Ethan Vera - Bitcoin Mining's Institutional Backbone

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: [00:00:42] Today I’m excited to be joined by Ethan Vera, co-founder and head of finance at Luxor Technologies, which is North America’s largest mining pool and hash-rank management platform. Before founding Luxor, Ethan served as an investment banker with Goldman Sachs and advised MND’s on cross-border Asia M&As transactions across the semiconductor, renewable energy and internet [00:01:00] industries. Ethan, the team at Luxor, are focused on building a range of solutions for scaling blockchain infrastructure and vertically integrating mining pools in enterprise-grade management software to provide investors with a full-service investment vehicle for cryptocurrency mining.

JohnPaul: [00:01:14] Ethan, welcome to the show.

Ethan: [00:01:15] Thanks for having me on JP. I’m glad that you’re here and we can have this great conversation on Bitcoin mining jump into the weeds of how the industry is changing and what you’re

JohnPaul: [00:01:25] seeing from your perspective. My first question for you, Ethan, is how did you get into mining

Ethan: [00:01:30] Bitcoin? Mining Bitcoin was actually the first way I got into crypto. It was a natural transition for me coming from industries like banking and whatnot. Three years ago, I was going to school with my co-founder Eddie and Guzman. He approached us with this new software product [00:01:48] he was working on, which at the time was a Sia mining pool. We quickly went down the rabbit hole of mining pool software and started building a hash-rate liquidation platforms. Around the same time, we also invested in a facility in Kansas City. It was a four megawatt facility and we were building it out down there, basically hosting a co-location style.

Ethan: [00:02:08] So that was my first two ventures into the mining space. And since then, we’ve touched on a wide range of different products ranging from pool software to now these half-rate liquidation platforms. Ethan, about the Kansas City mining site that you have, are you able to tell me any stories [00:02:24] about the wildest day when you were running the mining operation? There’s quite a few, but I think one stands out in particular. We were at the height of Kansas City summer. I think it was over 110 degrees or something around that. And all these machines were constantly overheating. Our customers were calling us saying, hey,

Ethan: [00:02:46] my machine keeps going down and we had to basically compensate for that downtime. And so we tried to make a big push on blocking off the cold and hot aisles and sealing it. And so I think the entire team spent about 24 hours in a facility working on the separation. And we eventually got it done by the morning the next day, but the team was exhausted and [00:03:07] I’ll never forget that day. That was one of the longest days of my life. And so when you say hot and cold hour separation, for people listening that don’t really know how mining facilities are structured or built, are you able to talk a little bit farther on what that means and what you guys end up doing?

Ethan: [00:03:22] For sure. Yeah. So most of these Asics are built like tanks, especially like the S9s. So they can actually run in relatively high heat, almost everywhere in the US. You can run S9s off of air cooled. When some areas you may need to go evaporative cooling and then it’s very small areas you need to do liquid immersion. But the biggest reason these machines [00:03:43] overheat is because facilities aren’t built in a great way. Or at least they didn’t used to be when kind of new people were entering the space. And the biggest problem was that basically these machines create a lot of heat and they push out a lot of heat. And so if you don’t properly seal that the heat coming out of the machine from the intake, then that

Ethan: [00:04:03] hot air will just circulate back through your machine and create like huge failures and destroy the longevity of that machine. So having a proper sealing from hot and cold aisle is extremely important for keeping your machines up and running. And that’s something, unfortunately, we didn’t know building the [00:04:18] facility. And so we learned it the hard way. And you mentioned it is pretty hard to do because you have these different miners or different sizes. You don’t necessarily know which miners are going to be going in the facility until you get it. And the seal almost has to be perfect. And there’s a lot of that

Ethan: [00:04:32] backflow you’re talking about that occurs when running this mining equipment that most people don’t realize that you’re like you said, there’s no HVAC. Most of these facilities are just air cooled and they have thousands of machines running. And during these super hot days is when that issue compounds, usually the facility can run fine. But usually that [00:04:51] four to five, you know, PM hours when the heat is the hottest, that’s when you see the most problems. At least that’s what we see with running our facilities. I think most mining operators would agree. So after Kansas City and getting that site deployed, running it

JohnPaul: [00:05:05] a lot and then closing it down, can you talk a little bit more about how you’re feeling

Ethan: [00:05:10] about the mining industry to build this facility out? You were talking about those feelings because it was must have been it must have been pretty hard to shut everything down.

JohnPaul: [00:05:18] And after chasing this dream of wanting to be a Bitcoin miner, and how did you pivot into

Ethan: [00:05:24] what you’re doing now? It was definitely a hard decision. We put a lot of time and effort into the facility and built up a lot of great relationships along the way. Ultimately, it just, it turned out that building the infrastructure side of the business was too tough for us to do. Our team is mostly software engineers. And so we wanted to focus on what we do best, [00:05:44] which is software products. And fortunately, even during this time, we had a successful mining pool business going on. And the majority of the teams focus was still on our mining pool. So it wasn’t a complete pivot of a business. It was more so letting go our dreams of being vertically integrated vertical integration sounds great on paper. Or maybe it’s good

Ethan: [00:06:03] for an investor deck, but in reality, sometimes it’s just like a ball and chain on your foot while you’re trying to swim. And it can distract you from your main products and what you really have your competitive advantage in. So that’s really what we’ve been focusing on is like, what are we best at? And let’s push that forward and let’s build like awesome products where the [00:06:21] industry, awesome software products. And so how has Luxor as a mining pool evolved, you know, since then, what new products have you guys when you added what new features have you added? And how have you been helping out new North American miners?

Ethan: [00:06:34] Yeah, in a few ways. The first, I would say is profitability. During this venture, we realized that squeezing out the most amount of profit for your machine as possible is vital to the long term success of your operation. And so when we think about building hazard liquidation platforms, whether it’s the mining pool, profit switching, or best price execution, [00:06:55] we always have that in mind is like, how do we get our miners the most amount of Bitcoin per terra hash as possible? And from a software provider perspective, that’s the greatest help we can give miners is keep them profitable for longer. So we try and do that with all of our products in regards to that. The second area would probably be on data and statistics. And so that’s partly

Ethan: [00:07:14] why we launched the mining data website called hashredindex.com as a way to provide free data assets to miners to help them think through their investments, think through their current operations and find ways to improve it. And as we move forward, I think we just want to continue to push that from a software perspective is tools that are useful and helpful for miners. [00:07:34] Now on a high level, what type of tools and services are you bringing miners to increase their profits? And what type of tools and services are you bringing miners to hedge their risk? On the increasing profit front, this is flowing from first our mining pools. Obviously, it’s a

Ethan: [00:07:51] big focus of us to reduce kind of latency and increase of miner efficiency. A lot of pools will give up 20 to 30 basis points on just stale and invalid shares. And so we want to make sure that we’re reducing that number, because 30 basis points in this business is still considerable. On the profit switching front, we want to maximize the rate that we can get above what we call like [00:08:14] the base chain or Bitcoin in the example of SHA256. And so we’re focused on generating uplift over Bitcoin FPPS rate for SHA256 and over Zcash, PPS rate and Equahash. And so in Equahash, we’ve been doing about 5 to 10% uplift over the base chain since inception. And we’re hoping to bring some of those gains over to SHA256 in the new year. So that’s it on the profitability

Ethan: [00:08:37] standpoint. On the hedging front, this is still a very new industry and not a lot of great products are out there to date. There’s a few that miners can use, but not many. And so we hope

JohnPaul: [00:08:49] to bring some of those to market to in 2022 and beyond. Can you explain how a mining pool works and

Ethan: [00:08:55] how it calculates profitability? How does it communicate with the miners and explain that for the users or listeners that don’t really understand maybe mining or never looked into the mechanics of a pool? Mining pools were invented, I guess it would have been 2011 by slush pool. Basically, mining by yourself was too variable because there’s only 144 blocks per day. [00:09:16] The chances you find a block yourself are just really low. So what they invented was a system where everyone pulls together their hash rate, UJP and I, we pulled together our hash rate and our chance of winning a block increases. The industry changed drastically in 2013 when BitPenny launched what was called like a paper share pool, which instead of paying miners out on the actual

Ethan: [00:09:38] value of block reward, the blocks actually found on the pool, instead they paid out on the expected reward. And that changed a lot for miners. It took the variance away from miners to mining pools and allowed for more consistent and equal payments from the mining pool. And so that’s how the industry has shaped up so far. So 95% plus of the industry works on this method. And from a higher level, [00:10:01] you can think of it as like basically a mining pool will buy your hash rate at, let’s call it 98% of the expected value. And they’ll take it off your hands right away. You don’t have to deal with mining luck risk, but you give up some of that upside for them to take that variance off your hands. And that’s why they buy the discount from you. And so they’re buying the hash rate on

Ethan: [00:10:19] discount. Are they effectively selling the hash rate to the Bitcoin network? Are they selling the hash rate to other pools? How are they hedging their risk? Or how are you hedging your risk? Majority of the hash rate does end up back at the Bitcoin blockchain. So these pools will buy it,

[00:10:34] let’s call it at 98% from a miner. They’ll go turn around and mine on the Bitcoin blockchain

Ethan: [00:10:39] with it and expect to earn 100% and make that 2% spread, obviously dealing with the mining luck risk there too and variable payouts for themselves. But there are increasingly more pools that are now doing profit switching, which basically will look across blockchains. And so being a single chain focus, they’re chain agnostic, and we’ll try and find the most profitable blockchain [00:11:00] for your hash rate. And that’s really what Luxor is focused on is this idea that we’re trying to maximize the value of hash rate. And so we can look across venues, Bitcoin blockchain, obviously being the major one, but looking to other venues too, in case there’s times where it’s more profitable for us to liquidate there. And these other venues, you’re referring just to Bitcoin. Cash

Ethan: [00:11:19] blockchain, or is it also involving selling the hash rate in an OTC market style where you have larger funds or someone else who is willing to buy it for a premium above maybe what the Bitcoin network’s paying? That’s a good question. This is a developing industry. This conversation we’re having will probably look very different in six months. Historically, it’s been just focused [00:11:39] on blockchains only. So mining Bitcoin, cash, BSB, Bitcoin, Terracoin, etc. But now I think we’re starting to get into this level of the industry where you can look to other venues, things like selling your hash rate on nice hash, or selling it to a hash rate contract with a long term buyer, or selling it to another mining pool that has a really good profit switching algorithm. Basically,

Ethan: [00:12:01] just taking in all these different sources and deciding which one’s best. A lot of miners now talk through like demand response where they sell power to back to the grid when it’s more profitable than mining. And so you can think of it the same way at the pool profit switching level, where you just have 10 different venues, whether it’s blockchains or other customers, [00:12:22] and whichever one’s most profitable at a given point in time, you direct your hash rate there. So it’s pretty much like the demand response, but on the software level.

JohnPaul: [00:12:30] And how do you see mining pools evolving over the next two years? As you mentioned, this space is

Ethan: [00:12:35] growing rapidly and changing very quickly with just the multiple hedging techniques being brought in. And then as you mentioned, some of these cross chain sales where the ability to sell that hash rate for more than what the network’s paying for it. What else do you see changing in the next two years? On the mining pool front, I think there’s gonna be drastic changes for a [00:12:53] couple reasons. One, we’re heading into an era of very low mining fees. And miners are increasingly fee conscious. So unless mining pools are doing sophisticated profit switching, I think they’ll have a very hard time competing in the industry. And so I think the days of single chain mining are coming to an end here. The second, I would say is like bundling up mining pools into broader

Ethan: [00:13:15] ecosystems. And so you saw that with like the Chinese exchanges, Huawei, OKX, now Binance. Basically, they’re using the mining pools to weight a funnel liquidity into their other products being financial services. And so I think we’ll start to see an increasingly amount of mining pools that are tied to things like exchanges, ASIC financing, collocations, and potentially more. [00:13:36] And so those are my two points on mining pools. But I think the biggest trend that people haven’t really seen yet is that the market is eventually going to change from majority OTC to exchange traded. And what I mean by that is right now, you have to go to a mining pool and directly negotiate a mining pool fee with them, basically an OTC contract. Whereas in the future,

Ethan: [00:13:55] I think a lot of hash rate will be sold on an open exchange where now these mining pools need to need to bid for your hash rate in an open manner. And what that will do for miners is basically increase the value of their hash rate and increase the transparency and what they’re getting for

JohnPaul: [00:14:09] their hash rate. So I’m excited to see all those three feeds play out here in 2021 and 2022.

Ethan: [00:14:14] So our mining pools looking to lock in hash rate for an hour, for a day, for a week. How do you see them in this marketplace interacting where you’re mentioning, bringing the value of the hash rate and increasing it and creating more competition for those buyers? Most of the industry right now works on a spot level, like instantaneous. So if you go and [00:14:38] negotiate with Luxor, Legas, or, you know, say like, slash pool or F2 pool or Binance, basically you have no commitment to stay with them. So every time you submit hash rate, they validate your share every five seconds and they credit you for that share. And so I don’t think that pools will be locking in miners for a long period of time. There may be the rare

Ethan: [00:14:59] example with say, slash pool and how they where they had an agreement for an extended period of time, or I’m sure in China, the same with pooling and F2 pool with their long term clients. But for the most part, this spot exchange will be very similar to the existing mining pool system today, where miners just get paid as soon as they deliver hash rate. And there’s no long term [00:15:19] contracts between miners and mining pools for hash rate delivery, where I think those contracts do come into play. And I know you have a lot of thoughts here. And really interesting ones is that investors will take the other side where they’ll want some extended period of hash rate and be willing to pay a certain amount for hash rate upfront and deliver it over a few months.

Ethan: [00:15:39] And I think that’s really interesting. In your opinion, what is holding back miners from selling hash rate futures or for selling their hash rate in these types of marketplaces where they are locking in maybe that delivery price or that cost per share? I think it comes down to a few things. One, miners historically haven’t been the [00:15:58] most financially sophisticated and these types of derivative instruments, whether it’s on the hash rate level or Bitcoin level just aren’t widely used amongst the miners. But I think that is changing now as new players enter the space from traditional backgrounds. A second, I would say, is that miners are extremely bullish on Bitcoin. And they kind of default to this idea that they

Ethan: [00:16:17] want to go long as possible and hedging their position and going short on their mining revenue. It wasn’t the natural step for them. But I think there’s ways that they can hedge portions of their revenue in a pragmatic way and still increase the value of their overall operations. I guess the third thing too would be that there’s not a lot of good venues to trade these products yet. [00:16:37] There’s some broker contracts going out there, but there’s no exchange products that are available for miners. Going through the hassle of an OTC-style contract and negotiating what that value will be is just like a lot of hassle for miners yet. So I’m really excited to see multiple different companies build out products for these miners to hedge and use as financing tools.

Ethan: [00:16:58] We’re really talking here about hedging their value of the hash rate. And just for people who don’t know where the hash rate value comes from, it comes from the Bitcoin price and then the Bitcoin difficulty. And with those two numbers, you can get something that Ethan and I are big fans of, which is the US dollar per terra hash metric. And that metric is a USD-based metric for how [00:17:21] much that one terra hash is making or being, or I guess how much the mining pool is paying for that terra hash on a daily basis, on an hourly basis, and hashredindex.com has a great chart where you can see historically how much that terra hash was worth and where it is today. Are you an investor looking for Bitcoin exposure? If so, Bitcoin mining provides daily payouts and

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Ethan: [00:17:50] the bridge to the Bitcoin mining industry for institutional investors and energy companies. Through 24-7 management, directly line incentives, and over seven years of mining experience, Orm’s managed mining program is the most secure way to enter the mining industry. Reach out to us at ormcapitalvengers.com to learn more about the program and talk to the team. [00:18:10] On the difficulty side of things, because that’s what brings in the complications of hedging out a

JohnPaul: [00:18:16] longer contract. Have you used FTXs or any other difficulty hedges and how do you see potential

Ethan: [00:18:21] difficulty hedges being improved over the coming years? I’ve personally traded on FTX for the past like six months now since they’ve launched. Just on my personal account, I find it quite fun. But that being said, I don’t think difficulty is a good product for miners. A quick analogy here, with corn farmers, some people thought it made sense to create futures, where corn farmers, [00:18:45] whose revenue is driven off, obviously, how much corn they can produce, would hedge like weather conditions, because weather conditions directly impact the output of corn. But it turned out that those weren’t great products for farmers, because it only represented a small factor in the overall revenue they generated. And so it wasn’t a complete hedge. And I think difficulty futures is very

Ethan: [00:19:07] similar, where difficulty is obviously a large part of mining revenue. But there’s other aspects to it that mean that if you only hedge difficulty, you’re still exposed. And if anything, you’re overly, you’re even more exposed. And what I mean by that is basically difficulty and Bitcoin price kind of act as natural hedges to each other. If Bitcoin price shoots up, difficulty will also [00:19:28] follow because more people plug in machines. And if Bitcoin price falls, difficulty will also fall because less people want to run their machines. And so if you only hedge one of those two, it actually creates a more kind of unhedged position where you’re actually, your mining revenue is actually more volatile than if you left it unhedged. That’s a long way of saying that I’m not super

Ethan: [00:19:47] bullish on difficulty futures or difficulty hedges. I think that in the future, it all has to be based on the value of hash rate itself. And that’s the complete hedge for miners. And that value of hash rate is what I work on getting investors and other people industry to build off of when it comes to modeling, when it comes to paying back debt and expenses, [00:20:05] because it’s a very good metric in US dollars. It helps us understand, as you mentioned, if Bitcoin price goes up, difficulty usually follows. How much hash rate do you see coming

JohnPaul: [00:20:14] online in the next year into 2021? How do you see bitman and microbt scaling their hash rate?

Ethan: [00:20:21] And for just for people that don’t know the industry as well as we do, right now, these major manufacturers are sold out basically until almost August of 2021 for any new machines because of the recent Bitcoin price. And because mining profitability has been able to stick right

JohnPaul: [00:20:36] around the 14 to 12 cent range per tera hash. So Ethan, what do you see? How do you see these manufacturers producing chips? How do you see the hash rate increasing? And maybe how many

Ethan: [00:20:46] exo hashes do you see coming online every quarter every month? You’ve identified really clearly like the bottleneck in hash rate production coming online, which is like the ASIC manufacturers. I think opinions on how many machines these guys are producing like varies quite significantly across industry. You’ll hear estimates as low as 5000 per month per manufacturer. And then [00:21:08] you’ll hear up to 2030K in rigs per month from each one. And so it’s a really wide range and there’s no consensus on it. This is especially true because the manufacturers themselves are not very transparent with production numbers. Sometimes at the end of the year, they’ll announce how many they made that year, but they won’t give you live figures on how much they’re producing

Ethan: [00:21:27] right now. So it’s still an estimation. My personal estimate would be like in a bull case Bitcoin, let’s say Bitcoin runs to 50K, even at current difficulty levels, like even bit main S5s will still be profitable if Bitcoin runs up to 50K. And so in that case, plus the manufacturers, I think that we could see like a 40, 45% increase in hash rate over the next 18 months. It’s obviously [00:21:52] variable on what the manufacturers do. And if it gets their act together, but I think if so, you can see close to a 50% increase over the next 18 months, curious to hear your position on this too, though. We do have a lot of conversations with the financing partners in this space and understanding that supply chain and the constraint at the foundry level, which is limiting the supply

Ethan: [00:22:15] for mining machines, as you mentioned, even with this massive increase of demand and mining manufacturers doing their best job to attempt to secure future capacity and future capital to match the demand, it provides that interesting balancing act where back in 2018, those manufacturers were selling machines fire sale because they had too much inventory and they just had to get rid of [00:22:40] it. So for me, personally, when I’m modeling out most of our models and for our new Oklahoma project, I’m modeling about 300 megawatts of miners per month. And then that compounding at 5%. And even with that, it’s an insane return. You’re basically mining over 4,500 Bitcoin over the course of a 36 month period on a $10 million investment with debt as leverage, which gets you around 1.6

Ethan: [00:23:05] exohash of a pass rate. So that’s how I look at it, which shows that even with massive increase, because I don’t think we’re at 309 megawatts, put that in perspective for the listeners, that’d be right around 90,000 of the new machines coming out of these facilities per month from microBT and from Bitmain and from others. But as you mentioned, Ethan, I think it’s closer to [00:23:27] the maybe the $10,000 to $20,000 unit range. One part I’m interested in is like, how do you forecast the value of your machine over the lifetime? So I think traditionally, people took a three-year depreciation schedule or even two-year. But now we’re seeing a really interesting dynamic where people who bought machines in April for $24 a terra hash for the new gen machines can now sell

Ethan: [00:23:51] it for $33 a terra hash or above, which make the whole forecasting the value of ASICS incredibly tough because they’re so volatile and they could actually increase. I don’t know, how do you factor that into your estimates? For most of our models, we basically depreciate it over that 36 month period down to $0 dollar value to really show the investor that this operation can run successfully, [00:24:12] can make profits and can return capital to the investor as long as the Bitcoin price and difficulty assumptions remain. As I mentioned, like that, 300 megawatts and then the Bitcoin price growing over the next three years. We don’t actually factor in the value or the resale value of those machines, but I think that is a key component of really the icing on the top of the cake,

Ethan: [00:24:37] which is going to bring additional returns because, as you mentioned, hash rate is worth a lot right now and it continues to go up based on the backlog of new machines. One of the things that I found interesting is that when you have these investors coming into the space or even investors who are already here, some of them have the belief that an S19 pro would be gone and it wouldn’t be [00:24:56] unprofitable in a year or it would be unprofitable in a year and a half. I think it shows that there’s a lack of information and a lot of clarity needed in the mining space to really open it up to larger investors as we’re seeing S5s are still running. S9s are still running. Those machines have been out for almost five years now and the S5 is probably six or seven years. There’s a huge misinformation

Ethan: [00:25:19] about the value and lifespan of a machine and it really all comes down to the value of that terra hash and then how much electricity costs, as you mentioned. All gravy from there, I guess, that makes sense to be appreciated on that schedule. It’s the most conservative thing to do. I can only have upside from there. One of the things I want to touch on is industry consolidation. [00:25:37] If people aren’t able to get their hands on machines, those machines in these facilities obviously have a per terra hash metric or valued on the market, let’s say at $35 a terra hash

JohnPaul: [00:25:47] for a facility with a bunch of new S19s in it, how do you see the industry beginning to consolidate

Ethan: [00:25:53] in 2021 and is it primarily at the mining facility level or also you’re predicting the mining companies will begin to merge and to be acquired? I think the idea of these machines being locked in and really scarce is a really good reason for industry consolidation like you pointed out. Basically, if that’s the only way that you can go and acquire machines, you can’t get them from [00:26:15] the manufacturer so then go buy another facility. I would also say that there’s a couple other reasons why consolidation might happen and that mostly comes down to the advantages you get from a larger mining company. One is increased purchasing power. If you have a bigger balance sheet, you can have a better relationship with the manufacturer. You can get a higher discount on

Ethan: [00:26:34] your machines. You can get lower upfront payments for those machines and overall, it’s just a better experience for you. On the power side too, as you can probably attest to, if you have larger amounts of capital, your chances of getting lower cost power at scale is just higher. There’s all these advantages on the infrastructure and machine side that you can get being large. [00:26:55] On the software side too, if you have more hash rate, you can reduce your pool fee, you can reduce your firmware fees, you can reduce your ASIC management software fees. It’s just a huge advantage in being a larger mining company right now. I think it’s going to happen, consolidation. It won’t be like an industry where it goes down to three players

Ethan: [00:27:15] because of the decentralized nature of Bitcoin. We could see it go down from say 1,000 main players in North America to like 100. I do think at first it’ll be on the asset level. If there’s a mining facility that people want of a company that has machines, they’ll go and just try and buy that facility themselves. Do you think a facility will be worth more a year from now? [00:27:35] It depends on your view on Bitcoin. I think right now we’re definitely in a strong point in the cycle, whether it’s the value of ASICs or the value of mining companies. If I’m a mining company right now, I think it wouldn’t be a terrible time to sell some assets, take some cash off the table. That being said, if Bitcoin runs significantly here, I think we’re in a complete gold rush phase

Ethan: [00:27:57] where hash rate can’t keep up, Bitcoin price is running, and you could be missing out on a lot of gains in the future. I would say it’s not a bad time to sell now, but it could be a much better time in a year’s time from now. I think one of the put numbers on this, public mining companies are at all-time highs or at least since the early stages of the 2017 bull run. The public [00:28:20] markets are looking really favorably upon US, Canadian, and UK listed mining companies. Most of them have gone up over 400% in value over the past few months. That type of valuation appreciation should also be thought of in the private markets where if you’re running a private mining facility, you should think of your facility as now being worth to an investor like 4x the

Ethan: [00:28:42] amount that it used to be a few months ago, given that you’ve already invested in machines in a supply and constrained world, and we’re on the edge of a bull market here. I think it’s looking good for everyone who is already in the industry and plugged in in mining.

JohnPaul: [00:28:54] Ethan, if you had to make a guess, what do you think the average size of a facility is in North America in the mining space? How do you see that growing, as you mentioned? There are a lot of

Ethan: [00:29:05] gains and advantages to being a larger player, but I want to hear your thoughts on how you see these facilities scaling in North America specifically. When we launched our facility in early 2018, it was enough power for 4 megawatts. I think we got 2.5 megawatts online in total. At the time, that was a relatively big facility. There was gigawatt in Washington State. That was obviously [00:29:27] much larger, but there wasn’t a lot of large 300 megawatt plus facilities being built out. Then I think in 2019, people started transitioning to the stream of having 10 megawatt facilities. Then in 2020, really, the era of megafusilities, 20, 30 megawatt plus, in some cases, people are aspiring for 300 megawatts really started to come about. I would say that megawatts are probably

Ethan: [00:29:52] overestimated. The 300 megawatt facilities, I think there’ll be a few of them, but not many. I think there’s a lot of great opportunity at the 20 to 30 megawatt range, but I know mine story that you’ve looked into this a lot more than I have. I think there’s good tower opportunities anytime you get over a few megawatts. It’s all about leveraging those opportunities [00:30:11] and potentially having multiple facilities around the US, leveraging different pockets of power where you can get them. I’m bullish on all stages of mining, whether it’s mid megawatt range up until megafusilities. I think the industry is definitely heading towards larger facilities as we go here. I definitely agree with you on that point. We are seeing those 10 megawatt facilities being

Ethan: [00:30:32] the norm and then quickly people building out 50, 50 megawatts, even to the point where we’re getting solicited for offers for 200 megawatt plus deployments in conjunction with large energy companies who are looking to off-take power or who have generation resources that are no longer selling to the grid or are no longer profitable. I would agree with you at seeing a huge increase [00:30:57] as we see financing step into this space and additional capital. One of the things I want to talk about next is North American ASIC manufacturing. Do you believe any of the large tech companies, NVIDIA, AMD, Google, or potentially anyone else will start building ASICs to compete with Bitmain MicroBT, Kanan, Inosilicon, and those manufacturers? I personally think the biggest hurdle right now

Ethan: [00:31:23] for American miners is the 25% tariff coming from China. Obviously, the facility is in Thailand and Malaysia for Bitmain and Whatsminer help with that. But I think that’s still a number one concern for American miners is let’s get ASICs that are at least assembled in the US. So we don’t have to pay that tariff. I think over the next few years, what we’ll be really great to see is the equivalent [00:31:47] of what Bitmain and Whatsminer did in Southeast Asia, but doing it in the US. So partnering with somebody like MicroBT and Bitmain, but manufacturing the machines or sorry, not manufacturing, but assembling the machines in North America to avoid that tariff and add some American labor component to it. And so I think that will be the case in the next two to three years is we’ll start to see

Ethan: [00:32:08] like MicroBT US and miners can buy from them instead of MicroBT China or Thailand. And so that’s what

JohnPaul: [00:32:16] I’m excited for. I think maybe five years down the line, we may start to see an American ASIC

Ethan: [00:32:22] manufacturer, but I don’t know, it’s pretty hard to predict at this point. We were really close with the obelisk team based in Boston. They launched the AnSia mining and they had a really hard go of it. They eventually got a product to market, but we watched firsthand how hard it is to build ASICs in the US. So I’m not extremely bullish on that in the near term. And I would agree with you, there’s [00:32:41] a lot to be said about the amount of capital that these manufacturers put in. I think it’s been rumored to over $10 million just for a test chip run when they’re designing these new chips for the mining equipment. So it’s definitely not an easy market to come into and especially one that has not had as much financial backing as some of the other blockchain based industries just because

Ethan: [00:33:02] of the hurdles and some of the, as I mentioned, some of the mists calculations or misinformation of the profitability or of the really size and scale of the mining industry for Bitcoin. What do you believe is the most difficult part of securing financing for miners and mining

JohnPaul: [00:33:17] operations currently? And how do you see that space evolving?

Ethan: [00:33:21] This is I think the big story of 2020 is new forms of financing available for miners. And it’s really exciting. So as a quick kind of history, in 2017, public markets started becoming available for miners. And so you saw a lot of mining companies do backdoor listings, like reverse more mergers, basically, buying shell companies on these exchanges or going and doing an IPO like [00:33:43] Bitfarms or Argo. And so that was like a great venue for them to do equity financing. Then those markets cut off in latter half of 2018 and 2019, but it’s since opened up again. So now public mining companies can raise insane amounts of money through equity offerings. You’re seeing that now with Riot blockchain as well as Marathon. And they can go and use like off the shelf

Ethan: [00:34:06] offerings, ATMs to basically finance their new rigs. That’s great for the public markets, but on the private side, I think the largest still are debt financing, as well as now the new trend is ASIC financing using the ESIX themselves as collateral. So basically, you can go buy thousands of rigs from finance from a third party and they take your rigs as collateral for that loan. And [00:34:28] that’s really exciting. There’s almost a dozen players now financing those types of rigs in that manner. And so I’m really excited to see how that grows. And I think it’s really great for miners to have another financing option available to them. And so now they can mix in equity, debt, and ASIC financing, and potentially hashrate forwards is all of these products that help them

Ethan: [00:34:47] go build increasingly large operations. And as you mentioned, those ASIC miners are what is really valuable in this whole space and what does have a lot of volatility. So how are these financing partners hedging that volatility? Are they really taking a bet on the underlying asset and the overall profitability? Can you touch a little bit more on your viewpoint there and maybe some of [00:35:07] the risks associated with large scale financing? Yeah, we haven’t seen any problems to date because ASIC financing really kicked off this year. And for the most part, ASIC prices have been increasing. It’ll be really interesting to see when we head into a market where ASIC prices may drastically drop in a rapid manner. And then their entire ASIC financing, ASICs as collateral model changes.

Ethan: [00:35:31] And so right now, I think a lot of the ASIC finance years are doing a similar depreciation says to what you mentioned before, which is a two year, potentially three year depreciation schedule for those ASICs. And hopefully having a fast depreciation schedule, as well as a fast payback of the loan protects their downside case. But I think in the future, they need to get more [00:35:51] pragmatic in how they value that collateral. So in a regular kind of Bitcoin loan, miners have to post like a certain amount of Bitcoin. And if they fall below their margin requirements, they have to post more Bitcoin on something like a matrix port platform. In the future, if we have more clear trackers of ASIC prices, we could do something similar where these

Ethan: [00:36:11] finance years are tracking the value of the ASICs on a per day basis. And basically, those ASICs dip below a certain point, no longer meet that collateral requirement than the miners in Bitcoin. And so on hashredindex.com, our new mining data website, that’s something that we try and deliver is this like idea that you can track the value of ASICs over time. And we want to get [00:36:31] to a place that eventually can be used by the finance years as a way to track their collateral and be more pragmatic in how they manage risk. Any opportunities or areas that mining operations can focus on in order to gain and strengthen their ability to be financed or to finance equipment quickly and easily. I think the biggest thing definitely is like track

Ethan: [00:36:53] record. The miners that have long periods of stable revenue and have made it through multiple cycles are more likely to get financed. And so you see that a lot with all the public announcements being made on people like Bitfarms or Core Scientific. And people like Mining Store, right? You guys have gone through what three, four mining cycles now. So the chances that you [00:37:16] make it through the next one are just so much higher than someone new to the industry. So I would say like from a miners perspective, try to earn your stripes. It gets easier as you go because you prove yourself how it is like a good operator. What else you can do I think is just have like great assets. So they want to make sure you can pay back your loan. And so if you have a

Ethan: [00:37:35] low cost of operation, you’re buying low CapEx machines or a CapEx machine, like you’re spending CapEx in a great way, then I think it gives them comfort and to the fact that you’ll be able to pay back your loan and you won’t go bankrupt and they won’t lose on their investment. But being just riding the best operation you can and make sure that you maximize the chances of [00:37:53] you paying back the loan and then you become really attractive for these finance years. So one of the things that I wanted to talk about and mention, which is insurance in the mining industry. And right now there’s the insurance products to ensure your mining equipment. After COVID, it became a little bit harder to ensure it’s because the whole insurance industry

Ethan: [00:38:12] in space had some difficulties with the overall policies they were underwriting. But so right now, these manufacturers or these financing partners are financing the machines and the requiring someone, another insurance company to ensure the value of those machines. And that protects if something in the event of a fire or disaster or tornado, [00:38:31] on hitting one of these mining facilities, that finance your partner has their collateral insured and protected and they have the opportunity to get a payout. One of the things that is new to the space that I’ve been working on for about, I would say two years, is the insurance products that will ensure the investment. And what I mean by that is that they’ll ensure the debt payments

Ethan: [00:38:52] and the interest payments on the loan or on the miners. The reason why I think this is going to be a huge jump in the right direction and over the past couple of months, we’ve had significant progress in that area, Ethan, where we’re able to have we’re able to work with a massive insurance company to underwrite this mining equipment in a hundred million dollar tranches, where they will [00:39:14] basically make sure that the lender gets paid and they take all of the risk. So now, the interest rates in the space, I think, could drop very quickly over the coming years, but then it also allows you to go out to other financing partners and other debt partners who don’t fully understand the industry, but are now willing to write a policy or willing to

Ethan: [00:39:33] lend capital to buy equipment because of this insurance wrapper. Have you thought about that at

JohnPaul: [00:39:38] all? And do you see how do you see insurance overall affecting the industry? That’s an area I haven’t

Ethan: [00:39:43] really explored at all. We had basic insurance for our facility and equipment back in Kansas City, but this again, it was just to like natural disaster and potential like theft or damage. The fact that you could create insurance for the value of the equipment itself, I think, is incredibly fascinating and it’s the first time ever hearing of it, but I think you’re the

JohnPaul: [00:40:04] right guy to do it. So I’m excited for that product to come to market. And like you said,

Ethan: [00:40:08] the fact that insurance is in place should just ultimately mature the industry in a really great way where now miners can get lower cost financing because they’re insured and provide a wide range of other benefits. That’s an exciting project. I’m super excited to see how that’s going to change the industry because it, as I mentioned, these facilities aren’t cheap. So for people who [00:40:26] don’t know, it costs about a million dollars to build out a megawatt of mining equipment and mining infrastructure and probably about 150 to 160,000 dollars just to build out the infrastructure on a new facility that is even a facility at scale. That’s a facility that’s at least 10 megawatts. And so there is a lot of capital going to the space. And before, as you mentioned, it was most

Ethan: [00:40:45] all equity finance, which was not an easy task, especially in a nascent crypto market, where people have to be comfortable with Bitcoin and they also have to get comfortable with the mining aspect and then the fluctuating value of those machines. So hopefully this helps mature the space and

JohnPaul: [00:40:59] helps it grow. But I’m excited to see bringing that to market, as you mentioned, Ethan, and seeing

Ethan: [00:41:03] how it can help us scale past 50 megawatts into the hundreds or thousands of megawatts in the future. We’d love to collab on that in some way if we can help provide data for that. It definitely will be needing a lot of good data. One of the questions they actually asked was, okay, how do you protect against Bitcoin from being used from nefarious activity? I’m like, [00:41:22] you see the Bitcoins we get, they’re coming right from the blockchain so they never use by anyone. We, they’re not used for anything. They’re so they’re clean coins and they’re like, oh, okay, that makes sense. Yep, that’s good. So many little questions like that that you never even think about as a miner about like why someone would have wanted to ensure a product or why someone

Ethan: [00:41:38] would have want to work with you. I think it’s definitely a great avenue for miners to get out of that. I think long term, just taking this out of mining for a second, but Bitcoin is a whole, we need to go through this internal battle on whether we consider coins clean or not. I know there’s varying opinions across the Bitcoin industry on this. And so I think that’s going to [00:41:59] be a really interesting debate topic over the next few years. And if it’s good for Bitcoin, if we start labeling coins as clean or dirty, that is going to be interesting to follow. Definitely agree with you on that, Ethan. And I’m kind of going to wrap, come into some rapid fire questions, which is the first one is what problem do you face every day

Ethan: [00:42:16] that nobody has solved yet? No hedging products for hash rate. We look at our mining pool revenue and complete variance day to day, no consistency and showing that to investors is insane because one month we may be up huge, one month we’re down significantly, whereas it would be just much easier to show consistent growth. How are you seeing this fluctuate on your sides because people [00:42:37] are jumping on and off? Or why is that happening? I guess a few reasons here. The one we take the mining luck risk on from the miners as the pool operator, so our kind of revenue is jumping all around. But I think more importantly to this hedging part is the value of Bitcoin itself is fluctuating. And a lot of our expenses are in USD, that Bitcoin price and the value of hash

Ethan: [00:42:57] rate and dollars per terra hash, that number is jumping around quite significantly. What risk have you taken in your life and would you do anything differently? I think the most recent risk I took was like leaving the corporate world, basically a year and a half ago I was working at Goldman. Pretty cushy like investment banking job. It was definitely tough, [00:43:16] but a cushy from a salary and compensation perspective as well as a branding perspective. And so leaping into cryptocurrency, which taking a salary cut being a founder of a company, as well as joining an industry that’s a little bit less proven, I think was a risk, but I’m very happy I made it. Was there anything you wanted to discuss that I haven’t touched on yet?

Ethan: [00:43:38] I think one of the largest things you can have a whole podcast on this itself. I’ve heard your story a few times on podcasts, but I think you coming in and bootstrapping a startup is incredibly interesting. And specifically, I’d be curious to see how that’s evolved. When I got in this industry in the beginning, it was a $50,000 investment from my uncle and some another $20,000 investment [00:44:00] from my grandma and then another $20,000 came for myself and 10k from my father. And I was like, let’s go ahead and buy some GPU miners and build this out. So it was very family and friends, equity round, just in the project. And so that was how I got into this space. And then after that, really, like you mentioned, was bootstrapping it didn’t really want to give up equity because

Ethan: [00:44:19] I knew I wanted to work on this space and didn’t know what that product market fit was going to look like. And we then went ahead and deployed out our Iowa facility and worked through deploying out multiple facilities between 2017 and 2020 for other clients and customers, GPU facilities and ACI facilities, and then also mining containers. We were deploying these containers at solar farms [00:44:37] at wind farms. And really, we’re just acting as a service company in this space. And I guess about a year ago, I was like, I need to start focusing on how to build out that hash rate infrastructure so that I can work on improving the liquidation process and improving, giving access to a hash rate as investment vehicle as an asset class to retail investors, to hedge funds,

Ethan: [00:45:00] to institutional investors. And this basically make it easier for everyone in this space to deploy and run and have exposure to hash rate as an asset class. From there, I think it really was, I jumped into the bond world a lot was like, okay, how do we finance this? How was, how are oil wells financed back in the day? And that was a lot of my 2019 journey and basically early 2020. [00:45:21] And then now where we are scaling, we’re seeing that talking to large energy companies, integrating the energy play in more, as you mentioned, a lot of these companies, mining companies now are selling energy back to the grid. So working at doing that, looking at actually acquiring power plants and seeing what the cost there is in order to get the lowest cost power, we’re seeing power prices,

Ethan: [00:45:39] you know, drop consistently. During my discovery, or looking for a facility, I was sending all over the US all the way from Oregon down to Texas to Iowa to New York, all over the US and even Canada, whereas how do you find this cheap energy? How do you connect it? How do you find 10, 15, 20 megawatts? It’s definitely not easy. But now we’re seeing with all these [00:45:58] renewable energy and the power markets continuing to shift down that the power prices in the US will just continue to drop making North America a great spot for miners. And then as I mentioned, the financing background and the kind of insurance pieces are coming together, which I believe will really build a almost a risk free product for lenders in this space that

Ethan: [00:46:15] has massive ability to scale, massive margins. There’s very few, if not, if any, debt-based businesses that have the return profile that Bitcoin miners have and to the scale that they have. So I’m super excited for this space, Ethan. That’s great. I’m bullish mining store, man,

JohnPaul: [00:46:31] going along mining store. Last question is, where do you want to go? Where do you see yourself in

Ethan: [00:46:35] two years personally? I think for us, we’re all very young founders still. So Nick is our CEO’s mid-30s or younger 30s. Eddie Guzman and I are all mid-20s. And we have a lot of room to grow as entrepreneurs, as well as operators. And so we want to make sure that we’re building really great products for our customers first, generating good returns for our shareholders, and then, [00:46:59] I think, creating really good work environments for all of our employees. All three of those pillars are incredibly important to us over the next two years. And from a personal perspective, I can’t wait to grow into more of an executive role and continue to build out our team and employ people and drive value for customers and shareholders. We’re kind of listening to you.

Ethan: [00:47:17] I’m on Twitter, Ethan underscore Vera. And then, if you want to check out our websites, we run hashredindex.com, the mining data website, as well as Luxor Mining Pool. And so, if you’re a miner with shock to five six or equity hashrate, feel free to reach out. And I can talk to you about our liquidation strategies there and try and maximize your BTC for [00:47:38] terra hash. There’s very few people, I think, in this space that I can talk to in the depth we’re able to jump in today about this industry. So I’m glad we’re able to have that opportunity. And I’m glad you were able to come on the podcast.

[00:47:59] Thank you so much for listening. And until next time, mine on.