Jamie's insights provide a compelling argument for the convergence of Bitcoin mining and energy production, suggesting a future where these two critical industries support and enhance each other, leading to more efficient markets and a move towards a more decentralized and resilient energy grid.
This TFTC episode dives deep into the intersection of Bitcoin, energy markets, and the financial mechanisms that tie them together. Marty and his guest Jamie McAvity, Founder and CEO of Cornmint, explore the rapid growth and evolution of Bitcoin mining, the technical and economic hurdles for older individuals engaging with Bitcoin, and the importance of self-custody. They also touch upon the impact of Chinese miners on the American grid and mining industry, highlighting the technical, legal, and operational aspects involved.
The discussion shifts to the dynamics of the Texas electricity market, illustrating the complexities of power purchase agreements, demand response programs, and the role of Bitcoin miners as price-responsive, base-load consumers. Jamie provides an in-depth analysis of the energy market distortions caused by subsidies for renewable energy, drawing parallels with the situation in Germany and emphasizing the potential benefits of nuclear power. The conversation also speculates on the future interplay between Bitcoin's price, mining difficulty, and the block reward halving's effect on the industry.
Lastly, Jamie introduces the concept of Bitcoin-denominated finance for power generation, suggesting that aligning the economic incentives of energy producers and Bitcoin miners could lead to more efficient and resilient energy markets. This idea presents a vision for a future where Bitcoin not only acts as a bridge between the energy sector and finance but also drives a more sophisticated and responsive energy grid.
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This TFTC rip offers a rich and nuanced discussion on Bitcoin's growing role in the energy sector and the broader financial landscape. It paints a picture of an industry at the cusp of transformative change, driven by technological innovation, market dynamics, and the pioneering spirit of Bitcoiners. Jamie's insights provide a compelling argument for the convergence of Bitcoin mining and energy production, suggesting a future where these two critical industries support and enhance each other, leading to more efficient markets and a move towards a more decentralized and resilient energy grid. The episode leaves listeners with a sense of cautious optimism about Bitcoin's potential to reshape not just finance, but also our approach to energy consumption and production.
0:00 - Intro
7:38 - 50k and Ready Player One
13:16 - Assertions of Chinese grid attack
23:06 - Working with the wind tax credit issue
36:44 - Renewable grid drawbacks and risks
44:17 - The right mix of energy sources
47:53 - Germany decommissioning and energy politics
1:00:23 - Bitcoiners running nuclear
1:06:11 - Halving
1:11:52 - ASIC innovation
1:31:04 - Mining fees
1:34:28 - BitMEX
1:38:07 - Gamestop
1:40:41 - Cormint
1:47:01 - Energy/finance integration
1:52:25 - Wrapping up
00:00:01:12 - 00:00:03:17
Marty
Like, check. One, two, one, two. Jamie we're live.
00:00:03:17 - 00:00:04:16
Jamie
Microphone check.
00:00:06:05 - 00:00:08:04
Marty
Jamie conversing with our Jamie Logan.
00:00:09:09 - 00:00:13:19
Jamie
Great. Great to be here. Thank you for having me.
00:00:13:21 - 00:00:14:24
Marty
It's a long time coming.
00:00:15:18 - 00:00:23:19
Jamie
It is a long time. I've been wondering and I've been wondering when am I going to get on the show? But we had a good riff on the Peter McCormack Show.
00:00:23:24 - 00:00:29:21
Marty
That was a great conversation. I was with Thomas over the weekend. Yeah, we were reminiscing on that conversation was great. Free flowing.
00:00:30:11 - 00:00:31:22
Jamie
God bless Pupkin.
00:00:32:13 - 00:00:39:12
Marty
God bless public. God bless America. God bless bitcoin. You might had 50 k during this episode, during this recording.
00:00:39:25 - 00:00:47:09
Jamie
Yeah. Well, we've we are over $1,000,000,000,000 market cap officially which is exciting.
00:00:47:22 - 00:00:48:11
Marty
One t.
00:00:48:29 - 00:00:54:07
Jamie
One t deleting zero as they say or adding adding adding a zero adding zero.
00:00:54:11 - 00:00:54:26
Marty
Yes.
00:00:55:09 - 00:00:55:20
Jamie
Right.
00:00:55:29 - 00:00:58:00
Marty
It's pretty crazy. It's happening rather quickly.
00:00:58:15 - 00:01:09:18
Jamie
It is. Yeah. The I think maybe we we all may have underestimated the the passive allocation machine of American public markets.
00:01:10:21 - 00:01:11:29
Marty
Did you underestimate it yourself?
00:01:13:03 - 00:01:57:15
Jamie
I did not. I did not. I, I deal with I have a lot of older friends, and I think that one thing that Bitcoiners underestimate is the technical hurdle of not so much learning Bitcoin and and setting up a bitcoin wallet. But the fear of that an older person thinks with regard to anything about a computer. I mean, how many how many kids, you know, friends that have to help their parents with their email every time they come home, you know, or get asked to solve a remedial or computer issue.
00:01:57:15 - 00:02:11:11
Jamie
And the one characteristic of it is the on the uncertainty that they have around what happens if I click this button? There's like this fear that if I click this button, my whole emails, I get this.
00:02:11:15 - 00:02:17:05
Marty
It's like that meme where the dude drags off his files to the trashcan and his computer just evaporates in front of him.
00:02:18:22 - 00:02:22:15
Jamie
Yeah, Yeah, exactly. That's a real technical hurdle.
00:02:22:15 - 00:02:37:04
Marty
And how many how many of these elder of our elders do you know that when you go to help them with their email, they have their password on a Post-it note Right on there. Right. Right on their screen? Yes. Think of Bitcoin. It's like, Oh, yeah, here's my private key. It's right.
00:02:37:04 - 00:02:42:16
Jamie
Here. Like the villain Nolan Sorento in Ready Player one.
00:02:42:24 - 00:02:45:01
Marty
I watched that Thursday night.
00:02:45:10 - 00:02:52:15
Jamie
And his password is Boss Man 69, and it's written on a Post-it note right next to the.
00:02:53:00 - 00:02:56:27
Marty
I didn't get through the whole the whole movie, but I watched, like, the first half before falling asleep.
00:02:57:10 - 00:03:02:24
Jamie
Oh, yeah. You probably missed the the part I'm referencing where they, they hack his.
00:03:02:25 - 00:03:04:24
Marty
I seen it before I was rewatching it. Okay.
00:03:05:08 - 00:03:06:24
Jamie
I've seen it like 25 times. Yeah.
00:03:07:10 - 00:03:11:05
Marty
It's very Bitcoin esque. Yeah.
00:03:11:21 - 00:03:40:25
Jamie
Prescient. There's a, a scene when they're doing an opening montage describing the success of this VR platform and there's a there's a currency, a digitally native currency within the world. And that I forget what the news clip says, but it's some kind of milestone that the the market capitalization of the in-game currency has exceeded a, you know, create crazy value.
00:03:41:04 - 00:03:41:10
Jamie
Yeah.
00:03:41:20 - 00:03:50:16
Marty
Yeah yeah. The the winnings for that a tournament and ready player one if you get all the keys. Trillion dollars in stock.
00:03:50:19 - 00:03:52:09
Jamie
Yeah half a half trillion.
00:03:52:20 - 00:03:53:11
Marty
Half a trillion.
00:03:53:12 - 00:04:06:18
Jamie
Yeah. Because he says I've seen it a lot. He says a half a million and a half a trillion dollars. Yeah. Which it's 20, 35. That's way low.
00:04:07:28 - 00:04:09:14
Marty
Considering all the inflation that we're going to.
00:04:10:00 - 00:04:26:22
Jamie
Yeah. Yeah. I mean, it's going to be like $50 trillion if it were realistic. Yeah, but the movie is based on a book that I think is 15 years old before MTG growth really, really started accelerating and compounding.
00:04:26:25 - 00:04:34:18
Marty
Yeah. Do you think that's why the price is popping right now? Because people are looking out at the world and they go, they're going to the shit ton more money, or is it simply flows?
00:04:35:22 - 00:04:58:11
Jamie
I think it's flows. I think that China I've been hearing a lot about the China situation. Uh, you know, the Chinese stock market is cratering. They're so indebted and their economy is stalling. Uh, and so the, the China print is coming. It's big. Yeah.
00:04:58:24 - 00:05:07:17
Marty
And people are successfully escaping yuan and Chinese stock markets in the Bitcoin despite the fact that China does not like Bitcoin.
00:05:07:26 - 00:05:34:28
Jamie
Yeah, there's, uh, probably a lot of that is flowing through the Texas electricity market through hosting contracts. I think that is a loophole that works is if you buy an asset in China, send it anywhere else and run it and then pay a services contract in renminbi, you know, you're effectively circumventing the capital control.
00:05:35:11 - 00:05:35:22
Marty
Yes.
00:05:36:06 - 00:05:38:10
Jamie
And acquiring Bitcoin and acquiring Bitcoin. Yeah.
00:05:38:12 - 00:06:02:17
Marty
On the back end, let's talk about this because it's a big, big theme in the space right now. I think everybody in the mining industry knows there's a bunch of Chinese that are either hosting with American companies or mining themselves. The media is beginning to portray this as a systemic risk to the American economy potentially, but more specifically the American grid system.
00:06:02:17 - 00:06:04:06
Marty
Ah, the Chinese attacking our grids.
00:06:04:27 - 00:06:37:27
Jamie
That media, you know, they are just they have such a wonderful imagination, aren't they? Yeah, it's there's no there's no grid attack. I mean, we know some of these firms personally. We know their leadership, their leadership is American. They're extremely sensitive to political risk. They're just they're terrified. These are people who were were or are citizens of China under that quasi authoritarian regime.
00:06:38:14 - 00:07:17:05
Jamie
They're very inherently scared and skeptical of government. And so they are doing everything they can to be compliant. The one thing I would say that is the most interesting and probably the least enduring component of this phenomenon with with Chinese owned A-6 being operated at American operated facilities, just for starters, the high voltage infrastructure that's connected to the power grid is owned and operated by an American firm.
00:07:17:26 - 00:07:45:22
Jamie
And then you are prohibited under Texas law to own and operate high voltage infrastructure in a Chinese controlled entity. So that's it's called the Lonestar Infrastructure Act. So that on its face is illegal for anything like that. So there's no Chinese nationals who have the ability to destroy the power grid. They also would would not want to because that's their Bitcoin printing capital control circumventing machine.
00:07:47:25 - 00:08:24:17
Jamie
The one thing that's strange about their behavior is they do not perform economic curtailment as a profit. Maximizing miner like like other equipment. Clients are bitcoin mining company. We are a profit maximizing entity. We are never attempting to consume electricity that exceeds the dollar per megawatt hour equivalent of our bitcoin mine for any period. And so last year, just by the numbers, we're running 30 ish joules per hour hash fleet.
00:08:26:12 - 00:08:56:17
Jamie
That meant that in the west zone of ERCOT, we were online 90% of the year and we were offline 10% of the year. And it's not exactly perfect because we are avoided some of the coincident, the four coincident peaks to reduce transmission costs. So it wasn't always economically perfect, but it's a rough estimate of how many hours of the year, 90% of the hours of the year you could profitably convert electricity in the Texas wholesale market into Bitcoin 10% of the hours of the year.
00:08:56:17 - 00:09:26:14
Jamie
You couldn't. The peer group of other miners within Texas is not economic actually perfect. They are willing to overpay for power just to convert that into Bitcoin, which is really kind of a unique market dynamic. It is. It is not an economically rational market because the desire to circumvent capital controls and save in Bitcoin creates a premium, a slight premium on power.
00:09:27:18 - 00:09:34:29
Jamie
I do think it's going to go away because it doesn't make any sense. But yeah, that's one kind of interesting phenomenon.
00:09:35:12 - 00:09:51:18
Marty
So why would does it have to do with the capital controls? The reason for them doing this? Because they're afraid that if they were to sell that electricity for dollars and then have to convert it to Bitcoin and run into some problems trying to convert that.
00:09:51:18 - 00:10:27:23
Jamie
I think it comes from a bunch of potential factors. You know, the default hosting agreement template is a 95% uptime agreement. And so, um, there's some economic imperfection in that. That means that the the miner who is hosted is, is paying more for electricity than they should and and the host is leaving money on the table. You know what in our view looks like a perfect hosting agreement is one that is constantly optimizing between the two and sharing the revenue between the host and the miner.
00:10:27:23 - 00:11:00:16
Jamie
You know, there's not much the Chinese guys who are sort of watching loads in the West, real time settlement in ERCOT, but their host is. And if the contract restructured in such a way that the host would optimize between the two and always just settle the difference in Bitcoin, then that would be the economically perfect outcome, but that the industry has not progressed to having a creative profit maximizing hosting agreement and it does add some complexity.
00:11:00:16 - 00:11:19:05
Jamie
It adds some trust. There's some fidelity on doing settlement reconciliation for an ERCOT bill, which is is an additional incremental overhead for the accounting departments. So I, I'm confident it's going to change, but the current state of it is not optimized.
00:11:20:01 - 00:11:56:29
Marty
But it's become more optimized. Over the last five years, it seems like there's been this progression of miners making mistakes around the power purchase agreements, learning from those mistakes, getting better. PPA is now with ERCOT and miners becoming more immersed within the man response programs we've had a bit of trial and error over the last three years specifically with that and people are getting smarter and it seems like slowly but surely over time the industry is going through this iterative process of figuring out what is the ideal situation from locking down the power to setting up the hosting agreement to then doing that profit share on top of that.
00:11:57:07 - 00:12:09:29
Jamie
Yeah, definitely. And there's been attrition of less efficient operators and we had a major Texas operator compute North.
00:12:11:29 - 00:12:12:27
Marty
Just talking about them.
00:12:13:13 - 00:12:58:19
Jamie
Lose their business to their lender and it was being operated by U.S. BTC for a while, who bought it, who partnered with the lender I think to attempt to recover some of the assets. And now that portfolio has transitioned to marathon. So Marathon acquired the compute North built assets. Celsius is another one Celsius. Actually, I am good friends with the guy who was running the Celsius fleet and they were actually good from an energy management perspective, but they had a critical flaw in their capital market structure, obviously.
00:12:58:29 - 00:13:01:20
Marty
And the business model, the other part of their business wasn't.
00:13:02:14 - 00:13:42:09
Jamie
Yeah, I mean, that's what I mean. You know, they were running an ongoing fraud and had an asset and liability duration mismatch. So they, um, yeah, not necessarily an inefficient operator from the mining perspective, but a fraud. Yeah. So it's, it's getting better. It's getting better. And I just I tweeted yesterday, you know, that the addition of a base load consumer to that is never contributing to peak demand periods on the grid is literally the ideal consumer that you can add for the health of a power market.
00:13:42:09 - 00:14:32:00
Jamie
In a power grid, there's no better consumer. It's the inverse of a retail consumer, which around the steady state most of the year, the ERCOT power grid demands between 40 and 50,000 megawatts of power. And last summer, record hot summer peak demand was 83,000 megawatts plus or minus a little bit. So you're talking about a2x response from the generation fleet on the grid to be able to serve those customers and the more bitcoin mining base load that is building coming online here, the stronger a signal it sends to the generation community to invest here and commit to power generation resources.
00:14:32:16 - 00:14:54:27
Jamie
And then that Bitcoin mine load is completely gone during the peak. So you get this great signal to the generator community, Hey, come and build a power plant here. Uh, build your solar farms, build your wind farms, builds your natural gas plants, and then that demand is there 90% of the year. If it's economically perfect and it's gone, the 10% of the year when the residential community needs it.
00:14:55:14 - 00:15:16:13
Marty
Do you see a scenario where we build generation capacity to, let's say, like 100 gigawatts, like far beyond whatever peak demand would be in the middle of summer or middle winter, If we get bad winter storms here and Bitcoin miners just soak up the excess capacity in perpetuity. That is maybe my naive brain. That's like what I think should happen.
00:15:16:15 - 00:15:35:06
Jamie
No, I think you're thinking about it from like a very first principles. It may be a naive analysis, but it's first principles and it's correct. It is absolutely correct that especially with the market distorting price signal of the renewable energy production tax credit.
00:15:35:06 - 00:15:36:22
Marty
I wrote about this over the weekend, you.
00:15:36:22 - 00:16:09:00
Jamie
Know, it's just like you can underwrite. So a wind farm. Here's an example. A wind farm has a capacity factor of about 30 to 35% of its nameplate output per year. What that means is you build a one megawatt wind turbine, you will get 35% of the year of wind. That is sufficient to create generation for that. So there's 8760 hours in a year.
00:16:09:10 - 00:16:36:19
Jamie
You get about a third of that. So call it a little less than 3000 megawatts per year. 3000 megawatt hours per year of generation will come from that wind farm. That one megawatt wind turbine costs $1 million to build a rough, rough estimate. The production tax credit will give you around $30 a megawatt hour for every megawatt hour that you generate.
00:16:36:29 - 00:17:02:20
Jamie
So that's 3000 megawatt. And the production tax credit last ten years when you build. So it's 3000 megawatt hours per year times ten years, 30,000 megawatt hours times $30 a megawatt hour In production tax credit, it's $1,000,000. Exactly. So you could literally make $0 from selling energy and you will pay for.
00:17:02:28 - 00:17:03:07
Marty
About.
00:17:03:07 - 00:17:36:28
Jamie
Even the wind turbine. Yeah. And that is what is happening. This is why we have 10% of the year. There's negative negatively priced power in ERCOT and even though wind farms are not generating any revenue from selling energy, they're still building them because the federal government is effectively subsidizing this power. I mean, Corman's Bitcoin mine is a decommissioned wind farm that decommissioned in its 12th year of operation because once the production tax credits ended, they were never making money.
00:17:36:28 - 00:17:40:24
Jamie
So they had no no use for they were losing money.
00:17:41:10 - 00:17:56:10
Marty
And I want to dive deeper into this topic before we do that. Like why was Corman positioned to come take this asset and make a profitable? What do you do that makes us now profitable?
00:17:56:18 - 00:18:26:04
Jamie
Yeah, well I mean it's we're effectively the inverse of the market distorted price signal from renewable energy. We are there to consume power when there is no demand from the grid and then we are shutting off. All right. Our behavior is as close to economic perfect, economically perfect as possible. And that's the business is attempting to be as economically perfect in consumption of power as we can be.
00:18:26:11 - 00:18:59:28
Jamie
And the big barrier to entry for a mining startup, if at least if you want to play on grid and and wholesale, I mean, you know you know, off grid better than anybody. So you know, the constraints there are generator finance and all of that stuff for on grid it's a substation and interconnection and the interconnection queue in Texas is 2 to 4 years depending on where you're trying to go online and long lead time items on a high voltage grid.
00:18:59:28 - 00:19:38:06
Jamie
Interconnected substation are one year at best, four years at worse. And you're talking about making somewhere between five and $20 million of CapEx before you even mine a Bitcoin. So you're waiting 1 to 4 years and making 5 to $20 million of CapEx to be able to mine Bitcoin. It's extremely if you're a startup company that's and most investors who invest in a Bitcoin mining startup, they would like to participate in the price appreciation of Bitcoin.
00:19:38:06 - 00:20:11:25
Jamie
And if you do not deliver that, they get they're not pleased with you as a fiduciary of their capital. So you've got to convince someone to give you enough equity at a valuation that still makes sense for you or to give you an infrastructure loan to go and build a substation to make that happen. We were in in that phase of our business, we began our operations in upstate New York and we concluded not a great place to be and to do anything related to Bitcoin, much less be a Bitcoin miner.
00:20:12:20 - 00:20:50:19
Jamie
And we did a nationwide search of the best place to do it. We identified West Texas, and then we found a wind farm owner who was very motivated to sell their assets because they were actively losing money on it. And we proved that we could develop the infrastructure to do this. And we had a team who who was going to figure out ways to innovate in this industry, and we convince them to sell us their substation and transmission line from their wind farm as an equity round in our business.
00:20:50:29 - 00:21:02:07
Jamie
So we actually took a substation and a transmission line in-kind as an equity contribution to the company, and that was a game changer. I mean, that was that the reason why we exist today?
00:21:02:19 - 00:21:05:11
Marty
And that's a very creative way of doing a deal.
00:21:05:24 - 00:21:42:03
Jamie
Right? Creative. We had to convince people and and the deal had so much hair on it that it was there was virtually no other use for it. We had to renegotiate three ground leases. It joint ownership of the transmission line, a an electricity supply agreement with the utility and a cooperative transmission studies with ERCOT. We basically had to do six or seven transactions successfully in order to do this so that the previous owner realized how daunting it was for someone to buy this asset and how much hair there was on the deal.
00:21:42:13 - 00:22:09:14
Jamie
And we were able to negotiate favorable terms that were effectively like, Look, this is going to be really hard to do and we'll pay you some money for just the option to let us try. So we paid them $1,000,000 at the close of the deal. And then upon the successful completion of these six or seven agreements, the transaction became structured as a little bit more in cash and mostly equity in the company.
00:22:09:14 - 00:22:29:22
Jamie
So there the second largest investor in our company, and I believe that we will deliver them a great return over the long run on this wind farm that was effectively junk. And they turn they have a chance to turn trash into treasure through this company.
00:22:29:28 - 00:22:56:25
Marty
Well, that's why it's creative in two ways. Number one, just the pure structuring of the deal. Basically acquire these assets in a smart way, in a capital efficient way that allows you to operate very profitably and get a payback on your initial investment quicker than you otherwise would have. And and to now that they're the second largest equity holder in your company, you have to imagine I imagine you probably know you definitely know better than I do.
00:22:56:25 - 00:23:11:15
Marty
But if they're building wind farms, you understand the economic issues that these type of projects have now that they're investor and seeing what you guys are doing, I'm like, Oh shit, this is a solution to this massive problem that exists. Is that happening?
00:23:12:23 - 00:24:03:13
Jamie
It's happening. It's happening gradually and across the spectrum of large institutional power market firms. You've got a huge range of Bitcoin acceptance and Bitcoin bullishness and orange Pilling. I'm surprised at how low it seems to be to me now, especially because bitcoin mining loads can really add a lot of value to generation fleets. One of the biggest problems in generation fleets is the forward power market in ERCOT right now is trading about $55 a megawatt hour for the next year.
00:24:04:07 - 00:24:32:15
Jamie
It goes down a little bit. The further that you go out and gas is natural gas is very cheap. Natural gas, power plant power plants have a healthy operating margin. If they can secure a long term gas supply that's cheap and run it through a natural gas plant. Obviously wind and solar have no input fuel. So it's it's even a stronger value prop for them because they have no sensitivity to a fuel input cost.
00:24:34:04 - 00:25:08:17
Jamie
The big boogeyman in the power market is that the volatility distribution of power prices in ERCOT is so large right now and it's growing because you have if you're a generator in this grid, you're absorbing power prices that go down to -24. The chance to get power prices that go up to positive 5000 per megawatt hour. And if you are a gas plant and you say, okay, I'm going to hedge a year of power because sure, it's going to be -20, it's going to be 5000.
00:25:08:21 - 00:25:33:27
Jamie
I just want to lock that in and sell for $55. You it's very hard for you to structure what's called a unit contingent hedge, which means as long as my power plant is operating normally and it doesn't have a catastrophic maintenance issue, then you buyer of this offtake agreement from me, you will get your power. But if something happens to my plant, you're not going to get your power.
00:25:36:05 - 00:25:58:29
Jamie
From what I understand, the buyers are more and more reluctant to do unit contingent deals. Deals that only deliver the power when the power plant is is operational and what that looks like basically is if something happens with the power plant during the summer when it's the hottest, you're more likely to have maintenance issues when you're running your plant really hard and it's very, very hot.
00:26:01:04 - 00:26:42:08
Jamie
If you sell that hedge and your power plant goes offline, you're short power, your short power to the market and that opens you up to catastrophic risk as a company. If you put a Bitcoin mining load there, even with crappy equipment and you can put s19, there are signs there and then you have you don't need to hedge because you're you're selling electricity to the Bitcoin protocol at, you know, let's say the worst machines on the market is the M 30 S it makes about $85 megawatt hour.
00:26:42:16 - 00:27:02:17
Jamie
The best machine is yes, 21 You're making close just under $200 a megawatt hour. You've got a PPA with the Bitcoin network. It's a variable price PPA and it's volatile, but you've got to PPA with the bitcoin network and you have a computing fleet that can power down 95% of its load in 3 seconds in response to prices.
00:27:02:17 - 00:27:26:07
Jamie
So you would be able to keep your generation fleet running if your generator goes down, you just optimize the bitcoin load against the real time market. You already have that behavior there, but you then are gaining a call option where if your generation fleet is running and power prices go up, then you can deliver that power back to the grid and make make a lot of money there.
00:27:26:21 - 00:28:12:20
Jamie
And so this is a it's a very appealing proposition from the perspective of a of a power market operator, power generation operation fleet. It's just that they're they're not there. I think that some of the bankruptcies, especially some of the early movers, the more open minded Bitcoin believers in the power industry, they invested in some of these firms that had very bad outcomes in 2022 and that scared and scared people off because there's just a ton of career risk for the junior guy at X, Y, Z, Energy Co who's I, We're going to go Bitcoin, we're going to do this or do A series B and we're going to sell a PPA to these guys
00:28:12:20 - 00:28:21:29
Jamie
and this optimization deal. And next thing you know, you're in a bankruptcy court for two years and you're CEO and your legal team are like, This guy's a joker. And yeah, that's.
00:28:22:23 - 00:28:23:22
Marty
We're not touching this.
00:28:24:10 - 00:28:48:28
Jamie
We're not touching this. It's going to have to be built bottom up. It's going to have to be built by, in my opinion, by Bitcoin firms who already have Bitcoin risk, like we're wearing Bitcoin risk every single place in our business. There's no incremental risk to us to go into power generation other than the operating risks of the power generation, which are numerous and could easily destroy our company.
00:28:48:28 - 00:28:50:24
Marty
At that point. And for a penny in for a pound.
00:28:50:26 - 00:29:05:22
Jamie
That's right. There's well, we're not adding an incremental, uh, existential risk or career risk. It's already risk that we're wearing and we know we're going to consume power. And that's the most consistent part of our businesses. We will consume power.
00:29:06:15 - 00:29:18:10
Marty
And then bringing this back to the renewable energy credits, particularly focusing on reliable hydrocarbon and nuclear to nuclear doesn't they're not able to take.
00:29:18:19 - 00:29:19:05
Jamie
They are now.
00:29:19:05 - 00:29:20:26
Marty
They are now. Okay, now they're. That's good.
00:29:20:27 - 00:29:22:18
Jamie
Biden Biden threw him a bone.
00:29:22:20 - 00:29:45:28
Marty
Okay, That's good. It's good to hear that. But honing in on natural gas in coal facilities that aren't able to reap the benefits of these credits, that's the threat I wrote over the weekend. I was at an event in Palm Beach on Saturday, and there was a panel talking about the quote unquote, climate crisis and energy markets. And this is the question I brought up.
00:29:46:07 - 00:30:14:19
Marty
Knowing what we've seen in the Bitcoin mining industry is the renewable energy credits have created such a distortion in the pricing mechanism of the market that it is impossible to spin up new reliable generation. Not impossible, but very hard because you have these the material amount of times with negative pricing that really eats into the economic models of these reliable generation sources.
00:30:15:05 - 00:30:50:00
Marty
And then it's just a if you're not going to decommission these reliable sources of your mandate, you just decommission them by distorting pricing mechanisms. And that's happening as well, where you have reliable sources that are up and running when they have to decommission themselves because they're not economically viable and I think it is imperative that the reliable generation sources that do not have the benefit of the recs that are out there really figure out a Bitcoin strategy because that is the only way that they're going to stay viable as long as these credits exist.
00:30:51:01 - 00:31:22:07
Jamie
Absolutely. Yeah. And I wrote a in response to the the winter storm that we had here from Polar Vortex in January, I wrote a big tweet thread about this, which is that, I mean, if you look at what's happening here, so Texas is the second fastest or the fastest, I believe it is the fastest as of this year, the fastest growing renewable energy grid in America.
00:31:22:16 - 00:31:47:17
Jamie
By volume. It's the number one wind state. It's going to be the number one solar state and west zone. A lot of this is going in in west Texas. West zone is 92% renewable installation by nameplate capacity. So this is like the grid of the future over there in West Texas, which is somewhat ironic given that it's, you know, a major hydrocarbon economy, but it is effectively the grid of the future over there.
00:31:47:17 - 00:32:10:05
Jamie
So if you want to see what these utopian grid of the future ideas look like with all intermittent renewables, you just go look at West Texas and you can see what happens. There's some some system reliability issues because there's not as much inertia and rotating mass on the grid as when you have a bunch of coal plants and nuclear plants and combined cycle plants.
00:32:10:16 - 00:32:44:03
Jamie
So you have a generation fleet that's more sensitive to a voltage issue somewhere else on the grid, meaning you could have cascading trips of multiple generators and then they trip off multiple loads and you could have blackouts with these largely renewable grids. You also have higher prices. On average, you have lower prices for 90% of the year. But the remaining 10% of the year is actually pushing prices up with the same gas prices that we had two or three years ago.
00:32:44:16 - 00:33:12:20
Jamie
You know, if you exclude the Ukraine invasion when gas went to $10, the same natural gas, just to be clear, you have this of roughly the same gas price environment. The forward curve of power is twice as expensive and it's all coming from the shoulder. Our volatility when there's no solar and the wind hasn't picked up yet. And so people are paying more for power and they get a less reliable transmission grid.
00:33:12:28 - 00:33:39:06
Jamie
So it is like this the the fastest growing renewable energy grids. I don't think the people who live in them understand that we are voluntarily degrading our standard of energy availability from a very first world standard to closer to a second world standard. And at the same time, we are paying more for a less reliable product. And that's just facts.
00:33:39:06 - 00:34:03:09
Jamie
I mean, you know, it would be great if we could transition to a a future where we harness the power of the sun via wind speeds and and photovoltaic energy generation to power our species. But this transition right now, if you look at the early stages of it's like this is people are making a bad trade here. They're paying more for a worse product.
00:34:03:22 - 00:34:19:27
Jamie
And at the same time, the federal government is going further and further into debt to to effectively subsidize this D reliability D reliability rising process of the power grid.
00:34:20:06 - 00:34:41:10
Marty
Well, and going back to like the voltage synchronization and I learned Steve Koonin was at this event, he was explaining this over the weekend where basically with the natural gas plant a plant, a coal plant within the turbines, they can synchronize like the push and pull through the transmission lines where that does not exist for wind and solar, which is right, enters.
00:34:42:01 - 00:34:46:28
Marty
It introduces this destabilizing effect that can lead to these rolling blackouts, correct?
00:34:47:03 - 00:35:29:21
Jamie
Right. Yeah, it's called voltage, right through effectively, um, gas and anything that has a turbine that has this rotating mass that is being used to generate electricity, any turbine mechanism, the more rotating mass and inertia you have on, on a power grid, the right way to think about it is like it's like pressure in your tires. You're just it's you hit a little bump in the there and you don't feel it, uh, with inverter based renewables, wind and solar, you lose that inertia and you lose.
00:35:29:21 - 00:35:54:19
Jamie
It's like your tire becomes slightly deflated, so you're going to feel a bit more shock. And that just to continue the busted AC analogy, if it works or not, it's like you hit a bump that's big enough and the bump actually hits your hubcap and hits it hits your ear, your wheel axle, or, you know, whatever the appropriate automotive part is and it dents it and it knocks your your car's alignment off.
00:35:54:19 - 00:36:27:23
Jamie
In this case, it's you have a one system, one piece of the system trips and the sensitivity of the other pieces of the system will then trip in response to that and they can solve it. The solution is that the utilities need to upgrade different hubs, you know, different big substations are connection points within the system with shock absorbing equipment, and that then gets added into the transmission charges that consumers pay the next year.
00:36:27:23 - 00:36:40:00
Jamie
And so you have to have beefier transmission infrastructure to be able to absorb of these shocks. And that's another way that costs go up. It's just not not energy costs, it's transmission costs in that case. Yeah.
00:36:40:22 - 00:36:49:19
Marty
So in your mind, what is the ideal mix of these unreliable generation sources and reliable generation sources?
00:36:51:19 - 00:37:24:25
Jamie
I see both sides where if you can get the cost of solar and batteries and wind low enough and subsidies, push that demand to drive innovation in that and you upgrade the grid, you do end up having a lower cost of electricity because you're not relying on fuels. So you can see that it is utopian. It's far it's extremely difficult to understand if you have a constrained economic view.
00:37:25:09 - 00:37:47:18
Jamie
So just as an example, right now, because of the amount of solar that's currently installed in West Texas and the amount that is coming in West Texas. And so if for, say, West Texas is the grid of the future, let's look what this market looks like. There's nobody will buy a power purchase agreement from a solar plant in West Texas.
00:37:48:07 - 00:38:16:28
Jamie
And so you can't get that project financed anymore. So we're we're at we're hitting a wall in terms of the willingness of financial market counterparties and lenders to purchase this power for a term that is sufficient to underwrite the lender on it. So that means someone's got to put equity to to build a solar plant and no one's going to do that because you're just giving up a cash return for a fixed return.
00:38:17:21 - 00:38:46:00
Jamie
It just doesn't make sense to do that. And through that and a number of other constraints, including grid volatility, battery economic viability, and we can spend 30 minutes just talking about this. It's really hard to see how we get there without having a centrally planned economy that's extremely inefficient for a while. It's already somewhat inefficient. We have this distorting signal production tax credits.
00:38:46:07 - 00:39:13:06
Jamie
It's hard to see how we get there using our market economy. I think they should give nuclear a $50 production tax credit. They should give nuclear a $50 production tax credit. The government should subsidize the storage and and removal of nuclear waste. And we can decarbonize our grid since that's what a good percentage of the American people want and vote for by building nuclear plants.
00:39:13:06 - 00:39:39:21
Jamie
And there's so much innovation with vision. You have small modular reactors, molten salt reactors, you have really good vision technologies that are much safer than, you know, the historical fission reactors that have melted down a few times in other places. And France, for all the things that they that they may not be the best at, like winning wars or whatnot.
00:39:41:11 - 00:40:08:09
Jamie
They are great at nuclear, they have a great nuclear industry. They don't have a history of accidents. And the French government subsidizes the removal and storage of nuclear waste. And now they're one of the best performing European economies. In response to the the shortage of gas and having to import all this LNG and having those pipelines cut off from Russia.
00:40:08:16 - 00:40:32:02
Jamie
The French economy from an electricity standpoint, is doing great because they rely on nuclear. And if you look at that, at the carbon footprint of the French power grid versus the German power grid, now that Germany has decommissioned its new plants, it's relying on tons of wind and tons of solar and then lost its access to natural gas.
00:40:32:16 - 00:40:34:18
Jamie
They're burning wood pellets over there. They're burning wood.
00:40:34:18 - 00:40:41:29
Marty
Pellets. They're cutting down forests in North Carolina, and we're shipping over wood pellets so that they can power their economy in Germany.
00:40:42:00 - 00:41:06:03
Jamie
Exactly. And and they're paying more for power. And they're they're emitting more carbon than they were before. And it's extremely ironic that the German Green Party is so dumb and they did suffer a bunch of defeat in recent elections. So the German people are waking up, they're waking up, they're picking up on this being just really bad, illogical policy.
00:41:06:03 - 00:41:16:14
Marty
But they're losing major incumbent industry that's been around for well over a century. BASF is moving out. Some manufacturers are moving out. They like it's too expensive. I can't do it here anymore.
00:41:16:24 - 00:41:21:20
Jamie
And that should be scary for the world. Historically, a weak German economy has not led to good things.
00:41:23:22 - 00:42:00:15
Marty
It is insane how we've gotten to this point because that's I wrote the piece in the Bitcoin Times Energy edition and I focused on Germany and it is insane what they did over the first two decades of the century. Like in 2002, their overall generation capacity was 115 gigawatts, 84% of it was nuclear or coal, nat gas. Since then, they've expanded their generation capacity by more than two X to 240 gigawatts, and the percentage of those re reliable sources of overall generation capacity is 34%.
00:42:01:03 - 00:42:05:29
Marty
They decommissioned 20 more than 20 gigawatts of nuclear power. That was over that time.
00:42:06:04 - 00:42:08:02
Jamie
I mean, it's a real head scratcher.
00:42:08:19 - 00:42:29:17
Marty
And that's really the question there because like you think you more than double capacity. People look at that like, oh, that's awesome. Whatever that same time period, the amount of terawatt produced in 2002 versus 2021, which is when I ran the analysis too, fell by 2%.
00:42:29:17 - 00:42:29:27
Jamie
Yeah.
00:42:30:13 - 00:42:35:23
Marty
And went from 53 terawatt hours a year to 51 point something.
00:42:36:00 - 00:42:36:09
Jamie
Right.
00:42:36:16 - 00:43:02:21
Marty
And then the price of electricity for your average three person German household went up 187%. Yeah. Over that time period. And I think that is the perfect case study that anybody in the world deploying an energy policy needs to look at and say get I get everybody wants to decarbonize. I personally don't think that is what we should be doing.
00:43:02:21 - 00:43:23:16
Marty
I don't think I think the carbon the story is just that a hysteria, fear mongering campaign. I think we should be as efficient as possible, as clean as possible. But I don't think we should write these sources off just because they produce carbon emissions. But putting that aside, just looking at what Germany did, it's like we have the playbook here.
00:43:23:16 - 00:43:24:14
Marty
It does not end well.
00:43:26:18 - 00:44:10:20
Jamie
100%. Yeah, and I mean, we talked earlier about wind capacity factor is 30% of the year roughly. That's the number of megawatt hours you get for every one megawatt of installed wind. Solar is even worse. It's it's about 20%, 15 to 20%, depending on how strong the photovoltaics are. And so, yeah, you can double or triple the installed capacity of renewable generators, but because they're not generating when necessarily when there's peak demand, because they don't have the ability to ramp up production in response to peak demand and it.
00:44:10:20 - 00:44:23:04
Marty
Should be common sense like when, when is peak demand come, when is really hot, why is it really part of the reason is the wind is blowing. And the other end of the spectrum is when it's really cold. And why is it really cold is because the clouds are blocking the sun.
00:44:23:18 - 00:44:57:05
Jamie
It's right. Yeah. And and I mean wind in particular is really quite a I've gone as far as to say that wind power is poised for an electrical grid. Maybe a little extreme. If there's enough batteries, it would be okay. But if you look at a wind production, it is it peaks in the middle of the night when no one is using it and it declines to its lowest output level at the the hottest part of the day.
00:44:57:18 - 00:45:28:24
Jamie
And every record power price day we had in ERCOT last summer was a low wind day. People don't even look at load as the the driving factor for peak pricing. They look at a metric called net load, which is load minus renewables. And so you could have a really hot day and and a ton of demand on the system.
00:45:29:03 - 00:45:52:22
Jamie
But if the wind is blowing, you're going to be okay. You know, in the solar there's going to be generating and if the wind is blowing, you'll be okay. If there's no wind, it could not even be necessarily that hot of a day. And you'll have 5000 megawatt hour pricing. And it's the the the the electricity consumption peak every day of the summer happens.
00:45:52:22 - 00:46:20:16
Jamie
At the same time it is between four and 5 p.m.. That is always when demand is peaking as the sun's been going ripping away for a long period the day it finally starts to decline and now it is like it's following a clock. 5 p.m. power demand starts to drop off as it starts to cool down because the sun is less intense and that used to be the highest price point of the day.
00:46:20:16 - 00:46:47:21
Jamie
You know, it makes sense. That's the hottest. That's when power demand is the highest that should be the highest price. The demand for it, the good is highest. So that would be when the price is high. And power, of course, it's extremely temporally sensitive. It's a different price every 5 minutes in ERCOT Now because of the prevalence of solar, the actual price peak has shifted out by over 2 hours.
00:46:47:28 - 00:47:26:00
Jamie
So it's no longer 4 to 5 p.m., it's now 7:08 p.m.. 7 to 10 p.m. is where you have peak pricing because the sun has gone down and almost every day like a clock, 7 to 10 this past August, a little bit of June summer, July and September, the prices were at administrative caps of $5,000. So through this price distorting and market distorting signal of production tax credit, we've actually shifted the the peak price of power out to a vector that is no longer consistent where there's peak demand and ideal.
00:47:28:02 - 00:47:30:04
Jamie
Not not ideal, not ideal.
00:47:30:06 - 00:47:50:09
Marty
So how do you square that? I think Korn meant you guys are using wind West Texas is the the future of energy grids everywhere. Is this just an anomalous awkward period where figure out how to use this or is this simply pure central planning corruption that needs to be fixed?
00:47:51:26 - 00:48:30:00
Jamie
I see both sides and I love renewable energy. My business is economically viable and profitable because of this price distortion and we are following the price signals that are centrally planning overlords are are telling us to follow and we our load being where it is is contributing to the demand to build more these projects. And so you know in a way this cheap energy is creating a flourishing economic environment for the Bitcoin community in West Texas is it's what's happening there right now, which is kind of cool.
00:48:30:16 - 00:49:25:11
Jamie
And I also think another really unique thing about it is that Bitcoin ers are the only people who are and not the only people, but they're consistently among the ranks, people who regularly tell the truth about power markets. Like everything else that Bitcoiners touch, they rabidly devour the available information. They learn entirely new disciplines and they become extremely educated on the all of the contributing factors to whatever situation is going on, whether it's, you know, distributed systems engineering, the history of money, you know, the history of various schools of economic thought cryptography, chip fabrication, chip manufacturing, silicon, all of this, all of these disciplines, bitcoiners, they learn about them.
00:49:25:17 - 00:49:45:18
Jamie
They start sharing their reactions to these ideas and how they interplay with Bitcoin. And then you you listen to a Bitcoin or talk about one of those things that guys one of the probably the smartest people in the world on that particular thing. And now we see all these bitcoiners who are really smart about power. They're just going in and trying to tell the truth.
00:49:47:03 - 00:50:07:27
Jamie
Cormac does not necessarily have a dog in the fight. We're taking advantage of the current distorted market. We're consuming lots of cheap power. We're profitably converting it into Bitcoin and I would say a second derivative of, yes, we don't have a dog in the fight. We're not going to tell you we want this generation type over that generation type.
00:50:07:27 - 00:50:40:25
Jamie
All we want is cheap generation. We want the cheap as possible generation. As a second derivative of that, we become stakeholders in wherever we are situated. Jurisdiction. Ali and I like I have enormous exposure. Every employee in my company, every executive has enormous exposure to the reliability of the Texas grid, the cost of the Texas grid and the overall well-being of our electricity marketplace as an orderly and function place functioning place to do business.
00:50:41:06 - 00:51:09:29
Jamie
And so you get this second derivative where educated, open minded and unbiased bitcoiners come in and tell the truth about this stuff. And I, I really don't think it's a coincidence that every Bitcoin here resoundingly says the same exact thing. We have to nuclearized the entire economy. And it's almost like the opposite of a politician where there is no NIMBY, there's there's none of that.
00:51:09:29 - 00:51:38:10
Jamie
It's just unadulterated truth. And if you contrast that with a politician, you have this this rabid voter base who's hysterical about carbon and they're, you know, paving themselves to roads and throwing paint on throwing oil on paintings and being hysterical. They're single issue voters on climate. It is what it is, right or wrong. True or not, it is what it is.
00:51:39:18 - 00:52:10:21
Jamie
Getting elected requires pandering to those voters. And you can see that in the Venn diagram of I'm doing something about decarbonizing the economy and ideal policy in terms of going to going to get me reelected. Nuclear is not in the middle of that Venn diagram because nuclear pisses people off. People don't want nuke plants in their backyard. They're not educated about nuclear safety and the improvements in the industry.
00:52:10:29 - 00:52:35:19
Jamie
And so building a bunch of dumb wind turbines, building too many wind turbines and solar panels that create a massive distortion in power markets, raise prices and reduce reliability. That ends up being the Venn diagram place where you can appear to be doing something. It's going to be enough for four years to get reelected, and you're not actually a long term stakeholder in what you're doing.
00:52:35:19 - 00:52:48:16
Jamie
It's really bad politics and I don't know how it's going to change. I don't know who's going to be the nuclear renaissance man. Nobody listens to Bitcoiners anyways, So it's.
00:52:48:29 - 00:52:59:03
Marty
I should start. I think we just need to start buying these assets. That's happening too. I've seen it. It's one of my you U.S. people are buying coal plants. People are buying that gas generation.
00:52:59:11 - 00:53:03:01
Jamie
Yeah, because they're building new plants. One of my long term goals.
00:53:03:08 - 00:53:08:15
Marty
Yeah. It's a virtuous goal to strive for. Thank you for striving for it.
00:53:08:16 - 00:53:17:02
Jamie
It's hard. I mean, they don't make it easy. Yeah. Every engineering decision in a nuke plant gets ten x the scrutiny of of a solar plant.
00:53:17:12 - 00:53:40:28
Marty
Well, that's. I spoke with somebody who runs a nuclear power plant in Nebraska a couple of weeks ago, and they have this exact problem overbuilding wind specifically. And they want, I think, 20% of the year. The nuke plant has negative pricing. And they just said that because that's the other thing where the pricing corruption do, the subsidies comes in is nuke plants.
00:53:40:28 - 00:53:57:08
Marty
You can't just spin them up and down. Yeah, you have to keep them on, you know, And so these plants have to eat that negative pricing when it comes. And it's becoming longer periods of time throughout the year as these subsidies incentivize all this unreliable generation.
00:53:57:24 - 00:54:11:23
Jamie
Yeah, it's it's really it is a truly distorting price signal because it is actively disincentivizing the type of generation that the grid needs to at least maintain reliability or improve it.
00:54:12:00 - 00:54:23:16
Marty
Bitcoin fixes this. Just fucking put 100 megawatts of a mining operation behind the meter, right? Give the finger to the wind farms. When the negative pricing comes, say, hey, we're producing revenue anyway.
00:54:23:27 - 00:54:30:00
Jamie
Definitely. Yeah. It it fits so well with reliable generation and avoiding negative prices.
00:54:30:08 - 00:54:30:15
Marty
Yeah.
00:54:30:29 - 00:54:33:27
Jamie
Especially like the crappier rigs.
00:54:34:06 - 00:54:54:13
Marty
Yeah. And luckily it does seem like the bitcoin mining industry is becoming more smart about this, particularly behind the meter. To date it's been a lot of front of the meter, um, basically getting electricity from a substation that's connected to transmission line. I think a lot of people in the industry are like, how do we get closer to the source?
00:54:54:13 - 00:55:00:14
Marty
Let's go to the Wright Power facility and get to the point before it even goes through the transmission light.
00:55:01:07 - 00:55:34:18
Jamie
Yeah, you do avoid a bunch of transmission costs. If you do that in ERCOT, you can get a nodal price instead of a zonal price. And nodal prices tend to be lower than zonal prices because the every every power generation facility in ERCOT has a node. It has its own pricing point on the grid. And every load on ERCOT has they don't have a specific nodal location.
00:55:34:26 - 00:56:02:06
Jamie
It gets blended into what's called the load zone. And inside of the load zone, all transmission charges to route power to different users throughout the grid are basically aggregated and then averaged and split across all consumers. So in the West Zone right now, because there's a lot of Bitcoin miners popping up, there's a lot of renewable generators popping up and things are growing and moving pretty fast out there.
00:56:02:19 - 00:56:31:00
Jamie
The trends, the transmission cost to serve loads that are isolated specifically in the far west of Texas are really really high. And so those costs then get subsidized across the entire load zone because what they don't want, and it does make sense, is they don't want a particular load in a very remote corner corner of the grid. They have to pay ten times the cost of every other load in the in the grid for generators.
00:56:31:06 - 00:56:49:12
Jamie
They're willing to to do that. And they want to incentivize generation to go in the right places on the grid. But for load, there's very little tolerance for a particular electrical load to pay a drastically higher price, higher price. And so the cost to serve that load is set by the market and by the generators, and that's averaged across everybody else.
00:56:51:06 - 00:57:17:11
Jamie
And as a result, the the additional transmission charges to those loads that are in very remote places, they end up driving up the average price everywhere else. If you are behind the meter next to your own generator, you don't you avoid all those charges. And in the summertime, when the entire generation fleet is ripping, these transmission charges are relatively low.
00:57:17:11 - 00:57:45:00
Jamie
It's called congestion or basis. But as soon as the weather cools down and the system has much less load on it, so starting in October and basically going through May, the basis has been averaging over $10 a megawatt hour. So you're paying a four penny higher during those outside months. So if you co-locate with a generator and just do a direct agreement with them, you get that generator pricing.
00:57:45:00 - 00:58:12:28
Jamie
And it is a huge event. It's a it's another reason why the energy community should move close to the Bitcoin community because the same thing could happen to them. Like if you have a a power generation node that's in the middle of 25 wind farms, you're going to get the lowest prices on the grid for your power because you're producing in a place where there is no user, there aren't not very many users of the power feeds.
00:58:12:29 - 00:58:19:24
Jamie
Bring in a bitcoin mining load. You're like, Oh cool, I'm out of that now. I got my own. Come on, little guy here. And he just takes all the power I give him.
00:58:20:00 - 00:58:30:15
Marty
And it seems like bitcoin adoption is picking up, the price is going up. That's another thing heading into the having which is less than 10,000 blocks away after this weekend.
00:58:30:24 - 00:58:31:15
Jamie
Don't remind me.
00:58:33:13 - 00:58:46:16
Marty
But it is an interesting dynamic heading into the having if this price appreciation continues. Yeah, so it seems like a very unique dynamic that hasn't existed in a pre having market today.
00:58:46:17 - 00:58:52:16
Jamie
We've got rapidly rising difficulty. We've got rapidly rising price. Yeah.
00:58:52:29 - 00:58:58:09
Marty
What 50 day 50 K congratulations. Let's go or a 50 K.
00:58:58:16 - 00:59:01:24
Jamie
So we haven't been above 50,000 since I think.
00:59:01:27 - 00:59:02:05
Marty
20.
00:59:02:05 - 00:59:06:00
Jamie
One April of 2022. Or was it 22.
00:59:06:00 - 00:59:11:04
Marty
I think it was like I think now because yeah, we peaked in November 21.
00:59:11:07 - 00:59:24:04
Jamie
We peaked at and just below 70 in November and then we stayed around So it might have been between. Yeah, it's been a while. Yeah. Welcome back, boys. Let's go. Cool.
00:59:24:10 - 00:59:30:07
Marty
Yeah. Exciting prices for everybody, as you said. Hash rates absolutely screaming right now. Yeah.
00:59:30:25 - 00:59:37:16
Jamie
And fees. We've had a couple of periods where fees have been surprisingly high, too. So it's spending. Yeah, it's been a wild time.
00:59:37:28 - 00:59:41:24
Marty
Yeah. So what what are you worried about heading into the havoc?
00:59:42:02 - 01:00:03:01
Jamie
I think the thing I'm most interested to see is what kind of difficulty adjustment happens. Um, after the having Seems like there's a huge range of predictions. And did you ever read the COIN metrics report called the Signal and the nonce?
01:00:03:20 - 01:00:04:15
Marty
Yeah, the cream. Right.
01:00:04:15 - 01:00:17:23
Jamie
That I, I think so, but I'm not 100% sure. But effectively what they did was they used nonce patterns in the, you know, the machines that make up the majority of.
01:00:18:00 - 01:00:24:10
Marty
Yeah, you can essentially the reverse engineer which machine is producing which nonce.
01:00:24:19 - 01:00:25:05
Jamie
Exactly.
01:00:25:14 - 01:00:34:01
Marty
And so you can get a use the chain data to get a landscape of the inventory of machines that are being used exactly in point in time.
01:00:34:05 - 01:01:10:29
Jamie
And so you look at that report, it was released at the end of 2022. I'm not sure when the dataset they used was, but as of the end of 2022, 60 of the network was um, s19 and thirties or, or lower efficiency machines. So right around 30 to 35 joules per T and just looking at the break evens of that equipment and where we are today, I think as the next difficulty adjustment is projected to be 9%.
01:01:11:15 - 01:01:13:23
Jamie
Yes, yes. Yeah.
01:01:14:06 - 01:01:21:22
Marty
And I look at look up the estimate, the hash rate of all that space above 600, it'll.
01:01:21:22 - 01:01:41:29
Jamie
Be above 600 with that adjustment and uh, the, the break even now Bitcoin rip and so this information may be stale, but let's say that after this 10% difficulty adjustment and given the fact that we just probably rallied 10% over the last six or seven days, the break evens there are in the high seventies, mid to high seventies.
01:01:43:06 - 01:01:45:00
Marty
696, 91 six.
01:01:45:00 - 01:01:45:13
Jamie
92.
01:01:45:15 - 01:01:49:06
Marty
For our estimate. So yeah, take that with a small grain of salt.
01:01:49:08 - 01:02:10:03
Jamie
Right. So you have break evens in the mid-to-high seventies right now and you know having are going to bring that to the having is going to bring that to $37 in megawatt hour 37 or $39 megawatt hour. Not a lot of people who have power costs set it below all in power costs that are below $37 a megawatt hour.
01:02:10:16 - 01:02:13:08
Marty
3.7 cents a kilowatt hour right out there.
01:02:13:21 - 01:02:48:24
Jamie
And so I'm a big believer that we're going to have adjustments, going to have material downside difficulty adjustments in April and May and in previous cycles, ones that I've been seeing a bunch thrown around is the number of days it takes it has taken historically post having for hashrate to recover to its previous value immediately prior to the having and it's been the the last two halvings were between 30 and 70 days that hashrate fully recovered.
01:02:49:05 - 01:03:21:29
Jamie
But now we have so much of the hash rate is in ERCOT and so we have April 20th having projection date of May, and then we immediately start the Texas summer where last summer during a Bitcoin bull market and a little bit of an upward upward momentum market difficulty barely adjusted at all through the entirety of the June 15th through September 15th period.
01:03:22:04 - 01:03:24:28
Marty
As miners were participating in demand response.
01:03:25:09 - 01:03:51:07
Jamie
Yeah, because there was it was active curtailment and and there is demand response, which was curtailing miners. And it was a pretty hot summer everywhere. So that was every northern hemisphere grid. And the ERCOT obviously being the biggest one with a very, very hot high electricity price summer. So I think we could see that hashrate does not fully recover until fall October.
01:03:51:14 - 01:04:07:15
Jamie
Yeah, October would be my prediction for when hash rate is going to recover to its previous level from before. The having with the caveat that if Bitcoin just goes on an absolute heater throughout the rest of the year all, all bets are off.
01:04:07:15 - 01:04:14:03
Marty
Yeah we run the like if Sam samples we run to 100 K before the having happens. That helps a lot of things.
01:04:14:08 - 01:04:15:03
Jamie
That would be wild.
01:04:15:13 - 01:04:34:03
Marty
But then you have this dynamic to two dynamics at play where the sweaty ones are coming to market. It seems like Bitmain's going to be able to produce a lot of them. Yeah, I'm ten a month out between 50 and 100,000 per month. Most efficient, highest hashing machines that we've ever seen. They have a hydro unit which is even.
01:04:34:03 - 01:04:34:16
Jamie
More.
01:04:35:02 - 01:04:37:06
Marty
Efficient, higher hashing.
01:04:37:18 - 01:04:39:24
Jamie
Which even are a lot of people buying those hydros.
01:04:39:26 - 01:04:40:20
Marty
I'm not sure. Yeah.
01:04:40:22 - 01:04:42:24
Jamie
I mean, you know, I'm sorry to interrupt.
01:04:42:24 - 01:04:55:01
Marty
You know, I'm not sure, but we have that dynamic coming and it seems like they're already being plugged in, which I would imagine a lot of the hashrate growth that we've seen over the last few weeks is anyone's getting plugged in and they have a log.
01:04:55:01 - 01:04:55:23
Jamie
Of 20 ones.
01:04:55:29 - 01:05:07:21
Marty
Then you have this confluence of events where the international markets seem to be seeing what's going on here in Texas and begin to get into the hash hash rates, if you will.
01:05:08:09 - 01:05:35:22
Jamie
Yeah, for sure. The other thing, but the S21 is the research that's coming out on them is they're very thermally sensitive so that that hash rate will also be restricted in light of their during the summer. Yeah. Yeah. So it's it could all come online and then there could be a big adjustment from lower uptime. All of those S nineties and M thirties going offline a lot of curtailment for power optimization.
01:05:36:16 - 01:05:37:09
Jamie
It's going to be interesting.
01:05:37:16 - 01:05:43:02
Marty
A lot of them will be in low power mode throughout the summer. Oh yeah. Which they made easy with this, this model.
01:05:43:22 - 01:05:44:07
Jamie
Oh they did.
01:05:44:15 - 01:05:45:00
Marty
Yes.
01:05:45:06 - 01:05:51:00
Jamie
Okay. So you it's you don't need as much the third party firmwares.
01:05:51:21 - 01:06:03:06
Marty
Now you probably would benefit from it because you can probably get more modular with what you want to do But they do have stuck power mode, high power mode and low power mode.
01:06:03:08 - 01:06:07:06
Jamie
Do they have a curtailment, uh, function? That's. That's good.
01:06:07:13 - 01:06:08:03
Marty
I doubt it.
01:06:08:24 - 01:06:15:06
Jamie
I'm not sure. It's wild, man. Yeah, And is there any other industry where the the manufacturer of a good.
01:06:15:10 - 01:06:16:08
Marty
Case us such.
01:06:16:08 - 01:06:21:08
Jamie
Distinct customer base that regularly mistreats them and there's very little consequence.
01:06:21:12 - 01:06:28:00
Marty
So there's only two really. One, maybe we can call it a duopoly, but it's trending towards a monopoly.
01:06:28:01 - 01:06:33:07
Jamie
Right. Um, I have heard good things about uh, or down.
01:06:35:22 - 01:06:36:09
Marty
Were done.
01:06:36:13 - 01:06:38:12
Jamie
Or a been is a.
01:06:38:13 - 01:06:45:24
Marty
It's the ones that did the, the they basically have there is like a North American Bitcoin conference. Um, release it.
01:06:46:16 - 01:07:29:24
Jamie
I would, I don't remember seeing them there but I'm sure that they did um marathon disclosed a a seed investment in them early on and um, they're now releasing their first ASICs uh, and they're good and they are, they have the functionality that a Texas based Bitcoin miner would care about. They can under clock, they can overclock, they curtail really quickly and the you don't need to use third party firmware it's all built right into the the miner firmware, the stock firmware and it's great tool kit.
01:07:30:16 - 01:07:52:12
Marty
Yeah. So let's dive into this a little more for anybody who may be ignorant to this dynamic in the mining industry, which is you have these machines, you get them from the manufacturer or the manufacturer has a firmware that basically runs the machines. But miners, particularly in ERCOT, need to do more of their machines, particularly if they want to participate in demand response.
01:07:52:21 - 01:08:14:04
Marty
Mainly they need to be able to turn down very quickly, which the stock firmware does not enable. So you have to go to third party firmware services that essentially jailbreak the firmware on your basic, inject their own firmware that can then communicate with the pricing API to to do all this in an efficient manner.
01:08:16:03 - 01:08:45:05
Jamie
Yeah. And uh, the, the core features that you would want, well, take a step back, you sort of have two main categories of functionality. You have performance, meaning how many watts can I run through my chip and, and the more watts that I run through my chip, I may lose efficiency a little bit, but I'm going to get more Bitcoin out of it because I'm going to be submitting more valid shares to a pool.
01:08:45:05 - 01:09:17:09
Jamie
I'm going to be attempting more solutions at a successfully mined block. Then you have a separate functionality, which is the ability to respond to either a signal which is called a base point or a frequency based point from the grid operator, which will say, Hey, I need you to set your machine to this, and you have to respond to that quickly, or you're responding to a free market power price input or the ERCOT pricing API prices every 5 minutes.
01:09:17:18 - 01:09:50:00
Jamie
You respond to that data and then you power down the miner or continue mining based on that that price input. So neither of those functionalities comes out of the box with the existing manufacturers that you would know. And so like you said, this third party firmware is effectively jailbreak the that the miner and they allow a and non manufacturer firmware to run on top of it.
01:09:50:00 - 01:10:20:10
Jamie
And these farmers are great and they're they're way better and on the overclocking and under clocking side it's not really surprising that the basic manufacturers aren't thinking like this because they're not really mining that much. Maybe because they don't focus as much on cooling, but cooling is so important. It is the name of the game. This is why immersion in hydro y immersion is sort of dominating now in terms of performance and hydro is the next level of it.
01:10:21:02 - 01:10:49:14
Jamie
Immersion is your miners are submerged in an oil bath and it becomes a fluid dynamics equation instead of an aerodynamics equations. They're just constantly pumping oil that is colder than the chips through the miners because the oil is coating 100% of the surface area of the chips instead of air, which is not hitting anywhere near 100% of the chips, you're able to dissipate more heat off of the chip into the fluid.
01:10:49:23 - 01:11:37:25
Jamie
And the fluid is exhausted outside of the tub that the miners are sitting in. And it's put through some kind of radiator dry, cooler heat exchanger type of thing. And it's a constant loop. You have a big plumbing equation, you have a big fluid dynamics equation, and that helps you draw more heat off the chips. The reason why that's important is because the ideal operating temperature of a chip is 60 degrees Celsius plus or minus, and then the you can run a ton of wattage through a chip way more than it's standard operating spec as long as the chip stays at 60 C, it's not going to cause any harm to it.
01:11:37:25 - 01:12:01:29
Jamie
So these things are incredibly robust and there's no other reason why the manufacturers maybe aren't that clued into this or they don't care is because there's no other computing industry that treats a computer like a Corvette, you know, where they're just like, dump the fuel in, Let's go. We want to get as many horsepower out of this thing as possible and as many RPMs as possible, because it's a vanity engine.
01:12:02:10 - 01:12:30:28
Jamie
Bitcoin mining is effectively like that because each incremental watt of electricity you push through gets you an incremental quantity of SATs or fractions of said in the case of Watt. And so you have this this big thermal optimization. What that ends up looking like in Texas, if you have a good cooling system, is you're able to overclock your machines sometimes as much as 20 or 30% in the winter when the ambient temperature is cold enough.
01:12:31:08 - 01:12:58:17
Jamie
And in the summertime you're actually you actually have to do the opposite. Like we're out in the West Texas desert, it gets well above 100 degrees almost every day. And so that's the thermal, the cooling capacity. Thermally speaking of our cooling system, which is normally very good at dissipating heat, it actually is reduced because the containers are hotter.
01:12:58:28 - 01:13:31:24
Jamie
The air outside that you're using to cool the fluid is hotter, everything is hotter. And so you have to reduce the amount of wattage that you're pushing through the machine in order to target that 60 degrees Celsius temperature. And so what this company or Dean has done really well, from what we understand, we haven't tested them out, but we've talked to enough smart guys who we trust that have tested them is they allow you to tune the minor voltage and frequency up, which gets you a different wattage draw from the stock setting.
01:13:31:24 - 01:13:56:16
Jamie
You can go way down. And when you do that, drastically improve the efficiency of the machine. You can also go way up and you decrease the efficiency of the machine. And the reason why that's important is because if power is if the cost of electricity is zero, you want to push as many watts through your mining machine as humanly possible because you don't particularly care if your machine goes from 28 joules.
01:13:56:16 - 01:14:23:02
Jamie
A tear has your efficiency to 36 joules. Tear ash, you don't really care because the input cost of that power is zero. And you know, in Texas we have 10% of the year that's negative pricing. We have zero in our pricing for electricity all the time. So these these 14 guys have made a minor that is very well fit for an electricity market like Texas that has a lot of zero pricing and has a lot of very high pricing, you can get paid a lot to curtail.
01:14:24:02 - 01:14:35:13
Jamie
And so it has this is like the what the minor firmware of the future should look like. And by the way, firma is expensive. You pay 1 to 2% of your revenue for firmware. So it's a huge cost savings to buy from them.
01:14:37:12 - 01:14:44:29
Marty
And how big of a splash they're going to make in the market Hack how many machines can they produce?
01:14:44:29 - 01:14:48:15
Jamie
Yeah, I mean, it's starting an AC company is really tricky because.
01:14:48:18 - 01:15:20:19
Marty
That's the thing I worry about most is extremely capital intensive, takes a long amount of time and that time, well, that's maybe we're hitting an inflection point with the time aspect is not as, uh, it's not as important as it was in the past where you have these large jumps from seven nanometer to five nanometer, three nanometer. We're literally reaching physical limits on these chips that you're likely not going to have the step function improvement in the leadership level that has existed in the past.
01:15:20:19 - 01:15:34:07
Marty
So the concept of asset commodification has been talked a lot in the mining community over the last five years. If we're getting close to that point, maybe the barrier to entry for a new ac-dc manufacturers is a bit lower.
01:15:35:04 - 01:16:05:29
Jamie
I do agree with that. I still think that there's really it's very hard. Yeah. Um, simply because from the perspective of an operator, we probably are picking the machine that we're going to run six months out from when we, when we run it or when we even buy it. Um, so you're thinking about what's the form factor of this machine?
01:16:06:11 - 01:16:34:12
Jamie
Um, what's the availability of this machine from a pricing perspective, and is it, is it going to function the way that I believe, you know, there have been historically, even with Bitmain, the S17 had a failure rate bad epoxy, bad epoxy, the heatsinks were falling off. You had a massive failure rate on that. So there's even risk with with the existing manufacturers then what was that one that kind of looked like Mountain Dew.
01:16:35:13 - 01:16:36:03
Marty
New miner.
01:16:36:03 - 01:16:43:06
Jamie
Or something? Yeah, new miner that had a 50% failure rate and people who bought those.
01:16:43:26 - 01:16:46:16
Marty
Were actually go back drag events. Yeah. Down the.
01:16:46:16 - 01:17:17:28
Jamie
Line drag. So there's a huge risk in buying the first batch of ASICs from a brand new manufacturer and yeah, if you're designing for a particular basic it's you have to really commit to it. And so as a premise it should be traded at a discount to a bitmain or a micro team. You know, even MakerBot trades at a slight discount to bitmain still after and it's been around for five years.
01:17:18:11 - 01:17:36:14
Jamie
And so if you're going to be a new A6 manufacturer, you probably need to price at a 25% discount to the market in order to compensate your customers for taking a risk on a new batch. And then that gets better and better and better as time goes on. But it's so it's one part asset commodification and reaching the state of the art in the chip industry.
01:17:36:14 - 01:17:47:22
Jamie
And then that's the other part, consumer mindset and consumer psychology of taking that risk. So it's not a risk to be taken lightly. If you're a miner, you could literally lose your whole business.
01:17:47:22 - 01:18:12:13
Marty
Yeah. Now that's the other thing, leaning into like Asia commodification and we've talked about this on Peter's podcast, but it's worth repeating, like even within Bitmain alone, like the PSA is like, right with the power supply units that literally you to plug your machine into a wall like they're not uniform across every model. Right? And that blows my mind.
01:18:12:13 - 01:18:24:24
Marty
It's like, how have we not gotten to a point where it's like, you can get an order and expect a certain PSU, right? Even between like different model, different XP batches have different pieces.
01:18:24:24 - 01:18:36:07
Jamie
Remember when they made one version of the J Pro like two inches longer than the previous one? Yeah. And it caught everyone off guard. Yeah.
01:18:36:09 - 01:18:38:22
Marty
Fucked up all their heat circulation, right?
01:18:38:22 - 01:18:44:21
Jamie
I mean, if you're running immersion, two inches is a lot. Yeah, that's, you know, you design an immersion tank.
01:18:45:27 - 01:18:47:20
Marty
Based off the form factor specs.
01:18:47:20 - 01:18:57:09
Jamie
Exactly. Because you need to have uniform flow rate and flow distribution of the fluid through, all of the miners and so little changes to the form factor.
01:18:57:12 - 01:18:58:16
Marty
Fuck up the physics.
01:18:58:16 - 01:19:05:22
Jamie
It could totally screw up. It could screw up your entire cooling system. Yeah. If you're trying to be extremely efficient with fluid.
01:19:05:22 - 01:19:12:11
Marty
We're so early like that, it's like because we were and you weren't where you were in Nashville. But no, we're.
01:19:12:11 - 01:19:16:08
Jamie
You know, I didn't wear one we were talking to. I'll be there for a Bitcoin conference.
01:19:16:08 - 01:19:35:25
Marty
So there was, um, at the Energy and Mining Summit Nashville last month. There was incumbent data center guys that are getting into Bitcoin mining that was like their one like piece of feedback was like, I can't believe that none of this is uniform yet. Like this is such slapstick.
01:19:36:05 - 01:19:36:12
Jamie
Right.
01:19:36:15 - 01:19:39:29
Marty
Activity. The fact that you guys put up with any of this is the same. Um.
01:19:40:27 - 01:19:49:16
Jamie
I know it's, uh, bitcoin miners are just rabid risk on consumers. Yeah.
01:19:50:03 - 01:19:53:18
Marty
It is the wow. It's like digital wild getting. Yeah, to an extent.
01:19:54:12 - 01:20:45:28
Jamie
Plus, you really don't have much recourse. You know, it's no, it's a Chinese vendor and they send you something. You got to plug it in no matter what. You've got it. You've got two a year and the first three months are critical in a rising difficulty environment. And it's yeah, I mean, an American manufacturer would be great. Yes, I could, I should talk to some folks about this and it, it almost got off the ground, but it didn't a cooperative an American based asec cooperative, where a couple of really good chip guys got together and started a nonprofit cooperative where you put a little bit in for the IP and and the tape out and
01:20:45:28 - 01:21:14:07
Jamie
all of that just to get the process rolling. And then everybody got a machine at cost. So you just you bought the fab time, the foundry time, you got paid back in six and and you look what happened with the intel. I think it, it was a first iteration of that with a reputable chip manufacturer and that was that did not work out well for the firms who participate in that.
01:21:14:19 - 01:21:40:28
Jamie
Now, history has been really unkind to people. Take incremental risk in Bitcoin mining, whether it's incremental financial risk, um, like us taking on USD debt, getting into anything upstream in manufacturing, the A6, trying a brand new ac-dc manufacturer, buying their equipment for the first time, control boards, even power supplies. You know.
01:21:40:28 - 01:21:43:03
Marty
It's building your own data centers.
01:21:43:29 - 01:22:06:02
Jamie
That risk I think you need to take I think you need to take the risk of building your own data centers. And I think you need to take the risk of getting as close to the wholesale market of electricity generation on power side as those risks are. You can control them really well. They do require investment, but you can control them much better.
01:22:06:15 - 01:22:06:24
Marty
Yeah.
01:22:08:00 - 01:22:16:09
Jamie
Because think about it, if you rely on a third party equipment vendor for your data center infrastructure, that's also a risk.
01:22:16:17 - 01:22:17:00
Marty
Yes.
01:22:17:03 - 01:22:17:21
Jamie
As we know.
01:22:18:02 - 01:22:41:19
Marty
They have to weigh the rest of the time because I go back to this name of the game, I think again, the whole industry has been going through this iterative process, and that's one thing that encourages me this cycle. It seems that the industry is getting smarter about when they purchased the basics and where they are in terms of infrastructure build out with those buys because you want to buy those 86, get them delivered and plug them in immediately.
01:22:41:20 - 01:22:45:06
Marty
Immediately. Yeah. Which last cycle was not happening.
01:22:46:09 - 01:22:48:28
Jamie
Right. And it's still happening today.
01:22:49:01 - 01:22:57:24
Marty
Yeah. Rackspace is. Yeah. Scarcer Than bitcoin it seems right now. Is it. It was for a while. Right now I.
01:22:58:03 - 01:22:59:11
Jamie
Am not in the market so I don't.
01:22:59:11 - 01:23:01:07
Marty
Know. I think the market is responding but.
01:23:01:16 - 01:23:02:20
Jamie
Yeah we don't have as.
01:23:02:21 - 01:23:11:21
Marty
The time in 2122 where after the Chinese migration people like, yeah, we'll take your assets, we'll plug it in and how they got ship and know where to plug.
01:23:11:21 - 01:23:26:04
Jamie
Them in. Yeah I know that. Yeah they the Ac-dc manufacturers were doing a lot of hosting deals, trying to get xrp's plugged in. We host one of the coolest things about our company, so we have no customers.
01:23:27:08 - 01:23:29:00
Marty
It's a lot less stress.
01:23:29:04 - 01:23:45:10
Jamie
My last business we had lot of customers and my two business partners in that company, they both love. They love that about this business. Technically, we do have a customer. It's an algorithm. It's our customers. They distributed.
01:23:45:19 - 01:23:46:01
Marty
Hash car.
01:23:46:02 - 01:23:51:19
Jamie
SHA256 Yeah, it's it's a distributed computer algorithm.
01:23:52:00 - 01:23:56:16
Marty
That's technically that's customer of the Bitcoin network looking to transact or is it your customers?
01:23:58:13 - 01:24:26:19
Jamie
They are, but also just the, the Bitcoin code. Yeah, that, that's where the vast majority of our revenue comes from is the distribution schedule of the original algorithm. Yeah. And then there are some incremental people doing God's work and paying me fees, uh, paying us fees. And yeah, I mean, I, you know, this is I'm the king of controversy on this topic because I like fees, but.
01:24:26:25 - 01:24:27:10
Marty
I like fees.
01:24:27:10 - 01:25:10:25
Jamie
So I, I'm very indiscriminate about fees. I want anybody who wants to pay me fees to be able to do so. One of the things I think is that's going to be the coolest development over the next ten years is if if we assume that fee markets are going to materialize and become, um, the majority of contribution to mining revenue versus the way they are now where the subsidy is, I mean, in this block era, I think averaged 1 to 20 subsidy versus fees, maybe maybe 1 to 17 when we have it's going to be 1 to 10.
01:25:11:20 - 01:25:50:22
Jamie
Then we have in 2028, it's going to be 1 to 5. If fees continue to grow, you could see an entire block epic to be parity between fees and subsidy. In the end, you know, the 1.6 block reward error, 1.5 and change whatever it's going to be in 2028 to 2032. But what should happen or what I predict will happen that's going to be really interesting is the block times are going to be much slower during periods of peak demand that that phenomenon is going to accelerate like in the Texas summer block.
01:25:50:22 - 01:26:13:14
Jamie
Times are much they they don't grow at as consistent over rate as they do during the non summer months in Texas. And you're actually going to see that more intraday where like let's say it'll be an afternoon period block times will start to slow as all the miners begin curtailing. That will have a reflexive effect where the fee market.
01:26:14:03 - 01:26:14:20
Marty
Jumps up.
01:26:14:23 - 01:26:34:22
Jamie
Starts to jump up, and then you'll see this inverse correlation between LNP's and fee markets, where the fees could rise up so much that it actually pushes the LNP of electricity to become attractive to mine. So all this hashrate will come online in response, the rising fee market. So you have this like crazy interplay between pay.
01:26:34:22 - 01:26:37:16
Marty
You imagine over time sort of like this, but it'll eventually get to like this.
01:26:38:11 - 01:26:51:18
Jamie
Yeah, it will eventually become very efficient. But it's I think you could start to see a long term trend where off peak electricity has materially faster times over a period of entire year than on peak electricity.
01:26:51:18 - 01:27:02:22
Marty
What was once the, the BitMEX payout fee spike will turn into. Yeah. Energy price volatility and curtailment. Yeah. This sea spike.
01:27:02:22 - 01:27:08:02
Jamie
Elegant intersection of fees and lamps.
01:27:08:07 - 01:27:14:00
Marty
Yeah. For those who are unaware like BitMEX, they would do what every Monday morning at 9 a.m. they do payouts or something like that?
01:27:14:00 - 01:27:15:13
Jamie
I believe that's correct.
01:27:15:25 - 01:27:21:23
Marty
And you could visibly see it on the changes they got. Fees are up, right? Max is paying out all their users.
01:27:22:21 - 01:27:34:25
Jamie
Yeah. Uh, I was thinking about that, uh, how far we've come since the that March 2020 BitMEX flash crash.
01:27:35:07 - 01:27:35:25
Marty
What does happen?
01:27:36:00 - 01:27:36:27
Jamie
Uh, yeah.
01:27:37:12 - 01:27:38:13
Marty
Turn the engines off.
01:27:39:19 - 01:28:10:01
Jamie
Crazy to think that that Arthur that Bitcoin almost a bitmex was the dominant exchange in terms of liquidity in March of 2020 and they only accepted Bitcoin as collateral and and blocks were full fees were through the roof. Bitcoin crashed over 50% in like a couple of hours overnight. It was trading eight, it was trading 8000 on whatever that period.
01:28:10:25 - 01:28:24:21
Jamie
Yes, right around there it's trading 8000 and within a few hours it was trading 3300. And so nobody could get additional collateral into BitMEX because the blocks were so full and the fees were so high.
01:28:24:22 - 01:28:25:24
Marty
Some of them were cheap out.
01:28:26:00 - 01:28:48:09
Jamie
And all of the collateral that was on there, which was supporting Bitcoin long positions, like if you wanted to buy Bitcoin on BitMEX during that time, you could only post Bitcoin as margin collateral. So your margin collateral was was crashing in value. Nobody could get additional margin call margin collateral in there. So everyone was getting liquidated. Uh, and then Arthur just pulled the plug.
01:28:49:25 - 01:28:51:27
Jamie
There was definitely a meeting after they were like, All right.
01:28:51:27 - 01:28:52:24
Marty
Guys, as.
01:28:53:04 - 01:28:54:12
Jamie
You were, you guys are done?
01:28:55:04 - 01:28:55:25
Marty
Yeah Yeah.
01:28:56:07 - 01:28:58:29
Jamie
You have to have a US dollar.
01:28:59:13 - 01:29:12:04
Marty
I mean, I know people who are running funds that were said, yeah, trading X, right? And they didn't put a high enough fee on their transaction and cannot meet their, their collateral call.
01:29:12:14 - 01:29:17:08
Jamie
That was probably the sickest the sickest buying opportunity in the hit in the history of Bitcoin.
01:29:17:08 - 01:29:17:21
Marty
Yes.
01:29:18:15 - 01:29:27:21
Jamie
In terms of what was going on in the backdrop from a macro economic perspective, money printing and all of that.
01:29:28:02 - 01:29:29:12
Marty
Anything up to a having.
01:29:29:22 - 01:29:37:04
Jamie
Into having you. Exactly into a having and you got an opportunity to buy bitcoin at 3500 bucks coin one.
01:29:37:05 - 01:30:02:05
Marty
Was I was so Parker and I recorded a podcast with Kyle Bass from him capital literally 5 p.m. before all of this happened. And I think the last question, as Parker said, what's going to happen with Bitcoin? He was like, I don't know just make sure you have your coins in Self-custody Yeah, thank God for Santucci. Let's say about that.
01:30:02:05 - 01:30:07:16
Marty
I was like smash buying trout that I was like, Oh shit, 5000, 3500. Like.
01:30:08:08 - 01:30:13:14
Jamie
Yeah, I bought a bunch of too. Yeah, it was good. And then people got stimulus.
01:30:13:23 - 01:30:14:02
Marty
Yeah.
01:30:14:09 - 01:30:17:10
Jamie
So everybody could roll their stimulus into Bitcoin. Yeah.
01:30:18:03 - 01:30:18:23
Marty
It's crazy time.
01:30:19:14 - 01:30:32:15
Jamie
It was. And then a year later meme stock. Uh, with, uh, deep, deep fucking value value.
01:30:33:05 - 01:30:36:14
Marty
AMC GameStop. Did you watch the money at.
01:30:37:06 - 01:30:38:03
Jamie
No. Is that the.
01:30:38:13 - 01:30:40:24
Marty
The movie on it? It's pretty good.
01:30:41:12 - 01:30:52:26
Jamie
That was one of the funniest, most fun times of my life. I remember every day just getting up and just like seeing the moves in the markets and the memes flying around on Twitter.
01:30:53:01 - 01:31:02:29
Marty
The the meme culture around that time, I think I don't want to say it peaked. Maybe we can get to that level again, but that is the last all time high. I mean, culture is around there.
01:31:03:05 - 01:31:05:20
Jamie
I love I'm a big meme culture guy.
01:31:05:23 - 01:31:08:13
Marty
Same. It's a it's good for the soul.
01:31:08:28 - 01:31:09:14
Jamie
It is.
01:31:09:21 - 01:31:22:25
Marty
And it's actually we laugh about it, but I do think it is one of the most potent tools we have to take away power from. These people probably do not deserve it. You need to ridicule these people. Memes are the most effective way ridiculing these people.
01:31:23:06 - 01:31:39:17
Jamie
They definitely are. Yeah. And there's nothing that ridicules them more than cryptocurrencies. Based on memes of dogs speaking broken English that are worth tens of billions of dollars.
01:31:40:18 - 01:31:42:12
Marty
This bank. Uh.
01:31:43:01 - 01:31:54:19
Jamie
No, I don't think bank is worth ten. Doge is worth ten buck doge. Yeah. Yeah. I mean there's there's three dog coins that are worth more than $1,000,000,000.
01:31:57:19 - 01:31:58:29
Marty
Bitcoin's worth more than a trillion.
01:31:58:29 - 01:32:03:19
Jamie
Now Bitcoin is worth more than a trillion. And guess what? Even our little dog coins are.
01:32:03:19 - 01:32:04:16
Marty
Worth more than a billion.
01:32:04:16 - 01:32:05:25
Jamie
They're worth more than a billion.
01:32:07:00 - 01:32:13:00
Marty
Where do you think this all goes? You optimistic? Cautiously optimistic. Everything. Bitcoin mining.
01:32:13:18 - 01:32:15:23
Jamie
Yeah. I'm this. I'm so optimistic.
01:32:16:06 - 01:32:16:15
Marty
Yeah.
01:32:17:01 - 01:32:17:22
Jamie
I'm blinded.
01:32:18:06 - 01:32:44:07
Marty
I, I have this long running belief that's becoming more hardened by the day that are in order of operations to the success of Bitcoin in the front of the order operations lies in the hands of the mining industry, convincing the energy sector like I do this right, I become extremely more hardened in that belief and more optimistic as time goes on, even though there's still a disconnect and not everybody gets it.
01:32:44:07 - 01:33:01:06
Marty
I think people like paving the way and others in the energy sector are beginning to have the lightbulb go off is creating the environment where it can really have this escape velocity. Terms of the acceptance of Bitcoin outside of this bubble that we've been in.
01:33:02:05 - 01:33:11:22
Jamie
Definitely, yeah. I mean, so we launched our our flagship financial product last year, which is are our Bitcoin denominated bond.
01:33:11:25 - 01:33:12:08
Marty
Yes.
01:33:12:18 - 01:33:38:25
Jamie
And we raised just under a thousand Bitcoin. It was a rate D uh, five or six C offering, which is an an SEC registered offering for accredited investors only. The only way you can do lending products with retail is if they're callable and if you have a call. And that's how your, um, that's how you have an asset and liability duration mismatch like Celsius and blockfi had.
01:33:39:06 - 01:33:57:23
Jamie
But so we launched this product the Bitcoin liked it a lot. We did it on pretty good terms. It was a venture debt. So you got a bunch of warrants in our company and you get a 10% yield on Bitcoin and you're at the top of our capital stack your first lien over all the assets of the company.
01:33:58:09 - 01:34:27:07
Jamie
Um, and you know, the way to think about this is we're taking this Bitcoin, we're turning it into the machines that create Bitcoin and, and that, you know, it's a, it's a very secure form of commodity production finance. It's like borrowing barrels of oil to go and build an oil drilling site and to pay your, your leases and and get your drill rig all set up.
01:34:27:17 - 01:34:55:10
Jamie
And so there's nothing like it in commodity production finance because obviously oil has is not transportable. There's tremendous storage costs. There's there's gravity differentials between different types of it's not a fungible commodity. Uh, and natural gas, same thing doesn't work. You could do it with gold. I'm surprised it never existed in gold, but you know, it is what it is.
01:34:55:13 - 01:34:57:02
Marty
Because of pretty high storage costs.
01:34:57:04 - 01:35:19:12
Jamie
See it? High storage costs, too. Absolutely. But Bitcoin is it's a monetary commodity. It's it's instantly transportable. It's fungible. Uh, you know, there's zero friction in it. And so it is this is a perfect method of commodity production, finance and where I'm going with this shell of my companies.
01:35:19:25 - 01:35:23:05
Marty
Yes, I'm happy you brought it up, because that's what I want to end with. Is this.
01:35:23:06 - 01:35:54:16
Jamie
Okay, good. But here's here's our kind of big thesis on it. And I tell these people and they so like, All right, cool, buddy is like we said before, Cormann has no customers. Our customer is distributed algorithm, distributed software platform, and occasionally it is individuals who want to pay fees. It's 5% individuals, one of individuals and firms paying fees, 95% a software algorithm.
01:35:55:09 - 01:36:06:07
Jamie
That software algorithm is the single largest non-state buyer of electricity in the entire world and growing at at 15 gigawatts.
01:36:06:16 - 01:36:08:07
Marty
Approaching 700 x slash.
01:36:08:21 - 01:36:42:10
Jamie
999 95% uptime times 16 gigawatts. It's the single largest buyer and most consistent buyer of electricity in the entire world. Bitcoin denominated finance power plants together. If you're converting energy into Bitcoin's bitcoin should be the financing instrument for power plants. And you get those two things together. Now, admittedly, right now it's there's obvious reasons why this is not happening.
01:36:43:07 - 01:37:08:00
Jamie
The having is one of them because a power plant amortization schedule, meaning you invest X in CapEx, expect to get your CapEx back in Y years. Y years is about ten years. And you're going to have, depending if you time the cycles perfectly, you're going to have to having during that ten year period, you might even have three if you screw it up, I think.
01:37:08:12 - 01:37:34:09
Jamie
Uh, and so if you take a bunch of Bitcoin and use it to buy a power plant and then plug in miners and go through the whole cycle there, during that period, you're going to your Bitcoin denominated revenue is going to go down pretty, pretty materially per unit of hash rate during that time period. And so it becomes hard to align the amortization schedules of the power plant with the mining operation.
01:37:35:04 - 01:38:06:11
Jamie
Dogecoin has no having. So it's actually you could probably find its power plant with Dogecoin Dogecoin's denominated debt for it stood show. But obviously the doge market cap is immaterial and it's a it's a significantly worse store value than bitcoin because it has perpetual issuance. There are no halvings. But what's really cool about bitcoin is that in that world where the fee pressure and the fees rise to be more than the subsidy, it mitigates the effect of the having successively.
01:38:06:11 - 01:38:24:29
Jamie
And so I think my big prediction in the next decade is people will start to use a little bit of Bitcoin in their cap stack. You know, it would be crazy to not have a power plant, a Bitcoin mine, a little bit of Bitcoin denominated, a little bit of usdc equity, a little bit of USD debt, like that's what the right cap structure looks like.
01:38:25:08 - 01:38:52:18
Jamie
Then you have an indiscriminate buyer of energy. You can sell that energy back to the grid anytime you want. If Bitcoin flies around and there's a bunch of volatility, your bitcoin denominated financing piece protects you from that and the revenues in a period where your bitcoin mining revenue goes down expressed in dollars per megawatt hour, your opportunity to optimize power and sell it back to the grid goes up.
01:38:53:06 - 01:39:22:04
Jamie
The more that the Bitcoin breakeven goes lower and lower, the more that you would be curtailing your Bitcoin mining load and selling the power back to the grid. So the interaction of these markets where you have a flexible generation stack and a and a flexible Bitcoin mining stack that also has that fee pressure dynamic with block times getting slower, it is all of like it fits together so elegantly and I'm a big that's my big prediction.
01:39:22:04 - 01:39:26:22
Jamie
That's my crazy prediction is Bitcoin denominated finance for power generation becomes the thing.
01:39:26:22 - 01:39:27:27
Marty
I don't think it's that crazy.
01:39:28:07 - 01:39:28:27
Jamie
Yeah I know.
01:39:28:29 - 01:39:29:22
Marty
You're good idea.
01:39:29:22 - 01:39:32:26
Jamie
You're on the the absolute fringe of.
01:39:33:01 - 01:39:55:13
Marty
This is how we get to a type one civilization and you need these Yeah you need these types of and again going back to like the first order of operations in the energy sector being so important think that's the big question is like how do you go from like a dollar reserve system to a Bitcoin reserve system? And like this is part of that process where you basically team up, right?
01:39:55:21 - 01:40:09:01
Marty
You have two of the most important tools that humanity, money and energy team up. And then from there you can disconnect from the dollar system and begin to have the Bitcoin standard materialize.
01:40:09:08 - 01:40:57:13
Jamie
Here you have a little microgrid. Yeah. Where you have a little a community that's organized around a power plant, a bitcoin mine and and short range transmission infrastructure and you just how you have economically perfect consumption of energy, you have incentives for demand response there. I do think some of the cool things that are happening with residential demand response are are another interesting step in this direction because right now Texas has started to do this a little bit, but it's it's blown up a couple of times where residential consumers can could participate more directly in demand response and you know actively turn off their AC when power prices get high and it would reduce their
01:40:57:13 - 01:41:29:14
Jamie
power bill dramatically. Um that but getting the largest consumer largest and most indiscriminate consumer of peak power the residential consumer to be more price sensitive also is a going to be an interesting restoration of free market like real price discriminate free market consumption because right now it's you know you just get your power pass through by your retail electric provider.
01:41:29:26 - 01:41:53:01
Jamie
There's not a lot of sensitivity to when you've consumed. It's just a big blended rate that gets distributed out amongst everybody. And that's the reason why the average residential consumer in America pays 16.5%, 16.5 cents a kilowatt hour for power, and the wholesale market is 4 to $0.05, and they're overpaying by a factor of three for their power because there's no price sensitivity on that.
01:41:53:19 - 01:41:57:22
Jamie
I think that's also a cool development that that plays really nicely with Bitcoin.
01:41:59:20 - 01:42:00:19
Marty
In terms of.
01:42:01:04 - 01:42:39:13
Jamie
In terms of the the way the let's say, the coincidence of supply, demand and price sensitivity all happening in electricity markets right now. Right now you have a lot of dumb electricity market participants, not dumb, but not sophisticated, not savvy. Now you have smart home technology and and that like a tech enabled digitally native power grid where the whole home can respond quickly.
01:42:39:28 - 01:43:09:09
Jamie
You know, you're not like honey, you run out to the breaker in the garage and so, you know, open the breaker. It's like, no, the this all the systems are connected to a price feed. And the price feed is ingesting the real time wholesale market electricity cost. And if you are a person who doesn't want to pay a $400 power bill in the summer, you just say, you know, I'm willing to sweat a little bit from 4 to 6 p.m. and that's family sauna time now.
01:43:09:12 - 01:43:25:06
Jamie
Yeah, we make we make a thing of it or we have a like a cold plunge or cold pool in the backyard and we have family pool time from 4 to 6 p.m.. Instead of ripping the APS, the AC at the absolute peak of transmission charges and electricity prices on the power grid.
01:43:25:16 - 01:43:37:09
Marty
That makes sense. Yeah, that would help obviously service demand in other areas. I'm sure up bitcoin plays into this like the bitcoin miners less incentivized.
01:43:37:10 - 01:44:13:06
Jamie
Because the bitcoin miners are already the the inverse of the residential consumer. Yeah. And so what it looks like is you have a power grid that's like it's a bit more reasonably sized. It actually works better with intermittent resource and battery. So in the world that the Inflation Reduction Act gets renewed again and then again and the government endlessly subsidizes the, the development of renewable resources and batteries and they insist that that's the direction that the species go, at least in North America, for our energy needs.
01:44:13:19 - 01:44:40:26
Jamie
Then you start to have okay of Bitcoin mining, which is price sensitive, inverse of residential peak demand. You have residential demand response and participation there with a direct and sensitive, a direct incentive for price sensitive electricity. Consumers reduce during the peaks. And so the way it manifests is you don't have a 40,000 megawatt differential between steady state electricity demand on the grid and peak demand.
01:44:40:26 - 01:44:45:09
Jamie
You have a much narrower thing and you have more perfect electricity markets. Is the way that that kind of.
01:44:46:03 - 01:44:49:18
Marty
That's the goal. Yeah you're late to your call.
01:44:50:06 - 01:44:51:01
Jamie
But I am I.
01:44:51:07 - 01:44:54:17
Marty
Yeah but I think this is a good place to have No that's.
01:44:54:17 - 01:44:54:24
Jamie
Okay.
01:44:54:28 - 01:44:55:27
Marty
Very optimistic.
01:44:56:03 - 01:44:56:24
Jamie
This is a great chat.
01:44:57:06 - 01:45:09:01
Marty
It's always a great chat. I'm happy we're able to obviously record it with Peter, but on this show able to record it for those. Jimmy I go way back to New York. We were both we're both New York refugees living in Texas now.
01:45:09:02 - 01:45:09:15
Jamie
Yeah.
01:45:10:14 - 01:45:12:01
Marty
Your hair was much shorter back then.
01:45:12:08 - 01:45:12:18
Jamie
Yeah.
01:45:13:10 - 01:45:14:09
Marty
And you didn't have a beard.
01:45:14:27 - 01:45:20:26
Jamie
I was envious of you. And when you moved to Texas all those years ago, I mean, save some for me.
01:45:21:09 - 01:45:27:10
Marty
Oh, you came and got yours. You came and got yours. Janie, that is certainly clear. Yeah.
01:45:28:06 - 01:45:30:12
Jamie
Oh, yeah. Thank you very much for having me. Well.
01:45:30:25 - 01:45:34:09
Marty
Thank you for coming around to do this much more. Also, you got to come to Austin more. I know you're West Texas.
01:45:35:01 - 01:45:37:15
Jamie
I may actually be getting a place here.
01:45:37:15 - 01:45:40:26
Marty
Yeah, get a place here. Yeah, I'm hang out here because I think.
01:45:42:02 - 01:45:43:19
Jamie
The way West Texas is great.
01:45:43:19 - 01:45:45:10
Marty
Though. That doesn't sound that great.
01:45:45:13 - 01:46:00:15
Jamie
I mean, isolation has its benefits. That's true. It's a big, wide open landscape. There's a lot of liberty now here. It feels like there's a lot more rules here than in West Texas.
01:46:01:17 - 01:46:04:18
Marty
Yes, a lot less rules compared to New York City, though.
01:46:04:27 - 01:46:05:16
Jamie
That is true.
01:46:05:17 - 01:46:06:19
Marty
Which is the tradeoff that I'm.
01:46:06:19 - 01:46:17:13
Jamie
Willing to make. Fair enough. Good trade. Good trade. But West Texas is some real freedom out there. Yeah, let's agree to do this. Maybe you'll come west a little bit more often and I'll come east for more.
01:46:17:13 - 01:46:19:23
Marty
We can make that agreement. I need to get up. Done.
01:46:19:23 - 01:46:21:11
Jamie
Sox's done deal. That's a deal.
01:46:21:22 - 01:46:24:13
Marty
That's a deal. We're going to have another deal. Peace and love for you.
