Bitcoin Halving Analysis: Bullish for Competitive Miners

Hi and welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics. Today for episode one hundred and sixty-two, my guest is Matt D'Souza, CEO of Blockware Solutions. With the halving coming up, there's a lot of chatter about the so-called miner capitulation, and it's funny that this sort of stuff comes up every four years. But nevertheless, I thought it would be good to have Matt on and talk a little bit about the actual dynamics and the actual strategy and whether miners actually welcome the halving. So there's a lot of interesting insights in this episode for you guys. But first, a word for the sponsors. This show is brought to you by Kraken, one of the world's leading Bitcoin exchanges offering a high quality platform with high trading volume, and you wanna be somewhere with high liquidity. Kraken also have low fees, with no minimum or hidden fees. There's twenty four seven support, it's easy to sign up. There In support, Kraken are consistently rated the best from a customer and security standpoint. It's also now even easier if you're an active trader or institution to avoid friction. Kraken have launched nine new foreign currency pairs, a combined offering allowing clients to be more agile and sophisticated. Don't forget there is Kraken Pro mobile app delivering all the security and features you love about the Kraken exchange in a beautiful mobile-first design available on Google Play and Apple App Store. Kraken also offer an OTC desk service For those seeking more private, personalized service for large block trades a hundred thousand USD or more, go and sign up for Kraken at kraken dot com. Have you got a steel backup product for your Bitcoin? Look into ciphersafe dot io producing the CipherWheel product. If you've got a Bitcoin hardware wallet and you've got a twelve or twenty-four word bip thirty-nine seed, make sure you've got it backed up in a way that's fireproof, waterproof, rustproof, petproof, and tamper evident. The CipherWheel comes in a wheel shape, it masks the words of your seed. And you basically use the tweezer tool to push the words or the letters in rather, and backup your seed in that way, and make sure you or your loved ones have access to your bitcoins if an accident occurs. Orders are going out now, go and order yours at ciphersafe dot io. This episode is also brought to you by Unchained Capital, a Bitcoin financial services company empowering customers with multisig vaults and loans. So the vaults are using collaborative custody, so you- Hold two of the three keys, and you can distribute your keys using a ledger and a trezor if you like. And there's a web interface, it's easy to set up. And if you're long term bullish on Bitcoin, you need to think about your security and going up to multisig is a great option there. So you can set up your vault, and then if you want USD liquidity, you can put up Bitcoin as collateral and get US dollar. All Bitcoin is stored on chain in dedicated multisig addresses, and it's never rehypothecated. Unchain Capital also offer Caravan Coordinator, so you can also go and try that out. Go and learn more at unchaineddashcapital dot com. Next up is Swan Bitcoin, who have just recently launched. Bitcoin is better money, and if you want to stack it regularly without manual processing, you must look up Swan Bitcoin at swanbitcoin dot com. If you're in the US, you can link any major US bank account via ACH and auto buy weekly or monthly. The Bitcoin is delivered to your wallet or stored with a licensed and regulated custodian. For this type of service, the fees are very Very competitive, they are the lowest for this type of product, and Swan Bitcoin also have a focus on education and advocacy, and they specifically want customers to hold their own Bitcoin private keys. I'm involved as an advisor with a small equity stake also, so go to swanbitcoin dot com for your automated Bitcoin stacking. Here's the interview. Matt, welcome to the show. Hey, thank you for having me. So, Matt, I know you've done some pretty cool work here with this recent, Bitcoin halving and mining analysis research report just recently. Recently released, and that is from seventeenth of March twenty twenty. So, but let's start with a little bit about you and, what, what is Blockware Solutions and how did you get into Bitcoin mining?

Yeah, that's a, that's a great question. It was, you know, I, I really started investing in the space in twenty fifteen and twenty sixteen. I launched a digital currency hedge con-- hedge fund called Blockchain Opportunity Fund in twenty seventeen, and it was far more Ethereum focused, far more Web three point o focused, and then probably around quarter three of A friend of mine had brought up these arbitrages in the mining space and kind of showed how there's, there's a lot of friction between the US and China, and that's really how we launched Blockware Solutions as hardware brokers. So what's critical is that allowed me to see how much infrastructure was getting spent around the world For Bitcoin mining rigs. you know, people discuss how there's ICOs and other things getting, and the spending on web applications for Ethereum and Web three point zero, the amount of spending in the Bitcoin network, the, the network effects that's created dwarfs Web three point zero and, and everything else in blockchain. You have billions of dollars worth of infrastructure, electricity spending, facility spending, to secure the Bitcoin network. That's a network effect. That's, that's Power, and that allowed me to start to deeply research Bitcoin and, and understand it more, and, and the fund actually did a significant pivot in twenty eighteen, and, and we've had more of a investment thesis in Bitcoin. We still believe in Web three point zero, but there's been a pivot due to that understanding, and now Block Resolution, we've grown significantly, you know, got, we were healthy through twenty eighteen, we, we had a great year in twenty nineteen, quarter one of twenty twenty was our best quarter, so over the past Last twelve months, we've probably sold about thirty thousand ASICs to the US market, placed about twenty five megawatts worth of miners in, in hosting facilities, and, in quarter four of twenty nineteen, I launched another fund. It's a Bitcoin mining fund with my partner, Mike Stolzner. it's called Blockware Mining. We're mining in Kentucky. We're running about a hundred and eighty petahash, and it's a three pronged strategy. We self mine, we resell our mining rigs, we allow miners to mine in our facility, and what You know, bring as much hash to the US as possible, and, and we're making it really easy for US miners to mine in the US and do it economically. We're getting miners all in costs about five point eight cents. They don't have to wait two months or two and a half months for lead times on mining rigs, and they have an exce- exceptional group of technologists that are managing these units. This group, they, they, They were some of the first miners on Zcash, SiaCoin, and, and, Dash. They controlled over ten percent of the network. They're, they're called Navier, exceptional technologists. Some of them have been mining since twenty- twenty eleven. So that's what we're, marrying together to, to, to really give US miners a competitive advantage in this space, 'cause mining is just all about survivability, and that's what we're bringing. So, miners don't pay for CapEx, they only have their- electricity rate, they get to maximize their hash, and that's what's gonna make them successful.

Yeah. And so the interesting thing there is that it may seem at first glance that US mining isn't as competitive as other countries around the world. Why, why do people have that view? And then, in your view, why is that not necessarily right?

Yeah, it's actually very inaccurate. I mean, it's, we-- what we're very good at is strategy and models. When you have other mines in the world, they may be paying a hundred, a hundred fifty thousand per megawatt to pay for their transformers, electrical infrastructure, their building, and then they're getting maybe three point two cents. So when you m-model all of that out and you put in the CapEx, amortize it, five point, five point eight cents without having to pay for facility and all that infrastructure And just buying mining rigs and mining, and just deploying cash to, to, to TerraHash, that's like the equivalent of, of three point six cents electricity and paying a hundred fifty thousand, per megawatt in build out. So it's, it's two different models. You could elect to deploy to just mining rigs and get a rate of about five point eight, and that's-- and we believe that's significantly better, you're maximizing your hash, or you, especially 'cause you're getting in the most efficient technology, that's really what's Critical. The fact that these S17 pluses are so efficient, they're so efficient where the impact of electricity is decreased. If you're in our report, we show that one, table how a miner with three cent electricity running the old generation S9 has a higher breakeven price than a miner running seven point five cents electricity running the next generation S17. Yeah, that's a

really interesting, analysis, and let's break into that. That I, I think, let's start though with the market participants though. So, a-as you spell out in your report, you spell out that the three that you assess are, investment funds, the hodlers, and then the miners. So can you just break some of those down? How are you viewing them from a mining and a Bitcoin price impact point of view?

If you're anyone who's involved in Bitcoin, for the most part, is pretty bullish. I mean, all these investment funds and, and, and hodlers, they're just about all long only, Is they could buy their Bitcoin and in two weeks they could, they could lose conviction and sell, and they're done. The miners are truly the most bullish, they have the highest conviction. They're buying mining rigs with a three, three or four year life cycle, they're buying, hosting, they're, they're buying a, a, a warehouse and repurposing it into a mining facility, ripping out the walls, putting in, these industrial grade fans, and those have five year life cycles. That's what they're getting married to, three to five years. and they're putting, they're injecting all their capital in there, and they may not earn back for eighteen months, and they can't just turn around in two weeks and sell that stuff, right? It's, it's illiquid, it's not as repurposeable. These ASICs, right? They're mining rigs, ASICs, only for Bitcoin. So they can't change their opinions, they're the ones with the highest conviction. But the thing is, they're getting their Bitcoin every day, and they have to sell the Bitcoin to cover their electricity expenses, and that's what's Bitcoin network. Every day, you know, I think it's eighteen hundred Bitcoin a day, fifty-four thousand Bitcoin a month that is, that is issued, you know, pre-heaven, that's how much Bitcoin is released to miners. You know, when you think about how, how do prices get affected? It's not, it, the trading volume on exchanges is really churn, it creates volatility and it affects price more short, short term, right? Bitmex had that liquidation, Bitcoin was at seventy-eight hundred It fell all the way to thirty-eight hundred, but look, we're right back at sixty-six, right? That's, that's churn and volatility from, from speculators. That's not what affects the intermediate and long-term price. What affects the intermediate and long term price is net cash in, net cash out, and miners unfortunately are net cash out, are net cash out because of, because they have to fund their electricity expenses. It's not because they don't have conviction, it's they have a bill every month and they have to fund it. So we're getting net cash out from, from the miners. They have to sell their electricity, or their Bitcoin to fund electricity. Sometimes they're buying more mining rigs, and we need positive- Sentiment. We need positive sentiment from, funds and hodlers to be buying Bitcoin as well to counterbalance the mining sell pressure.

Yeah, that's a really interesting way of putting it because you're saying basically that investment funds might, although generally, bullish, they have the ability to exit at any moment, and walk away if they get tested. And then similarly, now I think longer term hodlers, they have pretty strong conviction as well, but they can theoretically exit their position at any time. But I think the point you're making here is that miners, because of their big upfront investment, they can't just walk away at the drop of a hat. And so there, in, in some way, there is a commitment there, and that's a pretty interesting factor. You could almost say, Bitcoin miners are more bullish than you are than, than the typical, hodler. Exactly.

Exactly. And, and, and when you put things into numbers, fifty-four thousand Bitcoin released every month is a quarter billion dollars. That's five hundred forty, right? Five, five hundred forty million Pressure going to miners to sell for their electricity. Now they don't sell at all, but that's the potential. Now, how do you counterbalance that? Are funds and hodlers raising a half a billion a month? No chance. And, and of course, miners aren't selling all that, so it's not as pessimistic as I initially proposed it, but that's the potential. And realistically, and that's what we show in the paper, we only model out how much electricity needs to get spent, and that, that accumulates to about forty to fifty percent of that, you know, half That's what needs to get spent, unless a mine, you know, we're, we're getting some interesting mines out there that are raising a ton of capital, you know, it's funds, they're VC funds, hedge funds, they're raising a ton of capital, they're getting excellent balance sheets, and they're just accumulating the Bitcoin. So those miners are high conviction, they're paying electricity with cash rather than their Bitcoin, and they're holding all their Bitcoin. Those guys are the best for the network because they're truly removing supply off the network. They're getting all the new Bitcoin and they For the price of Bitcoin.

Yeah, it's interesting to put it that way. And so, yeah, as you spell out some of the potential sell pressure, but as you say, some of them are more bullish than that, and they're trying to hold it back as much as they can. And, so I think this also comes into, the different levels of, price or layers, as you say in the report, that there are some miners who are above seven cents per kilowatt hour, and then there are some that are below. You know, three cents kilowatt hour and so on. So could you just spell out for us a little bit around some of those different levels and how you figure out how many people are at these different levels or layers? Yeah,

that's a great question. So Blockr Solutions, we've-- a majority of our business, we sell a majority of it North America, a lot of the US market. But, you know, I've, I've been asked to speak around, around the world at different conferences. You know, I was in Chengdu, the Miner Update team threw a great

Sichuan province, we visited the mines in the Pacific Northwest, Washington state, one of my partners has visited upstate New York mines. So we've-- they're all in our network, miners in Kazakhstan, Iran, Venezuela, we just shipped several S17s to Venezuela last week, so all over the US, Canada, so we, you know, we talk to these clients, what are you running? What's your electricity rate? What's your megawatt capacity? and we communicate directly with the pools. I mean, we're talking with Poolin, we Every two or three days, we talk to Bitmain every day, Canaan. So we've got an excellent peer review on, on our piece and understanding what electricity rates are at different, geographical locations and what, most importantly, what mining rigs are they running? And we also have our own pool, we have the Blockware pool, so we have, we have miners on there and we can see what workers they're running. Are they running a worker that's thirteen point five tera hash or is it seventy-three tera hash? And that's how we know it's a- An old gen versus a next gen, so that's how we've modeled out the network, and this is what's really interesting. The miners with three cents or lower, they're all still running S9s and, and the, you know, that Canaan ten terahash or whatever it is, the E-Bank thirteen terahash. I, I know a colleague who was mining in Kazakhstan, he, you know, really, really intelligent individual, he raised some family money family office money, and they launched like in November of 2019. You'd think, all right, heaven's coming up, they're buying next gens? No, they have, they have sub two cent power, and they went and bought a bunch of the e-banks because their earn back is, is two or three months. So markets are efficient. I think cryptocurrency markets are the least efficient market of markets, but it's still a market and- When you pour, when you pour water at the top of the mountain, you have gravity, and the water's gonna go to the lowest point. It's gonna trickle down to the lowest point, and that's what's gonna happen in the mining rig space. The S nines, if, if someone has six cent electricity or five cent electricity, they have to sell it. You won't be able to mine it at a hosting facility, and it's gonna go to the cheapest power in the world. It'll, it, it might, it might take three times. They might sell it to someone with three cents, and then, and then it's gonna become unprofitable for the individual with three cents, and he's gonna sell it to someone with subsidized power, and it's all gonna flow and trickle down to the cheapest power in the world. And these S Venezuela, they're flowing to subsidized power in Iran. We have a cli-we have a client in Arizona who's got solar power and he's got, it's, it's zero, cost and they're flowing over there. So markets are fairly efficient. These S9s, many of them are gonna shut off and become obsolete. Many miners are just not gonna wanna deal with doing the shipping and stuff and they'll junk 'em. But other ones are gonna flow to the cheapest power in the world. someone may have a negotiated deal with a utility where the power is basically free. or, or they're just paying variable cost, you know, the, the cost to deliver the electricity. So that's how it's gonna work. These will disperse across, across the globe and get to the cheapest power.

Yeah, I love that insight. I think that's a very underappreciated point, and that really comes through very strongly from your report. could you please just outline a little bit around what the different rigs are? So you've got the, you know, old generation Bitmain S nine and the next generation S seventeen. Can you just spell out a little

Yeah, and what are the different generations?

That's a great question, 'cause this, this really influences the market. I think we focus on two, you know, two units. The S nine, which is thirteen point five tera hash and consumes fourteen hundred watts. Now, the S seventeen plus, which is what we're running at Blocker Mining, that is seventy three tera hash and consuming three thousand watts. So it's about, it's about two point one times the amount of energy consumption, but it's about five point five, I think, yeah, five. Six maybe? Yeah, six, six times the tera hash output. So, so two point, two point one more watt consumption, but six, about six times the tera hash output, right? So you're, you're consuming two times the watts, but getting six times the output. That is radical efficiency, significant efficiency. So what does that, what does that do? You know, before I needed to run seventy machines, seventy S9- Nines to get one petahash. Now I'm running fourteen machines to get one petahash, seventy S nines to get one petahash, fourteen S, seventeen pluses to get one petahash. And, and the watt consumption, you run the math, you're, you're, you're, I think it's, so fourteen times, times three thousand watts, that's like 4.2, right? And, and the S, the S, S9s, 1,400 watts times, times f- times 70. Here I got my calculator right here. 70 times 1,400. That's 90, 98, 98,000 watts. So it's, it's, it's, it's significantly more efficient, and what that does is it reduces the impact of electricity, because you're consuming less watts to get more hash. And that's why it keeps, and that's why it keeps, that's why it keeps these, high electricity miners in the game. So people with five cents, six cents that are at hosting facilities, they can mine very profitably if they're in the next gen. But if they have S-nines, they've blown out. You gotta be two and a half cents or lower because of, you know, difficulty and the price of Bitcoin. So it's a complete game changer.

Yeah. And so, so I guess that's-- So you're outlining there why if you have a high electricity

In the high, in the higher ranges, you can still make it work with next generation hardware, and then you're saying also that if you have in the lower range of electricity costs, right, you're in the better end there, you can make it work even with the old hardware. Now, the other question I guess is, is it just that because of the capital expenditure required to get the new hardware, that's why sometimes people will stay using the old hardware if they have a good electricity cost?

You hit it on the head. There's an opportunity cost. The opportunity cost of deploy- deploying Depleting your Bitcoin treasury to upgrade to next gen, if you're at two and a half cents or lower, it doesn't make sense. You're better off holding the Bitcoin. You're not really doing much for your, for your shut off price. You're not really lowering your break even price that much, and, and it just doesn't make sense to take on spending, you know, two thousand or twenty five hundred, for, for next gen, depleting your Bitcoin, and, and it's, it's a game of marginal returns. You're hitting marginal returns 'cause your If you're at six cents, you have no choice. You gotta get the next gen. And that's why-- and that's what's really cool about this and how we've modeled it all out, you know, Blocker Mining, we're at, we're at five point five cents and we're able to, we're better off not depleting our capital towards infrastructure, you know, building out a facility, transformers, because we're in the newest technology, the most efficient technology. So we're actually far better off having the five point 0.5 cent rate, not deploying 150 or 200,000 per megawatt for transformers, switch gears, electrical infrastructure, paying for management, paying for a facility, rent, all that stuff. We're better off deploying all that capital just into machines, maximizing our hash, and it's because the 5.5 cents isn't as impactful to us because we're in such efficient machines.

Yeah, right. And just for some context for the listeners, just reading from the chart here, at 5.5 cents, Electricity rate per kilowatt hour, the breakeven cost if you were on S9s is seven thousand, that's seven thousand and sixty-two dollars, Bitcoin price, but the breakeven cost at S17 is two thousand seven hundred, so it's a big difference there because you're using the next generation hardware. so I think this is a much more accurate way to think of this idea of shutting off. And so, Matt, could you just explain a little bit around this idea of miner capacity? Capitulation, and then why is that so commonly misunderstood, or what's wrong about people who say, "Oh, miners are gonna capitulate and it's all over for Bitcoin"? It's,

it's, I call it a healthy cleanse. It's, it's, look at, look at what happens, it's an efficiency. We're creating efficiencies in the market. You know, I, I think one of the biggest-- I don't wanna get too deep into what's going on with the economy and all that stuff, it's gonna be a big tangent, but when you do bailouts and The game, there's things that you need to bail out and kind of intervene a bit, but, but there's no reason everyone should get a bailout. If you're, if you're an inefficient company, you, you go through bankruptcy, an efficient company comes, takes your assets, and takes pieces of your departments that are healthy and profitable, and, and the stuff that's unprofitable gets wiped out, and that's healthy for an economy. mining, mining is one of the best, d-uh, examples Of this, you get, you get a miner who overspent on their facility, have S nines running, running at seven cents electricity, they should get wiped out. They, they are gonna get blown out. And what happens is, there's twelve and a half Bitcoin that's released, that's going, that every, every, you know, every block, that's gonna go to whoever's mining. So once those miners, when the price of Bitcoin goes down and those miners shut off, when the price of Bitcoin goes down, it creates margin pressure for everyone on the network. Now When the inefficient miner shuts off, the Bitcoin he was earning gets distributed to everyone else, and that improves the margins of the miners that survive. And that's what's critical. It's, it's a self-correcting mechanism. It, it's, it's, miner capitulation is about difficulty, and then also inefficient miners blowing out. The inefficient miners blow out, difficulty adjusts, right, right now, in a couple hours, difficulty's gonna adjust sixteen or seventeen percent. It's gonna be one of the largest ever. The price of Bitcoin went down, everyone's experiencing, margin compression. All these miners running S9s probably have shut down, and we, we watch the pools, all the Asian pools were really shutting down, so I think it's a lot in, in, Russia and China that are actually shutting down their S nines, they're, they're no longer gonna earn Bitcoin, and that Bitcoin's gonna go to the guys who are running S seventeens and who are running efficiently, and their margins are gonna get better. it's gonna-- right now, Bitcoin's at sixty-six hundred, in, in a couple hours, as, as difficulty adjusts sixteen percent, it's gonna be like Bitcoin being at seventy-eight hundred. That's how it works, because the margin, because of difficulty, profit goes up sixteen percent, and that's, that's Very good thing. It's removing the inefficient miners. They no longer get their, get their rewards. Their rewards get allocated to the efficient miners, the guys that have deployed, correctly, that have low electricity. And those are the strong hands. We want Bitcoin in their hands because they don't have to sell as much Bitcoin. Their margins are good, they don't have to sell as much Bitcoin. There's less sell pressure on the network, and Bitcoin price could increase. I almost think of it like the equity markets. Think about like Fidelity Contra or Van- Guard account. These are the large funds who know what they're doing, and, and when the market drops a bit, they, they don't ju- they don't sell, they're coming in and they're supporting the market and they're buying, and, and, and these equities, they go into strong hands, and they have a time horizon of one year, one, one to four years. So coin is getting, when you get miner capitulation, Bitcoin starts getting allocated to the efficient miners with strong balance sheets, low electricity rates, the proper mining infrastructure, and it's, it's getting Related with guys who've been doing this for years, who have seen this show before, and they're gonna be holding that Bitcoin. And now you're taking Bitcoin off, Bitcoin supply off the market, and you're reducing sell pressure on the network, and that's what positions us to move up to the next leg in the price of Bitcoin.

Yeah, that's really fascinating. So I guess just to summarize for listeners, it's something like as the Bitcoin price tanks, the-- some miners have to shut off, right? The inefficient miners have to shut off? And it becomes more profitable for the better miners, and also we get the downwards difficulty adjustment, meaning it becomes slightly less difficult to mine that Bitcoin, and that is what in turn rewards the best miners, because they can now make more for the same amount of work that they were doing. And then, as you were saying, they're the strongholders, they wanna hold, and so that in some way diminishes or decreases the downwards sell pressure that exists just permanently or just, contin- continuously on the network.

You're writing our second report, you got it.

No, I think it was a, it was a great explanation from you and from, reading the report, I think that was really interesting. And so let's, now that what we spoke through there was like the example where the price goes down, right? We have a crash. What, can you just talk through what it looks like when the price is on the bull run, like when the price is rising, what does it look like? Does that invite, you know, more people into the market, and then Get wiped out in the next crash?

Yeah, it's, it's totally cycles. And, and just, you know, I, you explained it really well. I think we really need to give a, a tip of the hat to Satoshi. I mean, the most ingenious, one of the most ingenious pieces of the Bitcoin network is difficulty. It's just this self-correcting mechanism that, that maintains the margins of, of the efficient miner. when, when too many miners come online and Bitcoin corrects, you know, too many miners come on line Online, margins get compressed, Bitcoin corrects, and miners have to shut off, then difficulty kicks in, improves the margins for the efficient miners, and now what you just discussed, it's gonna be the opposite. Difficulty is gonna, it's gonna, it when, when Bitcoin starts to rise, everyone starts buying mining rigs. You know, it's, it's human psychology, it's truly a market. People don't buy low and sell high, most people buy high and sell low, right? They, it's, it's fear And greed. So when Bitcoin starts to rise, all these miners start deploying, to mining rigs again, and, and there's a finite amount of Bitcoin that's released, so it's getting distributed amongst several miners, and that's what makes difficulty go up. And difficulty, like I said, it's a self-correcting mechanism. Difficulty's gonna punish all these miners that have chased price, and deployed mining rigs. If you're gonna get, difficulty's gonna go up, mining margins are gonna compress, and, and one- Once Bitcoin corrects in price, those inefficient miners get wiped out again, and the cycle continues. Then, then difficulty will be a positive where it's gonna adjust lower and restore margins. So it, it, it keeps things in a band. Difficulty keeps margins in a band, and when price gets too high and too many miners come online, you get ma-uh, margin compression, and when you get miner capitulation on the downside, Bitcoin price, corrects, miners shut off. Difficulty adjusts favorably and margins get better. So, it's why I say difficulty is this ingenious self-correcting mechanism. It's kind of a gravity, and what it's doing is it, it brings margins back for those efficient miners over the intermediate and long term.

Very cool. And so if we-- so we've spoken through if Bitcoin's price goes down or up just on its own, now if we talk about actually the halving impact, right? So the amount of block- Reward or block subsidy, to be precise, halves, can you talk us through some of the ways to think through that?

Yeah, so it's, it's gonna be extremely healthy. We, we believe that the miners at about six point five, and, and there's differences. You know, you actually brought this up, I kinda missed it, explaining it, but if you're paying six point five cents, that's not horrible if you're not paying anything towards CapEx, if you're just paying for machines and you're getting six point five, that's pretty good. If you're getting three cents, you're paying for infrastructure and all that stuff, and that's how that balances out. So that's critical. I, I don't recommend miners who are paying six point five, seven cents, eight cents, and they're running it at their house, paying for their own infrastructure, transformers, build out, you're gonna get wiped out. That's horrible. So that's number one. When you see those layers of people at five point five, six, six and a half, seven, they're in hosting facilities, but that's also their break-even price at the end So I just wanted to clarify that. Now, when you're discussing the halving and what's happening, we are, we encourage the halving. We don't fear it, we welcome it, because we understand what it's gonna do and what it's gonna do for our profit margins over the next six months. Being at our layer five point five for block reward mining is extremely healthy. What's gonna happen is it's, it's gonna be, it's gonna be like an onion. There's gonna be layers that peel off this onion. Those net-- those S-nines are gonna blow out. If Ten thousand, after the halving, S nines are gonna blow out. That's all the old generation. Mid gen- so S nines from seven cents to probably two and a half, three, two and a half cents, they're gonna blow out. They're gonna shut off. Now you have that other tier of, of those T two T thirties, the inner silicones, they're like mid generation. Those are all gonna blow out too, up to probably five cents. They're gonna blow out. And if Bitcoin happens to be at five, six thousand after the Even, even, even six and a half, seven thousand miners with seven cents running s seventeen s are gonna have to shut off. So, so people at six and a half and lower running next gen, they're gonna have an amazing difficulty adjustment, right? When all those miners shut off, difficulty's gonna adjust significantly, thirty, forty percent, and their margins are gonna come back. There's gonna be friction. It's not like a light switch, you know? It takes time for these miners to shut off because a lot of these miners who are in hosting Contracts, you know, they don't, if, if they don't, if they don't pay their hosting contract, they lose their equipment. So they're not gonna just let their equipment go, they're gonna wait to, to deplete their balance sheets and all that. So it might take two to four months of friction for all that to wipe out. And, and there's other large miners who have negotiated rates with the utility companies that they have to consume a specific amount or, or their four cent electricity turns into five and a half. There's all types of deals out there that are gonna make some More sell pressure, 'cause all the Bitcoin they're mining is, is gonna get sold, and then they have to tap into their treasury, and that has to get sold too. So that's more sell pressure. So we need all that to blow out. I, I think, you know, I don't know, I, I don't like price targets, I, but if Bitcoin is in these suppressed levels through the halving, it may take another two or three months of extreme miner capitulation for all those miners to blow out, and then difficulty's gonna adjust, and profit margins are actually Actually gonna be better for these efficient miners running the, seventeen pluses and in that six cent band or lower, their profit margins are gonna be better after the halving than before.

Right. And so it's an interesting insight there as well that the typical thing you hear people say is, "Oh, but if the price drops, then these miners can instantly shut off." But it's an interesting point you make there that that's not reality for many miners. They've got negotiated deals in place, they have a certain, contract- Act in place where they can't just immediately turn off, or not all of them can, at least. And, and then some of them are playing the speculation game as well, where they may temporarily just wear the loss because they're, they're kind of hoping for a long-term bullish, aspect.

That's, that's the worst part. I mean, I think that's what really drove the two downturns. The one, and, you know, after, after we peaked out in June twenty nineteen, you know, because I, I, I run the hedge fund as well,

Chicago, we discuss analyses, and they were telling me how their miner-- mining clients, they pumped the brakes. So when Bitcoin was going from eight thousand to thirteen thousand, they stopped selling their Bitcoin. They were looking at twenty thousand. They're not-- they weren't interested in the moon, they were interested in Mars. So at, at where they thought we were going, they stopped selling their Bitcoin, and then Bitcoin rolled over at thirteen thousand, it went till, you know, twelve thousand, eleven thousand, ten thousand, and these guys started feeling the pressure, and they started- Puke it, and, and that's what drove it, you know, that's what drives it down. It's, it's miners that don't-- they create a plan and they don't trade the plan. You gotta have a plan, you gotta have a strategy, and you stick with it. It's a game of discipline. Mining is all about survivability, deploying at the right times, and, and being-- having an excellent treasury management. And some of these guys elect to turn into speculators, and that hurts them significantly.

and, you know, in, in, Same thing from the OTC desk, they're like, "Yeah, these guys, they're not selling." And I knew once we get, get to about seventy-eight hundred, they're all gonna start puking again. And that's, you know, you had that sell pressure, and then of course, the BitMEX liquidations, people being on margin, coupled with the US equities really driving all assets lower, it was just a perfect storm for the sell-off. So

Yeah, that's an interesting one. And when it comes to electricity deals, right? So as you say, it Right. Now, I've heard that it can be difficult to negotiate a good rate, or you might have trouble staying in a certain area, that you might, you know, there might be a political risk of having the miner in that jurisdiction, or you kind of get shunted out. What are some of the strategies and ways to try and negotiate a, a, a good electricity rate and keep that rate?

So in the, you know, in the US, there's actually far more stability. Like, I, I, I just couldn't-- there's so much volatility in Bitcoin Bitcoin mining, I don't know how people do it in some of these other countries 'cause you can just get shut down overnight. There's, like, there's enough volatility and problems in Bitcoin mining. I, I don't know how people do it with the, with, you know, that you, you don't get excellent uptimes with the power, then, you know, if, if your internet's down fifteen, twenty percent of the time, what good is that? Your revenue's down twenty percent, right? A lot of these countries have blackouts and, and, and- Twenty percent of the day power shut off, and people are running mining rigs there. So, to, to us, it's, you know, from a risk management perspective, I don't, I don't get involved in an asset where I could just lose. There's a, there's a fifteen or twenty percent chance where I just lose because it's not in my control. That doesn't make sense to me. And that's why it's so critical to, to, to, to be deploying in like the US or Canada where there's stability and, and the municipalities are working with you and operations, we're not running them in, in this, in New York City or the, or Chicago or LA. You're going into rural areas where they have excess electricity, cheap land. You're right, markets are efficient, you go where the power's cheap. the utilities have excess, and you're, you're-- it's a communal relationship. Now, I think with utilities, a lot-- there's not a lot of negotiation power, but you have to go to places, you know, you wanna try and get this cocktail of cheap power, cheap land, and a good- Climate, it's, it's, it's difficult, but it's out there. You gotta do, you gotta do the work, and, and if you can get a place that has a lot of excess power, then, then, then you have a communal relationship, right? But you're not really gonna be able to push utilities around. You still are somewhat at their mercy, but the goal is to, have three to five year contracts locked in with utilities if they'll do that. I mean, I've, I've got a really savvy group in the state of Washington. They've been And, and, they've done a great job with, with, negotiating their contracts. I know they're sub three cents and, and they've-- they put in a lot of work, they did the due diligence, and they got it done. So it can be done.

Yeah. And is there-- do you face, I suppose, in the US and Canada, mining operations will face a little bit more scrutiny around things like auditing and so on, but at the same time, that might also help you from an outside investor point of view. Is that, has that been your experience?

Yeah. I mean, we, we are a, a US entity. We get our audits, everything, you know, by the book. It's good for us and it's good for our investors, right? Our LPs want it. It makes it a more attractive product. It allows us Debt financing as well. So absolutely, I mean, we, we pay our taxes, everything. This is, like I said, this is a game, mining is a game of not screwing it up, from, from what you're buying to how you're operating, to the treasury management, to the, to the regulation, to the taxation. Mining is, it's, it's a very lucrative operation. you know, with, with our, with our mining fund, Bitcoin is down, I don't know what it's down on the year, maybe thirty percent, we're We make money in a sideways and downward market. If you're holding Bitcoin, you're losing money. If you're mining and you have a diversified product like ours, where, where you self mine, you resell rigs, you take on hosting contracts, you're, you have three revenue streams, right? And, and that's allowed us to, to, to significantly outperform the price of Bitcoin. So, so from our perspective, we're, we're trying to do the, all the small things right. We're trying to be very diligent, be very disciplined with our treasury management And it's a game of survivability. Miners are survivors, and, and, and we're gonna be in the game. It's, it's about staying in the game. A lot of other miners blow out, make poor decisions, overspend, and they blow out. And, and a lot of times with, whether it's investing in equities or assets, you make a majority of your money in a month or two of the whole year, you know? And when Bitcoin went from five thousand to ten thousand, margins were insane. I mean, earnbacks were so short, so you gotta be in the game. If you take yourself out of the game, it's game over, right? So if, if, if Bitcoin, if difficulty's going down as it is, and lead times are two and a half months, and out of nowhere, Bitcoin sprints up to ten thousand, and we have our mining rigs running, we're gonna make, we're gonna make eight months' worth of money in, in two months. So you gotta be diligent, you gotta be doing the right things, you stay in the game, and you're gonna have segments of the year, one or two month segments of the year, where you're gonna make eighty percent of your money. So you gotta be positioned.

Yeah, that's also a really fascinating insight, and it makes a lot of sense when you think about it, because it's like you've set up your whole operation to try and be efficient, have a certain cost, but then all of a sudden the thing you're making, or the thing you are producing, has just shot up in value because Bitcoin just does Bitcoin things and goes volatile. Exactly. And then it just, during that period, you're just minting it, right? So that's a really interesting, and it's, it's kind of aligns as well with,

About Bitcoin from an investment point of view, he says if you weren't holding Bitcoin, there were certain days in the year where if you just weren't holding Bitcoin on that day, you missed out on a massive return, and it's a similar kind of aspect with mining because if you weren't- mining in a good, operational cost, then you missed out on the massive gain that was available during that day.

Exactly, exactly. And unfortunately, and that's, that's how we're set up, we have our mining rigs, we're accumulating, but unfortunately, most miners, they see those days where Bitcoin spikes, and then they're ordering their mining rigs, and then they're not getting plugged in for two and a half months, and right, our self-correcting friend, difficulty, has already punished them and brought- Margins back to normal, and then they get their mining rigs two and a half months later, and margins have compressed again and normalized, right? So that's why, as you said, you gotta be in the game and positioned when the opportunity. If the opportunity is there and you're not ready, you miss the opportunity. So you have to be, you have to be positioned before the opportunity comes.

Yeah. It's like that, luck is when preparation meets opportunity kind of thing. So, I guess projecting out, right? Like, so we're all bullish on Bitcoin, we think this thing is Higher. What does it look like when the block reward component, sorry, the block subsidy component of the block reward comes down, and, well, hopefully, most of that, a lot more of that reward is coming out of fees? Do you think that changes the dynamic there for mining, how you think about mining? I don't know, this is kind of maybe fifteen years out, do you have any thoughts around what that looks like?

Yeah, I, it doesn't concern me at all. This is what's interesting. I think Bitcoin is digital gold. I don't think Fees are ever gonna drive the network, and, and we need to put things into perspective. Right now, if I have a hundred thousand in cash and I park it in a bank, I'm paying a fee. In Germany, you're paying negative inter-- in Japan, you've been paying negative interest rates. In Germany now, you're paying negative interest rates. So we can go to what I believe, if this matures out five, ten years, Bitcoin's gonna be at a significantly higher price. There's gonna be miners, there's gonna be holders with a hundred Hundred million dollars worth of Bitcoin, ten million dollars worth of Bitcoin. If I buy gold right now and I, I buy a million dollars worth of gold, I pay insurance, I pay, you know, all the storage costs, so I'm paying essentially a negative interest rate right now if I have gold, a significant amount, right? It's in a vault, you don't keep it in your house if you got, you know, a significant amount. So when you look at the parallel systems or comparable assets, people are already paying a fee for to store- Or these, these store values. And now currencies, they're doing it. If you put your money in a bank account, you're paying a negative interest rate. So that's the world we already live in. Now with Bitcoin Forget mining rewards getting halved and transaction fees, we can go to zero rewards, and, and if, if we have a robust system in ten, twenty years where, where this stuff is valuable and it's, it's like digital gold, well, people are gonna be willing to pay a quarter percent, and, and you don't have to, right? You don't have to put it in a vault because you have, you have your private keys, so that cost isn't there. But I'm willing to pay a quarter percent to the miners to subsidize them because the comparable world Like gold or, or currencies with negative interest rates are already there, and they're probably more expensive. And, and, and if I wanna move my gold, it's not portable like digital currency. Jump on a plane, go, go wherever, you got your digital currency, just on a ledger. So that doesn't scare me at all. I mean, it-- because, because there's a dynamic. For us to get to that state, that means Bitcoin succeeded. And if Bitcoin succeeded, it's at a significantly higher price, it's significantly more valuable. And, and if it's more valuable, we have the incentive to, to pay that quarter percent or half a percent to miners to secure the network. And, right? Like that's, that's what we're doing in the real world with gold, insurance, storage costs, all that stuff. So, so it, it's-- when you think about what the real world looks like, that's normal. That's normal. To not pay is abnormal. So, so, yeah, that doesn't concern me at all. And also, I don't know what's gonna happen with Bitcoin is, is, is, Lightning Network gonna take off? Is it gonna be a payment processor? I don't really think so. I think it's gonna be Digital gold, and if that's the case, you don't have a ton of transactions, and you don't-- so therefore, you don't have a lot of transaction fees. People should be, should be holding their Bitcoin, as a hedge or whatever, you know, when you get, you get these multi-- these, these mega networks, especially in like China or other countries, it makes a lot of sense to diversify your assets. They put, they put their money in fine art, twenty million dollar paintings, diamonds, property. all around the world, and Bitcoin's just gonna be another one. It's gonna be another asset to the cocktail of store of value. The, and, and, and think about how attractive that is to the mega networks. I'm talking about the billionaires to, to have this on, on a, on a ledger and be able to go wherever you want and no one can confiscate it, right? And now, now I'm seeing sophisticated people with the brain wallet, right? They're memorizing their twenty-four words. So, y-, you know, I'm- On a ledger, you have your twenty-four seed words. They're, they're not even, they're-- I have a, I have a colleague who's been mining since twenty eleven. He has a brain wallet. So he's memorized all twenty-four words. About every two weeks, he tests to assure that he's got all twenty-four words memorized, and he can, he can just not have a ledger or anything. He can go fly to Switzerland, buy a ledger, upload his seed character on that ledger, and he's got all of it. And then he can just throw out

In his head, and he can get access to his coins there. Like, talk about immutability and, and portability. Portability, you can't beat it. That's, it's gonna be-- and you, you factor in generational trends, the fact that millennials have just taken over baby boomers, and the generation under us are more digital. China, eighty percent of payments in China are, are digital off the mobile. It just resonates with, with the, with the upcoming generation. Digital gold is gonna make a lot of sense. We just need this technology to mature. Presently, a technology in its infancy, there's a lot of volatility, so it's not truly a great store of value. But as technologies and commodities mature, the volatility gets sucked out. You know, gold, soybeans, oil, they've been around for hundreds of years, right? And, and they're less volatile because the supply is better controlled. If, if you're an oil company drilling oil, you have a trade desk. You're, you're hedging out your futures and forward contracts twelve months. You're- Next, you're locking in margin and that reduces volatility, and when the volatility is reduced, it's more usable for the end user, and, and that's how those commodities become usable and stick around. Bitcoin right now, we have miners in China or wherever who just puke their, their, their supply. They're the ones who are the suppliers, right? Bitcoin is probably gonna be digital gold, a commodity, and right now the people that are controlling the new supply, they just sell at will, they market order when they get their coin from the pool, and that creates volatility, and, and then it's not as good of a store of value, and then it's not as usable for the, for the, for the populace. But early adopters are getting into it. So once we get more And more maturity on the supply side, the miners, which we're seeing, and we get better financial products, which we're seeing, this is all happening right in front of our face. CME futures, backed options, that's gonna reduce volatility. When that reduces volatility, this becomes a more effective store of value, and therefore it becomes more usable, and therefore it's more of a digital gold, people can use it. So right now, Bitcoin is a commodity in its infancy, as that matures, it improves the narrative radically.

And so- Looking out to the coming halving, right? So we are in late March now, the halving is predicted for, call it ninth or tenth of May, so just a little over a month away, and so what we spoke about earlier is kind of getting at that idea that there might be a couple months of, you know, shakeout before the breakout, and I guess over time, just those investment funds and the hodlers and the people who are just stacking will basically keep purchasing new bitcoins and there'll just be less selling pressure. Continually coming from the miners because of the halving. So is that basically your outlook on the halving in the next few months following?

So, like funds and stuff buying Bitcoin because of the halving?

Yeah, and also just what happens to Bitcoin as an overall ecosystem over the next few months? I think historically we've seen the halving happens and then it's kind of the price starts to rise a few months later. Is that, essentially what your, view is on what's coming?

So what we expect, there's, I think there's three dynamics. It's kind of like this perfect storm for Bitcoin. Number one, the sell-- the supply, supply side economics improve, right? The, the one thing that is a fact is that the amount of supply of Bitcoin is gonna get half, right? So if you have fifty percent less Bitcoin to sell, that's great for the network, right? That, that sell pressure, fifty percent potential is removed. So that's, that's exceptional on the supply side, economics for the price of Bitcoin. Now, what does that do? It-- everyone knows that halving is typically bullish People understand that this supply side, economics is gonna improve, so that improves sentiment into the system. You want, you know, it's, it's, it's, it's, it's improved sentiment on the, on the demand side. Investment funds, hodlers, they naturally are gonna try and lean bullish. They wanna be bullish because they're going, "Oh, the heaven, oh, less, less sell pressure, less supply, this is good." And, and once prices start to improve, they'll chase the momentum because sentiment improves on the demand side. Supply side economics improve 'cause Fifty percent less sell pressure, that's gonna flow into the investment funds and the hodlers, and that's gonna give them positive sentiment, and it's, you know, markets are driven by sentiment, right? So, so if, if they naturally-- Right now, I think everyone's just very scared because of the US equities and, and, and what happened in Bitcoin, but overall, all these participants want Bitcoin to go up, and, and, and so it creates positive sentiment if we get price to start tick- Picking up, I think people are gonna chase the momentum because of that positive sentiment. So, so what that does is it carries over im-pro- an improvement on the demand side as well. And then there's a third factor in there, which is all the debt financing, collateralize, collateralization of Bitcoin, that could be a whole nother lever. You know, it, it wiped, it, it created a bunch of margin calls on the downside because people were overlevered and, and got wiped out because there was such a nasty sell-off. But a lot of miners, they're starting- And to collateralize their Bitcoin, and that reduces sell pressure on the network, right? So they get their Bitcoin, and rather than selling it, they can, they can collateralize it with a lender, and they get, you know, USDT or Dai or whatever, and that, and now they're able to get cash and pay their electricity bill. So the electricity bill is getting paid without having to sell Bitcoin, and, and, and it's essentially removing supply off the network. You know, we're kind of going through a reset because everyone got wiped out, on the margin calls People are gonna start collateralizing their Bitcoin again. They won't have to sell their Bitcoin, they'll be able to fund their electricity expenses, and, and what that will do is remove sell pressure, and it's another lever of, of basically improving the supply side. When you couple all these three together, that's how you position for the next leg up in Bitcoin.

Fantastic. That, yeah, that's a really great, explanation there, and, I think it's been a, yeah, it's been a, it's a great report. I recommend, listeners And, if listeners want to follow you online or keep up with Blockware Solutions is doing, where can they find you guys?

So you can, you can find me on Twitter. We, release a lot of information off my Twitter, mjd, so mjd s o u z a two, so at that, mjd'souza2. You could also follow our Blockware Solutions team, it's at blockware team, and then of course, check out, check out our website. We have a miner resource center, you know, calculators, projections Of difficulty, all of our hardware deals, that's blockorysolutions dot com, and that's also where we print our research. Join our newsletter, we'll, we'll send out our research reports as well.

Fantastic. Well, I've really enjoyed chatting with you. Thanks for joining me. Likewise.

Thank you so

much. I found a lot of interesting insights out of that interview and make sure you check out the transcript for the podcast as well at stephanlivera.com/162 for this episode. Make sure you subscribe in your podcatcher applications and give the podcast a review just to help me out and get found by other people. Thanks very much, and I'll see you in the citadels.