Historically, Bitcoin Mining as an industry was dominated by China. John Lee Quigley (formerly of Compass Mining, and now independently consulting) rejoins me on the show to talk about his recent report on the state of Bitcoin mining. We talk about the various factors going into this generational shift. Listen to this episode to understand some of the dynamics, gleaned from John’s in depth research and interviews on the subject. We chat: 

• Historical reasons for China’s dominance
• Why its changing now
• Mining equipment upgrade cycle
• Capital market access
• Regulatory certainty
• Downsides of this shift

John links:

• Twitter: @bitcoinnomadic 
• Substack: Adaptive Analysis – Substack 

Prior episodes:

• SLP158 John Lee Quigley – How Does A Bitcoin Price Crash Impact Bitcoin Miners?
• SLP259 Whit Gibbs – Bitcoin Mining For All With Compass Mining
• SLP275 Pavel Moravec – Slushpool Signalling For Taproot
• SLP162 Matt D’souza – Bitcoin Halving Analysis: Bullish For Competitive Miners

Sponsors: 

• Swan Bitcoin
• Hodl Hodl Lend
• Compass Mining
• Unchained Capital (code LIVERA)
• CypherSafe (code LIVERA)
• CoinKite.com (code LIVERA)

Stephan Livera links:

• Show notes and website
• Follow me on Twitter @stephanlivera
• Subscribe to the podcast
• Patreon @stephanlivera

Podcast Transcript

Stephan Livera:

John welcome back to the show.

John Lee Quigley:

Hey Stephen, how’s it going? Thanks for having me back.

Stephan Livera:

Yeah, man, You’ve done some great work on this report for compass mining and I thought, oh look, it’s a good time to get you back on and talk about the mining industry and where it’s come from and where it’s going as well. So do you want to just tell us a little bit about what you were doing with this report?

John Lee Quigley:

Yeah, sure. I’m glad you, you enjoyed it. So just to give a bit of a background compass mining launched their two-sided marketplace back in and goes around October, 2020, and obviously it’s grown a lot, become a huge success since then. But around the time of the launch, we also wanted to start a research initiative called the bitcoin mining index to give some more insights and information to Bitcoin miners about the about different regions, where they could mine. And we started off the first two research reports. The first one was on Russia. Second one was on Kazakhstan. We spoke to industry professionals in both these regions and put the report together. It took us about a month or two, each report. And by the time we’d finished our report, we kind of got a good idea of how the research process worked with speaking to industry professionals, et cetera, et cetera.

John Lee Quigley:

But by the time I was finishing there was north America mining was just becoming a bigger and bigger topic. And obviously we turned our attention to, to the north American region, but when we turned our attention to north American region, it also turned out this was going to be a completely different beast than Russia and Kazakhstan. Obviously the region’s huge, there’s a huge variety in jurisdictions across the country. And yeah. Then we set out on what would turn out to be five, six month research report, speaking to the biggest industry professionals in north America, trying to get as comprehensive as we could information on the energy market in the country, how sourcing hardware was changing for Bitcoin miners in north America. Also looking at the regulatory environment, the capital markets, what role they played. So it turned out to be a monster report and anybody listening, I would certainly recommend checking it out.

Stephan Livera:

Yeah. Excellent. And so one of the difficulties with this is when people are new, they just think of it all as one thing, right? Mining pools and miners, and they’re all the same. Well, no, they’re not. They’re actually distinct entities and they’re not all public facing or they’re all fully open about all that. And maybe that’s for good reason. So was that part of the difficulty then that you had to sort of go around and research and try to figure out who is open to speaking more forthright and others who were more, let’s say a little bit more private?

John Lee Quigley:

Yeah, so what I would say is one of the reasons we were able to carry out this report is prior to launching the compass marketplace. Whit was carrying out the hashr8 mining podcast, finding podcast for, for a long, long time and corresponding very closely with a lot of the biggest Western miners and managed to build some, some close, close relationships with them. So that really gave us the access, the tools and resources to be able to carry out the research without those connections research simply wouldn’t have been possible. And in terms of like some of the mining industry being secretive, blah, blah, blah. We’ve seen that a lot in China because the jurisdiction was more opaque from where it stood in the eyes of the law. So a lot of mining centers used to pose as cloud a cloud computing centers, or you might see a group of maybe five data centers.

John Lee Quigley:

And one of them will be a normal data centers if inspectors came. They showed them this one and the rest will be crypto mining centers. But when it comes to Western miners we’re seeing a completely different approach. The companies are trying to be more transparent more in line with regulation for north American mining pools we’re seeing them KYC the addresses of their connected miners. There’s definitely a big shift compared to compared to what, what mining looked like in China a few years Ago.

Stephan Livera:

Very good insight there. And so let’s talk a little bit about where we came from, and now it seems that there’s a lot of mining shifting into north America, but I guess just to set the scene for listeners out there, what was it like and why did so much of the industry in terms of Bitcoin mining, start off in China? What were some of the advantages that China had as a jurisdiction for Bitcoin mining years ago?

John Lee Quigley:

I mean, it’s certainly an interesting background story. The first ASIC for become mining came on the scene around 2013. Think what the Bitcoin market looked like back at that time? It was, it was completely different different than it is today. The asset class was maybe 10 billion, or under in terms of total market cap, the block rewards available to mine are much lower than they are today as a result. And what happened was the initial manufacturers obviously set up in China they were close to fabricators, such as TSMC, Samsung, et cetera. And back in the early years, it was obviously a very high-risk venture Bitcoin mining. And we’ve seen the propensity from Chinese miners to be willing to take this risk and what that gradually evolved into.

John Lee Quigley:

And what we’re seeing today is a more institutionalized market. In the early years of Bitcoin mining hardware, life cycles were super quick. Chips were innovating and improving and becoming smaller at a much greater pace than they are today. And as a result the hardware, the manufacturers were releasing had much shorter life cycles, but with the longer life cycles now we’re seeing hardware having a greater life cycle, more hardware is operating outside of China. It’s becoming more of a, margins are tighter. So we’re just essentially seeing a transition from an extremely high risk opaque industry to one that is more transparent, institutionalized, and yeah, hopefully going to be better and more decentralized for the Bitcoin network as well.

Stephan Livera:

Yeah, really interesting. And so just to touch on that hardware lifecycle point. So it’s, I guess it’s saying that in the earlier days, the technology was not at operating at the human limit right. In terms of like nanometers and things like that. So it was more important to be close to where the hardware was being made because you were constantly upgrading. And now it’s more like that hardware that you get, it will last longer, it might be three or five years, something in that range where that you buy this machine, and it will be generally profitable for you to mine with that. Whereas historically, you had to upgrade really quickly because of how quickly the technology was improving, such that if you had this old miner it was not competitive. Would you say that’s basically what was going on there?

John Lee Quigley:

For sure and this also played a huge role in keeping the dominance in China because personal business relationships play such a huge role in how Chinese business is conducted. They have a term called guanxi which is the personal relationships you develop within country and the role play. And because essentially mining miners have always scrambled to, to get as much hardware as they can. So there’s like this insatiable appetite for hardware and a limited supply. And when hardware life cycles were short, every new batch or new innovation that came out, it often made the old generation obsolete and Chinese miners would capture the biggest share of the new generation coming on the market. And this will also allow them to deploy their hardware in extremely attractive conditions because the difficulty level would not have adjusted yet to reflect this new, powerful hardware coming on the market.

John Lee Quigley:

So these miners would get these huge margins. And then by the time that the rest of the world could get their hands on this hardware, which would take much longer yeah, the conditions for mining will be, will be far less profitable. And also in the report as well, we were covering what the state of affairs looked like for say an American miner, looking to import hardware from say 2013 to 2015 compared to the current day. And it’s pretty ridiculous here in what they were doing in 2013 to 2015, like institutions would just be sending money to some random Chinese company, hoping that they deliver what they said they were going to deliver. Then they deliver it to a different place than, than what the customer requested and blah, blah, blah. So it was obviously, as you can see from that scenario it is clearly unfavorable to an institution getting, getting involved. And it’s like, starkly differs what we’re seeing today with publicly listed entities, such as Ebang and Canaan Bitmain and micro BT, also looking to go public by going public, they’re going to have to adhere to high professional standards and they will need to the level of professionalism will be far greater.

Stephan Livera:

Interesting point there. And I recall this is maybe this is more like an anecdotal story or a rumor that was a very common one was this rumor that some of the manufacturing would basically mine on the machine that customers had bought first before sending it out to them, because just because of how much more profitable it was to be first to mine with this new equipment. Right. Was that your experience that you would have heard that story as well? Right?

John Lee Quigley:

Yeah, of course everybody says yeah. Bitmain will like ROI your equipment before it gets to you. Just make sure it’s running. Okay. Obviously you can’t say for sure, but that’s that’s definitely what I believed to be the case.

Stephan Livera:

And because at that time time was of the essence, right. Especially in those days, it was all about getting that new equipment and plugging it in because every extra day or week that it took for it to ship to you, it was a massive loss. So just, I mean, it was massive forgone opportunity there. So

John Lee Quigley:

Yeah, I mean, as well, why do the manufacturers even sell these equipment? They’re money making machines. So when you consider that you’re entering you’re thinking in to a new angle and why do they sell these machines? Well, they can sell these machines at a huge premium to what they can generate as well, because in hot market conditions retail miners have been showing that they will buy at enormous enormously long payback periods. Also especially in the early days, for sure the manufacturers were getting the best of all worlds. They were able to mine under extremely profitable conditions, supposedly, or allegedly, and excuse me, and then sell on their hardware had extremely high premiums to their value as well.

Stephan Livera:

And the other difficulty in fairness, part of that is because it was such a boom and bust industry, right. We’ve seen these rises and falls in the price, which in turn impact the profitability of the different machines. And so what seems to be a funny trend that we saw it as well, is that because of the massive price run up that we saw from, 3000 in March, 2020 up to at the top around $60k recently, what we were seeing was a lot of old machines were now becoming profitable again, where previously they weren’t.

John Lee Quigley:

For sure. Yeah. I mean like efficient miners will always set up under attractive conditions. They’ll know what their input costs are. They’ll have established great relationships with the manufacturers, they won’t be overpaying for hardware because the manufacturers will treat their biggest and most reliable customers favorably, but in heated market conditions like on the secondary market and for retail miners, you’re going to see them pay enormous prices for hardware. And when things turn, what naturally happens is some of these miners enter into the red territory. They can’t make back the money to ROI on their hardware and they look to resell it and who’s going to be the natural people picking up those miners. It’s going to be the efficient miners. Who’ve got extremely low electricity costs and they’ll be able to pick up the hardware for pennies on the dollar. So it’s like the mining cycle. It’s almost like a leveraged bitcoin cycle.

Stephan Livera:

That’s crazy. Hey, when you think about it and basically if you can play that game, well, it can be extremely profitable, but on the downside, if you don’t play it well, you can lose a lot of money too,

John Lee Quigley:

Yeah, for sure. And yeah, a lot of people when they first start to get exposure to cryptocurrencies and they’re looking into mining and they’re so eager to deploy some capital, and they don’t realize that “Oh maybe the figures look good right now”, but how will the figures look if difficulty moves this way, or if price moves this way, like how vulnerable are they to price declines? And how likely is it that their hardware and that the capital invested, is gonna pay off? If price declines, by that much. And it’s also an opportunity cost as well because that money can go into invest in Bitcoin or other assets.

Stephan Livera:

Yeah fascinating. Because you really have to think about all these different factors. You have to think it’s a speculation game, right. You’re playing this a speculation of saying, where do I think the price is going to be in one year or two years from now? Where do I think the difficulty is going to be and the hash rate going to be in a couple of years from now, where do I think the technology is going to be in a couple of years from now in terms of Bitcoin mining equipment. And then can I source cheap power and get good certainty on that as well, as opposed to historically, where if you couldn’t do that, you were at the whim of your energy provider who might do the rugpull and give you initially a good deal. And then later do the rug pool and now, you’re left with the miner, but no power or no cheap power. And so I guess that’s these are the things that miners have to think.

John Lee Quigley:

About. Yeah, absolutely. And and that just, just naturally shows who the strongest players from, in terms of pure play time, mining operations, who the strongest players are that can secure the lowest possible operating costs for the longest term possible plus have their CapEx as low as possible. And yeah, that’s one of the reasons we’ve seen such huge growth in the north American mining industry, in certain states, Texas particularly is attractive. It’s offered the opportunity for miners to secure extremely attractive electricity prices. And it doesn’t seem like at least to a lesser degree, it’s not as subject to being rugpulled as you say, as in many, like in some regions in north America, of course there is that risk, but miners can establish themselves in, states, which are more favorable to being able to keep the rates low for a long, long time.

Stephan Livera:

Yeah. And so, yeah, that gets into this whole transition over to the North American Bitcoin mining market that’s growing. So historically China might’ve been, if you aggregated it might’ve been something like 60, maybe even 65% of the networks hash rate. And so that was one of the areas where the critics would throw barbs and say, oh, look, see, it’s centralized into China. Even if it was different pools and different miners, they would say, oh, see, look, and now obviously with what’s going on in China, it seems that that number is obviously coming down a lot. If you had to guess, or do you have like a rough idea? What percentage of Bitcoin’s hash rate would you say is coming out of north America now, or even the USA?

John Lee Quigley:

I’m not actually, I wouldn’t have any figures myself, but I did see the Cambridge put out some estimates for April 2021. And the figures for China were already radically lower and that’s before the comments came from the high level politicians yeah, I believe when one person is the right-hand man to the president yeah, led a committee, to essentially pretty much outlaw the activity of behind mining and yeah, since then, we’ve just seen an absolute flood of miners out of countries. So I don’t know what the figure is, but I’d be super interested to see it. And I think it’s probably going to be super low, especially compared to historical levels.

Stephan Livera:

Yeah. And so that also brings up this whole idea of certainty. So jurisdictional certainty or regime certainty. So I think that’s potentially one of their factors and you outline this in the report where maybe historically it was more important to be close to getting the new hardware soon. Now it seems like it’s more important to have regulatory certainty or regime certainty. So what are some of the factors that go into that? Why is that?

John Lee Quigley:

That’s a great question. And yeah, to be honest, the way I anticipated it happening was I wasn’t expecting such a harsh stance from the Chinese government so quickly to catalyze such a flood out of the country, into the U S and was expecting it to have a huge share for a long time. And hashrate gradually transition over to North America as a result of this jurisdiction or certainty and other factors as well. And this jurisdictional certainty is like, it’s legal systems that Western Western, sorry, excuse me. It’s legal systems that Westerners are comfortable with. It’s capital markets that they’re comfortable with the regulations around. And it’s essentially just a different environment that Westerners are more comfortable establishing their operations in. And of course it won’t be the number one north America. Won’t be the number one choice for every miner that wants to migrate.

John Lee Quigley:

Some will be able to be more comfortable setting up in Russia, Kazakhstan, maybe Iran, maybe they have connections or circumstances in these regions that allowed them to set up more favorably. But if you think that if you’re a Western businessman or Western institution, and you’re looking to set up a business that can operate for decades profitably North America is going to be a strong candidate because it’s legal systems and regulation have stood the test of time and as the leading economy in the world. So there’s a lot of favorable factors there and it’s it also another thing that shouldn’t be forgotten is it has abundant power sourcing electricity can be tricky in a lot of states, but there’s definitely a lot of opportunities to also source low cost power for the long run.

Stephan Livera:

And so it’s all about trying to find good deals for electricity as well. And as you point out in the report, it seems that some areas while Texas is probably a big, big growth area, and you also mentioned upstate New York. So what’s special about Texas and ERCOT and their energy market?

John Lee Quigley:

The interesting thing about Texas and the ERCOT market is the ability for miners to participate in demand response programs, where essentially they can communicate with the grid and shut their power off and be compensated when the grid needs more capacity. So essentially they can participate in these programs and they will reduce their consumption. And this will give the grid more power to allocate to other sources. So back near the start a year when Texas was going through that super harsh winter conditions, and there was a huge drop in the supply of energy those that are participating in such demand response programs were doing so are extremely attractive prices. Okay.

Stephan Livera:

So digging into the U.S. Energy market, why is it that places like Texas are more attractive than others?

John Lee Quigley:

Yeah. So one of the interesting things about the Texas and the ERCOT grid in Texas is the ability for miners to participate in demand response programs, and radically reduce their electricity rates as a result of this. So miners can already secure, quite attractive base electricity rates in the region already but the ability to participate in these demand response programs, gives them the possibility to reduce these even further. And essentially what happens with these demand response programs is miners, when they meet certain requirements, can communicate with the grid and they can shut off in times of peak demand. And then the grid has supply that I can allocate elsewhere. And yeah, those that participate in these programs can be heavily compensated as a result. And this will reduce their average electricity price over the course of the year.

Stephan Livera:

So for listeners, ERCOT means electric reliability council of Texas. And so, yeah, as you were saying, this allows, let’s say under a time of stress that they need power for people to stay warm in winter or something like that. The Bitcoin miner can offer to basically turn off and still receive some income while the grid is shunting and giving that power over to the people who need it for, to stay warm in winter or something like that. Right.

John Lee Quigley:

Exactly. So the grid is constantly trying to maintain, maintain a state of supply meeting demand. And if demand goes above supply, or say, supply drops off and can’t match demand. Then these demand response programs play a huge role in catering to this mismatch.

Stephan Livera:

So thinking then about places like New York, upstate New York as well. So that’s another area that you highlighted as well. So what’s the deal there? Why is that an attractive region?

John Lee Quigley:

So in upstate New York, there’s been some municipals that have been able to have an abundance of hydro-power and have given the possibility for businesses securing this power to get really really low rates. However at the moment, these municipalities have a moratorium on power requests coming in. So upstate New York really isn’t as friendly towards bitcoin miners as it used to be. And another factor to take into consideration is the political stance of Texas versus New York. So New York is largely a democratic state. Texas is largely a Republican state. It’s just means that in terms of running a Bitcoin mining operation you’re going to face a higher risk that some entities will, give you backlash for the environmental concerns regarding your activity, if you operate in New York compared to compared to Texas. So that’s another factor to take into consideration. And it just highlights that every jurisdiction is different in in North America. And it’s one of the reasons that Texas has emerged as an extremely attractive one because it’s offered miners, the ability to run a low political risk, secure extremely attractive electricity rates get into a state where abundance of a power and also participate in demand response programs to reduce their electricity rate even further.

Stephan Livera:

Definitely a good point there around the politicization. And definitely we are seeing conversations about this even now with even things like Bitcoin mining council and the supposedly ESG concerns. Now it might also be interesting to touch on how some of the more sophisticated Bitcoin miners might be trying to see themselves as collaborating with the grid a little bit more. And I think that kind of comes into the point you were saying around demand response as well. So I think some Bitcoin miners have really tried to help outline, Hey, we’re helping here. We’re actually positive because we are helping certain forms of power or certain power projects might be more feasible now with Bitcoin mining there as the quote, unquote plug factor, because some, there might be some stranded energy that is hard to transport. And yet there’s not really a big town there to use all the energy. But then the Bitcoin miner can come in and say, well, Hey, we can come in and be that plug factor for you. We can use up that additional energy for you and then offer to turn off when you need us to, and in doing so sort of help that project become viable where previously it might not have been.

John Lee Quigley:

I mean, that’s a really interesting point and it’s been raised a lot, is that the it doesn’t really matter where the Bitcoin mine is located. They can like, if you’re a normal business, there’s huge advantages to say operating in a city or close to your customers or what not, but a bitcoin mine can go close to these regions that maybe have an excess of power being produced and they can provide a constant load response, and this can potentially improve the financial conditions of the power producer and allow them to build out further transmissions infrastructure. And also have this have this reliability of a constant load there.

Stephan Livera:

Yeah. So maybe that is another way that the industry goes to make it more palatable for the rest of society to sort of get along with it. But of course, some of these points are maybe a little bit more technical or a little bit more involved, and they won’t just be like a three-word slogan that people can just repeat and whatever,

John Lee Quigley:

But I mean, it’s definitely an argument that, that pro pro Bitcoiners bring up a lot is that, oh, Bitcoin can just move into where wherever there is an excess of renewable energy. And it’s kind of like one of your go-to arguments for pro bitcoiners. I believe the reality is going to be quite nuanced and, and different from, from region to region. Maybe it’s not as, as clear cut as that, but yeah, there is no doubt that Bitcoin and Bitcoin mining in particular has attractive, attractive properties in that it can, it can go and provide a constant load.

Stephan Livera:

And the other important point is with the U.S. The capital markets. So there’s a lot of funding available. So what are the pros and cons there of getting access to this huge pool of capital in north America?

John Lee Quigley:

I mean, it seems to only be pros, to be honest like it’s extremely attractive for any mining related company to have been publicly listed over the past year. They would’ve seen their multiples go to enormous amounts. We did some analysis in the report looking at the value per hash rate of the various publicly listed mining companies. And yeah, it just increased hugely by huge multiples during the delays polar on and mining public list of mining companies essentially acted as a leverage play on Bitcoin during that bull run. And it just offers lot of benefits to the companies that are publicly listed during these ballrooms, because their share value increases so much, and this gives them leverage to expand their infrastructure. And we’ve seen that with Argo blockchain coming to a share purchase deal with a New York company to purchase land in Texas and build out a facility there. And we’ve also seen several other companies use their high share value to execute purchase agreements as well.

Stephan Livera:

Yeah. So essentially being part of that US regulatory regime, while you do have to do some reporting costs and things, ultimately you’re getting access to all this capital that’s out there, and that can then be used to fund your operations. And turn that in the service of Bitcoin, by making the Bitcoin network more secure. So that’s certainly an important factor. Maybe the downside, I guess, is if everything becomes more like regulated and maybe it might theoretically in the future become more easy to capture Bitcoin and stop say, or start the introduction of things that we don’t want to see. Things like white lists or black lists of who you’re allowed to send transactions to. And supposedly if the miners were to be forced into that kind of arrangement but there is a countervailing factor as well, where let’s say the fact that it’s getting distributed more and more around the world, right?

John Lee Quigley:

There definitely is some downsides to publicly listing as well. There’s gotta be more costs associated with accounting, financial reporting requirements. And plus you need to be transparent about everything you do. So let’s say if some publicly listed mining company comes up with some huge innovation that can radically reduce their costs in some way. Well, they’re going to have to disclose that whereas a private company could just keep it under the hood for forever pretty much. And the other factor is maybe you’re more liable to lawsuits and you’re more in the public light. There’s more risk legally operating as a public company.

Stephan Livera:

So yeah, definitely pros and cons there. But on the whole,

John Lee Quigley:

It seems like the pros maybe always the cons

Stephan Livera:

Yeah. And yeah, and just the broader point around how it hashrate is moving all around the world, right. It’s not just going into north America into USA, it’s going, as you said, into Europe, into Russia, into other places. So I think that probably on net, and especially as the hash rate rises, it just becomes harder and harder for anybody to try and attack the network over time.

John Lee Quigley:

Yeah. In terms of attacking the network, you’re really facing a big task because any hardware that comes out essentially is gobbled up by miners. Right. Maybe the biggest risk we face is if all the hardware, if the majority of the hardware got concentrated within a small region and then some sort of government authorities or powers in that regard, try to seize the hardware or something along the lines of that. But yeah, I’m sure the network will adjust to such an attack. Yeah. Just thinking of attacks on the Bitcoin network, it seems like a hard task, for even a collection of states to pull off.

John Lee Quigley:

Although I guess just for the sake of being devil’s advocate, you could say, all right, all these miners in the USA, they’re public, they’re regulated, they’re known people. What if the political environment turns and say U.S. Government says we’re mandating that because you’re all under the regulated tent. Now you need to subscribe to our whitelisting and blacklisting service where we say, you may send to this address and this, and maybe that would be an angle now that everyone’s inside the regulated tent.

John Lee Quigley:

Yeah, definitely. That’s a good point. I’d be more concerned about if a huge amount of the hardware migrate to north America, and then they try to do some sort of seize assets thing and take all the hardware. I’m not really sure how it would play out in that regard, whether you would need to shift to maybe a different mining algorithm to make that hardware redundant. If it was known that the U.S. Government was trying to do an attack to build a longer chain and then take control that way, that would definitely be a scary attack. But in terms of whitelists and blacklists, then I think it’s always the case that as long as there’s one mining pool waiting to add transactions were complete censorship resistant, then that transaction will eventually be added. It’ll just take a long, long time. Yeah.

Stephan Livera:

Yeah. And just to explain for the listeners there, so what we’re referring to there is when you send your transaction on the Bitcoin network, and obviously we’re anticipating longer, longer-term over time, this will be very high value transactions between say banks, because number is going up. Right. And so what would theoretically happen if a lot of the miners were trying to censor a certain transaction, then one of the censorship resistant properties of Bitcoin is that it could be, that person could be offering a higher fee. And that fee would be an incentive for a miner somewhere around the world. A quote unquote, good miner who wants to promote the censorship resistant values would have an incentive then to take that transaction and put it into their block, as opposed to some of the other miners, let’s say hypothetically, who had been legally mandated not to accept this transaction from A to B that kind of thing, but it there’s a lot of different complicated scenarios here because even to mandate that kind of thing, it would require that all the transactions are identifiable from between identifiable parties, such that a person could create a whitelist or a black list that is even practical.

Stephan Livera:

So it kind of depends on how much or how many of the coins are, I guess, all KYC and tracked and chain analyzed or chain surveilled. And so I guess it’s a complicated story and there’s going to be that push battle back and forth on how censorship resistant Bitcoin should be. Right. Because some of us would argue, look, the whole value. The whole point of Bitcoin is inflation resistance and censorship resistance. And so if you start to erode that, the value of Bitcoin starts to go. So I think it seems now that the industry is recognizing that and pushing that as well. So even recently there was that whole, there was that Bitcoin miner who was OFAC compliant blocks in their blocks. And now recently they’ve taken that off and said, no, we want to support taproot. And we’re going to get rid of that.

John Lee Quigley:

Yeah, yeah. It’s definitely an, interesting angle to consider is what would happen if Bitcoin mining continues to be institutionalized and then these institutions are under the watch of a large regulatory body and they attempt to introduce this whitelisting, blacklisting mechanisms yet. It’s certainly, it certainly is a risk to consider not something to be mindful of.

Stephan Livera:

Yeah. But I think the other point as well, and we were talking about this earlier is that it’s not just one country, there are many countries all over the world, and they’re not necessarily all going to agree on what the white list and the black list should be. And so even if the USA came out and doing this, that might end up actually in practice, it might just end up harming US Bitcoin miners, but helping Russian Bitcoin miners or Kazakhstan Bitcoin miners or some other jurisdiction, because they might now get more fees because of all the people who have to pay for their transaction to get included inside a block.

John Lee Quigley:

I think one of the best things for Bitcoin is that the governments around the world, can’t agree if they could agree. Maybe Bitcoin would have been stopped a long, long time ago. Here we are.

Stephan Livera:

Exactly. Right. So that’s, it’s an interesting dynamic, but I think I count myself as an optimist. I think things are gonna work out in that way longer term just because of the way the system is crafted and the way the incentives sort of work. Although, you have to admit this and possibilities of bad outcomes that could have happen as well.

John Lee Quigley:

Yeah, I have my glass half full here.

Stephan Livera:

Yeah, that’s it. Another topic I wanted to chat with you about is this whole idea of hash rate derivatives and hash rate tokens. So in the report, you spell out this idea that some of the big mining pools like Poolin and Binance are starting to explore these ideas, whereas potentially in the U.S. or maybe elsewhere in north America, it’s not as much of a thing. Can you outline what this idea is? What’s the idea behind these hash rate and derivative tokens?

John Lee Quigley:

Yeah. So the financialization of mining has been a big topic for a few years. What do I mean by that? The financialization of mining it’s essentially providing better tools and better services to miners for them to hedge their risk. One of the biggest topics in that area has been, how can we turn hash rate into a tradeable token or something that trades on an exchange? We’ve seen some rudimentary applications of that so far. There’s one website, the name is gone from it now where you can rent a hash rate from different algorithms.

Stephan Livera:

NiceHash or one of those I can’t remember. Yeah.

John Lee Quigley:

I think it might be nicehash. Yeah, over the past year we’ve seen some companies really start to push this idea forward further. We’ve seen both Binance and Poolin launched tokens that are tied to hash rate yet. It’s been a while since I’ve looked into them, but I believe they trade a huge premiums to actually the underlying value of hash rate. But I guess as it relates to North America, the point I was trying to make in the report is that in jurisdictions, outside of North America, they will have more propensity towards risk and they will carry out more risky activities and experiment more. And as a result, a lot of people are going to end up being scammed, right. Whereas in north America, businesses are more careful to do things under the guidelines of a regulatory agency.

John Lee Quigley:

So what’s the natural result of this? It’s like we see some innovation outside of North America, but we also see some people being scammed and frauded, but then eventually not America remains on the frontier of innovation because they have the biggest market, biggest economy in the world. So they eventually will come out with regulated products. If there is a sustainable idea there, and I think it’s similar to the story of Bitcoin mining, right? In the early years, north America, who’s keeping the tans far away, anybody that was doing Bitcoin mining, what was extremely questionable activity for only in the past few years, has it gained huge legitimacy and seen a huge growth in North America and have North America being more willing to embrace it. We’ve seen institutions for Lander balance sheet, et cetera, et cetera, but are we seeing institutions putting shitcoins on their balance sheet? No, we’re not bought in other countries course. Institutions are messing around with shitcoins et cetera, et cetera. But yeah, it’s kind of like a test of what yeah, it’s like experimenting outside of the US and then naturally a bigger product and a bigger market gets created in the U.S.

Stephan Livera:

Yeah. also we haven’t spoken much about Canada as well. So did you want to just outline a little bit of what’s it look like in Canada, Bitcoin mining wise?

John Lee Quigley:

Yeah. So yeah. Canada has its own special chapter in the report for sure. And it’s definitely very distinct from, from the US it’s a much more bureaucratic environment and it kind of has the same relationship that I was outlining. What other countries versus the U.S. In Canada there was huge growth in the Bitcoin mining industry long before there was in the U.S. and many, many companies with various cryptocurrency activities have listed on the Toronto stock venture exchange. But because of its hugely bureaucratic environment and political environment, there’s a lot of hurdles to building large scale Bitcoin mining facilities in Canada. So Canada offers some attractive, there’s some attractive regions to build profitable operations, but typically at a lower scale, whereas in the U.S. it’s more favorable to miners that have ambitions of huge scale operations.

Stephan Livera:

Yeah. Good point. And so with the creation of the mining equipment as well, so mining machines there’s this whole constraint that people talking about with semiconductors, right? So this idea of TSMC being one of the big dogs of that world and there being a constraint there because of limitation of the factories in Taiwan, but then also there is talk now, I think they have mentioned they’re going to build one in Texas, and there’s more talk about competition coming into that semiconductor space. So I’m wondering whether you have any thoughts there on what the future of that looks like. Does it look like we’re going to see more more alternatives in terms of semiconductors, which in turn will then create more people who can create Bitcoin mining equipment or the expansion of the current big players?

John Lee Quigley:

Yeah, it’s an interesting question for sure. And it seems that in terms of factories like TSMC and stuff, and TSMC, Samsung, et cetera, building facilities that could cater to Bitcoin miners on north American soil, we’re a long, long way from that. Yes we’ve seen TSMC and believe Samsung establish some north American facilities or begin developing, but development is going to take a long process. And then the first applications are going to be secured by say, government and military uses, et cetera. So it looks like we’re a long way from Bitcoin mining commercial use for these factories. But yeah, it’s certainly promising in the long run that we’re seeing more diversification in terms of chip production. And also you were spot on when you said data chip supply constraint is one of the, one of the biggest constraints worldwide right now. And it’s not just become miners that are scrambling for more chips. Big tech companies are also trying to get there hands on these chips. Yeah.

Stephan Livera:

Yeah. And I mean, I’m hearing, I was hearing stories of even Car manufacturers, struggling to get chips and having to take out features of their cars because the chips simply were not available at that time. And they didn’t want to just have the customers waiting for a year or two, because by then it’s a new car and all that. So interesting trends. And I mean, we would like to see a progress on that, but of course it takes time. And so that’s, just literally where we’re at right now. So I’m curious as well. Do you have any thoughts rest of the world in terms of other places Africa, or I don’t know, elsewhere in Europe, do you see Bitcoin mining operations coming there or are they just not really at the scale level yet?

John Lee Quigley:

Yeah. I don’t see them being at the scale level yet. I believe North America is going to be the biggest U.S. In particular. China’s shares dwindling, Russia, and Kazakhstan are going to hold significant shares. Iceland will continue to have a share for, in terms of other regions. I’m not sure which region is going to be significant or non-significant.

Stephan Livera:

Still remains to be saying, Hey, yeah. So yeah, let’s talk a little bit about your other work or what other stuff are you working on and, or whathave you got any other stuff coming up that people can keep an eye out for?

John Lee Quigley:

So I actually, I ended up leaving compass mining after doing this report at the end of may. I’ve been in the industry for over four years now, working with various various clients doing freelance writing work. And since leaving Compass mining, I’ve, I’ve come back to doing a lot of freelance writing work. And one of the main things I’ve been doing is helping a lot of companies with their newsletters. So companies providing various products or services, I have them get out and newsletter to their audience weekly helps them build an audience. Also helps them get an audience more comfortable with their brand. If you can issue high quality insights to an audience that is relevant to your product or service very few companies can do that. So it both helps build an audience plus warms and audience to using your product or service. So that’s been the focus for me recently. Excellent.

Stephan Livera:

So, yeah, really enjoyed chatting with you, John. Where can listeners find you online or get in touch with you?

John Lee Quigley:

Get in touch with me. I’m pretty active on Twitter. They can follow me @bitcoinnomadic . You can also connect me on LinkedIn. I’m not so active there for them. Feel free to follow me on Twitter and DMA or tweet at me.

Stephan Livera:

Excellent. Thanks John.

John Lee Quigley:

Yeah. Thanks Stephan.