Have you wondered about the challenges of managing a large publicly listed Bitcoin mining company? Jason Les, CEO of Riot Platforms joins me to talk:

  • His poker background
  • Why hashrate expands even when price is down
  • Riot’s competitive advantages
  • Should miners use debt financing?
  • HODLing Bitcoin as a miner
  • Bitcoin ETF impact?
  • How can miners outperform bitcoin?
  • Dodging knives
  • Educating government
  • Curtailment & Ancillary services
  • Halving predictions



Stephan Livera links:

Podcast Transcript:

Stephan (00:01.238)
Hi, everyone. Welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics brought to you by swan.com. My guest today is Jason Less. He is the CEO of Riot platforms. They are one of the biggest Bitcoin miners in the world. They are a publicly listed Bitcoin mining company. I’m interested to chat with Jason. I know you also have a background in poker as well. So welcome to the show.

Jason Les (00:27.246)
That’s right. Thank you, Stephan. Thank you for having me.

Stephan (00:30.474)
Yeah, so let’s talk a little bit about that. I think that’s interesting. I actually, not nowadays, but back when I was in Australia, I used to play a little bit myself. Obviously not at the nosebleed high stakes levels like you were, but that’s certainly interesting. I know there were a bunch of poker guys who sort of saw the point of Bitcoin early. I’m curious, what was your experience like there?

Jason Les (00:40.09)

Jason Les (00:50.946)
Yeah, and I played a poker in Australia myself at the Crown in Melbourne a couple times. But yeah, so I started playing poker in 2004 when it was really a mainstream phenomenon at that time. Internet poker was just starting to roll out. Chris Moneymaker won the 2003 World Series of Poker. And I was getting a lot of people romanticizing with the ideas, wow, really anyone can be good at this game. And that was interesting. Anyone can win at this game, I should say.

And that was what was interesting to me is that the luck factor in poker gave anyone the opportunity to win in the short term, but it was a pure skill game long term. So what I kind of determined as well, as long as I can play this game better than everyone else at the table, I’m not playing against the house, I can make money. And that led into a 14 year career playing poker professionally played mainly on the internet, played a lot of high stakes tournaments.

and cash games in person as well. And it was through that I discovered Bitcoin. I first heard about Bitcoin in 2011. Everyone always has a story. When they first heard about Bitcoin, they didn’t buy it, right? So I first heard about Bitcoin back then, 2011. There were some sites accepting Bitcoin that were starting up and in the poker community, people are like, hey, maybe we should be checking this out. I didn’t think too much of it. But over time, it just became the best tool.

Stephan (01:59.959)

Jason Les (02:18.414)
for moving money around online, for depositing money off sites, for withdrawing money, for sending around between people all over the world. It was just a useful tool. So a lot of people in the internet poker community were first movers on Bitcoin for that utility. Not even necessarily having a political or philosophical view of Bitcoin. It was just, it wasn’t like a future use case. Everyone was like, this makes life easier for us now. And that’s how I got exposed to it.

Stephan (02:40.854)
The utility.

Jason Les (02:47.582)
And then over time, I started to learn more and more about Bitcoin because, you know, I have this thing sitting here and it’s going up in value. Bitcoin’s, you know, technology number go up technology at play. And that captured my interest. And then I got to the point where I couldn’t focus on playing poker anymore because I was studying Bitcoin all the time. I have, you know, one screen with eight tables of poker, then I have another screen with Twitter and a podcast and reading Bitcoin talk and all this kind of stuff. And I’m like, okay, I just got to pick one thing here to be good at.

Poker was intriguing because I was very focused on being the best in the world, the best I possibly could be, one of the best in the world at the game that I played. And I just decided Bitcoin was too important. I wanted to devote my life to that. So I started researching and following Bitcoin without any aspirations of working in it. I just wanted to commit my life to being around Bitcoin because I was so enamored with the transformative impact that it was having. And I was just so excited.

It’s been an incredible ride since making that decision.

Stephan (03:50.674)
Right. And yeah, there’s so many, it’s funny, I recall stories where people would, you know, they just use the utility of Bitcoin even because maybe they were traveling and it was an easy way to sort of move the money around. If they had some live winnings, they would try to flip it into Bitcoin and then take it home that way and things like that and all kinds of things. I guess there’s certain mindsets that, you know, if you’re thinking about like what’s a good value bet in poker, then it’s sort of, there’s kind of analogies of that with, you know, Bitcoin as this kind of

Stephan (04:20.852)

Jason Les (04:22.778)
So my background, my education was in computer science. Before I took on poker as a career, I knew I wanted to be in computer science my whole life, just dead on. I was going to be in software engineering, studying things around that. And when I got back into, when I stopped playing poker and started focusing on Bitcoin, I got back into that again. So I was interested in how Bitcoin worked. I was interested in doing software development projects around Bitcoin. And

I’ve always liked putting my hands on things. And doing computer hardware, doing projects involving computer hardware is very interesting. So with Bitcoin mining, that’s what it is. You’re buying these machines. I did some GPU mining as well. So I’m buying GPUs and throwing them together. And just getting my hands on and building the infrastructure was really cool to me. It captured my interest because it just really, to me, kind of underpinned the.

the work behind proof of work. Like this was the tangible, the physical consequence of a proof of work based system. And I really liked being a part of that. I liked building out the infrastructure and maintaining and running all of that. Now, I wasn’t operating at a very large scale, a pretty decent sized scale for an individual, but just learning all of that by trying and failing was a really great experience for me. I think like anything.

Trying and failing is how you really learn how stuff works. And that was a really cool way to get started.

Stephan (05:57.39)
Gotcha. And so then, as I understand with Riot, I’m not clear when it exactly formed. Was it like 2018 or so? And then you became CEO in February 2021. Is that right?

Jason Les (06:09.898)
Yeah, so the basic history here is Riot started as a company in 2017, did a reverse merger with an existing publicly traded entity and became this Nasdaq traded Bitcoin slash blockchain slash other things company. At the start, Riot was mining Bitcoin right off the bat, but was also investing in other companies, was looking to launch an exchange, a mining pool, kind of a bunch of different things. So I was first just on the advisory board and then joined the board of directors.

And I was a part of the board of directors that was really involved with management and transforming the company around. And through that transformation, we made the decision to focus on exclusively Bitcoin, which I was very happy about. And the best way that we could see ourselves focusing on Bitcoin was through Bitcoin mining. So on the other side of this transformation, the board of directors asked me to be CEO, which I was obviously more than happy to do. And it’s been very rewarding building up the company.

from here. I became CEO. We had about eight employees. Our mining operations were entirely – miners that we owned were being hosted at a third-party hosting facility in New York. Since then, we’ve done a number of major acquisitions that have built up our infrastructure base, built up our engineering and manufacturing base, and today we have over 500 employees and over 10x hash going on 12x hash pretty soon here.

building out a second site. So there’s a real tremendous opportunity set here, I believe, with Bitcoin, but with specifically Bitcoin mining. So we’re trying to position ourselves to really be in a spot to capture all the upside from Bitcoin that we believe in as a Bitcoin-focused company.

Stephan (07:58.398)
Right, and so just some context, I checked the hash rate just today. Memple.space has it around 481 exa hash on the network. Right. And then if you’ve got, yeah, right. And if you’ve got like 10 exa hash, you can think of it like Riot alone is more than 2% of the entire hashing power of the network then.

Jason Les (08:07.146)
It just keeps growing. It’s been a pretty, yeah.

Jason Les (08:20.755)
Mm-hmm. Sometimes we say that, OK, as a publicly traded company, you could argue our competitors are the other publicly traded companies. We’re competing for capital, for investor interest, et cetera. But at the end of the day, our really only real competition is the network difficulty driven by the network hash rate. And it’s a fight to continue to stay up with that number. Like breaching that 2%?

Getting beyond that it really requires one an incredible amount of financing and then to an incredibly capable team and expansion Pipeline in front of you to be able to execute to continue to build there We want to be a meaningful part of this network and as the rest of the world is growing its Bitcoin mining footprint We have to really aggressively continue to grow ours to make that ratio to keep you have a strong ratio there

Stephan (09:13.79)
Yeah, that’s interesting. And I think the curious part for a lot of people now, I guess it’s interesting now because this year, you know, Bitcoin is up some ridiculous percent, right? But last year, it was sort of it was going down, there was all these miners who were in a lot of trouble. And at the same time, the hash rate was still climbing anyway. So I’m curious what your view is on that. Could you help illuminate that for us? What how can it be that, you know, there’s all these miners who are in trouble, but at the same time, the network has trade is still climbing.

Jason Les (09:42.818)
Yeah, so a few thoughts on that. First, the network hashrate always tends to lag a little bit with price action. So I’ll step back to 2021 when we had this last bull market and the price was taking off. All the miners are prospective new miners that wanted to respond to that opportunity. It takes them a while to actually build out. If you are in June 2021, well,

Bitcoin, I think, went down to 30,000 that month. So let’s say you’re March 2021, Bitcoin’s approaching 60K and you’re like, okay, this is it, I wanna get involved with mining. Well, you can’t go on and turn on the next day. That’s one of the great security properties that you get from proof of work mining. It takes a lot of work to be a part of this consensus system. So let’s say, in March 2021, you wanna get in.

you’re gonna build a facility or you wanna buy miners to do all these things, it’s going to take you some time to actually get all that going. And that’s what we saw in 2021, there was a number of new mining companies that came forward, number of companies completed various corporate transactions to become publicly traded, but a lot of their operations didn’t really end up rolling out until 2022. We saw a similar thing last cycle in 2017, lots of investment went into mining.

and then crashed down to 8K, I think, pretty fast in the first half of 2018. But hashrate was still going up because all of this investment, all this capital that was previously deployed was now finally getting executed. That makes it really tough with Bitcoin mining is you can have both of those variables going against you when in theory, yeah, okay, when the price is going down, network hashrates

but it’s not always happening that directly in these sequences. If you look at something like a halving though, well then it’s a little bit different. Okay, at the halving, there’s less efficient miners that are out there, they will simply just have to drop off when that happens and that should address the difficulty downward. But that lag is also the opportunity set for us at Riot. And it’s why we’re so focused on building during downturns in the market. Because the building that we did

Jason Les (12:04.298)
in 2020, 2019, before the market took off, paid off so handsomely in 2021, because we didn’t have to build a new operation from scratch. We had the hash rate there, and hash price explodes, the value of the Bitcoin that we’re mining explodes, and that’s, I’ll tie it back into, that’s why having this Bitcoin-focused culture is important. We’re always thinking about the long-term. It’s not just about the immediate results. We’re focused on what Bitcoin is doing

uh… you’ve been many years in the future

Stephan (12:38.558)
Right, as you say, there is a lag time between making that decision of wanting to plug in miners and actually being able to do that because maybe you need to negotiate power, maybe you need to set up a facility and have actual rack space, you need, you know, engineering talent, construction, all of these aspects.

Jason Les (12:54.266)
And I’ll use Riot as an example. We announced a new site that we were building in a city called Corsicana, Texas. We announced that in April of 2022, around there. And that site is not going live until Q1 2024. So we bought this site, we’ve done all this work to get it ready, procuring these buildings, materials, building these buildings, getting the miners, all of that.

And it’s taking almost two years to get that going. And this is right, we’ve built a expertise and track record of being good at this stuff. So there’s a real lag between making that decision and when those miners flip on and start hashing.

Stephan (13:36.106)
Right, and from my reading into the Corsicana side, I think the total max capacity there would be about a gigawatt, is that right? Like eventual, yeah.

Jason Les (13:44.77)
Yes, one gigawatt. So that’s pretty exciting. That was approved by ERCOT’s large flexible load task force as well. Not sure if there’s any other one gigawatt loads that have been approved. There’s an example of us finding this excess capacity at a switch in the ERCOT grid and having this land that we could acquire and then build out this site from it. So very excited to see all that come together.

Stephan (14:11.158)
Gotcha. And so just for context, the current side is the Rockdale side, and that has, I think it’s up to about 750 megawatts, is that correct? Around that.

Jason Les (14:20.196)
We’ve built 700 megawatts of capacity there.

Stephan (14:23.766)
Gotcha, right. And so this new site’s gonna be another, almost half on top of the prior site.

Jason Les (14:30.838)
Yeah, when completed and as far as we’re aware, our first site in Rockdale, it’s 700 megawatts, we believe that’s the largest site in North America. I think it may be the largest site in the world, like the mega sites in China no longer really exist. And we’ve gone from this big site to now focusing on building one even bigger. Now the first phase that’s rolling out in 2024 is only 400 megawatts. It would take future phases of development to get to that full one gigawatt capacity.

But we’re really excited how that’s coming together. Sourcing miners for micro BT, miners manufactured in the United States and shipping over all immersion cooling technology. There’s a bunch of stuff about this site and how we’ve approached it that we really think is going to reflect well on us as a company, but also reflect well on how Bitcoin mining as an industry is evolving and maturing.

Stephan (15:23.39)
Right. And so Bitcoin mining is a notoriously competitive industry. And so maybe if you could just spell out for us a little bit, what’s, you know, what are some of Riot’s advantages? I guess part of that is, you know, the skillset and, you know, what are some of the advantages that Riot is bringing here?

Jason Les (15:41.646)
So I think we have three main advantages. Scale size of operation, our low cost of production, and our strong balance sheet. Scale and operations, we were just talking about these big facilities we have and these big pipelines of growth we have within these facilities. We’re building up this 1 gigawatt site. So we don’t have to acquire 10 100 megawatt sites to have 1 gigawatt of capacity. We have the pipeline all right there. And that makes for a very efficient

development process where we can leverage economies of scale to the most, the biggest extent possible. We have one of the largest hash rates, deployed hash rates in the industry right now, almost 11x hash going to 12.5x hash very soon here in this quarter. And once the first phase of our Corsicana sites developed with the hash rate we purchased will be up to 20x hash. Next major strength is that cost of production. We have a proprietary.

power strategy we use where we are leveraging the flexibility of Bitcoin mining to achieve a very low cost of production. In Q2 of this year, that’s the most recent period we have financial results on, we had a direct cost per Bitcoin of $9,300 per coin, inclusive of the results from our power strategy. So that’s really important because, you know, short of, let’s say all variables remain the same, Bitcoin could double tomorrow.

and that cost would remain constant. So we look at that as giving ourselves a leverage position on Bitcoin’s upside. We’re trying to accumulate Bitcoin for the lowest possible cost below its market, lowest possible price below its market price. The final major strength we have is a balance sheet. We haven’t taken on no long-term debt, and we’ve been very prudent in building a strong balance sheet of cash.

that allows us to one, withstand the volatility within the Bitcoin market and the power market with what underpins our power strategy and allows us to achieve that low cost of production are these fixed power hedges that we have. They have bilateral collateral requirements though. So it’s very important that we have the balance sheet to be able to withstand if that forward curve moves in the wrong direction. That balance sheet allows us to ride through bear markets in Bitcoin.

Jason Les (18:03.266)
which have happened on a regular basis. And that balance sheet allows us to grow and be opportunistic when others are fearful and the markets downturn. So the large scale of operations, the very low cost of production for Bitcoin, which is going to be even incredibly important and getting a lot more focused leading to the halving and that strong balance sheet, right, it’s three major strengths.

Stephan (18:29.674)
Yeah, that’s interesting you mentioned the, especially the balance sheet point about being at a ride through the cycle, right? Because typically what we’ve seen, and I’m sure you can relate to this also, is historically you’ve seen this kind of dynamic of people who get overly bullish in the bull cycle and they may be the over-expand or they take on too much debt, too much leverage, and then…

you know, the cycle turns and now, you know, it’s the proverbial people are left swing without, you know, uh, like that Warren Buffett quote, uh, you know, who’s swimming when the tide goes out, uh, who’s swimming naked when the time goes out. And then on the other hand, it’s kind of being able to ride that bear cycle out or keep expanding in the bear cycle. Um, which I guess that’s, that’s part of what you were mentioning earlier around actually being able to, you know, sustain that. So how do you actually.

achieve that idea of having a stronger balance sheet? Is it more, is there a certain level of conservatism in how you expand or what’s the, how do you actually achieve that?

Jason Les (19:24.358)
There’s a few things that come to mind there. First talking about the leverage, we’re not opposed to taking on debt. We don’t think debt products exist that makes sense for this industry yet. The previous debt options available in Bitcoin miners had just been too expensive. And if you’re buying the bottom with those, the market only goes up from there, OK, that may work out. But that’s a really difficult bet to make. So we have held off doing any.

debt financing for now, although we’re always looking and trying to pioneer new option out there for the, for us and, you know, to help drive the industry forward. And instead, we’ve relied on equity financing in the past. So we have a very liquid stock. We have an at the market offering program. We issue shares into the public market that become cash.

Jason Les (20:16.202)
Equity financing will have a higher-will be a higher cost of capital than what maybe a more mature industry will find with debt financing often. But by doing the equity financing, you know, one, with our stock, we’re able to keep the cost of that financing down, you know, very low. We are not entangling ourselves with different obligations, covenants, debt service payments that could impact us going through that bear market.

and we are always having access to capital to take advantage of opportunities or do what we need to do. So we focused on always having a strong amount of cash on our balance sheet. And with that cash, we have demonstrated a track record of deploying that into operational results. We don’t sit on this cash forever. We keep this cushion here, so we continue to be opportunistic and have the staying power to survive, but.

We are constantly taking the proceeds from our ATM program through our equity financing and putting that to use to building our Bitcoin mining operations. So I think our shareholders are looking for a growing operation. They’re looking for a company that is de-risked as much as you can in this industry, de-risked and not be pinned down by so many onerous debt obligations. And the other part of our balance sheet is the Bitcoin that we hold on our balance sheet.

Most commodity producers do not hold what they produce. Maybe diamond producers, but most people producing copper are not holding a bunch of copper and speculating it. It’s a bit different here in Bitcoin mining because we are producing a commodity we believe is very valuable. There’s a lot of future value. We are producing the future world reserve asset. So-

In addition to holding cash on our balance sheet, we hold Bitcoin. We’re a Bitcoin company. We want to have Bitcoin as part of our treasury management strategy.

Stephan (22:18.346)
Yeah, that’s really interesting. Now, don’t get me wrong, I obviously hold a lot of Bitcoin myself and you hold Bitcoin yourself, I’m sure. But let’s steel man for a second. An investor could say to you, no, Jason, I just want the most efficient Bitcoin miner. If I want to take a Bitcoin position, I just hold Bitcoin myself. Why should my Bitcoin mining company also hold Bitcoin?

Jason Les (22:39.362)
Well, first, the last part I forgot to mention is we sell most of all of our Bitcoin production on a monthly basis. So most of what we mine, we are taking in paying operational costs and reinvesting in and growing the business. Our experience is most investors are interested in us having that Bitcoin balance sheet. They look at miners as a leverage position on Bitcoin and us holding Bitcoin is a part of them achieving that leverage. And, you know,

Stephan (22:46.519)

Jason Les (23:07.146)
If you share the common Bitcoiners view on the US dollar, having that Bitcoin is a way of de-risking the company. Holding too much dollars may be deemed by many to be too risky. Having Bitcoin as part of that balance sheet, de-risks that. We also think that Bitcoin, there is this new ecosystem and world that’s being built out with Bitcoin. None of us know exactly what that looks like yet.

but we know that we wanna have Bitcoin to be a part of that. So we don’t even know exactly what the future looks like, but if the future we believe is going to happen, it’s going to be very expensive to acquire, we hold 7,300 Bitcoin right now, to acquire 7,300 Bitcoin in the future at a much higher price. So we like de-risking, we like building the strong balance sheet by holding Bitcoin. It’s a part of believing in what we do.

And we like having this piece of this ecosystem that is being developed that we don’t exactly know what it’s gonna look like yet.

Stephan (24:08.306)
And look, I personally agree with you, but for the sake of, I guess, listeners who might be curious, they might also think…

Well, does this change if, let’s say hypothetically, right, we’re here on 31st October 2023, the speculation is that an ETF, a Bitcoin spot ETF is going to come in the US, let’s say, late this year or early next year? That’s kind of the, that seems to be the consensus in the market right now. Do you believe any of that calculation would change for an investor if a spot Bitcoin ETF were to come, let’s say, early next year or late this year?

Jason Les (24:42.454)
I don’t think it changes. I think the ETF would be an incredibly bullish thing from the industry. Some people ask me, hey, do I think that’s going to take capital outside of Bitcoin mining stocks and into ETFs? I think it’s a rising tide, lifts all boats scenario. I think what that will do for the price of Bitcoin will be very beneficial to us. I don’t think it takes away from what a lot of people look at the value proposition of

public due to Bitcoin mining stocks, and that is a leverage play on Bitcoin. Riot has underperformed Bitcoin in 2022 when it went down, and we’ve overperformed Bitcoin this year when it’s gone up, and we’ve seen that type of price action over the years here. Bitcoin miners, by having that leverage position on Bitcoin, tend to have results. Shareholder return, that’s a leverage play on Bitcoin. So I think with the ETF.

doesn’t still take away from the fact that holding Bitcoin on the balance sheet is an important treasury management tool that de-risk our exposure to the dollar and it gives us upside on the future from Bitcoin.

Stephan (25:51.946)
Gotcha, yeah. So I think, and you know, I’m not disagreeing with you, I think maybe the key there is sort of finding that right level of balance, because maybe there were miners who went too hard on trying to hold Bitcoin to the exclusion of not actually selling enough to pay their expenses. And then maybe that’s where they were falling into a problem when the cycle turns against you. And then maybe that’s where the problem comes.

Jason Les (26:13.046)
Yeah, you’re right. There is a sliding scale of somewhat there. I think operators should be very mindful of their costs. And I think selling Bitcoin to pay your operating costs is kind of a basis approach that everyone should take. Not doing that is taking an even greater leverage view on Bitcoin, which as a Bitcoiner, I respect. So I’m not going to be too critical of that. But.

As operating a company, yeah, I think it’s an important part to generally sell your production necessary to pay for your cost.

Stephan (26:51.682)
So you mentioned this idea of outperforming Bitcoin in the bull run. And I’m curious to sort of get your expanded thoughts on that, because I guess I have my own ideas, but could you just explain a little bit of that dynamic? How is it and why is it that Bitcoin miners can outperform Bitcoin in a bull run?

Jason Les (27:10.138)
So going back to what we talked about, kind of on that lag of results when the Bitcoin price changes, just going back to using our Q2 results for an example, our direct cost per Bitcoin was $9,300 a coin. If at that time Bitcoin had gone up to $60,000, so a little over, let’s say double the price was around at that point, the end of Q2, then our cost is still the same.

network hashrate is going to start to grow and difficulty is going to start to go up as a result of that. But in the immediate timeframe, our cost per Bitcoin is the same. So we are still purchasing that Bitcoin effectively through the process of mining at a price that is now even less, it has become even a smaller ratio of what the market price is. You go from a 80% margin to an even higher and higher margin.

95%. So that is how we achieve that leverage position in Bitcoin. And that’s what translates into the stock price action on our stocks. You know, take Riot, for example. Bitcoin this year is up 68% or 107%. And Riot is up almost double that. So when Bitcoin’s gone up 100%, Bitcoin’s gone up 200%. And I believe that’s because-

Our costs, you know, fundamentally stay fixed, all varials remain equal. We keep that low cost of production and the value of the thing that we’re producing has just continued to gone up dramatically. Now the other side of the coin is in the bear markets, when Bitcoin performs worse, Bitcoin miners tend to perform even worse than Bitcoin. So Bitcoin could be- and I don’t remember the figures from 2022 off the top of my head, but-

I think Bitcoin could have gone down around 75% that year, maybe something around that. I think Riot went down around 90%, so it would perform worse than Bitcoin. The leverage position works both ways there in the eyes of the market. I think investors are interested in owning companies that have that upside with Bitcoin. They’re producing Bitcoin for a very low price.

Jason Les (29:37.282)
and the price of that Bitcoin is going up, the value of that commodity is going up external to the company.

Stephan (29:43.902)
Right. And to be clear, it’s not that you have to be all or nothing, right? It doesn’t mean like you have to hold zero Bitcoin and only hold Bitcoin miners. The reality is that you may actually hold a little bit of both, right? You may have your Bitcoin hodling stack and then maybe you have some stocks and some of those stocks are Bitcoin mining companies because you prefer some of that exposure.

So I think that’s probably in practice how it might happen. And maybe for some people, that’s actually part of their journey. Maybe they start by holding some Bitcoin mining stock, and then later they realize, oh wow, actually, I want to hold some underlying as well.

Jason Les (30:14.898)
I would hope so. I would hope that if someone’s first exposure to Bitcoin is Bitcoin mining equities, that they develop an interest in Bitcoin, they develop an interest in how Bitcoin works, and that leads them to learning how to self-custody Bitcoin and use Bitcoin on their own. And therefore, they can kind of switch from, I think a lot of people like Bitcoin mining equities because it’s just a safe way to get exposure. That’s why the ETF will be good as well, because people who do not have the expertise are…

do not have an interest in learning how to self-custody Bitcoin and take advantage of the sovereign wealth properties that it has. They just want to own something in their brokerage account. Okay, that’s their preference. And equities, ETFs help support that.

Stephan (31:02.306)
So you’ve also mentioned this funny idea that being a Bitcoin miner is sort of like dodging knives. Can you elaborate a bit on this idea of dodging knives and what that’s like?

Jason Les (31:14.422)
Yeah, you know, when I said that, Stephan’s referring to a panel at the Pacific Bitcoin Mining Day recently. I said that because this is a brand new industry. There’s no roadmap of how this gets played out. And there’s a lot of things that are happening to impact our industry from the outside. A normal business, you’re just showing up, you’re trying to be competitive and turn out good financial results for your shareholders.

So that’s the core of what we do. But while we’re trying to accomplish this, there’s all these external factors that are coming up. We can just rattle off a few. Hey, there was that infrastructure bill amendment two years ago where they were trying to classify Bitcoin miners and wallet developers as financial institutions or broker dealers, brokers by the IRS definitions.

The Biden administration rolled out this proposed DAME tax, 30 percent tax on mining. Different accounting rules on how you account for holding Bitcoin on your balance sheet kind of can shift around. We have to come up with whole-we’re pioneering the ways that internal controls over financial reporting work for Bitcoin mining companies. So I say dodging knives because we’re dodging-

all these things that are happening external to just the core focus of trying to manage the business. Oh, and then add to that, we have a volatile Bitcoin price that’s moving all over the place that changes the market around you. Things like FTX happen, and it totally undermines investor confidence in the whole industry for a bit. So it’s exciting. You never get bored in Bitcoin mining, I’ll tell you that much, but there are so many external factors that we are trying to deal, manage risk on all the time.

And I think it just it comes with being a part of a new industry. So to me, that’s exciting and that’s rewarding. And that’s worth the cost that we have to pay to manage all of these all the time. But it definitely does not feel like a normal business from that regard.

Stephan (33:24.458)
And speaking of this, there are, well, maybe one other knife to be dodged is some of the political attention Bitcoin has been receiving recently with the Israel-Hamas conflict, and Elizabeth Warren was basically using this as part of her narrative. And I know you recently wrote an article, you did an opinion piece for The Hill.

touching on some of this. So do you want to just explain a little bit of your thoughts on this narrative of quote-unquote Bitcoin is being used to fund terrorism and if you could give us your thoughts there.

Jason Les (34:02.154)
Yeah, so this kind of ties in with one inch deep criticism that outsiders will always levy against Bitcoin. Oh, it’s used for illicit activities. That’s the only use. Well, let’s start there. A company like Chain Analysis, whose entire business is identifying illicit activity on the Bitcoin blockchain, estimates that a quarter of a percent, 25 basis points of activity on Bitcoin is illicit activity.

Compare that to 2 to 5% of fiat currencies like the US dollar. So that rap that people try to levy on Bitcoin as a criticism that it’s only used for illicit finance is totally baseless and should not be used as a tool or a reason to introduce adverse legislation around Bitcoin mining. I’m sorry, around Bitcoin. So the Wall Street Journal ran an article.

article last week, or maybe a little bit before last week now, saying that Hamas had raised somewhere around $133 million with cryptocurrencies. And pieces like this is what is used in ammunition for politicians to get the regulatory gears going. The fact is that was a very misleading figure. That was a misrepresentation of the data that was received. The source of that data has corrected that.

Jason Les (35:32.222)
It’s one of these instances where the lie gets halfway around the world before the truth is told. And that was the purpose of writing this opinion piece, to set the record straight. That figure was not accurate. And in fact, Bitcoin is not an ideal tool for using illicit finance. And in fact, Hamas put out a press release earlier this year asking people to stop sending Bitcoin because it was too easily traced. So there’s no need to introduce legislation

a new regulatory regime on users, wallet developers, miners in Bitcoin in response to inaccurate articles like this, that doesn’t solve a problem. As we said, as head of public policy, Brian Morgensen and I coauthored the piece. As we said in that piece, that’s trying to solve a problem that doesn’t exist. We don’t, we should not have users of Bitcoin being forced to register as financial institutions, being forced to register as banks.

It’s important to set the record straight. And I appreciate the lawmakers who are pro-Bitcoin, who were active last week in D.C., getting that on the record, that figure being cited in the Wall Street Journal article of $130 million was not accurate. And a lot of the criticism being leveled at Bitcoin around being used for illicit finance was not accurate. But there are some people who are determined.

to go after this industry, and they are not as interested in the truth as the rest of us. So that’s something that we as an industry have to continue to fight against. It can seem daunting at time. Another example of a falling knife being all of a sudden alleged that Hamas is using Bitcoin to do all these things, but it’s something that we as an industry have to push back on and make sure the truth is being told.

Stephan (37:22.666)
Right. And I will also note that in one of these hearings, Elizabeth Warren asked this question and the response from one of the respondents, Dr. Shlomit Wagman, I’m reading the notes here, former director general of Israel Money Laundering Authority commented saying that most terrorism financing is still using fiat, like fiat rails, normal fiat rails and not Bitcoin. So it’s important to note that various experts in the industry are pushing back. They are saying no, that’s not factually correct.

Although I do have some sort of, let me put it this way, I have some hesitation about sort of trying to rely on chain analysis and elliptic because to some extent what they’re doing is probabilistic as well. It’s not even really a science. It’s kind of, it’s sort of yes and no, right? Maybe if there are certain transactions done with a KYC exchange and elliptic or chain

Stephan (38:20.31)
maybe if it’s closer to the transactions that happen, you know, one step to and from that exchange, okay, yeah, there’s probably something there, but when you get further and further away, it becomes probabilistic. And then we’re sort of also opening the door for this kind of chain analysis and elliptic style regulatory capture. And so I have maybe a little bit of a misgiving around that, but, you know, so it’s sort of, we’re sort of in this awkward position of people pointing to elliptic and saying, well, hang on, that’s not right. But at the same time,

Is elliptic and chainellysis even correct? Well, who knows, right?

Jason Les (38:53.846)
Yeah, it’s very difficult and we would not want to falsely accuse someone or overinflate a use of one way or the other by using an imperfect, as you know, probabilistic analysis. So it’s very tough. Bitcoin, at the end of the day, on the base layer is a pseudonymous currency. If you’re interacting with entities that know who you are, then you’re creating…

record that’s tied to who you are and that’s why Hamas did not want to use Bitcoin anymore.

Stephan (39:29.806)
Right. And related is this concept of educating the government, educating politicians. I know this is another area that maybe some Bitcoiners are divided on. Some people just say, oh, just build. And then there are other people saying, well, hang on. If you don’t educate this government and these politicians and these regulators, there’s a chance that they put out laws that are actually really bad for Bitcoin and regulations that are really bad for Bitcoin and bad for Bitcoin miners.

What’s your stance and Wright’s stance on this kind of question around education of government, politicians, regulators?

Jason Les (40:04.482)
Our stance is education advocacy in this industry is really important. We invest a lot in hiring top-tier talent and working with groups to help get the message out there, contributing to groups that are helping with these efforts. First off, I’ll say we’re a Bitcoin company, so we rely on a positive regulatory environment to continue to exist as a company. So we’re very motivated to represent Bitcoin well.

and to push back on these criticisms and make sure adverse regulation to our industry is not passed. The hardcore Bitcoiner would be correct in saying, hey, you could pass all sorts of laws to whatever against Bitcoin, and you’re not going to stop it. That’s right. Bitcoin is censorship resistant. It’s decentralized. You could pass law in any one or number of jurisdictions, and it is going to continue to kind of operate. But…

doesn’t mean it’s going to operate in a way that is, you know, one, that’s friendly to the businesses that are trying to build this ecosystem, and then two, not going to necessarily operate in a way that is easy for more people to get on board and take advantage of this technology and take advantage of this new financial system. So we do not want adverse regulation going forward. We do not want individuals’ wallets.

users, miners, software developers to be classified as banks. That’s preposterous. We think it’s very important to push back against that, not only for what that means for us as a Bitcoin company, but for what that means as people, individuals, and other companies that are a part of Bitcoin. I think it’s a battle that’s very much worth fighting. I have been very impressed with the reception that we get from doing this. I was just…

in D.C. last week, meeting with as many members of Congress as I could with the digital chamber of commerce, had a whole set of meetings rolling. We’re trying to meet with as many lawmakers as possible, talk about Bitcoin, talk about Bitcoin mining. I was really encouraged by the level of support from different lawmakers that we have. At times discouraged by some. But I think the amount of…

Jason Les (42:25.022)
allies that we have, allies to the Bitcoin industry, and the amount of blank sites that exist that are looking to learn more that have not informed an opinion, means this is a very worthwhile effort. I’m very pleased with what Riot’s doing. I’m very pleased with what I see other companies in the industry doing. It’s once again outside of our core business. The capital we’re investing in this, we’re not making back like we would if we would invest hashrate. But it’s very important for going this industry.

And I really encourage all companies to be involved in this. There’s misinformation out there about Bitcoin. There’s people that want to learn about Bitcoin. It takes good educators, individuals that are excited about Bitcoin to get out there and communicate those messages.

Stephan (43:10.474)
Right, and I have to say, I agree with you. I think, you know, I’m a libertarian, but I also believe that there is a role in educating because I’ll give, there are examples in other countries where maybe regulators just, or government politicians just made laws and there wasn’t that much input from the people who really cared about Bitcoin. And some of these laws have sort of harmed Bitcoin in those countries. And so I think it, you know, it’s worthwhile if you can influence

somebody to defensively not put in bad regulations, bad laws that would impact Bitcoin use, Bitcoin mining, Bitcoin node running, Bitcoin holding of keys. I think these are valuable. And so I personally do think it’s worthwhile. So I guess from your perspective, Jason, if you are, let’s say you’re talking to a listener and that listener is having difficulty.

communicating the value of Bitcoin and the use of Bitcoin mining, what sort of answers would you say, what sort of answers have you found that can resonate with people? Right? So as an example, the listener is at a dinner party or something and somebody’s saying, oh, Bitcoin doesn’t use more energy than this country. What should we do about that? What should you say?

Jason Les (44:29.218)
What I would tell people is what the internet did for the distribution of information, Bitcoin is doing for the ownership and medium of exchanges for money. Bitcoin has these valuable properties. It’s decentralized. It’s censorship resistant. You can have sovereign control as an individual. You don’t rely on third parties, et cetera, et cetera. These are important properties of Bitcoin.

I think you can talk to someone and point out to many different examples in the world present day of why those properties are valuable. The sales pitches just continue to write themselves, it appears, in the macro environment. So if someone can accept that those properties are valuable and they can accept that Bitcoin is value, it’s important to make the connection that Bitcoin mining is how these properties are achieved.

Jason Les (45:25.594)
solved a problem that made a fair distribution of this currency possible, that spread out consensus for agreeing on the state of the blockchain. And that is the tool that’s required to do that. So it’s not a, you know, it can get at a nuanced technical argument, but proof of stake cannot achieve those same properties.

Jason Les (45:54.626)
for Bitcoin achieving those properties. And it’s a very efficient use. You think about Bitcoin’s global energy use using approximately 20 basis points of the world’s energy to serve tens of millions of people on this system. So you can’t look at the energy use, people that are concerned about the energy use in just kind of isolation, put it in context. That’s a very efficient use of energy. And with the flexible properties of Bitcoin mining,

It’s solving a lot of energy problems and great instability issues as well. So that starts to get down another tangent. But if you accept Bitcoin is valuable, if you accept these properties that are unique to Bitcoin are valuable, then Bitcoin mining is how it achieves that. So Bitcoin mining is the valuable tool to ensuring financial freedom, to ensuring decentralized finance.

Stephan (46:46.454)
Fantastic. And so I think that’s a great way to give people some context about why Bitcoin is using that energy and also putting it in context as well. As you mentioned, 0.2 percent of the world’s energy, which is, you know, it’s not some crazy, crazy huge fraction. And another topic that I think listeners will be interested to hear some explanation on is curtailment in Texas. And so, you know, if you could explain a little bit about this, how it works.

Because I think this is another area where maybe some of the news articles were perhaps a little bit inaccurate recently, right?

Jason Les (47:21.634)
Right. So this ties back to what we talked about earlier. One of Riot’s strengths is our low direct cost per Bitcoin. We achieve that through our proprietary power strategy. What underpins that strategy is these long-term, low-cost, fixed blocks of power that Riot has. In a deregulated market like ERCOP, we have the ability to effectively trade that power. If we’re using it, then we’re using the power at that rate. If we’re not using it, then we are…

pocketing the spread between our hedge and what the market price of power is. Now, because of all of the intermittent generation sources in ERCOT, so much solar, so much wind, there can be a lot of volatility in that market. There’s volatility of when these generators are generating power, and there’s a mismatch with that matching when consumer demand for power is high. The sun might be setting around six, seven o’clock, but people are going home.

and they are cranking up their AC and that’s why they need power. So in these discreet times is when loads like Bitcoin mining riot through our power strategy are able to provide a service and make a profit by doing so. So what we’re really doing is just trading our power into the market of energy that’s out there. There were misleading headlines like rape Texas.

power users paying Bitcoin miners. That’s not how it works in practice. There’s no subsidies in this market. There’s these costs are not directly passed on to consumers. There’s a whole market of energy players in there buying and selling energy. Riot is a very small piece of that. The other big thing that we do is participate in something called ancillary services. And the easiest way to think about this is we are selling insurance to the grid.

in this case, ERCOT, by giving them the ability to control our load. So we say you can control this amount of megawatts through these hours of the day. We have to make this decision in the day ahead time frame. We give them that control. And they are able to manage frequency on the grid, manage load however they need. So some oftentimes they keep us running, other times they need us to shut off during different times. And that is not always price responsive. That’s trying to accomplish.

Jason Les (49:49.058)
a other type of stability goal. So once again, Riot, a very, very small piece of that very big market that exists in an energy market as big as ERCOT in a state as big as Texas. So we provide a very valuable service to the grid operator and to the ERCOT grid as a whole by being a load that is taking power when it is not in high demand and having the flexibility to then make that power available.

when it is in demand. We commit to buying power over a very long time frame at a certain price, and that gives generators visibility in what the return is going to be, and that helps incentivize more generation development. Now that fixed price, we’re fixing that for many years. So sometimes people look at that and be like, oh, okay, this company has this deal, and they’re now able to sell power.

You know, why can’t we all get paid to do the same? Well, we took a financial risk on this price. You know, not all users have that view or want to take on the risk of having to do that. Most people just want to use power, not use power. But because this is our business, we’ve taken on that financial risk. We’ve committed financial resources to it. That’s why the strong balance sheet is important to us. And we’re able to participate in the market. So by doing this…

by economically curtailing power when the price of power is high, indicating high demand low supply, by participating in insular services, giving grid operators like ERCOT the ability to curtail our load. We are positively contributing to grid stability. We’re providing a service that many other energy loads cannot. And because of the way we execute it, we’re able to benefit from that, and then that helps lower our direct cost per Bitcoin.

Stephan (51:48.61)
Right. And one other question around that curtailment and ancillary services aspect, it requires you to basically turn miners off and on depending on what somebody else is, you know, depending on the market conditions. Does that cause any additional wear and tear, right? In the same way, I guess intuitively people might be thinking, okay, just like if you’ve got a car, it’s easy just to kind of run it straight.

on the highway, if you’re in the city doing stop and start, it’s sort of more wear and tear. Does that cause more wear and tear on your actual mining rigs?

Jason Les (52:22.006)
Well, first, one other point I forgot to make is, you know, we’re not setting these market prices of power. The price of power is going up based on other conditions going on, and we are sellers into that. Sellers drive prices down. So getting reducing, helping reduce that volatility. One other point I wanted to make there. To your question, Stephan, what we do is put the miners in what’s kind of an idle mode where they are still running, just not using full amount of power. So.

That allows us to be really responsive. We’re not turning things all the way off and then having to turn them all the way off again. In an extreme emergency, yeah, we can flip a breaker and turn everything off. That would cause wear and tear on the electrical equipment and not be great for the miners. But what we do is we take the miners, they’re still on in a more idle mode, not hashing, and then we can ramp them back up when market conditions change.

Stephan (53:15.006)
Okay, great. And so I’m curious as well, and you’ve sort of touched on this a little bit with, I guess, the long-term power agreements. Is this something you see in the industry where, well, let me put it this way. There seems to be more development around things like hash rate futures and derivative products. Is that something you see a future for in the Bitcoin mining industry? And is that something right?

Engage in or do you see it more like you have other mechanisms to achieve these things where you know you can hedge in other ways

Jason Les (53:47.682)
We are evaluating those tools to see how they might fit not saying we are going to do that or not But we want to be aware of the products out there and we think about how they might work. I think hedging strategies on Bitcoin are Particularly useful if you are matching that with debt and you need to control your downside more I think that can be a very useful tool for

miners who are trying to protect their downside there if they have a more leverage balance sheet. But then I think the ultimate question, the answer to your question comes from what is it that the market wants? What do investors and shareholders want? Do they want a company that is getting all of the upside from the volatility of Bitcoin or are they more interested in companies that maybe protect their downside a bit more? I don’t think we know the answer to that question yet.

We are certainly looking at it and that, you know, I’m saying that could be a part of the strategy in the future, but something that we’re going to approach very, very cautiously.

Stephan (54:54.082)
Gotcha, yeah, and you do rightly point out that in order to protect a little bit on your downside, you’re giving up a little bit of the upside. So as you said, it’s not a free launch, but maybe it’s still useful, maybe it’s still valuable. And in terms of the future of Bitcoin mining, do you see it like…

Jason Les (55:01.13)
Exactly, yeah.

Stephan (55:11.958)
Bitcoin miners will try to vertically integrate with energy production themselves, or is it more about trying to get closer to the energy providers? Is it more a question of just having long term agreements that give you reliability? Because what we’ve seen in this industry as well is this kind of unreliability and in different jurisdictions, right? So as I’m sure you’re well aware, after the China mining ban, there was a lot of hash rate that moved to North America, but there was also a lot that went to Kazakhstan.

Stephan (55:42.672)
some operations in Kazakhstan and he was saying some recent regulations and laws that have basically just smashed that industry in Kazakhstan. Basically the government got too greedy with taxes and regulations and it just you know made it unstable. So do you have any comment around trying to sort of have stability in your operations there?

Jason Les (55:47.266)

Jason Les (56:04.078)
What I was going to say when you started listing out, hey, how do I, these different ways I see the industry manifesting itself in the future, I think it’s all of the above. I think it’s important to start from the basis that one-third of all energy that’s generated globally is wasted. That is an incredible inefficiency that we carry as humans occupying the globe. We’re generating one-third of energy that’s lost in transmission, that has to be curtailed, all of these type of things. Bitcoin mining is the solution to that.

because Bitcoin mining can be deployed anywhere, it is interruptible, and the skill at which you’re deploying it is completely customizable. So I think Bitcoin mining is going to find its way into more and more parts of our energy grid as this industry goes forward. I think like what Riot does today as operating sites, that’s a flexible response to the grid, I think that is a practice that will continue to be seen as a grid resource. I think generators,

will see Bitcoin mining as a tool that they can put behind the meter to help monetize that capacity when they otherwise don’t have a strong market for it. In Texas, energy goes negative. So generators are not looking to sell energy at a negative price, but sometimes they are forced to. Having a load like Bitcoin mining that could be behind the meter at that generator to absorb that excess load when the market is otherwise bad.

Therefore, it would take the generator position where it’s not losing, for example, $20 per megawatt hour selling it into a negative market, but could be instead monetizing that, making $80 a megawatt hour on it, mining Bitcoin. So I think many are, of course we’re not seeing this on a large scale right now. I think a lot of companies are still in a wait and see approach around Bitcoin and Bitcoin mining. I think the lack of regulatory clarity.

isn’t helpful. Another reason why what we’re doing with public policy advocacy is so important to kind of establish the regulatory framework around this so we get companies more comfortable. But over time, Bitcoin mining is going to be this tool that generators use that’s used to balance grid stability and is used to solve a host of other problems in the industry as well. We see people using Bitcoin mining to capture flared methane. We see people talking about using Bitcoin

Jason Les (58:29.434)
capture landfill waste gas, the uses keep coming forward. And not only is Bitcoin transforming how the world thinks about money, but through mining, Bitcoin is changing how the world interacts and uses energy. And I think that’s a very fascinating and important second order effect that Bitcoin is having.

Stephan (58:52.298)
Yeah, it’s a great answer and really it is all of the above. At the end of the day, you need some kind of edge, you need some kind of way to get cheap power if you’re going to be a competitive Bitcoin miner, right? Like bottom line, that’s really what it is at the end of the day. And so one, I guess, final topic area before we finish up, the halving coming up, right? So projected to be in April next year. I’m curious if you have any predictions or thoughts on how things will go. I guess…

Historically, it’s probably fair to say that the weaker miners historically got cut out and typically, historically what we saw is they would quote unquote, puke their miners out or sell their mining devices out and other miners would accumulate those. But it also depends on where the price is at that time, right? Because I think it’s fair to say that if we went into the halving and the price is in that let’s say 15 to 20,000 range, there’d be a lot less miners who make it. But now…

With price at $34,000 as we speak, it’s sort of, there’s a lot more miners who might be able to make it at this price level. Any thoughts, any predictions on what might happen this time around?

Jason Les (01:00:00.886)
Yeah, you know, a way to think about the halving from Bitcoin miners perspective from the other side is when the halving occurs, your direct cost for Bitcoin doubles because you’re using the same amount of energy and hash rate and your block rewards are now cut in half. So we like to think about it from the cost side too. And that’s what gets us so focused on having that low cost of production. I think at the halving difficulty will go down because there are still so much.

you know, mid or later generation hardware that’s still out there that is profitable at a $34,000 Bitcoin at a 6.25 block reward, but won’t be at 3.125. So I think we’ll see a drop there. But what’s very interesting about this having is we’re pairing it with this potential ETF approval, which I think consensus is will have a positive impact on the Bitcoin price. I think based on what we’ve seen in recent weeks that

approval alone would have a positive impact on the price but how that actually manifests itself the timeline of which we actually see a sustained impact on the Bitcoin price may take a little longer you know we don’t know how this is gonna play out I guess is what I’m getting at so if an ETF is approved and that results in a huge appreciation of price then hey like you noted Stephan the difficulty is not going to go down as much these

Previously inefficient miners now can stick around for a little bit longer. But things could get tough. We could have a buy the rumor, sell the news kind of situation because the actual inflow of capital takes a little bit of time down the way. The marketing behind these ETFs maybe takes a little bit more time to roll out and we don’t see the price appreciation right off the bat. That will put miners into a position they were in 2020. In March, we had a halving in May 2020.

In March 2020, Bitcoin went as low as flash crash at 3,500. So things can get pretty bad. You have to be prepared for all scenarios. At Riot, we do not predicate our business on needing the price of Bitcoin to go up. We believe it will. We’re a Bitcoin company. We have strong view on the future of Bitcoin, but we structure our business to prepare for the war. So…

Jason Les (01:02:24.238)
That power strategy, this emphasis on having this low cost of coin will allow us to continue to have positive operating leverage on Bitcoin even if the price does not appreciate and we have to deal through a tougher market with the halving for a while. So we’re trying to be prepared for all scenarios. How things play out, I think this is going to be very interesting. 2024 halving, potential ETF, presidential election in the United States.

everything’s on the table, it is going to be a year to remember.

Stephan (01:02:56.226)
All right, well, I think that’s a great spot to finish up. Listeners, you can find Jason, the website is writeplatforms.com. I’ll put all the links in the show notes over at stephanlivera.com/522 for this episode. Jason, thanks for joining me today.

Jason Les (01:03:08.538)
Thank you for having me, Stephan.

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