Is the Future Green for Bitcoin Mining?

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1:30Welcome to the Real Vision Crypto Daily Briefing. We've got a great show for you today. I'm speaking with Fred Thiel, CEO of Marathon Digital, one of the large publicly traded Bitcoin miners. Fred, welcome to Real Vision. Great to be here. So much to talk about. We're talking a little bit off camera about what's happening right now in the mining space, energy, Bitcoin. A big picture, where is the mining business today? So Bitcoin mining is growing and expanding. The way to measure that is just look at the global hash rate. Global hash rate is up about 23 % year to date, which means more miners are plugging miners in to take advantage of kind of the uptick in the price of Bitcoin.

2:12That's happened since the beginning of the year. I think Bitcoin's up over 70 % plus since the beginning of the year, one of the best performing assets out there, or even from a risk-adjusted basis. So, you know, supply of hash rate always lags price of Bitcoin by a few months. And so we're starting to see, you know, that come online. You know, ourselves, Marathon, we're growing our capacity about threefold over where we ended last year by middle of this year. So it gives you a feel for kind of the amount of growth we're putting in place. And then you're seeing a lot of expansion offshore, a lot of mining going on in other countries outside the US that's coming online now as well.

2:53And then next year around this timeframe, we have the halving where the rewards that Bitcoin miners receive will be chopped by 50%, which happens every four years. And so, you know, it's going to be very interesting to see what happens as Bitcoin price continues used to appreciate or if it stays where it is today and the impact of that on the industry. But we're very excited, certainly, about what we're up to and what the industry is doing, even though there are some headwinds in the news from the regulatory perspective and just obviously capital markets being quite constrained for those in the industry that need to tap the capital markets to grow, which luckily we don't have to do at this point.

3:36Yeah. And some additional environmental concerns. We'll talk about all that in just one moment. But you mentioned price, and I wanted to bring this up. Bitcoin up 75 % on a year-to-date basis, on a trailing 12-month basis, down nearly 27%, obviously a volatile asset, some movement to the upside here that we've seen recently. Give us a little bit of the context on how you guys think about price. Sure. So if you look back historically, the price of Bitcoin goes through kind of two years of growth, two years of declines. And I'm being very general now. There are obviously lots of spikes and dips in between.

4:12But the price of Bitcoin essentially goes in this four-year cycle. Typically, if you go back over prior cycles, you'll see that about six months after a halving event, again, the next halving event is in May, Bitcoin price reaches a peak, which would be kind of December of next year and then it does a slow decline down, reaches a bottom about 36 months kind of through the cycle and then it turns around and goes back up again. That's the historical pattern and I'm not necessarily saying that the pattern will repeat itself but it has repeated itself three times exactly this way in the prior three having events.

4:55So our perspective is we typically develop kind of three scenarios bear base bull where we think price of bitcoin and the global hash rate are going to be because in our business global hash rate is critical to understand because that drives our productivity if you would and the more miners that are hashing uh the harder it is for us to win a block the harder it is for get that block reward for those who may not know just this little bit of background here this is the aggregate get computational capacity online at any given time. And obviously there's a free market in this. So it's a supply and demand issue.

5:32Talk a little bit about that and why it's so critical to understanding the mining business. Sure, yeah, it's a great point. And I think we take it for granted sometimes just because we're in the midst of it all. So think of it as there is a fixed number of Bitcoin that can be awarded today. And today that's 900 Bitcoin. At the halving, it'll be 450 a day. And all the miners globally are contributing hash power. Think of it as just compute power to solving essentially the puzzle that we try and solve. And if we solve that puzzle successfully, then we get to mint a block and we get the block reward.

6:08There are a little over 2000 blocks awarded a day. So that 900 Bitcoin per day pays out about six and a quarter Bitcoin per block. And in theory, a block is meant to happen every 10 minutes. and that's the way the software for bitcoin blockchain is written and to maintain that consistent speed if more compute power comes online which means the problems are being solved faster then it makes the problem more difficult so that that 10 minute interval is maintained and uh again if you double the number of people competing for that 900 bitcoin it gets twice as hard and so each miner has to work twice as hard to get the same amount of bitcoin block rewards So that's how that works.

6:50It's kind of a zero sum game, unlike oil or gold, where somebody can sit on reserves and determine I'm going to extract more or less based on price in the market. We are constantly fighting over this fixed number of Bitcoin so that you go through a period like when the global hash rate dropped dramatically because China prohibited mining and all the miners in China had to shut down. then what effectively happened was the hash rate dropped by half almost. And so Bitcoin miners were rewarded accordingly. And then we, you know, I think you guys are showing a chart now that shows kind of the hash rate.

7:24And then we returned to kind of the trend line. But, you know, Bitcoin hash rate continues to grow right now as miners put on more capacity. And, you know, it gets more difficult with each difficulty adjustment. But, you know, sometimes it's adjusted downwards. And we had earlier this year a downward adjustment, for example, when the price of Bitcoin was low. Yeah, it's such an important, I'm so glad you were able to describe that, Fred, because it really is important for people to understand the supply and demand and the financial and economic dynamics of this business because it determines so much in terms of the capacity that gets put online and the profitability of mining.

8:05So let's talk, go ahead, please. No, go ahead. So let's talk a little bit about something that you've been intimately involved with, which is what's happening right now in regulation. I know that you were down on the Hill talking to some folks and briefing them about what's happening. Where are we right now in this process of, you know, oversight from Congress and the potential legislation we may, hopefully, but may see in the future? Well, I think while last year before FTX, Three Arrows Capital, Celsius Mining, etc. happened, lawmakers were generally speaking open to learning about crypto, how it could help, you know, where were there risks, etc.

8:50And we're working with many of the crypto firms to kind of understand things and move things forward. And while the SEC hasn't really changed their tune, you know, they've always been kind of come speak to us and we may or may not decide to let you do what you're going to do. What happened post FTX and these other crashes is that basically the tone went to consumers have been harmed. Therefore, we need to regulate this industry. But because no lawmakers are willing to, you know, really a handful of lawmakers have put forward bills, but there's not enough traction, I think, at the moment in Washington to get those bills passed.

9:32And so we're in an environment where we don't have a regulatory framework where companies can operate. And generally speaking, the regulators are anti crypto and digital assets. Bitcoin mining sits in its own little niche a little bit because while Bitcoin has been deemed a commodity by both the SEC and the CFTC and even the IRS because we pay taxes on it, The issues around Bitcoin mining tend to be more related to climate and energy politics. And so it requires a lot of education from our side to educate people, just like we spoke about the global hash rate and understanding the dynamics of global hash rate.

10:10We have to also educate lawmakers and their staffs, more importantly, about the energy and the climate aspects of Bitcoin mining and how Bitcoin mining actually contributes to grid stability and how it contributes to lowering the cost of renewable energy to consumers and contributes to the growth of renewable energy in this country, which without baseload offtake customers like Bitcoin mining, there would be little incentive for outside of government incentives. And if you want, I'm happy to riff about what's called the duck curve and how energy markets work so that people can understand about that.

10:45But essentially, we're just doing a lot of education on capital, talking to staffers and helping them kind of understand and, you know, winning over some people who maybe were sitting on the fence before now that they have a better understanding, you know, are forming more informed opinions. And that's what we're really trying to do is we want lawmakers to have informed opinions, not opinions based on stuff that's printed in the New York Times or that's inflammatory in nature that where they don't have the benefit of hearing the counter argument. Hey, everyone, we're going to take a quick pause and hear a word from our partners.

11:22We'll be right back.

11:28Yeah, we're going to talk in just a second about that New York Times article, but let's dive deep on exactly that, exactly those points you just made. Tell us a little bit about how the Bitcoin mining business works in terms of energy. I think it's probably counterintuitive for some people to understand this idea that by consuming energy to do Bitcoin mining, there are some potential benefits to that. Talk big picture, and let's start at the very beginning for people who may not understand this or just haven't had the opportunity to hear this conversation before. Let's explain that issue. Sure.

11:59So if you look at the energy markets, for one thing, the amount of electrical energy that's generated in this country, it's not a zero-sum game, meaning if one person consumes electricity, it's not that that electricity is now not a you know electricity won't be available to somebody else so we actually generate and have capacity to generate much more electricity in this country than is consumed start there the other thing is the grid which is the transmission the transmission mechanism that sends electricity from a power generator to your home and the plug in your wall it cannot store energy it's a plumbing so just like plumbing it can only hold as much water in in this case, electrons, as is being pulled or demanded or consumed by consumers.

12:49So what the grid does is it signals to the generators, hey, turn on more capacity because consumers need more electricity or turn off capacity because demand is dropping. Now, what most people, and this is where most people really don't have a proper understanding of this, is that demand during the day and night changes fairly dramatically during certain periods of the day. And so the grid's challenge is how do I balance demand and supply? This is what economists call a peak load problem, the challenge that you have loads that are much higher at one period and much lower at another. How do you balance that out?

13:27Exactly. So the issue with load balancing, as it's called, is that essentially there There isn't a very, the typical pattern during the day is that, you know, people get up in the morning around 9 a.m. There's a small peak because people are making breakfast. They turn on the heat. They turn on a washing machine. They're consuming energy. Then they go to work. Demand drops. And there's this, what they call the duck curve. Think of the shape of the bottom silhouette of a duck. You have the tail here, little peak where the tail is. Then you have the belly of the duck, which is a dip. and then up to the nib in the mouth up at the top.

14:08In the morning, you have the little tail peak. Then it dips into the belly, and then it goes up into the kind of really peak flow during the day, which is 4 p.m. to 9 p.m. during the day. That's peak demand. That's when people are turning on AC, turning on heat, et cetera. So now you've got this energy that's needed, and you have different types of energy that are generated. Some types of energy that are generated you can regulate up and down. other ones you can't so at the bottom of the energy pyramid is nuclear why is it at the bottom well you can't tell a nuclear power plant I need 40 percent more power I need 30 percent less power it doesn't work that way it takes a long time for the nuclear power plant to react and so they put that at the bottom where there will be guaranteed demand so that all of the energy generated by nuclear power plants gets sucked up first the layer above that is coal and why is coal the next layer?

15:01Well, coal, you can turn up and down just a little, but it takes hours, if not days for the response in demand to happen. And so coal is the next layer. Then comes natural gas. Why natural gas? Well, natural gas or what they call peaker plants is a type of power where you can turn it on and in 30 or 40 minutes it comes online. And then when demand has slackened, it can be shut off and then it doesn't have to cool down like the boiler does in the traditional kind of coal world. And then only comes solar and wind and other renewable forms, which are intermittent. Why are they intermittent? Well, the sun shines from 9 a.m.

15:41to 3 p.m. Go back to that duck curve I talked about. The dip from 9 a.m. to kind of 3 p.m. is when the least demand is there. So what happens? The grid operators say, okay, I don't have peak demand. I need to start shutting off supply. And they go from the top down in that pyramid. They shut off wind. They shut off solar. Then they shut off natural gas. And then they keep coal and nuclear running at base load. So what ends up happening is when solar is most productive is when they have the hardest time to sell it because there's the least demand in the market. And that causes solar energy to be negatively priced during parts of the day.

16:18In Texas, up to 20 % of the day, solar and wind energy can be negatively priced, meaning the generator pays people to take it. The other challenge we have is that as we bring on more renewable energy, that renewable energy is just competing for that little peak of the pyramid, which only is in demand during peak power times. And so how do you get somebody who can only sell energy a few hours of the day to be profitable if they're typically being shut off or curtailed? And so a Bitcoin miner can step into the picture and they can work with a renewable energy provider and say, we'll take all the excess energy you produce and that will give you a base level of revenue.

16:59So now you're getting a return on your investment in this renewable energy generation project and you can charge the consumer less money because most of these marketplaces are bidding marketplaces where they have the generator has to bid against the demand side. to make the energy market work, so to say. And so by having a baseload customer like us, the renewable guy can lower their prices in bids, which means they may win more of that bids, which makes them overall more profitable and the consumer gets more renewable mix in the pipeline. In the US today, we have almost a two-year backlog between renewable energy coming online and available transmission lines.

17:39So what that means is, you know, you're adding all this generating capacity, but you can't get it to the consumers because power lines don't have the capacity to transport it because most solar and wind is built where people aren't because that's where you have cheap land. That's where you have access to good wind. It's where you have access to good solar, like West Texas. Yet 70 % of the population of Texas is in the eastern part of the state. You can only transmit electricity about 600 miles before you lose so much power in the transmission line that it becomes inefficient. And by the way, in this country, we lose anywhere from 15 to 25 percent of the electricity generated just in transmission line inefficiencies.

18:21So let's look at how much energy does Bitcoin mining use. Globally, Bitcoin mining uses less than a fraction of one percent of the available electricity that's generated, less than a fraction of 1%. Now, Bitcoin mining uses about a quarter of the energy that ATMs used in the US, right? Cash is something that's going out of style. Last I heard, people are paying with things on their cell phones. We still pay to have all these ATMs running all over the place. Bitcoin mining uses less energy than holiday lights do in the US. Bitcoin mining uses less energy than video game consoles. Bitcoin mining uses less energy than all the streaming service providers data centers use.

19:09Yet people deem that Bitcoin mining is a waste of resources. So I think, you know, people really need to educate themselves, understand the nature of how the energy markets work, realize how we help load balance the grid, because when the grid needs quickly 200 megawatts, Bitcoin miners in Texas can shed that load in 10 minutes and have all that energy available to the general public. And then when there's too much energy being generated, we can start our systems up again in a very short period of time around. So we are this perfect interruptible load that can load shed immediately, essentially from a grid parlance.

19:51And then we can bring up our demand again so that the energy generators again have an opportunity to generate revenues and cash flows when the demand side of the marketplace doesn't call for it. So we act as this great balancer of the grid that overall is helping fund more renewable energy and overall helping decrease the cost of electricity to consumers. It doesn't mean that we're causing more fossil fuel to come online because energy is not a zero-sum game. There is plenty of energy generation capacity, and our industry predominantly selects renewable energy. We are, as an industry, over 50 % fueled by renewable energy.

20:34No other industry in the U.S. does that. The average, you know, the U.S. grid, by the way, is only 25, 26 % renewable anyway. So as an industry, you know, we are the most environmentally friendly. We don't generate CO2 emissions by our operations and we're using renewable energy. So I think people really need to be educated and understand this to understand the benefit Bitcoin mining brings to the grid and balancing it and making it operate more efficiently. Hey, everyone, we're going to take another quick break and hear a word from our partners. We'll be right back to the Real Vision Crypto Daily Briefing.

21:17a true deep dive there on the nature of mining and i think some of the aspects of the grid and power generation here in the united states that people may not have been aware of a lot of facts thank you for sharing that perspective i want to open this up to our viewers right now come and join the conversation put your questions down in the chat wherever you're watching we're going to ask the best ones on the air remember real vision members take priority but the good news is membership is free. Go to realvision.com forward slash crypto to sign up. That's realvision.com forward slash crypto to sign up.

21:48And by the way, I should say, as you just heard from that last answer there, an incredible amount of detail about the way not just Bitcoin mining works, but also the power grid and electricity generation here on the United States. Real Vision is absolutely committed to keeping this content free to you. So if you're watching on YouTube, please tweet this link out. You can always follow me as well at Ash Bennington on Twitter and, of course, follow Real Vision at Real Vision on Twitter. Fred, a really detailed information dump there. So much to talk about. I'm pretty surprised, actually, to hear that ATMs use more capacity than Bitcoin money.

22:26That's a pretty striking statistic, particularly when you think about the relative role and the importance of the future of the financial system, according to those of us who are passionate about this technology, versus the past. I mean, But ATMs are clearly going the way of the dodo bird as things become much more digital in their transfers. Talk a little bit more about that absolute capacity number because it's a striking one. Yeah. So if you think about it, ATMs have to be on 24-7, 365. Banks do not make it a priority to identify renewable energy sources for those ATMs. Most ATMs are just plugged into whatever supply of energy is being provided to a bank branch.

23:11And I haven't seen any bank ESG reporting because that hasn't really become mandatory quite yet. But I'm sure the regulators will make that mandatory at some point here. And it'll become quite evident that the energy mix that banks use is most probably predominantly carbon based as opposed to renewable. So it's an area I think that it's important that if we're going to highlight one industry's energy use, let's look at everybody's energy use, at least make it an even playing field. And while you're looking at just data centers and Bitcoin mining operations are really just data centers, look at the data center industry as a whole.

23:50Look at how much, you know, these, you know, large learning models that we're now starting to use for chat, GPT and AI and things like that. Educating and teaching those models, building those models uses a huge amount of compute power also, which uses a lot of energy. You know, 25 % of the capacity of the Internet, the bandwidth of the Internet is consumed by streaming services. We don't talk about that either. Right. The Internet's meant to be free. Yet these streaming services use the majority of the energy of the bandwidth of the Internet. So I think consumers need to become educated about these things.

24:27And unfortunately, the lack of that education makes them very susceptible to questionable practices by the media and reporting on the industry. Talking of which one of the things that you mentioned earlier in the show is the New York Times article. I read it when it came out, and I was really struck by the fact that, listen, the article, if you haven't read the article yet, it literally begins with 40 people freezing to death in Texas during a storm and then transitions immediately into Bitcoin mining, implying a causal connection between the two. It was really, well, let's just say it was quite striking to me when I read that article.

25:04Some thoughts about it, Fred, and the implications for this kind of information flow. So I think I would deem this as a hit piece, as we call it, where it was very specific in its agenda. The New York Times did not speak to us in preparing for this article. So had they done that, we would have shared our perspective. I believe some of our colleagues in the industry, Riot Platforms, has commented extensively rebutting a lot of the points the New York Times made. And you can find that on their website. They have a detailed rebuttal there. It's also generally available on Twitter. But essentially, the New York Times conveniently forgot to do the energy discussion about the energy pyramid I went through.