challenges. Many of the ideas I saw being proposed around 2017 were really around energy trading and transactions. Some on the wholesale level, but there were also ideas around peer-to-peer transaction of solar production and even tokenizing demand response and unused energy and monetizing

Daniel: [00:03:04] that into various markets. I saw a lot of ideas, frankly, and at the time I joined local energy blockchain working group, which was essentially professionals in the energy and technology space trying to understand how this interacted with them. Everything from software developers who had actually implemented blockchains to people from electric utilities saying, [00:03:26] this guy just called me up and asked for a gargantuan amount of electricity at $0.05 a kilowatt hour and I’m not even sure if I need to create a new tariff for this guy. One of the things we saw when looking for power prices, Daniel, was that it’s really hard to get below that four cent rate in the United States in the regulated energy space. Do you

Daniel: [00:03:45] know why that is or have you run up against that in your search for energy? A utility needs to get regulatory approval for a new tariff and those tariffs are designed for certain customer classes. The cheapest tariffs you’ll find, if you can find one at four cents, they do exist but they’re hard to find. It would be for established industrial [00:04:07] customers who have large electric needs and would presumably use them over a long period of time located at the same space and located near a large base load electric producer so you could think of dams, large hydro power in Washington state or other places. Texas has very low wholesale power prices on the grid. The thing is that Bitcoin miners don’t

Daniel: [00:04:38] fit neatly into a tariff. No tariffs existed specifically for mining and there was a natural conflict between the time horizon of the investment of a miner and that of a utility. A utility likes to make investments over 20 year periods if they’re going to put in new transformers, switch gear, substation equipment versus a miner might pack up and move after two years, [00:05:00] or less if economics change and they find a better deal elsewhere. And aligning these different time horizons of investment, I think struck me as one of the first challenges of having the Bitcoin community and the electric utility industry speak to one another coherently. I think we saw that as well when I was looking for power up in Grant County in Washington state where they did add

Daniel: [00:05:24] some of those tariffs because that was the cheapest energy that you could regularly go and get on the grid close to about one to two cents. That was selling to traditional data centers. So Daniel, the first challenge you mentioned with the Bitcoin mining space was the different outlooks that the energy industry has versus the Bitcoin mining industry has and the ability for Bitcoin miners [00:05:43] to get up and move where the energy industry is putting in a more expensive investment, a longer term investment. How else do you see these two industries interacting? Maybe one of the challenges are there for the two industries to be able to work together to use energy and bring cheaper energy prices to an area? It comes down to the unique aspects of mining. So first of all,

Daniel: [00:06:03] it’s worth commenting that mining is a very energy intensive industry. It requires a lot of kilowatt hours to make a Bitcoin. So today, the rate at which you make Bitcoin is roughly about 120,000 kilowatt hours to make one Bitcoin using today’s miners at today’s hash rates. An average home would use 10 to 12,000 kilowatt hours a year. So we’re talking about to make one [00:06:30] Bitcoin the equivalent of what 10 homes would use over an entire year. The way a mine operates is that it wants to use that energy all the time. So day and night, but the grid prices are not so stable, right? During the daytime, you tend to have higher prices when there’s demand and overnight, you have cheaper prices. Miners are looking for the cheapest blended price.

Daniel: [00:06:56] And so they’re looking to avoid places where you have spikes in power prices. And then the third component is that cryptocurrency mining, unlike data centers, is not mission critical. You don’t need uptime guarantees to clients. Cryptocurrency mines can essentially shut down at peak without suffering business consequences. And so there’s a certain number of [00:07:18] hours per month that are or even per year that are curtailable by a mine. And this allows the electric utility to have a customer that can absorb a lot of cheap electricity when it’s not wanted, but at the same time, not be consuming energy when all of the other customers want it. So it can serve to both increase the aggregate demand in a certain area for electricity,

Daniel: [00:07:43] while also not creating impositions for peak demand, which is really where the need for capacity investments are driven or driven by. And this peak demand issue for people that aren’t aware of how that works, can you just go into on a high level, what that is? Yeah, sure. I think we’ve all experienced this where utility during a hot summer day will ask to shut off our thermostats or there’ll [00:08:11] be a switch on our air conditioning system. In commercial and industrial sites, there’s something known as demand response, which is where the capacity of the building is paid for by the market or by electric utility. And the factory or the building goes into a routine where certain things are shut off in order to shed the amount of load promised by the facility as part of the agreement. This all

Daniel: [00:08:40] helps keep power prices down, right? Because we need to have enough power production to ensure that we can meet that last final highest kilowatt at the day that we need all of it. So if we can avoid building out peak demand, we can avoid building power plants. And going back to cryptocurrency mining, the nice part about a cryptocurrency mine is that it is curtalable. What that means is when a [00:09:06] market or utility asks it to not consume power because prices are going up and there just isn’t the power production available, the mine can shut down. And so it can help the utility avoid meeting those peaks where at the same time when the power is cheaper and in abundance, and you might even have generators sitting idle, those generators can produce power that the mine

Daniel: [00:09:29] would want to buy. So Daniel, it seems to me that most of these utilities have, when this statements in 2016, 2017, where people were coming to ask for hundreds of megawatts of power, took the stance of like, no, we don’t want Bitcoin miners because you guys, you don’t, we don’t know if Bitcoin’s going to be around this long. We don’t have the same time horizons. You guys just use

JohnPaul: [00:09:48] all this energy to do nothing. How has that changed their opinion understanding maybe the benefits

Daniel: [00:09:55] that these Bitcoin miners can bring as you mentioned, being able to turn off immediately? Do you see that shift in perspective in the energy sector, which is just the amount of new generation that’s already coming online in the amount of excess energy that we have throughout the days as we see negative pricing in some areas? I think that there’s a couple of facts. One is that [00:10:15] I actually think that there’s there might be less interaction between the mining community and utilities than there was because cryptocurrency miners have become more savvy and sophisticated. And instead of simply finding a warehouse contacting utility and trying to buy power, I think miners are increasingly looking to wholesale markets to buy their power in bulk,

Daniel: [00:10:37] working through procurement advisors or doing the procurement themselves even, or going right upstream to the power generation and being able to generate their own power or working with those who have excess power, be they in the oil and gas sector, who might have an excess fuel that or even a standby generator that can be used or a merchant power producer, somebody who [00:10:58] would otherwise sell their power into the utility space but instead can sell it to a cryptocurrency miner. So in some respects, I think that the electric utility industry might be circumvented in or at least the electric distribution utility industry might be circumvented in the quest to mine cryptocurrencies. But the second thing I’ll say is that you do have utilities that see this as

Daniel: [00:11:23] a customer base that can help benefit their own economics. So if you are looking at places that have, for example, factories that have been shut down, industrial power plants that are no longer used, deindustrialization, but you have the grid assets, you have the power generation, and the utility is looking at declining revenues, this is an opportunity for utility to entice [00:11:47] miner into their territory, leverage pre-existing infrastructure, maybe renovate it and provide a new stable customer base for the power that can help supplement the other customers in that area and their need for power as well. You mentioned Bitcoin miners have the ability to move directly to the source and sometimes consume that power behind the grid or off the grid. And you also

Daniel: [00:12:11] mentioned market to market in merchant power contracts. Are we able to talk about maybe the differences between how most of our listeners buy their power and what a market to market contract would look like or what a Bitcoin miner or how sophisticated Bitcoin miners are now beginning to buy power on the grid? Most of us, when we buy electricity, we just pay a utility bill [00:12:32] to a regulated electric utility or possibly a cooperative utility for which you remember owner or perhaps a municipal government that is a municipal utility. But these are all you can drink contracts. You typically would pay a monthly service fee and a rate at which you buy the power. So that rate would be 10 cents a kilowatt hour, 12 cents, 14 cents, whatever it is.

Daniel: [00:12:58] Other places, there are different tariffs, there are time of use rates and other things. But so I’m oversimplifying here. The thing to understand is that the economics to the utility are not the same as what you so when you buy your power, you might, for example, pay $10 a month plus 10 cents a kilowatt hour just to make up a very simple tariff. The utility might see you as having a [00:13:21] service cost of $25 a month to maintain all the poles and wires in order to get it to you. But their power cost could be three cents a kilowatt hour. And so what you end up with is a system by which the utility through its tariffs is essentially supplementing one group of customers in favor of another. Very often, what that means is that if you’re buying a lot of kilowatt hours of 10 cents,

Daniel: [00:13:45] you’re overpaying. And so as someone who’s overpaying, this would be your traditional industrial user who’s maybe supplementing for all the home users. And so for those far distance, those extra wires to feed that one customer. Is that what you’re saying? So these industrial customers will get a lower tariff because they’ll negotiate it directly with your utility. [00:14:05] As a homeowner, you don’t call your utility and negotiate a rate. But if you are opening a factory somewhere and are going to be consuming a lot of energy, you would do some energy engineering and work out what the right energy procurement is for your factory, what the mix would be of electricity plus maybe onsite generation and onsite storage, what you can put in solar panels or perhaps a

Daniel: [00:14:28] natural gas generator, you might have a need for combined heat and power. And when it comes to the electricity, you might have tranches that you’re buying. So you wouldn’t just pay a single tariff. You might promise to buy a certain amount of power from the utility. And then you would buy a second amount of power from the utility at a higher rate per kilowatt hour, but it would [00:14:49] really be marginal. So it’d be as you need it, whereas you could commit to the first tranche. If you’re large enough and you’re in the right regulatory environment, you don’t really need a distribution utility at all. You can buy the bulk power from a wholesale market and have that power delivered to you pay a transmission and distribution fee and negotiate with wholesale power traders

Daniel: [00:15:09] and power marketers to get you to get you that wholesale power. And there are obviously big discrepancies around the country in terms of power cost. You wouldn’t want to see cryptocurrency mining in downtown Los Angeles, for example, but in the middle of West Texas, where you have lots and lots of wind and a wholesale and a transmission grid that brings that power [00:15:32] to retail markets, it could be a good place to co-locate cryptocurrency mining right at the site of the generation so that you can avoid bringing it to market altogether. When it comes to

JohnPaul: [00:15:46] sourcing power for the cryptocurrency mining sector, where do you see the most opportunity

Daniel: [00:15:52] laying in the whole generation mix? Because it is very complex and there are a lot of different ways to generate power. As a cryptocurrency miner, what you’re looking for is both the cheapest fuel cost, but also the cheapest generator. So consider your options. You could look for a power plant that needs renovation that might need a new transformer or a new substation. An industrial [00:16:18] power plant to that has been decommissioned and needs renovation, possibly a hydro facility somewhere that needs upfit. As a general rule of thumb, for every million dollars in capital cost, you could think about the improvements as being $200,000, maybe in the range of 20% plus or minus 10% in order to get a generating station up and running. The generator itself, wherever this

Daniel: [00:16:42] is cited, there are going to be reasons why it is decommissioned. It might be old, but most likely it’s because there just is not enough power demand in that sector, in that area, a geographic area. It’s too remote or the customers who used to use it, the industrial plants or possibly homes, they’ve since moved away. There’s a reduction in demand. So the cryptocurrency miner is looking [00:17:07] for these places where there used to be a power demand. So there is incumbent infrastructure there but that demand doesn’t exist anymore. The other big opportunity for citing cryptocurrency mining is with renewables. So as we incentivize more and more renewables, we’re essentially putting in incentives for power generators that the market is not asking for.

Daniel: [00:17:32] And the result is energy that the market isn’t asking for. And so as we build out more and more solar and wind with tax incentives and other local incentives, there are going to be opportunities where the grid simply can’t absorb that power economically. And so there are opportunities to make deals behind the meter, if you will. So it’s before that power is put onto the grid directly [00:17:57] in a bilateral contract with power generator in order to avoid all of the electric distribution industry altogether, the tariffs and everything else and simply form a bilateral purchase agreement. How is this different than, as you mentioned, the cheap or negative fuel cost in bringing online that power generator? You have these sunk assets in both scenarios. But how do you view

Daniel: [00:18:22] these natural gas generators versus maybe the renewable wind farm that’s already built in generating energy? Is there a difference there? Is it just because one subsidizes and one’s not? And why the economics worked out? So if you look around at the natural gas in the United States that’s available, it comes in different types. So upstream at the well head, [00:18:45] you see what are called flares. This is when the gas is coming out of the well and is being burned. And you think to yourself, gee, this is basically free energy. Or if there’s a fee for flaring, it could be negatively priced energy. Somebody might pay you to take that flare off their hands in order to not emit it and not have to flare in the first place. The problem with flares

Daniel: [00:19:07] is often they don’t last long. They’re part of a process called well testing, reservoir testing. And so you have to figure out where these flares are, bring in power generation to their site, presuming there isn’t power generation on site, bring in mobile cryptocurrency mining. And then when the flare moves, you have to move with it. This doesn’t lend itself well to cryptocurrency [00:19:31] mining. It doesn’t lend itself well to anything where you want to put down some routes. Because small scale and mobility costs you money as compared to the ability to build a more permanent, physically permanent infrastructure, a larger scale. So then you look downstream a little bit and you have processed gas and you have areas of the country where you have plenty of natural

Daniel: [00:19:53] gas and it’s not in raw form like a flare. It’s had some of the natural gas liquids, these heavier molecules taken out of it brought to market. And so it’s going to lend itself better to power generation. And possibly there just isn’t the pipelines in place for whatever reason. Maybe they just there couldn’t be approval or they couldn’t be built fast enough. And so you have [00:20:15] semi stranded gas or you have opportunities to buy gas locally at discount. Now there are problems here too because oftentimes this gas doesn’t have power generator associated with it. So you might have to put in power generation equipment or perhaps this gas is seasonal. So there might be there might be cheap gas during nine months, the year, but during the winter time that gas is

Daniel: [00:20:38] needed for heating and that could hurt the economics of the cryptocurrency mine. So even when you find cheap sources of energy in the oil and gas sector, you have the problem of figuring out the capital cost of the generator needed to turn that natural gas, whether it’s refined, separated refined or raw natural gas and the operating and maintenance costs. Whereas if you can find cheap electricity, [00:21:02] all of that works already been done for you. And so you can feed it right into your miners, which is the right transform. And as we’re seeing, I would say is that as you mentioned earlier, the amount of renewable energy being deployed and subsidized by the government is creating plenty of pockets of power where the prices are negative or are very low, where it as a Bitcoin

Daniel: [00:21:22] miner who’s always looking for the most efficient or cheapest electron, it makes more sense to actually go to those areas where the market economics are already off compared to maybe the excess gas supplies we have or the gas for mining, as you mentioned. I think that’s right, JP, I would agree with you. So the big refueling we’re seeing here in the electric industry in the [00:21:47] United States is the decommissioning of coal and the installation of renewables and also natural gas. If you take out a coal plant, 50 megawatts of coal and put in 50 megawatts of wind and solar, it’s not really the same thing. Needless to say, you save all those emissions, but you’ve increased intermittency. So a coal plant works when you turn it on and burn coal, whereas sometimes the

Daniel: [00:22:11] wind is blowing and sometimes the wind’s blowing too hard. And sometimes it’s sunny and sometimes it’s cloudy. And so what you end up with is intermittency, which leads to price discrepancies. Sometimes that electricity becomes very expensive and sometimes it’s so cheap that they’re desperate to get rid of it. I have a story from about 10 years ago, I was working in Germany and Germany [00:22:35] was undergoing something, they’re still undergoing something called the Energevende, their energy transition. This was in its early stages of decommissioning anything that wasn’t renewable, nuclear and coal and what have you, and putting in lots of wind. The problem was sometimes they had too much wind and they were not allowed to ground it, they had to sell it. And so sometimes

Daniel: [00:22:57] the power prices would go negative. What happened at one point was that the prices went negative and the German grid was connected to the Polish grid. The Germans were literally paying Poland to accept their excess wind energy and Poland took the money and then grounded the power. And so for people who don’t know what grounding the power is, they’re literally just putting it [00:23:20] into the ground and taking the electricity and putting it straight into a pole in the ground in a wire and because they couldn’t do it in Germany because of regulatory issues, is that correct? That’s what happened. So this is all growing pains for all of us, of course. But the lesson here is that the mix of energy, the type of energy and its production characteristics

Daniel: [00:23:42] and the regulations you’re dealing with create these pockets of economic opportunity for people to take advantage of. And the way I see it, the broader thesis here is it’s the cryptocurrency miner that confined those pockets and set the floor price of electricity, where electricity can be reliably delivered for a very cheap price because it’s an abundance at that location. [00:24:07] That’s a place to put in cryptocurrency mining. When it comes to using energy, I wanted to talk a little bit more about the actual production

JohnPaul: [00:24:17] cost of Bitcoin. Can you talk a little bit farther maybe about the production cost of Bitcoin and

Daniel: [00:24:22] how we can compare that to other very energy intensive processes and how we could end up valuing Bitcoin or how you view that whole energy discussion and really energy in Bitcoin and stored in Bitcoin? So from my perspective, Bitcoin is a form of embodied energy. It is a finished good which is made by taking a lot of electricity and using that electricity to fabricate [00:24:53] In this way to me, it is somewhat similar to other commodities with finished goods with a lot of embodied energy. So a good analogy here might be cement or steel. So let’s just consider steel for a second. Steel is made at about 40 megajoules per kilogram. That’s just a measure of its energy per weight. Bitcoin has made it 430,000 megajoules per Bitcoin. And so the equivalent amount of steel

Daniel: [00:25:23] would be about 11 metric tons per Bitcoin. That’s about the weight of eight cars. If you were bringing that amount of steel to market, its value would be somewhere between $8,000 and $10,000. So you could take all of that energy, make steel and retail it for eight to $10,000, the equivalent of the amount of energy that would go into one Bitcoin. Right now Bitcoin is trading around, let’s say, [00:25:49] $25,000. So what you’ve got is a finished good which has more market value given the same amount of energy required to make it than for example, steel or cement, which again would be in the eight to 10,000 range given the same amount of energy that it would take to make one Bitcoin. Is it safe to say that this Bitcoin mining is a new industrial process that will be able to

Daniel: [00:26:16] be created for the Bitcoin miners and then be able to consume that energy and produce more value than maybe a cement factory or steel factory would have. So basically in place of energy generation for those different asset production of cement and steel, we’re now putting energy and generation in place just for Bitcoin mining or similar activities. [00:26:37] It seems to be the case at first blush, I’d have to study that in detail to understand fully how they compare or read a study on it. What can be said is that it is very energy intensive, but that energy is converted into something that the market is clearly valuing. I think the core question is really around the value of a Bitcoin. So when you buy a Bitcoin for $25,000,

Daniel: [00:27:06] what exactly are you buying? So a portion of that is clearly spent to pay for the embodied energy required to make it. But the rest of it has characteristics that are non-utilitarian. So people don’t buy steel and cement because they want to own it or believe that it’s going to appreciate in value unless they’re really trying to hedge a major construction site. [00:27:31] Bitcoin, the analogy falls apart there and Bitcoin starts to take on characteristics that are more similar to some other store of value such as gold or any number of other things that we could draw analogies to all imperfectly in order to fully understand what exactly Bitcoin is. I think hitting on that farther basically when it comes to what Warren Buffett and some of these

Daniel: [00:27:53] other large institutional investors think about Bitcoin, they say, I can say with almost certainty that it’ll come to a bad end and that’s from Warren Buffett. He says it doesn’t produce anything, but it has no value beyond someone else willing to buy it. Now, in my opinion, it seems like we just talked a lot about how there’s a lot of value stored in Bitcoin in the [00:28:11] form of energy. So how do you view that value storage, as you mentioned, similar to gold, but different? It’s not steel, it’s not a commodity. How would you do you disagree with Warren or how do you view that? Yeah, it’s always tricky to disagree with Warren Buffett, especially in public. But I read that comment and I can say very little with almost certainty. And so I found it odd

Daniel: [00:28:34] that he would even say those words. His criticisms are interesting. So that Bitcoin doesn’t produce anything, I think is what you said, and that it doesn’t have value. He is correct that from a practical perspective, Bitcoin doesn’t have any uses. Unlike a fiat currency, it can’t be used to pay a tax liability to a government. And it’s too new to have the full social construct that gold [00:29:01] does. Gold has thousands of years of history as a store of value, whereas Bitcoin has 10 years. But that’s basically where his criticism ends. So his complaint about Bitcoin is essentially the same as his complaint about gold, that when you own it, it just sits there and looks at you. I think Warren Buffett is taking the position of an investor. So he is a person that allocates

Daniel: [00:29:25] capital in order to create value. And the way he sees it, holding Bitcoin doesn’t do that. But that doesn’t mean that it can’t. So you and IJP, we’re not economists. We’re not even traders, at least not yet. Maybe one day we will be. We’re entrepreneurs. Our job is to take people in capital and create value. And if somebody were to lend you Bitcoin, you could take it, deploy it [00:29:50] to create value by mining more Bitcoin, or perhaps using it to do some other endeavor. So Bitcoin can be put to work as a financial instrument, at least in theory. And we’re starting to see that happen. As soon as you’re deploying Bitcoin as a form of capital, it’s no longer just sitting there looking at you. You’re using it to productive use. So that kind of knocks down the

Daniel: [00:30:11] whole argument that it doesn’t produce anything. It certainly doesn’t have to, but it also can. And this second criticism, which is it has no value. So that criticism could be made of Bitcoin, but it’s much harder to make it of Ethereum. So you have Ethereum being used to essentially to automate the adjudication of smart contracts. Does that adjudication not have value? If a lawyer [00:30:40] were to perform the same administrative work, would we argue that the legal work has no value? The ether is used to pay for services to support the contract. So that ether was part and parcel of the production of something of value. So I think that there are reasonable arguments, but they aren’t necessarily true in every circumstance. And I think more to the point, as we see the

Daniel: [00:31:02] development of financial instruments around cryptocurrencies and more and more blockchain applications that are driven by cryptos do appear to have more real tangible value. They seem to produce things and more value on top of them. And I think most importantly, the social construct

JohnPaul: [00:31:22] that gives us all comfort that they have value deepens. Let’s talk about Warren Buffett for one

Daniel: [00:31:29] more second. He’s a stamp collector as I understand it. So do stamps produce anything? The value of a stamp is really driven by what? Paint in paper? My son collects hockey cards. I think that’s great. But these things are just a different form of energy that went into their creation and a different set of economics. But at the end of the day, they’re all driven by collective psychology [00:31:50] that can further them with value. I think that Bitcoin’s value is somewhat derived by collective psychology. But I also think that in some respects, everything is or many other things at least. And I would agree with you on that, Daniel. I think for what we’re talking about here today, Bitcoin seems to have become this value transfer mechanism that you don’t have to trust any other

Daniel: [00:32:17] financial intermediary. You don’t have to trust the PayPal’s, the Visa of the world. You can just understand that I’m going to be able to send value to anyone in the world without asking permission from anyone. And that could be a contract, as you mentioned, like a smart contract. Or that could be for a Bitcoin miner, for a good or service. And there is no, I guess, regulatory [00:32:38] or there is no gatekeepers stopping you from transacting that value. I think that’s one of the biggest arguments I’ve seen in why Bitcoin has value. It’s just like the internet has value with information being able to transact across or being able to communicate across wide ranges of geographic area. Bitcoin is now this next leap where we’re able to transact value without having

Daniel: [00:32:59] to meet people. And I think stamps, art, hockey cards, those were all maybe ways in the past of cementing social value. And that story behind it or why Bitcoin or why they have value. It’s interesting because Bitcoin has really stayed the same over the past 10 years. It hasn’t changed when it comes to the overall fundamentals of what a Bitcoin is and what you’re getting when you buy [00:33:23] a Bitcoin, what has changed though is the perceived social value and the overall macro value of the environment. Take the volatility out of Bitcoin for just a second. As a way to transfer value, you’re entirely right. It’s much simpler to simply move it from my wallet to your wallet or to anybody’s than having to deal with a full range of financial intermediaries who benefit from their incumbency

Daniel: [00:33:53] in our financial system. As a quick story, I recently had a client project and at the conclusion the client offered two mechanisms to pay me. The first was they said, we can provide you with a credit card number, a visa number managed by a bank. We will deposit money into the account tied to that visa number. And you can pay a payment processor to transfer the money from that card [00:34:25] into an account of your choosing. And between those three intermediaries, the bank, visa, and the payment processor, they would extract around 3% of the value of the transaction between me and my client. And the second alternative was, we’ll mail you a paper check. Okay, so we have two choices, one in which the financial industry collectively extracts 3%

Daniel: [00:34:53] for just being there. And the second is Victorian era technology. So the argument that there is value to be captured by simplifying transactions and payments through using cryptocurrency to me goes without saying there is absolutely value to be captured by the frictions that are in our current financial system and the payment systems that we use. I think that brings up a great next

JohnPaul: [00:35:22] topic, Daniel, which is how do you see the role of governments in cryptocurrency is over the next

Daniel: [00:35:28] few years? We’ve already seen central backed digital currencies or CBDCs come on to the stage in 2020 and 2019 with the Chinese and the Euro and also the US dollar. Where you see this playing out, do you see the banks and intermediaries getting cut out and the Federal Reserve’s really

JohnPaul: [00:35:48] stepping in and acting as that frictionless payment mechanism? And I guess, how do you see

Daniel: [00:35:53] Bitcoin playing an Ethereum playing with these large government cryptocurrencies here to come? Yeah, I wrote a blog post this weekend about this very issue called it’s a crypto Christmas. And I was just imagining what the world would look like in 10 years, if all of these challenges against Bitcoin were to find some resolution in Bitcoin’s favor, what if the volatility decreased? [00:36:23] What if governments embraced cryptocurrencies? What if it became a useful medium of exchange? And there’s a scenario by which all of these could play out. So if you look at just imagine yourself in the position of the government and asking yourself, what do we do about this? So is it possible that the government could just simply outlaw cryptocurrencies in the long term and say,

Daniel: [00:36:49] we can’t tolerate this parallel currency that we can’t control within our economies? I think it’s possible, JP, that there is history there. There was a time when Americans were prohibited from holding gold. That didn’t end until the 70s. So it isn’t crazy to think that there could be a prohibition against trading Bitcoin in the US. The real question is that likely? What [00:37:11] is the most likely scenario that will play out? And I think to answer that, you have to think like the government collectively and ask yourself, how is this viewed? So the first question is really around the IRS because the government’s first interest is in taxing it. And to some extent, I think this question’s been answered. The IRS has already put out guidance on cryptocurrencies.

Daniel: [00:37:36] When you speak to any good lawyer or accountant in this space, they give you the same advice, which is to keep a good tally of trades as you would any stock or other tradable commodity and report faithfully to the IRS capital gains and losses. And that’s the IRS’s guidance. So we already have the beginnings of a mechanism to deal with Bitcoin. So then we have to enter the [00:38:01] political domain. We’re really asking the question of what the politicians will do. From my perspective, if you want to make a guess about the future of American policy, which I admit is a fool’s errand, start with something that stands a chance of bipartisan consensus and also doesn’t fire up the base and on one side or the other. And if you look at cryptocurrency

Daniel: [00:38:24] from this perspective, it actually checks both boxes. So it was very promising, I think, for a lot of people this year to see Andrew Yang actually articulate the beginnings of policy platform around cryptocurrency. He clearly understands its innovations and the opportunities for cryptocurrency and blockchain and the need for the government to catch up with this reality. [00:38:47] Okay, so let’s look around the political spectrum just quickly, JP. On the left side, you have progressives like Elizabeth Warren. And I think it’s fair to say that their interest will be in consumer protection and preventing fraud and theft and ensuring that if people are going to use cryptos that they’re doing it safely and securely, and that’s just a matter of regulation

Daniel: [00:39:09] and policy, I would think. And then if you just imagine a conversation on the right, you could see you if you squint a little, you could see conservatives advancing pro blockchain and pro cryptocurrency legislation. You could even imagine a floor speech by a staunch conservative. If they ever take away your crypto, what else could they take? It wouldn’t be a stretch to imagine that as a position somebody [00:39:32] could take. And I think you hit it right in the head because if crypto is value, it’s like now they’re stealing a property. And at that it has been treated as property previously by different departments of the United States. And now we’re talking about this is why we have the rule of law and the US is to protect property. And it has been for centuries. It’s been what our judicial

Daniel: [00:39:53] system has built on even looking back in slaves and them viewing viewed as property, which is obviously not the case nowadays, but it shows you that’s why we created this system in place is to protect the assets. So I don’t, it would be very far a fair statement to say we’re able to take people’s crypto and hand over the keys to your own personal property. [00:40:15] So take the ingredients personal property protection, as you point out, innovation, legislation, the fear that if we don’t do this, we’ll miss out on something that will happen elsewhere in the world and taxation. And then the rubber hits the road because the question you’re really asking about is what the Fed will do and whether we’ll start to see Fed coins and central

[00:40:41] bank to nominated coins. Orm provides a bridge to the digital currency mining world for individual

Daniel: [00:40:48] investors, financial institutions, and energy companies. By combining over 70 years of mining experience, 24 seven management and directly aligned incentives, Orm’s managed mining program is the simplest way to enter the digital currency mining market. To learn more, please visit Orm capital ventures.com. We were talking about Bitcoin versus gold and whether Bitcoin has value, [00:41:16] what derives gold’s value, what derives gold’s usefulness, aside from us all believing it has value and frankly, having believed it for thousands of years. So I looked into it a little bit, 2000 metric tons of gold were produced this year, 50% of that for jewelry. So gold demand is driven by our desire to turn a metal into finished goods we wear. It’s too bad you can’t make jewelry out

Daniel: [00:41:46] of Bitcoin. Not yet, you can’t make jewelry out of Bitcoin. Hopefully, I think there will be a future where people will show off a watch with one Bitcoin in it or a handbag with half a Bitcoin. Like here it is. You could showcase your Bitcoin in a virtual world. You could have Bitcoin jewelry and virtual reality. Yeah, that will definitely be coming. So Daniel, this concept of believing [00:42:11] that it has value because it’s a collective belief. How far do you think Bitcoin’s value is because of this just collective belief? Because in my eyes, over the years, people like, oh, I don’t want Bitcoin is $70. I don’t want Bitcoin at $5,000. But oh, it’s at $25,000. Let me get it now. It’s interesting now. What a tough question, JP. I certainly a lot of it is dependent on our belief

Daniel: [00:42:37] that it has value. But to me, the real question is whether that belief is founded. So what supports the Bitcoin price? So if you just disaggregate pricing of Bitcoin, if you say what drives its market price, there’s three components from where I see it. There’s what we’ll call the technicals. So what the traders will analyze in order to find signals to move the Bitcoin one [00:43:08] direction or another. And in that way, the technical analysis is much like any other commodity. The second is the supply of Bitcoin. And the third is the demand of Bitcoin. And let’s take the supply first. So we’ve talked a lot about mining and the hardest to make these things. We all know that the number of Bitcoin is limited. And we know that Bitcoin are simply

Daniel: [00:43:35] hard to get. They’re hard to make. They’re hard to buy and they have scarcity written into their algorithm. And as soon as you say the word scarcity, you have the attention of people who are looking for a store of value. So it seems to me that all of our confusion is on the demand side. If Bitcoin prices drop low enough, you have Bitcoin miners who don’t want to mine it anymore. [00:44:03] So that helps create a floor. You have existing holders of Bitcoin who see a dip opportunity to increase their holdings because they don’t want to see their value of their Bitcoin asset base drop too low. So you have demand there. It tells you that there’s a floor price to it. I’m not sure where exactly. Then on the demand side, that’s where all the confusion is. What exactly drives Bitcoin

Daniel: [00:44:26] demand? And that is the open ended question that I think nobody has come up with a great answer to yet. And I think that’s the question that makes Warren Buffett and Ray Dalio confused about it. Is what can you buy with it? Can it be exchanged for goods? Is if it’s so volatile, does it accurately reflect the price of those goods? I think these are the questions that need [00:44:53] to get answered in order to fully understand what portion of Bitcoin is driven by some fundamental value versus what is driven by just the idea of it. And I would say it’s probably fairly hard to even argue what the value of transacting or trust over the internet is. And as we saw the value of the internet has been completely underestimated. What is the value of being able to trust these

Daniel: [00:45:18] protocols? Maybe not having to trust third parties anymore to do these transactions of legal work or even value storage or wealth storage, as we’ve mentioned, and being able to transact in these systems that are permissionless. That is one of the biggest questions that is hard to even put an answer or put a number to because now we’re evaluating it in US dollars or in other types of [00:45:45] currencies that are being printed by the federal government and by other governments. And so stepping into this digital world of federal government issued coins, how do you think we will have? Do you think we’ll have a Fed issued digital wallet on our smartphones? Or do you think that basically the banks will be replaced by the federal reserve in some sense where we’re interacting

Daniel: [00:46:09] more with them than we are these financial institutions that we know of today? Let’s look at this question of what will the Fed do? Because I think that’s driving this whole discussion, whether there will be a Fed coin. I remember the Bush stimulus checks of 2001 where they mailed $600 per person and the idea was financial stimulus. They didn’t have much impact. [00:46:38] People instead of spending the money, they used it to pay off credit card debts and home loans or they put it into savings. From what I’ve seen of this spring’s analysis, it’s basically the same story. This spring’s stimulus, the analysis reveals the same story. People use it to pay down debt followed by savings and then some spend it. So what motivates the Fed? What’s motivating them

Daniel: [00:47:01] to expand their balance sheet by 3 trillion and increasingly look for more and more exotic ways to stimulate the economy? There’s an insatiable appetite there to stimulate, to entice the economy. If you look at the amount of economic activity right now in the US in 2020 and you consider the share of stimulus between monetary and fiscal stimulus, it is such a huge portion of the economy [00:47:33] is based on stimulus. It’s unhealthy. From that lens, you say, do we think that Chairman Powell is looking at Fedcoin as a possible stimulus opportunity? I think he is. He’s even said so as much. If we were to have a Fedcoin, you could write in rules for it requiring it to be spent instead of saved or paid off debt. You could create smart rules around Fedcoin stimulus.

Daniel: [00:48:07] It would be a very easy way to track economic activity to see how money is being spent in different sectors would create all kinds of information for economists to be able to better steer Fed economists to better steer their common to their wishes. Here’s the strongest argument I’ve got, JP. If the government had to rebuild the entire financial system from scratch right now, if we were [00:48:31] to rethink the whole thing, money would certainly be digital. US dollars are largely digital anyway, but they weren’t born to be. There’s incredible friction there. I think they’ll still be durable forms, but I do think that as soon as somebody embraces a Fedcoin, whether it’s a Eurocoin or a Wancoin in China, other central banks will feel compelled to look very carefully at this

Daniel: [00:49:01] left they be left behind. Do you think that there are benefits for the consumers? You’ve already mentioned some of them direct stimulus being able to have less friction in the system, but is there any other benefits to using a Fedcoin to the users or will it be required almost where, in order to get your stimulus, you have to take a Fedcoin? I feel like that’s very far [00:49:25] fetched to have people move to that so quickly, but I think it will be an option that a lot of the tech-literate population will be able to utilize. That question reminds me a little bit of a story from the 90s, which is so funny, it must be true. It was a company that was looking at implementing email within their corporation, and the executive asked for an analysis of the

Daniel: [00:49:53] economic impact of having email. It’s an innovation that just changes the way business is done, because it makes it easier, more seamless, and has benefits that previously weren’t contemplated. So if we had Fedcoin, if we had US dollar-denominated approved coin regulated within our wallets, it would simplify the way we pay for things, it would simplify the way we do our accounting, [00:50:28] in my blog post-type, postulated that if you paid independent contractors in Fedcoin, you would be able to auto-file their tax documents, because look, the Fed is already monitoring the blockchain, they know how much money is going to everybody, and so they’re going to know exactly how much everybody made, and if it will be the natural currency of the gig

Daniel: [00:50:52] economy and freelance workers. When I look at the next generation, frankly, this is going to age me just a little bit, or date me, but I see people who live on their phones in a virtual world, and they will be transacting between, frankly, between, if there were a Fedcoin, between Fedcoin, and Bitcoin, and other cryptos, within any environment that they exist in, they could be buying [00:51:20] things within apps, they could be buying things within games, they could be trading things with friends, and I see this all as a more seamless way to manage a financial system. In somewhat of an analogous way that email is a more seamless way to manage a communication system as compared to paper memos. And it’s, as you mentioned, potentially 10 times more efficient, more available,

Daniel: [00:51:50] easier for the person who’s already a digital native, who’s already working on their phone, you mentioned the ability for freelancers to transact, and potentially even almost have their taxes already calculated based on using this Fedcoin, which would provide so much really, a ton of relief for people who just feel that pent up anxiety of having to track all of it and file [00:52:11] taxes. So I do think, I do agree with you, Daniel, that this issue and Fedcoin into the day to day hands of the people is here to come. And I think, like you said, once the First Nation state or First Bank, Federal Bank does it, from there, it’s off to the races on how quickly we can get on the mobile app on your phone and have it be a federal issued wallet. So my last question, or one of my

Daniel: [00:52:36] last questions, Daniel here for you today is what concerns do you have over digital security going forward, understanding the massive solar winds hack that just happened and the overall

JohnPaul: [00:52:47] Chinese and battle versus China in the US that we have going on here? You know, where do you see digital security going and how do you see blockchains either living or interacting with the overall,

Daniel: [00:52:59] I guess you would say almost battle at play? Your question almost answered itself. If I was sitting on a massive stockpile of Bitcoin, which I’m not, I wish it was, government regulation, unfavorable regulation would be my second biggest concern. My biggest concern would be cryptographic security. We seem to be living in a world right now [00:53:22] of cyber war. To say it’s a cold war in the cyberspace isn’t even accurate. I think we seem to be at war with whom sometimes we don’t even know. Often times we do, of course, other nation states and what have you. But we need to move into a decade here where we think about cryptographic security as intrinsic behind any asset because the alternative to it is the old-fashioned trust,

Daniel: [00:53:49] is that if money is stolen, there’s somebody to sue. There’s some door to knock on. There’s somebody to call on all high-friction mechanisms of dealing with breaches in trust. We have to, I’m certainly one of the first person to say this, we have to be moving towards a system by which trust is built into the way that we interact with the world. We’ve seen, we saw breach of Equifax. We’ve seen [00:54:16] breaches of credit reports. We’ve seen breaches of government records. Just imagine what a large scale breach of Visa would do. Just imagine what would happen if all of a sudden a huge number of credit cards were invalidated. There are industries all over the place that require automated monthly credit card billing that would have liquidity issues and cash flow issues immediately. Needless

Daniel: [00:54:43] to say, the electric utility industry being one of them and other utilities that charge on a monthly basis. On this idea that the payment infrastructure could be halted or attacked and how much we rely on today, do you see that being feasible with blockchain or do you think it’s built well enough to not have a single point of failure? I think blockchains need continuous improvement. I think [00:55:08] that there are some very smart people who are working on cryptographic security behind blockchains who are committing code to improving it. I see this as an arms race too. The desire to break a blockchain, to redivert payment or to do something that is nefarious to a blockchain, to me will be irresistible to people who have the power to do it. We’re starting to see the emergence of

Daniel: [00:55:42] the type of quantum computing and artificial intelligence technologies that might be able to compromise blockchains. We’re in an arms race against future quantum computers to create quantum networks that are impenetrable to them and to create quantum proof cryptography on the blockchains. To me, it’s going to be a perpetual arms race that will never go away. There will always be [00:56:10] desire to make things more secure and desire to make keys that can open any lock. If I can advise young computer scientists of anything, it’s to learn quite a bit about cybersecurity because cryptography is one thing that will, in my opinion, will never go away. Never go away and only be used more and more in our day-to-day lives as we hopefully are able to

Daniel: [00:56:35] prove valuable information that we hold like our Social Security number or biometric data DNA without having to give it up, which I think is currently where we are, which is you give up all this information that we don’t value as a consumer, as an individual. Instead, it’s taken for granted, but in reality, that information has lots and lots of value as we’re seeing to the nation, [00:56:57] states and companies that are able to easily access it from us or give it away. Its information is so insecure that full value can’t be extracted by those who own it. I agree with you, I’m completely, I think that’s what blockchains in crypto are here to change. Daniel is that I think that over the next coming years, we will start to take back some of that

Daniel: [00:57:20] data, the value to that data, be able to really own it. If that’s location data, that’s payment data, and hopefully be able to utilize it to produce passive income or be able to at least monetize it individually instead of where the corporation level, corporate level. Yeah, I wonder about that. I wonder as we adopt cryptocurrency, whether it’s, let’s say we move [00:57:47] towards Fedcoin and we adopt cryptocurrency for payment and we move towards more blockchain applications, the extent to which it will be the individual who will capture the benefit. I can’t help but think that in that world, the corporations and government will certainly be capturing their fair share. So I hate to divide, I hate to presuppose how the value creation will

Daniel: [00:58:11] be divided. I think that there’s plenty of opportunities for savvy entrepreneurs to introduce services that create value and extract value for themselves. So I can’t put a stake in the ground yet on what this will look like from an individual perspective beyond the fact that whatever a smartphone will look like in 10 years, it’ll have a lot of blockchain based apps, including payment

JohnPaul: [00:58:37] that we haven’t quite contemplated yet. Daniel, thanks again for coming on the podcast. Where can people connect with you and what’s the best way to keep in touch if they want to learn

Daniel: [00:58:46] more about what you’re working on? If they want to check out my company, the website is in period.io to contact me personally. LinkedIn is probably the best way. Or if push comes to shove, I would say call JP or contact JP. You know how to reach me quite well. So if anyone is looking for a mutual introduction and believe that there might be some opportunity to work with Daniel on some of these [00:59:11] topics or if anything you want to discuss, definitely reach out to me there. Or as meant Daniel mentioned

JohnPaul: [00:59:16] on LinkedIn, all the notes will be in the show notes. So feel free to check out that. Thanks again,

Daniel: [00:59:21] guys, for listening. We appreciate a five star review. If you haven’t already left one and to share the episode with our friend or family, we always grow by making better content for you and by

JohnPaul: [00:59:31] you guys telling the world about us. Thanks again, Daniel. I appreciate it. You have a great day.

[00:59:36] You too, JP. Thank you. I hope you enjoyed today’s episode of Digital Gold. Be sure to subscribe so you’re notified when the new episode drops. Don’t forget to leave us a five star review to

Daniel: [00:59:47] support our journey to become the number one crypto podcast. Thanks so much for listening. And until next time, mine all.