Matt D’Souza CEO of Blockware Solutions joins me to talk about his team’s recent research piece on Bitcoin Halving and analysis from a mining perspective. In this conversation, we chat: 

  • Market participant profiles
  • Miner electricity distribution
  • Shut off and breakeven cost
  • Mining Rigs
  • Scenario Analysis
  • Why some miners operate at a loss
  • Difficulty adjustment dynamics
  • Why Efficient miners welcome the halving

Matt D’Souza links:

Sponsor links:

Stephan Livera links:

Podcast Transcript:

Stephan Livera:

Matt, welcome to the show.

Matt D’Souza:

Hey, thank you for having me.

Stephan Livera:

So, Matt, I know you’ve done some pretty cool work here with this recent Bitcoin Halving and mining analysis research report just recently released and that is from 17th of March, 2020. So but let’s start with a little bit about you and what is Blockware solutions and how did you get into Bitcoin mining?

Matt D’Souza:

Yeah, that’s a great question. It was, you know, I really started investing in this space in 2015 and 2016. I launched a digital currency hedge fund hedge fund called blockchain opportunity fund in 2017 and it was far more Ethereum focused, far more web 3.0 focused. And then probably around quarter three of 2017, 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 U.S. And China. And that’s really how we launched blocker 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 the spending on web applications for Ethereum and web 3.0. The amount of spending in the Bitcoin network, the network effects that’s created dwarfs web 3.0 and, everything else in blockchain, you have billions of dollars worth of infrastructure, electricity spending, facilities spending to secure the Bitcoin network.

Matt D’Souza:

That’s a network effect. That’s, power. And that allowed me to start to deeply research Bitcoin and understand it more. And the fund actually did a significant pivot in 2018 and, and we’ve had more of a investment thesis in Bitcoin. We still believe in web 3.0, but there’s been a pivot due to that. I don’t understand it. And now Blockware solutions, we’ve grown significantly. You know, got, we were healthy through 2018 we had a great year in 2019 quarter 1 in 2020 is our best quarter. So over the past 12 months, we’ve probably sold about 30,000, 86 to the U.S. market, placed about 25 megawatts worth of miners in hosting facilities. And in quarter four of 2019, I launched another fund. It’s a Bitcoin mining fund with my partner Mike Stelzner. It’s called Blockware mining or mining in Kentucky. We’re running about 180 Petahash and it’s a three prong strategy.

Matt D’Souza:

We self mine, we resell our mining rigs, we allow miners to mine in our facility. And what we’re doing is we’re looking to bring as much hash to the US as possible and we’re making it really easy for us miners to mine in the U.S. And do it economic. We’re getting miners all in costs about 5.8 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 exceptional group of technologists that are managing these units. This group, they, were some of the first miners on Zcash, Sia coin. And, dash they controlled over 10% of the network there. They’re called Naveah exceptional technologists. Some of them had been mining since 2011, 2011. So that’s what we’re marrying together to really give US miners a competitive advantage in this space. Cause mine is just all about survivability and that’s what we’re bringing. So miners don’t pay for cap ex and they only have their electricity rate. They get to maximize their hash. And that’s what’s gonna make them successful.

Stephan Livera:

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

Matt D’Souza:

Yeah, it’s actually very inaccurate. I mean it’s, what we’re very good at is strategy and models. When you have other minds in the world, they may be paying a hundred, 150,000 per megawatt to pay for their transformers electrical infrastructure. They’re building and then they’re getting maybe 3.2 cents. So when you model all of that out and you put in the cap ex, amortize it 5.8 cents without having to pay for a facility and all that infrastructure and just buying mining rigs in and just deploying cash to Terahash, that’s like the equivalent of of 3.6 cents electricity and paying 150,000 per megawatt in build out. So it’s two different models. You can elect to deploy to just mining rigs and get a rate of about 5.8 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 a table. How a miner with the recent electricity run in the old generation, S9 has a higher break even price than a miner running 7.5 cents electricity running the next generation S17.

Stephan Livera:

Yeah. That’s a really interesting analysis. And let’s break into that. I think let’s start though with the market participants though. So as you spell out in your report, you spell out that the three that you assess, there 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?

Matt D’Souza:

If you’re, anyone who’s involved in Bitcoin for the most part is pretty bullish. I mean, all these investment funds and HODLers, they’re just about all alone only, and they have high conviction, but the thing 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 3-4 year life cycle. They’re buying a hosting fee. They’re buying a warehouse and repurposing it into a mining facility, ripping up 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 18 months and they can’t just turn around in two weeks and sell that stuff.

Matt D’Souza:

Right? It’s, illiquid. It’s not as repurposable 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 going on in the space, which creates sell pressure on the Bitcoin network every day. You know, I think it’s 1800 Bitcoins a day, 54,000 Bitcoin a month. That is issued you know, pre Halving and that’s how much Bitcoin is released to miners. You know, when you think about how do prices get affected, it’s not, the trading volume on exchanges is really churn. It creates volatility and it affects price more short term. Right? BitMex had that liquidation. Bitcoin was at 7,800. It fell all the way to 3,800 but look, we’re right back at 66 right?

Matt D’Souza:

That’s, churn and volatility 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 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 the miners. They have to sell their electricity are their Bitcoin to fund electricity. Sometimes they’re buying more mining rigs and we need positive sentiment. We need positive sentiment from funds and HODLer’s to be buying bitcoin as well to counterbalance the mining sell pressure.

Stephan Livera:

Yeah. That’s a really interesting way of putting it because you’re saying basically that investment funds might, although generally are 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 HODLer’s , 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 they’re in some way, there is a commitment there and that’s a pretty interesting fact that you could almost say a Bitcoin miners are more bullish than you are, than the typical HODLer.

Matt D’Souza:

Exactly. And when you put things into numbers, 54,000 Bitcoin released every month is a quarter billion dollars. That’s $540 million of potential sell pressure going to miners to sell for their electricity. Now they don’t sell it all, but that’s the potential. Now, how do you counterbalance that? Are funds and HODLer’s raising a half a billion a month, no chance. 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 accumulates to about 40 to 50% of that, you know, half a billion. That’s what needs to get spent unless a mine, you know we’re getting some interesting minds out there and are raising a ton of capital. You know, it’s fun. It’s there. VC funds, hedge funds, they’re raising a ton of capital, they’re getting excellent balance sheets and they’re just accumulate in 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’re holding it. That is excellent for the price of Bitcoin.

Stephan Livera:

Yeah, it’s interesting to put it that way. And so yeah, 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 7 cents per kilowatt hour. And then there are some that are below, you know 3 cents a 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 and layers?

Matt D’Souza:

That’s a great question. So, Blockware solutions. We’ve, a majority of our business, we sell a majority of that North America, a lot of the U S market. But you know, I’ve been asked to speak around around the world at different conferences. You know, I was in Chengdu, the miner update team through a great conference in Chengdu in October. I’ve visited these large mines in 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 seventeens to Venezuela last week. So all over the U.S. Canada. So we, you know, we talked to these clients, what are you’re 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.

Matt D’Souza:

We talk F2pool almost every two or three days. We talk to BitMain everyday, and Canaan. So we’ve gotten excellent peer review 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 a worker that’s 13.5 Terahash or is it 73 Terahash. And that’s how we know it’s an old Gen verse 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 the Canaan 10 Terahash or eBang is the 13 Terahash. I know a colleague who is mining and Kazakhstan, he, you know, really, really intelligent individual.

Matt D’Souza:

He raised some family office money and they launched like in November of 2019 you’d think? All right halvings coming up they’re buying next gen’s no, they have sub two cent power and they went and bought a bunch of the ebangs because their earn back 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 water at the top of the mountain, you have gravity and the water is going to go to the lowest point. It’s going to trickle down to the lowest point. And that’s what’s going to happen in the mining rig space. The S9’s, if someone has 6 cent electricity or 5 cent electricity, they have to sell it. You won’t be able to mine it at a hosting facility and it’s going to the cheapest power in the world.

Matt D’Souza:

It’ll, it might take three times. They might sell it to someone with three cents and then, and then it’s going to become unprofitable for the individual three cents and he’s going to sell it to someone with subsidized power and it’s all going to flow and trickle down to the cheapest power in the world. And these S9s are flowing to Kazakhstan, they’re flowing to Venezuela, they’re flowing to subsidized power in Iran. We have a client in Arizona who’s got solar power and he’s got zero cost and they’re flowing over there. So markets are fairly efficient. These S9s many of them are going to shut off and become obsolete. Many miners are just not going to want to deal with doing the shipping and stuff and they’ll junk them, but other ones are going to flow to the cheapest power in the world. Someone may have a negotiated deal with the utility where the power is basically free or they’re just paying variable costs, you know, the cost to deliver the electricity. So that’s how it’s going to work. These will disperse a cost across the globe and get to the cheapest power.

Stephan Livera:

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 old generation Bitmain S9 and the next generation S17. Can you just spell out a little bit for the listeners around, you know, what’s that dynamic there and what are the different generations?

Matt D’Souza:

That’s a great question cause this really influences the market. I think we focus on 2, units, the S9, which is 13.5 Terahash and consumes 1400 Watts. Now the S17 plus, which is what we’re running at Blockware mining and that is 3 Terahash and consuming 3000 Watts. So it’s about, it’s about 2.1 times the amount of energy consumption, but it’s about 5.5 I think it 5 or 6 maybe. Yes, 6 times the Terahash output. So 2.1 more watt consumption, but six about six times the Terahash output, right? So, you’re consuming 2 times the Watts, but getting 6 times the output. That is radical efficiency, significant efficiency. So what does that, what does that do? You know, before I needed to run 70 machines, 70 S9’s to get one Petahash now I’m running 14 machines to get one Petahash 70 S9 to get one Petahash, 14 S17+ to get one Petahash and the watt consumption, you’re running the math, you’re I think it’s so 14 x 3000 Watts = 4.2 Right?

Matt D’Souza:

And the S9, 1400 Watts times, 70. Here I got my calculator eight times 1400 that’s 98,000 Watts. So 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 these high electricity miners in the game. So people with 5 cents, 6 cents that are at hosting facilities, they can mine very profitably if they’re in the NextGen. But if they have S9’s, they’ve blown out, you’ve gotta be two and a half cents or lower because of, you know, difficulty in the price of Bitcoin. So it’s a complete game changer.

Stephan Livera:

Yep. And so, I guess that’s, so you’re outlining there, why if you have a high electricity cost, not like crazy high, but like reasonable 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 and the you can make a work even with the old hardware. Now the other question I guess 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 elctricity cost.

Matt D’Souza:

You hit it on the head. There’s an opportunity cost, the opportunity cost of depleting your Bitcoin treasury to upgrade to NextGen. 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 shutoff price. You’re not really lowering your breakeven price that much and it just doesn’t make sense to take on spending, you know, 2000 or 2,500 for NextGen depleting your Bitcoin and it’s a game of marginal returns.

Matt D’Souza:

You’re hitting marginal returns cause your electricity expense is lower. But if you’re at 6 cents, you have no choice. You got to get the NextGen. And that’s what’s really cool about this and how we’ve modeled it all out. You know, Blockware mining. We’re at 5.5 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 5.5 cent rate, not deploying 150 or $300,000 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.

Stephan Livera:

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 break even costs if you are on S9 is $7,762 Bitcoin price. But the break even cost at S17 is $2,700. 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 capitulation and then why is that so commonly misunderstood or what’s wrong about people who say “Oh miners are going to capitulate and it’s all over for Bitcoin”?

Matt D’Souza:

It’s I call it a healthy cleanse. It’s look at what happens. It’s an efficiency. We’re creating efficiencies in the market. You know, I think one of the biggest, I don’t want to get too deep into what’s going on with the economy and all that stuff. It’s going to be a big tangent, but when you do bailouts and all that stuff, you’re keeping inefficient companies in the game. There’s things that you need to bill out and kind of intervene a bit, but there’s no reason everyone should get a bailout. If you’re an inefficient company you go through bankruptcy, an efficient company comes, takes your assets and takes pieces of your departments that are healthy and profitable and the stuff that’s unprofitable gets wiped out and that’s healthy for an economy. Mining is one of the best examples of this.

Matt D’Souza:

You get a miner who overspent on their facility, have S9s running, running at 7 cent a watt electricity, they should get wiped out. They, they are going to get blown out. And what happens is there’s 12 and a half Bitcoin that’s released that’s going that every, you know, every block that’s going to go to whoever is mining. So once 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, it gets distributed to everyone else. And that improves the margins of the miners that survive. And that’s what’s critical. It’s a self correcting mechanism. 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 is going to adjust 60 or 70%.

Matt D’Souza:

It’s going to be one of the largest ever. The price of Bitcoin went down. Everyone’s experiencing margin compression. All these miners running S9’s probably have shut down and we watched the pools. All the Asian pools were really shutting down. So I think it’s a lot, in Russia and China that are actually shutting down the S9 there. They’re no longer gonna earn Bitcoin and that Bitcoin is going to go to the guys who are running S17s and who are running efficiently and their margins are going to get better. It’s going to, right now, Bitcoin’s at 6,600 in, in a couple of hours as difficulty adjusts 16%. It’s going to be like Bitcoin being at 7,800. That’s how it works because the margin, because of difficulty, profit goes up 16% and that’s what’s critical. Capitulation is a very good thing. It’s removing the inefficient miners.

Matt D’Souza:

They no longer 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 Vanguard account. These are the large funds who know what they’re doing and, and when the market drops a bit, they don’t just, they don’t sell. They’re coming in and they’re supporting the market and they’re buying 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 accumulated with guys who’ve been doing this for years who have seen this show before and they’re going to 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.

Stephan Livera:

Yeah, that’s really fascinating. So I guess just to summarize for listeners, it’s something like as the Bitcoin price tanks, 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 strong holders they want to hold. And so that in some way diminishes or decreases the downwards sell pressure that exists just permanently or just continuously on the network.

Matt D’Souza:

You’re writing our second report. You got it.

Stephan Livera:

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 more people into the market and then some of those people are inefficient and then they just get wiped out in the next crash?

Matt D’Souza:

Yeah, it’s totally cycles and just, you know, you explained it really well. I think we really need to give a tip of the hat to Satoshi. I mean, one of the most ingenious pieces of the Bitcoin network is difficulty. It’s just a self correcting mechanism that maintains the margins of the efficient miner. When too many miners come online and Bitcoin corrects, you know, too many miners come 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 going to be the opposite. Difficulty is going to, it’s going to Bitcoin, when Bitcoin starts to rise, everyone starts buying mining rigs. You know, 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?

Matt D’Souza:

They, it’s fear and greed. So when Bitcoin starts to rise, all these miners start deploying to mining rigs again and, and there’s that 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 is going to punish all these miners that have chased price and deployed mining rigs. If you’re going to get difficulty’s going to go up. Mining margins are going to compress. And once Bitcoin corrects in price those inefficient miners get wiped out again, and the cycle continues, then difficulty will be a positive where it’s gonna adjust lower and restore margins. So 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 margin compression. And when you get miner capitulation on the downside, bitcoin price corrects miners shut off, difficulty adjust favorably and margins get. 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 brings margins back for those efficient miners over the intermediate and longterm.

Stephan Livera:

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?

Matt D’Souza:

So it’s, it’s going to be extremely healthy. We, believe that the miners at about 6.5 and there’s differences. You know, you actually brought this up, I kind of missed it explaining it. But if you’re paying 6.5 cents, that’s not horrible. If you’re not paying anything towards capex. If you’re just paying for machines and you’re getting 6.5 that’s pretty good. If you’re getting three sons, you’re paying for infrastructure and all that stuff, then that’s how that balances out. So that’s critical. I don’t recommend miners who are paying 6.5, 7 cents, eight cents, and they’re running it at their house, paying for their own infrastructure, transformers build out, they’re going to get wiped out. That’s horrible. So that’s number one. When you see those layers of people at 5.5, 6 and a half, 7, they’re in hosting facilities, but that’s also their break even price at the end of the day.

Matt D’Souza:

So I just wanted to clarify that. Now when you’re discussing the halving and what’s happening, we encourage the Halving. We don’t fear it. We welcome it because we understand what it’s going to do and what it’s going to do for our profit margins over the next six months. Being at our layer, 5.5 for blockware mining is extremely healthy. What’s going to happen is it’s going to be, it’s going to be like an onion. There’s going to be layers that peel off this onion, those S9s are gonna blow out. If Bitcoin is still around 10,000 after the Halving. S9 are going to blow out, that’s all the old generation. So S9 from 7 cents to probably two and a half, three, two and a half cents, they’re going to blow out. They’re going to shut off. Now you have that other tier, of those T2T30’s InnoSilicon, they’re like mid generation.

Matt D’Souza:

Those are all going to blow out too, up to probably five cents. They are going to blow out. And if Bitcoin happens to be at five, six thousand after the halving even six and a half, 7,000 miners with 7 cents running S17s are going to have to shut off. So people at six and a half and lower running next gen, they’re going to have an amazing difficulty adjustment, right? When all those miners shut off, difficulty is going to adjust significantly. 30-40% and their margins are going to come back. There’s going to 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, they don’t, if they don’t pay their hosting contract, they lose their equipment. So they’re not going to just let their equipment go.

Matt D’Souza:

They’re going to wait to deplete their balance sheets and all that. So it might take two to four months of friction for all of that to wipe out. And there’s other large miners who have negotiated rates with utility companies that they have to consume a specific amount or their 4 cent electricity turns into five and a half. There’s all types of deals out there that are going to make some miners operate at a loss, which creates more sell pressure ’cause all the Bitcoin they’re mining is going to get sold and then they have to tap into their treasury and that has to get sold to. So that’s more sell pressure. So we need all that to blow up. I think, I don’t like price targets, 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 is going to adjust and profit margins are actually going to be better for these efficient miners running the S17 pluses and in that six cent band or lower their profit margins are going to be better after the halving than before.

Stephan Livera:

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 in place where they can’t just immediately turn off or not all of them can at least. And then some of them are playing the speculation game as well, where they may temporarily just wear the loss because they’re kind of hoping for a longterm bullish aspect.

Matt D’Souza:

And that’s the worst part. I mean, I think that’s what really drove the two downturns. The one, after we peaked out in June, 2019, you know, because I run the hedge fund as well and I trade OTC with one of the largest groups in Chicago. We’d discuss analyses and they were telling me how their miner mining clients, they pumped the brakes. So when Bitcoin was going from 8,000 to 13,000, they stopped selling their Bitcoin. They were looking at 20,000. They’re not, they weren’t interested in the moon. They were interested in Mars. So that’s where they thought we were going. They stopped selling their Bitcoin and then Bitcoin rolled over at 13,000. It went till, you know, 12,000, 11,000, 10,000 and these guys started feeling the pressure and they started puking and, and that’s what drove it. You know, that’s what drives it down.

Matt D’Souza:

It’s miners that don’t make, create a plan and they don’t trade the plan. You got to 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 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 January, I was so concerned, I heard the 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 7,800, they’re all going to 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 U.S. Equities really driving all assets lower. It was just a perfect storm for the sell off. So

Stephan Livera:

Yeah, that’s an interesting one. And when it comes to electricity deals, right, so as you say, it’s a very important factor. What is your electricity 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 in a good electricity rate and keep that rate?

Matt D’Souza:

So in the, U.S. There’s actually far more stability. Like ,I just couldn’t, there’s so much volatility in Bitcoin mining. I don’t know how people do it and some of these other countries, cause you can just get shut down over night. There’s like that there’s enough volatility and problems in Bitcoin mining. I don’t know how people do it with the, with you know, that you, you don’t get excellent uptimes with the power. And you know, if your Internet’s down 15- 20% of the time, what good is that your revenue is down 20%. Right? A lot of these countries have blackouts and 20% of the day power is shut off and people are running mining rigs there. So to us it’s, you know, from a risk management perspective, I don’t get involved in an asset or I could just lose, there’s a, there’s a 15 or 20% chance where I just lose because it’s not in my control.

Matt D’Souza:

That doesn’t make sense to me. And that’s why it’s so critical to be deployed in like the U.S. Or Canada where there’s stability and, and the municipalities are working with you and they appreciate you because they have, you know, a lot of mining operations. We’re not running them in New York City or Chicago or LA. You’re going into rural areas where they have excess electricity, cheap land. Right? Markets are efficient. You’d go where the power’s cheap, the utilities have excess, and you’re, you’re, it’s a communal relationship. Now I think when utilities a lot, there’s not a lot of negotiation power, but you have to go to places, you know, you want to try and get this cocktail of cheap power, cheap land and a good climate. It’s, difficult, but it’s out there. You gotta do, you gotta do the work and if you can get a place that has a lot of excess power, then, then you have a communal relationship, right?

Matt D’Souza:

But you’re not really going to 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 got a really savvy group in the state of Washington. They’ve been around the block for a few years and, and they’ve done a great job with, with negotiating their contracts. I know there’s sub three cents and they’ve put in a lot of work. They did the due diligence and they got it done. So it can be done.

Stephan Livera:

Yeah. And is there, do you face, I suppose in the U.S. 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. Has that been your experience?

Matt D’Souza:

Yeah, I mean we are a U.S. 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 that allows us to get debt financing as well. So, absolutely. I mean, we pay our taxes, everything. This is, like I said, this is a game. Mining is a game of not screwing it up. 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 a very lucrative operation. You know, with our mining fund, Bitcoin is down. I don’t know what it’s down on the year. Maybe 30%. We’re up, we’re up significantly. We make money in a sideways and downward market. If you’re holding Bitcoin, you’re losing money.

Matt D’Souza:

If you’re mining and you have a diversified product like ours where you self mine, you resell rigs, you take on hosting contracts, you have three revenue streams, right? And that’s allowed us to significantly outperform the price of Bitcoin. So from our perspective, 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, we’re going to be in the game. 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 invested in equities or assets, you make a majority of your money in a month or two or the whole year, you know? And when Bitcoin went from 5,000 to 10,000, margins were insane.

Matt D’Souza:

I mean, earn backs 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 is going down as it is and lead times are two and a half months and out of nowhere, Bitcoin sprints up to 10,000 and we have our mining rigs running, we’re going to make, we’re going to make eight months worth of money in two months. So you gotta be diligent, you gotta be doing the right things, just stay in the game and you’re going to have segments of the year, one or two month segments of the year where you’re going to make 80% of your money. So you gotta be positioned.

Stephan Livera:

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. And then it just, during that period, you’re just minting it. Right. So that’s a really interesting and it’s kind of aligns as well with even if you look at people like Thomas Lee who talks 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.

Matt D’Souza:

Exactly, exactly. And unfortunately, and 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 mind and 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 mind and rigs two and a half months later in margins have compressed again and normalized. Right. So that’s why as you said, you gotta be in the game and position when the opportunity, if the opportunity’s there and you’re not ready, you miss the opportunity. So you have to, you have to be positioned before the opportunity comes.

Stephan Livera:

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 going way, way 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, therefore mining how you think about mining, and I know this is kind of maybe 15 years out. Do you have any thoughts around what that looks like?

Matt D’Souza:

Yeah, 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 we need to put things into perspective. Right now, if I have 100,000 in cash and I park it in a bank, I’m paying a fee in Germany, you’re paying negative interest in Japan, you’ve been paying negative interest rates in Germany, now you’re paying negative interest rates. So we can go to I believe if this matures out five, 10 years, Bitcoin’s going to be at a significantly higher price. There’s going to be miners, there’s going to be holders with a hundred million dollars worth of Bitcoin, $10 million worth of Bitcoin. If I buy gold right now and I buy $1 million worth of gold, I pay insurance, I pay, the storage costs. So I’m paying essentially a negative interest rate right now if I have Gold, a significant amount, right?

Matt D’Souza:

It’s in a vault. You don’t keep it in your house if you’ve got, a significant amount. So when you look at the parallel systems or comparable assets, people are already paying a fee for to store 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 if we have a robust system in 10-20 years where, this stuff is valuable and it’s like digital gold, while people are going to be willing to pay a quarter percent and you don’t have to, right? You don’t have to put it in a vault because you have your private keys. So that cost isn’t there.

Matt D’Souza:

But I’m willing to pay a quarter percent to the miners to subsidize them because the comparable world like gold or, currencies with negative interest rates are already there and they’re probably more expensive. And, if I want to move my gold, it’s not portable, like digital currency, jump on a plane, 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 if it’s more valuable, we have the incentive to, pay that quarter percent or half a percent to miners to secure the network. And right. Like that’s, what we’re doing in the real world with gold insurance, storage costs all that stuff. So, so it’s, when you think about what the real world looks like, that’s normal.

Matt D’Souza:

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 going to happen with Bitcoin is lightning network and to take off is going to be a payment processor. I don’t really think so. I think it’s going to be digital gold. And if that’s the case, you don’t have a ton of transactions. And so therefore you don’t have a lot of transaction fees. People should be,\ holding their Bitcoin as a hedge or whatever. You know, when you get, you get these multi, these mega net worths 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, $20 million paintings, diamonds, property all around the world. And Bitcoin is just going to be another one.

Matt D’Souza:

It’s going to be another asset to the cocktail of store of value. And think about how attractive that is to the mega net worths. I’m talking about the billionaires to, have this 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 24 words. So you know, on a ledger you have your 24 seed words. They’re not even they’re, I have a, I have a colleague who’s been mining since 2011 he has a brain wallet, so he’s memorized all 24 words about every two weeks. He tests to assure that he’s got all 24 words memorized and 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 this and then he can just throw out that ledger, go fly to Australia.

Matt D’Souza:

He’s got his 24 characters memorized in his head and he can get access to his coins there. Like, talk about immutability and portability, portability. You can’t beat it. That’s it’s going to 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, 80% of payments in China are digital often mobile. It just resonates with, with the, with the upcoming generation, digital gold is going to 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 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 hedging out your futures and forward contracts, 12 months, you’re locking in margin and that reduces volatility.

Matt D’Souza:

And when the volatility is reduced, it’s more usable for the end user. 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 supply. They’re the ones who are the suppliers, right? Bitcoin is probably going to be digital gold of 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 then it’s not as good as a store of value. And then it’s not as usable for the populace, but early adopters are getting into it. So once we get more commoditization 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, Bakkt, options, that’s going to 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.

Stephan Livera:

Yup. And so looking out to the coming halving, right, so we are in late March now the Halving predicted for, call it 9th or 10th 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 of months of, you know, shake out before the breakout. And I guess over time just those investment funds and the HODler’s 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 and the next few months following?

Matt D’Souza:

So um like funds and stuff. Buying Bitcoin because of the Halving?

Stephan Livera:

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?

Matt D’Souza:

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 supply supply side economics improve, right? The one thing that has effect is that the amount of supply of Bitcoin is going to get halved right? So if you have 50% less Bitcoin to sell, that’s great for the network, right? That sell pressure, 50% potential is removed. So that’s exceptional on the supply side. Economics for the price of Bitcoin. Now what does that do? Everyone knows that having is typically bullish, people understand that this supply side economics is going to improve. So that improved sentiment into the system you want, you know, it’s improved sentiment on the demand side, investment funds HODLer they naturally are going to try and lean bullish. They want to be bullish because they’re going all to Halving all less, less sell pressure, less supply.

Matt D’Souza:

This is good. And once prices start to improve, they’ll chase the momentum because sentiment improves on the demand side. Supply side economics improve cause there’s 50% less sell pressure that’s going to flow into the investment funds and the HODLers and that’s going to give them positive sentiment. And it’s, you know, markets are driven by sentiment, right? So, if they naturally right now I think everyone’s just very scared because of the US equities 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 priced to start ticking up, I think people are going to chase the momentum because of that positive sentiment. So, so what that does is it carries over, an improvement on the demand side as well. And then there’s a third factor in there, which is all the debt financing, collateralization of Bitcoin.

Matt D’Souza:

That could be a whole another lover. You know, it wiped, it created a bunch of margin calls on the downside because people were over levered and got wiped out because there was such a nasty sell off. But a lot of miners, they’re starting 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 collateralize it with a lender and they get, you know, USDT or Dai or whatever, and that now they’re able to get cash and pay their electricity. So the electricity bill is getting paid without having to sell Bitcoin. 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, but people are going to start collateralizing their Bitcoin again, they won’t have to sell their Bitcoin. They’ll be able to fund their electricity expenses. And what that will do is remove sell pressure and it’s another lever 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.

Stephan Livera:

Fantastic. Yeah, that’s a really great explanation and it’s a great report. I recommend listeners go and have a look at it and if listeners want to follow you online or keep up with Blockware solutions is doing where can they find you guys?

Matt D’Souza:

So you can find me on Twitter. We release a lot of information off my Twitter @mjdsouza2. You can also follow our Blockware solutions team. It’s @blockwareteam. And then of course check out our website. We have a miner resource center, you know, calculators, projections of difficulty, all of our hardware deals. That’s blockwaresolutions.com. And that’s also where we print our research. Join our newsletter, we’ll send out our research reports as well.

Stephan Livera:

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

Matt D’Souza:

Likewise. Thank you so much.

Comments (4)
  1. Hi !

    Not sure I understand how all that havling dynamics and miners actions could impact btc price in short term.
    Sorry for being sucha a noob but does the interviewee suspect that BTC price will still drop lower before halving and in the moment or some short time after the halving since the less efficient miners will sell-off their coins ?

      • Thank you Stephan, you are very right. I think I just did a little bit of projecting my line of thought back there, sorry.
        So if I could continue with that question, based on the dynamics around the halving what would your thouths be regarding the price ?
        Would it be correct to speculate that its very probable that the btc price might still drop basically due to some of the miners capitulating when the block revard gets cut in a half ?

      • I was just trying to remove that question since it looks like a “price target” kinda a question. And those kinda suck. But I couldnt edit the comment anymore, sorry 🙂

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