When you need to send a bitcoin transaction, you need bitcoin blockspace. But blockspace is scarce! CEO of Barefoot Mining, Bob Burnett and I chat about this, and what you can do about it. 

  • Blockspace scarcity and explanation
  • What you can do about it
  • UTXO management
  • Different types of miner
  • Miner’s Trilemma
  • Arguments against public company mining
  • Mining NOT being a leverage play on Bitcoin
  • Public vs private miners
  • Gateway going public
  • Core Scientific bankruptcy
  • Mining decentralisation



Stephan Livera links:

Podcast Transcript:

Stephan (00:00.792)
Hi everyone, welcome to the Stephan Livera podcast, a show about Bitcoin and Austrian economics, brought to you by swan.com. Today, we’re gonna be getting into Bitcoin mining and Bitcoin’s block size scarcity. And joining me today is my friend, he’s the CEO of Barefoot Mining, and obviously is doing a lot of work in the Bitcoin mining world. Bob, welcome to the show.

Bob Burnett (00:21.226)
Hey, great to see you, Stephan.

Stephan (00:24.012)
So Bob, let’s talk a little bit about Bitcoin mining. Let’s hear a little bit of your background story. I know you came in, was it like 2017, 18 or so, and you got into the mining game from there, but you previously had a career as a technology entrepreneur as well.

Bob Burnett (00:39.346)
Yeah, yeah. So my career is really founded on the personal computer industry. So because it’s so long, I won’t bore everybody with the whole story. But it goes back to the late 70s, actually starting coding in the late 70s. That led to a degree in computer engineering. It led in the mid 80s to be joining a company called Zenith, which

at the time was one of the early personal computer clone companies. So trying to clone the IBM early PCs. And I was fortunate enough to be on a team that was designing what I consider to be the world’s first laptop. And we brought that to market. Then I left there, did a startup, also designing laptops. We were purchased by Gateway company called Gateway, which was a top five personal computer company.

So I joined them just a little bit before their IPO, was with them, helped take them public, then became the Chief Technical Officer there. And so led for about 15 years, led product development across notebooks and servers and desktops and even we did plasma TVs and cameras. So it was a real exciting time, obviously. This would have been in the 90s

early 2000s. And then, this will fast forward, in 2017 I got a phone call from an ex-gateway person I had left in 2004 so I hadn’t talked to this person for a long time and they said, hey Bob could you design some Ethereum mining equipment for me? Ethereum mining servers? So at the time I was thinking about it like a computer guy and of course said sure I can design the computers for you and did that and that

led though to me, after fulfilling that initial order, it led to me trying to sell them to other people who primarily said, hey, I’m interested, but only if you’ll host them for me. And that kind of pushed me into the mining business or the hosting business. And I saw they were making a lot of money, so we started to take the profits into mining for ourselves.

Bob Burnett (03:00.89)
And then about a year in when I had a chance to sit back and breathe, I started looking at what Ethereum really was and saw some flaws technically. And while I don’t have the chops that you have, I do have a background in economics as well. I have a degree in economics. And I just, and I had found Austrian economics around 2002 as well. Beyond my formal education, I had also.

founded in 2001 2002 And so it just didn’t add up. It didn’t add up technically. It didn’t add up governance wise. It didn’t add up monetary monetarily but Bitcoin did and so the company pivoted and really adopted Bitcoin and You know here we are today

Stephan (03:50.932)
Yeah. And I know you’ve been obviously commentating on Bitcoin mining as an industry. And recently you’ve been raising the alarm about the Bitcoin block size scarcity. Right. I think that’s an interesting one. Now, this is something I think long time Bitcoiners have been talking about. I recall mentioning it even in some of the first, you know, here we are episode, you know, 525, but in my first hundred episodes.

When this kind of topic came up, we would mention, hey, fees are going to rise. I recall talking with people like Andreas Antonopoulos and others talking about this idea that every time you hit the chain in the future, you might need to be very judicious about how often you do that. And it might be more like lightning channel open and close sort of conversations as opposed to just, in the early days of Bitcoin, where people just would transact on chain and not really think about the

the fee or not really worry about the size of the coins that they were spending. So can you spell out for us a little bit of your thoughts on the scarcity of block space?

Bob Burnett (04:52.83)
Yeah, well I guess we’ll start mathematically. So if you look at the way Bitcoin is constructed, on an annual basis there are about 53,500 blocks. So given that, we have a finite capacity just from the fact that there’s only that many blocks. It’s

It’s further defined by the size of the blocks, which is four million weight units. That’s probably beyond what most people want to know. But if you look at block space, what you’ll find is that really for the last eight months, every single block has been 100% full. Like there is no space in any of these blocks. And if you look at the average number of transactions in those blocks, you’ll see the number’s 2,700. So.

If you take that and say, well, the average block has 2,700 transactions, and we have 53,000 blocks, you can do the math and you’ll see a number somewhere just north of 140 million. Now it’s my belief, and I’m sure you could comment on this too, Stephan, that people can be a little sloppy in the way that they do transactions because it’s kind of free.

You know, if I have to send money to you and I have to send money to a second person, I might do that as two different transactions instead of maybe just doing one and sending money to both. So I think we could get to the way where maybe we can see more an average like 4,000, but there’s a finite limit to that, that’s the main point. And I believe that limit is about 200 million. And…

In fact, I often like to use the word resolutions, like base layer resolutions, instead of base layer transactions, because it’s all a bit of semantics, but if I’m doing UTXO consolidation, for instance, I’m not really thinking about that as a transaction that’s more of a, like I said, a resolution with the ledger and kind of tidying things up. But regardless, that 200 million sets a limit.

Stephan (07:06.602)
I see, yeah.

Bob Burnett (07:10.758)
Right? And I think we all have to think about that. Now, if there are 200 million transactions available for the whole world, we’ll start with there’s 8 billion people in the world. So if 2% of the people or 2.5% of the people wanted, we’re Bitcoiners, right? That means they could each do, they can do one per year. So.

Stephan (07:32.044)
They’d get one per year.

Bob Burnett (07:36.318)
And by the way, that’s excluding the fact that there are 330 million companies in the world, like formal legally formed companies in the world. So they could also all absorb it. So there’s this certain reality that, I appreciate that a lot of those that came before me were echoing it in the early days, but I haven’t seen much about it recently. And that’s part of why I’ve been just trying to speak up about this and bring.

I think probably to the people from maybe my class of 2017 up through the current classes to say, hey, this is, it’s not a problem by the way. This is the way that the Bitcoin is architected and it’s actually a positive thing. It solves the problem of network security. It incents L2 and L3 developments. I think all those things are very, very good.

Bob Burnett (08:33.799)
One of the other things I’ll say is…

I think most people are probably aware of the Bitcoin subsidy. So when a block reward is generated to the miners, there’s two components to it. The subsidy, which is the new issuance of Bitcoin, right now six and a quarter, and then the fees. And I think most people think of the subsidy only relative to the miners. But

I think that’s a bit of a misnomer or a bit of a miscalculation because it’s really a subsidy to all of us. And I think what was really happening was the subsidy was there to encourage the early users to say, hey, here is this secure ledger and now the world’s, I think, most secure ledger, the most secure network in the world.

repository of truth available in the world and use it. The subsidy is there to say, you know, use it.

But in my opinion, we’re at the end of that era. That we’re seeing the effects of it, right? We’re seeing like right now, literally, we’re seeing fees skyrocket again. And they really haven’t gone down materially. The mempool’s been absolutely stuffed for eight months. And so I think there’s just this realization because so much of, I think,

Bob Burnett (10:13.954)
the way a lot of people perceive Bitcoin and the way they communicate about Bitcoin, things like not your keys, not your Bitcoin. I believe those things. Please don’t take that as me saying maybe something sacrilegious, but everybody can’t do that. It’s just not mathematically possible.

Stephan (10:35.936)
Right, yeah, and certainly this is something I’ve been also trying to help make sure people are aware about this idea. But as you say, it’s a challenging thing to explain for people. And it might also be fair to say that some of these considerations can get automated away and some of these things will sort of be.

You know, the very technically talented protocol and application developers will work on solutions, but perhaps for those of us here today, you know, if you’re listening in 2023, there’s a decent chance you might need to think about it manually and do some manual management of these things. And the other challenge of this is there’s always been so many moving parts here. So as an example, like you correctly note, the subsidy is dropping a lot, but at the same time, the price is going up.

So that can sort of help counteract a little bit in terms of the subsidy going down. If the price more than doubles at least once every four years, well then at least from a fiat purchasing power perspective, the miners are still getting that same amount in subsidy in fiat terms, right? And then the other aspect of it is, there is always a trade-off with this, because as you rightly point out, there’s a scalability aspect of this.

Bob Burnett (11:47.967)

Stephan (11:57.836)
There’s also the privacy element to this, because as an example, if a person does say, okay, I’m going to start consolidating my UTXOs, there’s also a privacy trade-off to that. And I think historically, there were users who just saw it like, well, it’s cheap now, I’m just going to use, you know, these more privacy preserving techniques, but they are not as scalable in terms of on-chain use, right? And then the other aspect to add into that is, as you say, there’s about

Bob Burnett (12:20.546)
Yeah. Yep.

Stephan (12:27.096)
you know, let’s call it 200 million resolutions on the base layer or transactions in terms of on-chain transactions, but each transaction can include batching as well. And so that’s another element that can kind of confuse things also. But, you know, at the end of the day, like kind of at the end of the day, you kind of crunch all of that out, you sort of come up with a number in terms of what size the UTXOs, you know,

Bob Burnett (12:39.246)

Stephan (12:54.996)
should be if you’re trying to manage it at a reasonable level, right? So for new listeners, UTXO means Unspent Transaction Output. Think of it like a little hunk of gold that your Bitcoin wallet is managing, right? That it’s got, you know, that it holds the private keys for those coins and it’s managing the private keys and it’s you are spending those coins by sort of pulling together those notes, just like if you’re making a, you know, an $8 payment, you might pull out a $5 note and three $1 notes out of your wallet.

in the same way your Bitcoin wallet is managing those UTXOs. So Bob, from your perspective, what kind of UTXO sizes do you think makes sense? Is it like a million sat or what are you thinking?

Bob Burnett (13:33.394)
Yeah, yeah, that’s kind of the number I’ve settled on. I think people have to work toward it. Some people may, I think in the short term, a few hundred thousand is okay. But don’t look at that as a resting place. I think that long term, about a million is a good number and more if you can. I mean, I would say the bigger the better for the most part. And

The people I worry about, by the way, I worry about people, I’m a big fan of SWAN, I know they’re a big supporter of you as well, and you’re part of the SWAN team. But I look at, I know people, for instance, who let’s say, DCA $5 a day. And those are people that I say, you know, be careful, because if you’re taking $5 a day, and every few days you’re pulling that into cold storage.

you might have a problem. It would be a good idea for you to just take some time and go look and see what you have because if you have a full bitcoin

in your head or you possess a full Bitcoin, 100 million Sats, but it’s broken up into 10,000 pieces. It’s kind of like having a million dollars in pennies. Like, you know, you’re not going to get a million dollars of value out of those million dollars of pennies because you’re going to have to…

pay to transport it, you’re gonna have to pay for somebody to count it, you’re gonna go through all these things and you’re not gonna end up with that. And so in simple terms, I think that that’s a good analogy as well to just think about that. But if you get it together, because if you have all hundred dollar bills, you’re gonna get a million dollars probably. So get it into those kind of chunks. Yeah.

Stephan (15:31.308)
into larger denominations, let’s say. And so one thing that I know, for example, with Swann, one thing we do is we have thresholds when you withdraw. So as an example, I have set up, when I automatically withdraw out of Swann, I set my threshold to 1 million SATs. So whenever the balance gets over 1 million, that’s when it’s automatically withdrawing. So that’s something that Swann is doing, and other companies can be doing similar things like that, but I think…

Bob Burnett (15:41.407)
Oh, that’s good.

Bob Burnett (15:49.282)

Stephan (16:00.96)
like to your point, yeah, this is one of those things where today or in the early days of Bitcoin, you might need to manually think about it. But potentially in the future, I could imagine some of these things could maybe be automated or maybe the software will sort of present you an option. As an example, let’s say your Bitcoin wallet in the future, maybe a few years down the line after a few people run into this problem, it might say, hey, Bob, actually, we’ve got a little bit of an issue here. You’ve got all these UTXOs and right now fees are cheap.

Do you want to do a consolidation transaction? And it’ll, it might present you the option for you to then sign or to approve and say, yes, Bitcoin wallet, you know, approve this, or do this consolidation for me so that I have a more advantageous set of denominations for my UTXOs on my coins.

Bob Burnett (16:38.323)

Bob Burnett (16:46.622)
Yeah, that’s absolutely true. And I think that’s why Bitcoin’s an exciting place to be, because there’s so much virgin territory for people to have creative ideas and come up with these kind of services. I do want to say, because I’m a miner too, that I do worry about small miners having the same problem, because it’s effectively the same as DCAing. So if you have an S9 in your garage, and you’ve got just the same as you said with them.

Stephan (17:05.717)

Bob Burnett (17:15.998)
If you have a very low threshold amount that you’re pulling the money out of the pool from, you can run into exactly that same problem. So just be careful out there.

Stephan (17:26.816)
Right. And so I guess the unfortunate part of this is it does tend to push people into custodial for smaller values. And maybe that’s just going to have to be, you know, it’s not what we want to, you know, there’s the world we want and then there’s the world that we think is likely. And I think it’s going to be a situation like that where there will be users who are, you know, dealing with smaller amounts and they may have to go custodial because…

They simply, it simply won’t be cost effective. But I think on the bright side, I think that it is fair to say that there may be further innovation and advancement coming. And that’s where maybe some of these soft fork ideas, things like, you know, we’ve spoken about online, things like CTV, APO, and various other ideas that may help with sort of getting more efficiency and getting more for less. And so maybe some of those ideas will

help expand the set of people who can truly fully self-custody, but there may be a certain bunch, a certain group of users who just cannot self-custody if they’re not able to hold enough coins to justify the cost.

Bob Burnett (18:39.934)
Yeah, I completely agree with that. In the end, though, there is going to be some threshold. And that’s just, you can play with the math, and we can make these protocol changes. We can make these services changes. But unless we mess with block size, which I don’t think we’re going to do, or block time, by the way. I’ve talked about that a little bit, too. Those are really only two variables

Bob Burnett (19:10.102)
massive orders of magnitude. And so if we think about a world where 5%, 10%, 20% of the world is living in a Bitcoin economy, then this problem is real for sure. Because one of the interesting things is, as I mentioned before, the mempool, for those of you who aren’t familiar with it, it’s basically the pending

transaction pool, right? So how many transactions are waiting to get processed? It’s primarily vacillated over the last eight months between maybe 100,000 and 500,000 transactions. It’s zipped below a little bit a few times, but really it’s so, and every block is full. Therefore, demand for block space is already at a point where it’s saturated.

Now, the time preference of a lot of these people hasn’t caused any panic, right? So a lot of people have transactions that they’re not panicked about and they can wait for. But remember, we’ve achieved this level with only about 50 million addresses that hold any level of Bitcoin. And even if we said each of those was associated with one person, which isn’t true, but even if we did, we’re talking about 50 million.

addresses against eight billion people and it’s already caused back lot massive backlog in the mempool and every block being full. So I’m just kind of reiterating that this is real. And yes, I have a lot of belief in the faith and ingenuity of the people working out in the ecosystem but

the issue or the situation isn’t going to radically change.

Bob Burnett (21:07.182)
You know, one interesting thing to Stephan, just people might find this interesting, is that we talked about fees themselves. And I had a project with one of my team members. And we went in and we went all the way back to the Genesis block. And we had created about 30 different fields of data that we wanted to extract about the blocks, everything from

you know, block time, number of transactions, and you know, kind of our own little glass node sort of thing. There were certain things we couldn’t get from there that we wanted to get, so we created our own. And through that analysis, one of the things I started to do was, for instance, I looked at fees. And if we go back to the Genesis block, and we average per block what the average number of fees per block is, it’s 0.335. So…

Now if you average just the last six months, it’s.335. Like it’s exactly the same number, the last six months, that it is all time. I found that fascinating. But to the point you talked about before, in the Genesis block, or the first block, yeah, the first block, there was a 50,000, or 50 Bitcoin subsidy, and

Stephan (22:09.975)

Bob Burnett (22:28.934)
and let’s say an average of.335. So we have a tiny little, what would that be, 6% of the early day reward was that. But now.335 of the current one puts us at like 5% or 6%. And I think, and then when we hit, assuming.

even at the minimum we hit the next one, well what does that mean? That means now we’re up over 10% of the reward is fees. And personally I think it’s going to skyrocket from there. And, you know, we’ll see. But I found it very interesting that it hasn’t moved as measured in Bitcoin. As you said, in measured in Fiat, it’s through the roof up.

Stephan (23:20.608)
Right, yeah. And I recall in some of the earlier days, I think in those days, there were different rules and things. So I recall in earlier days, some transactions just had like a set, you know, 10,000 SATs or 5,000 SATs. I think there was something like that. And also in earlier days, there used to be kind of older school, old school rules like…

It was almost like, it seemed like you were tipping the miners, you know, it was almost like that. And there were rules that preference older coins. You know, it’s evolved over time in terms of how things have worked. But I think people in the know have always said, look, fees are going to rise. That’s just, that is the dynamic, right? And I find it funny because every now and again, as I’m sure you’ve seen over the years, you’ll see people sort of talk about, oh,

you know, the security budget, the quote unquote security budget, which is this argument that, oh no, there won’t be enough fees to sustain the system. And I’ve, you know, quite consistently said, no, I think it’s going to be the other way around. It’ll be a question of access that we, the fees will be so high that not everybody can access on chain, not your keys, not your coins. And I think it’s going to be, you know, and I think this is aligned with what you’re saying as well. I think that is the more likely situation.

Bob Burnett (24:37.59)
Yeah, yeah, completely. Yeah.

Stephan (24:42.036)
Assuming Bitcoin doesn’t somehow fail and go to zero, if Bitcoin continues on the trajectory that it’s on, even in the 2030s or mid 2030s, I think the fees will be much, much higher. And people will simply have to find ways to batch and to deal with that in some clever way. And that may be lightning, that may be multi-party channels, that may be coin pools, there may be different ways of doing that.

Or of course, exchanges and broker services who do batching on their side, but fundamentally, the fees are going to go up.

Bob Burnett (25:16.478)
Yeah. You know, it’s funny when people talk about miners, the public miners always get a lot of attention. I’m a private miner. But I spend a lot of time doing modeling. And whenever I’m doing a pro forma or examining a future site, I always go back to the historical norms. So that’s part of why I’ve done such extensive analysis and I have that figure available for you.

So that’s basically what I use in any of my future performance stuff. But I think when we look at minor revenue, interestingly, it is the big wild card that even a lot of the analysts that I see following like public mining stocks don’t really talk about enough. Because here’s, I was just playing with some numbers today, you may find this interesting. So next year, I think everybody knows the halving’s coming, right?

And it just so happens that it’ll be at the end of April. So what that essentially means is we’re going to have four months of the year where the subsidy is going to be 6.25. And we’re going to have eight months of the year that’s 3.125. And so if you average all that out, what you find out is the average subsidy next year per block is 4. Comes out to 4.07, I think, was the number that I came up with. So.

If you remember earlier, I said there’s 53,500 blocks. So that tells us that next year, there’s gonna be about 214,000.

Bob Burnett (26:48.97)
new issuance of Bitcoin. Now, we know that, we don’t know the price, right? But we know that number is the case. What we don’t know are the fees. So, you know, what I do is I’ve run that number and then said it’s 0.335. But I can certainly argue a case for a reasonable probability where it exceeds one. Now, if it exceeds one,

know, that could be 40 or 50,000 more Bitcoin coming in, well, coming back through the miners, right? Because we know that’s not new issuance. But there’s a lot of liquidity that come. Yeah, yeah, because of the fee. So, you know, obviously, if that happens, it has a tremendous impact on the mining community, because the cost basis of the mining community doesn’t change, even if the fees are zero.

Stephan (27:28.7)
Right, just because there’ll be so much more feed.

Bob Burnett (27:46.89)
Right? So we we’re going to spend the same amount of money operating our companies no matter what. So those fees go straight to the bottom line. They are 100 percent profit for the miners.

Stephan (28:00.8)
Right, and so that’ll be interesting to see because that may herald a new era where there just are a lot more fees. And then that might become part of a miners projections and calculations going forward. So that’s kind of an interesting dynamic also. So I guess let’s sort of kind of summarize the thoughts on the Bitcoin fees and the UTXO stuff before we get into the mining. So I guess we could maybe close this section by saying, look, if you…

have coins, make sure you check your wallets and actually look at the UTXOs that you have. And as a guideline, think about consolidating, but know there’s a privacy trade off with this too, but think about consolidating such that you have denominations bigger than one million Satoshis. And that way you’ll be safer in the case of high fee scenarios. So I guess that’s kind of the key.

you know, take home message for people and potentially if you’re interested in day-to-day transacting, well, maybe you need to start thinking about lightning. That’s probably the main takeaways, right? What, what, anything else you want to add there or something to elaborate?

Bob Burnett (29:02.886)
And just think about how you’re acquiring your Bitcoin in the future. Have make sure that if you’re DCAing with Swann or you’re mining or whatever, you know, don’t, don’t fix the problem and then keep going. Like, you know, make sure that, you know, in it, your thresholds is really the big thing, whether you’re a miner or whether you’re a, uh, you’re DCAing, you know, keep those thresholds and learn lightning. I know I don’t, you advocate it better than anybody in the world, I believe. But, um,

Stephan (29:15.54)
Right. Yeah. Make sure you’ve got thresholds in place. Yeah.

Bob Burnett (29:31.914)
You know, learn, learn lightning. You.

Stephan (29:32.737)
Well, I think Phoenix wallet is a great easy one. Zeus is out there, you know, Breeze is out there. So there’s, you know, there’s Lightning wallets out there. I think Phoenix is a great easy one to use. It’s, you know, you write down 12 words, it’s, you don’t really have to think too hard about it. You just, you know, receive and spend and that’s non-custodial. So that’s a great one. But, you know, then we’ll see what happens out there. I know there’s other, there are custodial Lightning solutions out there also.

But of course I prefer to tell people about non-custodial, of course. So let’s talk a little bit about Bitcoin mining. I know this is something you’re obviously, you’re doing this, this is your day job now, but you’re also writing and speaking about this. So I think an interesting place to start is you’ve actually written a little bit about the different classifications of miners, right? You’ve spoken about rabbits, horses, and elephants.

Bob Burnett (30:11.211)
I mean, gay.

Stephan (30:27.256)
Do you mind spelling out a little bit about these different classifications of minor?

Bob Burnett (30:32.091)
Sure. So in the mining world, I think we can divide mining sites into three categories. And as you said, I call them rabbits and horses and elephants. And we’ll start with the elephants. You might know them as the mega miners, the big pubcoes. There are a few private mega miners too. But those are elephants. And they’re big and powerful.

They’re easy to see, you know that they’re out there. They have a couple other attributes though. They are slow to grow. It takes a long time for them to come up. I’ll also say they’re easy to hunt. So if you had some ill will, we could maybe go into this a little later, and you were looking for them, you’d be able to see them.

you can find the elephants very easily. Now, on the other end of the spectrum, we have the rabbits. The rabbits are the home miners. I mentioned somebody with an S9 in their garage, an accountant that threw an extra S19 in a server closet. Those kind of people and operations are rabbits. Independently, they aren’t very powerful.

But, and they grow very quickly, they can reproduce quickly and they can scatter. If you try to hunt the rabbits, you’ll never get them all. And the moment you start hunting them, they’re gonna hide in places. So they’re really important. If you think about the overall ecosystem, they’re very important because of that. Collectively, they can still do some damage. It’s not like they’re not powerful as a collective.

You know, it’s just like, you know, you’ve probably heard of stories of rabbits overtaking a farmer’s field, right? You know, any one rabbit’s not eating much lettuce, but all the rabbits can eat all the lettuce, right? The horses are in the middle. They are the small to medium size commercial operations. They can come up fairly quickly. They’re generally built in a mobile fashion. They’re in containers or hash huts.

Bob Burnett (32:52.874)
So if they see a better opportunity or they see a threat, they can generally get up and move pretty quickly. They’re a little harder to find. It’s hard to hunt a wild horse. So those are the three categories. And then I’ll also throw in another term. So I apply it this way. I call it either captive or wild. So every site, regardless of its site, is.

size is either captive or wild. So a captive site is traditionally gonna be an on-grid operation, and it means that it is dependent on a third-party source to provide the power to it. And it’s a permission system, if we wanna use some Bitcoin terms, it’s a permission system. It’s not self-sovereign. Now, they’ll often protect themselves with PPAs and…

and things like that, but they’re still exposed and ultimately dependent on a third party and a permission. Wild miners create their own energy. And so you could have a wild horse or a captive elephant or a wild rabbit or a captive rabbit. And so…

I think it’s a good way of thinking about if you’re evaluating a company, you’re evaluating a site, you know, what do you have? So that’s…

Stephan (34:26.552)
Right, yeah, it’s interesting because as you point out, this has implications for the decentralization of the network, right? If you are a public mega miner, obviously it’s very public. This is where your site is. This is who your power provider is. Generally speaking, if the state wants to come after you, that they can do that quite easily, they can impose taxes, they can impose regulations. Uh, but maybe on the, on the bright side for them, they have access to tap.

big public capital markets. And maybe that’s kind of an advantage that they might have. But then, you know, you have different advantages and disadvantages if you are a horse or if you are a rabbit. Whereas maybe if you’re a rabbit or a horse, you’re more nimble, you can maybe change more easily. And maybe it’s easier for you to be a wild rabbit or wild horse as opposed to a captive one.

Bob Burnett (35:19.234)

Stephan (35:19.244)
You know, I suppose that these are some of the different dynamics. I know you’ve spoken a bit about a miners trilemma. So maybe this is a good spot to, if you could explain the mining trilemma for us.

Bob Burnett (35:29.11)
Yeah. So when you’re going to put up a new site, three things have to come together for the new site. You need energy, good price and consistent source of energy. You need mining equipment, primarily talking about the servers, and you need capital. And what I realized after doing this for a while and came up with the theory behind the miners trilemma

at any point in time, one of those has always been hard. And the moment one that was hard starts to become easy, it forces a different one to become hard. So, to be successful in mining, you better be good at all three because you may enter the mining market, let’s say, in conditions where…

Energy, let’s say you have good energy and you’ve got good sources of mining equipment, but you’re terrible at raising money. Well, you’re gonna get whammied as soon as that thing shifts the other way. And we’ve seen this play out, by the way, in real time. If we go to the end of 2021 and early 2022, what we had, so you had a period of time where capital was just

everywhere. And even for me, I’m primarily a horse miner, by the way, for those who don’t know what we do, but I’m basically a horse class guy. But I had people almost throwing money at me. I couldn’t get the equipment.

to take the money and get sites up. It wasn’t available, right? So at that time, that was the problem. And a lot of that was because, by the way, the big public guys who had gotten a lot of money were able to go in and essentially buy everything. And so that forced everything to a gray market and highly, highly expensive prices.

Bob Burnett (37:46.718)
Now as soon as we got to the middle of 2022 though, it started to shift. And suddenly the price of the servers came down, slowly by the way, they weren’t like super fast, they slowly started to come down, but the money dried up. And all of 2023, that’s the world we’ve lived in. Even though the price of Bitcoin is up,

I don’t know what the number is 140 whatever that is. We are paying less today materially for new equipment than we were in January. Materially less.

Stephan (38:15.86)
Like 110% or something like that roughly.

Bob Burnett (38:31.498)
Now, we have seen the bottom, I believe. We have seen a slight uptick. So about three or four weeks ago, I think we saw the bottom. And we’ve seen some slight increases in the equipment.

Stephan (38:45.356)
Gotcha. So in other words, the hash price, we’ve seen the bottom of hash price and hash price. Now you’re expecting to be in a bull cycle, let’s say, you know, as the Bitcoin price bull cycle happens as well.

Bob Burnett (38:53.068)

Bob Burnett (38:56.842)
Right. And interestingly, I’ve seen the capital markets free up. So we’ve actually raised a decent amount of money over the last 60 to 90 days to come into new mining projects. And I think those are, by the way, going to be really successful projects. I’m not a big Warren Buffett fan for probably obvious reasons. As a pit-coiner, he hasn’t been kind to us. But.

He is wise and experienced in some ways. And he has this phrase, be fearful when others are greedy and greedy when others are fearful. And so I just had a meeting with my team today. And one of the things I told them was I said, hey, we’re still in the phase in the trilemma where the value is there and we need to still be pushing the envelope and looking to expand. But the day will come when

we’re gonna say no. And even when the people want to throw money at us, even if we can find the equipment, it’s gonna be overvalued and overpriced and we’re not gonna be able to get the ROI we need. So we have to have the discipline to say no. That that’s.

Stephan (40:11.316)
Yeah, that’s really interesting that you have to actually very consciously be countercyclical, right? Because you have to sort of think, okay, we’re in a bear cycle. Now is actually the time to be acquiring the mining rigs because now they’re cheap. Uh, and then usually what happens in the bull cycle is the price of the mining rigs pumps even harder than the price of Bitcoin pumps. And so then it ends up being very uneconomical. And this is actually, uh, I did a recent episode with Adam back and part of that is part of the reasoning behind this block stream, uh, basic.

Bob Burnett (40:17.42)

Stephan (40:40.84)
note. But it’s interesting seeing the dynamic and how you have to try to ride the cycle, but at the same time be ready for different scenarios. Because right now the price is pumping whatever 36, 37,000, whatever it is. And that to some extent may have saved some miners who were otherwise inefficient. And maybe if the price had stayed at 20,000, they might have been in

It’s almost like some of these miners are getting saved or kind of quote-unquote bailed out because of the price rise.

Bob Burnett (41:15.226)
Yeah, I have to say I, it was a rough ride, by the way. I mean, we’re not a massive operation and we’re primarily self-funded or from private investors. You know, we don’t have debt. We, I refuse to IPO. I don’t, I actually believe it would be against the ethos of Bitcoin for me to try to run a public mining company. I believe it creates.

a friction and I’ve been part of a C-suite exec in a public company before, a $10 billion public company. I don’t think you can do it. I think you eventually are faced with this decision between doing what’s right within the Bitcoin ethos and doing what your shareholders at least perceive to be the best thing. I think you will find yourself in that position. But.

Bob Burnett (42:14.214)
The point being though that those public miners that really overextended themselves were hanging by a thread, as you said. And because it’s public, I won’t name names, I don’t feel right doing that. But I mean, they were hanging by a thread and the having every day waking up, knowing the having’s a day closer.

Stephan (42:31.842)
Right, yeah.

Bob Burnett (42:41.522)
And if Bitcoin was at 22 or something like that, it would have been catastrophic. No, it still could, right? I don’t think any of us can say, yeah, but I’m sure there’s a big sigh of relief. And yeah.

Stephan (42:49.056)
Yeah, it could still go there. Yeah, we can’t, we’re not out of the woods. Yeah.

Stephan (42:58.264)
for a lot of them, I’m sure, yeah. And it’s also a question of, is that the right thing for the shareholders? Because maybe, it’s fair to say, for some of the shareholders, they’re the ones getting rinsed in a way, because they’re kind of taking all this risk without maybe understanding the risk that they’re signing up for. Now, that said, I guess part of the case with the public miners is the idea is that they’re kind of like a leverage bet on Bitcoin, right? The idea is that the shareholder who’s buying

those maybe they’re expecting it to be kind of like a leverage play on Bitcoin that you know that it pumps harder than Bitcoin price in the bull cycle and then it also dumps harder than Bitcoin price in the bear cycle.

Bob Burnett (43:39.826)
I think that’s the perception. I think it’s wrong for many. Yeah. Well, I’ll start with something you and I already covered, which is we just said the business of mining is somewhat anti-cyclical. So you want to be expanding in the bear period, and you want to hold back in this other period.

Stephan (43:44.992)
Yeah, curious. I’m curious to hear why.

Bob Burnett (44:09.278)
I think being public kind of forces you in the other way, that when things look bad, people want to hunker down, they wanna cut costs, they want to do those things, and then when the growth is coming, when they see the market exploding, I think the market perception is, well, you’ve gotta be throwing a whole bunch of money in this if you’re not expanding during this growth period, then you’re gonna lose. So I think there’s a misalignment there.

Bob Burnett (44:40.099)
Um, so, uh, I had another point there too.

Stephan (44:45.052)
Right. So I guess we were talking about why you shouldn’t be public as a miner or why you think, or basically the other argument is why you think they’re not a leverage play on Bitcoin.

Bob Burnett (44:56.114)
Oh, okay, yeah, yeah. Well, so another reason would be…

Bob Burnett (45:05.218)
The Bitcoin, the larger Bitcoin companies,

Bob Burnett (45:12.802)
They, I think a lot of people look at what they’re huddling and saying, oh, X-minor has 1,000 of these or 1,000 of those. And they get kind of caught up in those things. Those are often highly leveraged Bitcoin. I won’t speak about any of the current major players, but for instance, if you look at the core scientific story,

they went bankrupt. We’ll talk about that. What happened with Core Scientific? Core Scientific went public in January of 2022. They raised $200 million. 11 months later, they were bankrupt and they had a billion dollars of debt on their balance sheet. So they went from an IPO in January to bankrupt in 11 months. I’m not sure if that’s a record or not, but it’s gotta be pretty close to one.

Right? And what happened was they went out and started to take on massive amounts of debt to try to capture what they felt was that they were trying to capture all of the stock of mining equipment. It’s actually what caused the trilemma to get out of whack.

In doing so, they forced the price of the mining equipment up, but it was all leveraged, right? So, this billion dollars of debt was leveraged against the inventory and against their stash. Well, when the price of Bitcoin started slipping, it just became a negative feedback loop that they started to have to sell.

sell the Bitcoin to service the debt, they couldn’t get the machines operating quickly enough. So, I guess maybe what I’m saying in some ways is that there’s so much more that can go wrong when you invest in a company like that, that I think to just think, oh, it’s, if you wanna do that, go buy the ETF when it comes out. I guess that’s what I’m.

Bob Burnett (47:38.93)
I’m saying that the mining companies have a lot of wild cards with them and they don’t necessarily follow the same cycles as Bitcoin

Stephan (47:48.896)
Interesting. And so would you say, so I’m just trying to gauge how I guess strong or your sentiment is here. Would you say

Stephan (48:01.428)
it’s possible to run a Bitcoin mining company that, you know, is not taking on undue risk? Or do you think the incentive of the game literally will not allow it?

Bob Burnett (48:15.394)
Well, as a private company, I think you can, and that’s what I think I do.

I had people approach me during the last cycle saying, Bob, you should take your company public. I said, no. I had several people approach me, large organizations, names you would know, saying, hey, let us lend you money. But of course, it was, lend you money at 12% or 14%, and we’re going to leverage everything you have to do it. And so my answer was, no. I am not.

I’m not going to do that. That’s too much risk. I lose too much control. And I think I could kind of smell the greed in that last cycle. And so just as I said before, what I told my team today was we have to be aware of that, that this could happen again. We cannot get caught up. If things start going great, we can’t get caught up in it ourselves.

We’re running a business. We’re trying to run a business to be stable in the long term. And as I said, I’m at a point in my life, I’m almost 60 years old, where I’m here as much for Bitcoin as I am to make money. And so, in fact, Bitcoin succeeding is a lot more important to me than me making more money. And so I’m not going to do something that disrupts Bitcoin for my gain. As soon as I’m a public company,

I have literally signed myself to become beholden to my shareholders and not necessarily what’s in the best interest of my shareholders, but what they perceive to be in their best interest. So when you run a public company, you get measured in 90-day windows. There’s nothing more high time preference than that. If you know that every 90 days you have to report to the world…

Bob Burnett (50:20.118)
your financials and a state of your company, and they’re expecting good short-term news, it’s almost always what they want, that puts a tremendous amount of pressure, and there’s no way, in my opinion, and again, I’ve done it, so I speak from experience, there’s no way it does not impact the culture of the company, the processes of the company, ultimately even the type of people that you hire change. So a lot of times public companies start

with a founder and a core group of people with a certain value set.

But it changes. The people change and the pressures change. And when you’re a public company, you lose control of that. And I believe, especially in mining, by the way, I believe the way the mining business runs, that it forces this almost moral choice that people have to make. And even though there’s some great people in those public companies, I believe that.

they’re gonna face some decisions that really test their personal morals and ethics down the road.

Stephan (51:30.976)
And see, so it’s almost a two prong thing. One angle you’re saying here is around what’s good for Bitcoin and the decentralization of the network aspect. And the other aspect is potentially the, let’s say how aggressively that company tries to expand, how aggressively that company tries to show short-term results. So I guess theoretically, like it would be fair to say that I’m sure there are private companies that went too aggressive and also got wrecked too, right? Like it’s not to say that, you know,

Bob Burnett (51:56.579)
Of course, of course, yes.

Stephan (52:00.368)
only private companies can be conservative enough. But I think maybe that point about the decentralization of the network, maybe that point is definitely more true to say with private companies than with any public Bitcoin company, obviously, just by the nature of being public.

Bob Burnett (52:14.826)
Yeah. Let me I’ll give an example. Because I know you cover Austrian economics in here too. So let me give you like a real thing that happened in my personal computer days. So before Gateway was public, now we were about a billion dollar company. And we were making before we went public. We’re about a billion dollar company, we’re making about $100 million a year. So very profitable.

We were a top 10 PC maker in the world at the time. And we were the only non-private company by 1992, the only one. So as we approached the end of

especially the year, approach the end of the calendar year, we would, but any quarter, we would frequently get phone calls from CPU suppliers, from Microsoft, from DRAM suppliers, hard disk suppliers, and they would say, hey, we’re missing our number. We need to book some business. So let’s say it’s December 20th. Will you buy?

the next two months of goods from us at a deep discount.

Now, if we have $100 million in cash in the bank and it’s gonna cost us $100 million, let’s say to buy all that, we didn’t care. We said, yes, sir. Where do we sign? Here’s the money, send us the goods because we’re gonna rip the next several months, right? Our cost structures are gonna be fantastic. As soon as we went public and we got the same phone calls,

Bob Burnett (54:07.894)
we couldn’t do the same deals. Why couldn’t we? Because if we did it, what would happen is, someone would look at our balance sheet and they would say, hey, Gateway doesn’t have any cash and it has bloated inventory. And we didn’t have a mechanism by which we could go say, well, it’s because Intel or Seagate or some other company was in trouble and so we bailed them out. And so what

What ended up happening was as a public company, we had to make deals that were not in the best interest of the company, and even in the shareholders, but we had no way to explain to them that was the case.

Stephan (54:57.664)
So I guess it’s a difficult example to, I guess what you’re saying is you had a bit more flexibility as a private company, right? Like I guess bottom line, that’s…

Bob Burnett (55:10.134)
Yes, I’m not trying to say that mimics exactly into public mining, but what I’m saying is you’ll be faced with the same types of choices. I’ll also say, I don’t wanna, maybe we don’t wanna spend too much money on public stuff, but I’ll say one last thing. When we go back to core, which I believe was a massive travesty, by the way, the core scientific blow up.

I believe should be perceived by the industry on the same level as Celsius or Voyager or BlockFi. Like the damage they did not just to their shareholders but to the entire infrastructure. They disrupted price discovery and capital allocation across the entire mining industry. They forced a lot of Bitcoin to be liquidated that suppressed the price. There was a lot of that going on. But I would say…

A big part of that was…

Historically, when companies have gone public, and again, I take my company as an example, we spent about two years preparing to go public. We had to reinvent all kinds of financial processes, manufacturing processes, communication processes. We had so much to get in order before we went public. And today, what happens in a lot of cases is people…

IPO through the back door they use a SPAC or they do some sort of reverse merger and the companies don’t Get the maturity of the management team. They don’t have the maturity in their processes To handle being a public company It’s very hard. And so I would just say, you know me in closing I’m not saying to buy or not buy public mining stock or any other stock but

Bob Burnett (57:09.822)
I would highly recommend doing some research on who they are and how sophisticated they are because it’s not easy and I’d say on the whole most of the companies in the Bitcoin world that I’ve seen go public aren’t ready.

Stephan (57:31.304)
Interesting. Okay. And so I guess this also has to be traded off with the advantages of being public as well, right? Like you could say, maybe certain advantages are there that, you know, they can expand to a certain size or maybe the capital structure advantage. But, uh, I mean, certainly I can’t disagree that, uh, you know, um, if a company’s not ready for, if, if companies not ready for it, uh, it doesn’t have the right structure in place. Um, then that could also be bad. And as, as you’ve mentioned, I think that this is the point that

is, I think, hard to dispute is the point about decentralization of, you know, mining. I think that’s probably the point that really, it’s hard to argue that. But I mean, you could also say that, you know, maybe some of the large public companies can also do advocacy of Bitcoin and maybe try to help keep it legal or lower the regulations and taxes. Maybe there’s something to that also.

Bob Burnett (58:25.078)
Yeah, yeah, I don’t I don’t want to paint them and I apologize if I’ve come off as you know, completely trying to categorize them as evil because, for instance, a lot of the lobby groups and those sort of groups that the work from the public miners has been tremendous and supporting the folks going off and fighting for it and small companies like mine try to help but the reality is if I throw them a couple thousand dollars, it’s a drop in the bucket. It doesn’t mean anything they have

They have the money to go do those sorts of things. And as you said, putting together the capital to go build an elephant, it’s almost impossible to do without being public. Now, I don’t have an interest in building elephants. I think horses are actually a better thing to build, but having some elephants out there is not the worst thing in the world for Bitcoin and…

Stephan (59:17.632)
Right, yeah.

Bob Burnett (59:23.566)
it’s probably good that there are a few people doing it.

Stephan (59:26.168)
Gotcha, yeah. And I think to spell out a few points around the decentralization aspect, I mean, we’ve touched on it a little bit, but I think this is something in one of your articles, you do point this out, and I’ll put it in the show notes as well for listeners, but you spell out this idea of trying to grow, let’s say rabbit and horse groups or populations. Do you wanna spell out a little bit about why that would be a good thing?

Bob Burnett (59:48.866)
Yeah. Yeah, so all of this thought process for me goes back to the China mining ban. So I started doing some mental exercises. Because I think, as we all know, the China mining ban happened in June-ish of 2021. And we lost 60-ish percent of the hash power, 50% to 60% of the hash power. And for the most part, the network

and the Bitcoin ecosystem as a whole shrugged it off and off we went. And I think for the most part, people said, we gave ourselves a collective pat on the back for our resiliency, right? But I started to say, well, true, I’m really glad, don’t get me wrong, but what if it had been a 70% drop? What if it had been an 80% drop? How big would that drop have had to be?

for there to be really negative ramifications. And so more than we’ll wanna do here, but I wrote an article called Satoshi’s Heal. It’s in Bitcoin Magazine. Again, for anybody that wants to see it. But I explore this. And I’ll summarize the conclusion here, which is I feel that anytime, if the world dips with more than 70% of the hash power,

in the hands of the elephants, then we start having a real problem. And at 85, it’s like, you know, warning, red warning lights, and over 90, then it’s like really scary stuff. So we want to make sure that doesn’t happen. And I will also say that I believe we want probably at least 30% of the hash power tied to a wild source or be a wild site too.

I think that that’s important. So if we just think about, you know, what are the Bitcoin attack vectors, and how might people come after that? And there’s different ways they could do it legislatively. It could be terrorism, by the way. So part of the reason I use that moment, Clayture, too, and I talked about being easy to hunt, is I worry about things like ecoterrorism and people coming after the Bitcoin network in a violent way. I’m not predicting it, I’m just saying that

Bob Burnett (01:02:14.518)
Those are things that I think we have to look about that are a non-zero possibility. And I believe we are trying as a community to build money for the next thousand years. And so we have to think in those terms. Something that is a.1% chance, is there a.1% chance of some sort of terrorist activity on Bitcoin mining sites this year? I mean, maybe that’s a reasonable guess, right? But

But if it’s a 0.1% chance annually and we’re trying to build 1,000 year, it’ll happen, right? So, you know, will there be more government bans? Probably. Will there be things like the Biden proposal for a 30% tax on electricity consumption by miners? I mean, that’s already happened in Kazakhstan and I think Sweden. So, you know, we have to think this way, I think to be…

Stephan (01:02:48.436)
Right, it’ll eventually happen.

Bob Burnett (01:03:12.822)
to be secure, we have to always think this way. We have to think defensively. And so that’s what that exercise was. So how do we fight that? Well, horses and rabbits fight that. If we have a robust ecosystem of horses and rabbits, 30% or greater, which we are at now. I’d say we’re probably in the 70% horses and rabbits right now, give or take a few percent. That’s about where we are now. But the fear is.

the elephants are gaining. So I think it’s fairly clear that the elephants are gaining. And so that’s part of my warning shot is, I’m not worried about today. I’m not worried about two years from now. But I worry about maybe in the next epoch, not this having cycle, but the one after, what happens? Because by the way, that’s when the big change will be, right? So if in this epoch,

At this halving, we’re worried about the elephants. Like the elephants are the ones that were exposed, right? And part of that was they didn’t do a lot of investment in high efficiency equipment in the last cycle. They didn’t invest during the bear very much. But let’s say the opposite happens in a future cycle. Well, we could suddenly find ourselves, a halving occurs, and now boom, you lose half of the horses and rabbits overnight, or virtually overnight.

and suddenly find yourself in this condition, and now you get exposed to these attacks.

Stephan (01:04:46.6)
Right, increased risk of shutdowns or attacks. Yeah, interesting points. I think it’s well worth people considering those. So we’re pretty much out of time now. So let’s finish up here, but I’ll make sure all the links are in the show notes at stephanlivera.com/525. So I think it’s just from my notes, barefootmining.com and I’ll put your X link there. And Bob, thank you very much for joining me today.

Bob Burnett (01:05:11.81)
Thank you, Stephan.

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