Fred Thiel: The Future of Power and Mining (2021 Digital Mining Conference by BITMAIN)

Transcripts are autogenerated. May contain typos.

00:00

up here okay so i'm going to talk to you about the future of power and mining um i'm not going to talk to you about technology specifically i'm going to talk to you about what is going to happen in the intersection of power and crypto mining um there's a big shift that's about to occur it has started uh let's just say that we have awoken the sleeping beast and that beast uh is a very powerful force that will help grow this industry but will also dramatically change the economics in this industry

00:33

so charlie munger who is warren buffett's partner in crime has a famous saying show me the incentives and i'll show you the outcome if you look at the mining industry today it really consists of power married to hosting hosting operations and then bitcoin miners deployed and that's what bitcoin mining is all about traditionally bitcoin miners have gone and contracted for power then they've gone and built infrastructure hosting facilities they've populated it with miners and then they mine their bitcoin

01:13

and they either save or they hold their bitcoin that's changing you have to think about who has the biggest incentive here if you think about the input cost to mining what is the single largest input cost today it's power who has the absolute lowest cost power on the planet it's the power companies tomorrow maybe not tomorrow the day but tomorrow as in next year you're going to start seeing every single power company starting to invest in bitcoin mining why it's the single best load balancer for

01:55

their capacity the incremental cost for a power company to increase production by 10 percent is de minimis compared to the cost de minimis compared to the profits that can be gotten by it so the biggest incentive in this industry today for a shift is for the power companies the other thing is the power companies are very focused on deploying renewable energy the problem with solar energy is it's only available basically 30 of the day but by taking solar energy aggregating bitcoin mining and leveraging excess capacity to create

02:29

hydrogen gas that can run turbines you all of a sudden have a very big incentive for deploying renewable energy it also helps that president biden recently said that he wants 50 of the energy in the u.s to be generated by solar power by 2050. so there is a huge incentive for large energy companies to go into deploying renewable energy sources and leveraging bitcoin mining as a way to fund that and also using that as a way to generate hydrogen so let's talk about the key ingredients to mining you obviously have that power

03:05

you have to have a hosting facility you have to have hardware and thank you to our host today bitmain being one of the biggest providers of that equipment and then you have to have pools you typically have three partners in this business it's the minor marathon's a minor it's the hosting company sometimes it's vertically integrated with the minor sometimes it's a third party you have companies like riot and core who are kind of in the hosting business but also in the mining business the self-miners and then you have the

03:34

power companies and up until recently the power companies were taking a back seat they were basically viewing crypto miners as just another revenue source for power you know when you think about it the miners are deploying hardware the hosting guys are managing that for them and the power companies are providing energy so the traditional relationship in the business is about to change and this is the elephant in the room right because if you think about it the global hash rate as terrass mentioned earlier is on its

04:13

way back to trend if you believe most of the analysts next year we'll have at the end of 2022 the global hashrate will be close to 300 hecks of hash today we're at 130x a hash the economics of mining is about to get through its usual cycle year three of the cycle it's going to become tougher and tougher for people to generate block rewards and then we have a having not too long after that power is our single biggest cost at marathon it costs us about five thousand six hundred dollars to generate a bitcoin between power and hosting

04:47

costs all in it doesn't include the depreciation of the miners but includes everything else we go to double the hash rate that cost increases biggest input cost driver there is power so again charlie monger show me the incentives and i'll show you the outcome the power companies have a huge incentive here because if you're a an energy provider you have to be able to provide capacity for the grid for maximum demand but that demand doesn't exist 24 hours a day that demand exists just a few hours a day

05:23

and so you're generating energy that has to go somewhere for those of you who are familiar with the power industry there's a concept of negative energy pricing and that's what happens at times of the day when too much energy is that is created and it has to be taken off the grid and so you get paid to take it off the grid imagine if instead of paying people to take that energy off their grid the power companies could just turn on more bitcoin miners to consume that excess energy they have a huge incentive

05:52

and the cost to them is very small they also are huge sources of capital because they're well capitalized and for them to go into this business is very easy so why generation in this country today exceeds consumption considerably more importantly power generation has been flat for years in this country four terawatts of energy day in day out industrial power consumption in north america has been on the decline this is a look at the blend of energy sources and you can see that renewables are starting to grow fossils are

06:31

decreasing but more importantly industrial consumption has dropped 14 percent in this country in the last 20 years residential consumption is where it's increasing why well we offshore a lot of manufacturing that's one reason another reason is industries become more efficient if we look at again energy consumption the expectation even with a huge transition to electric vehicles the prohibition of natural gas use in homes for cooking in california and other states electrical energy production still doesn't have to ramp a whole lot to

07:09

support that so the economics favor the power companies in this business i've had conversations with some of the largest renewable energy producers in this country and they welcome us with open arms because we provide a huge economic incentive for them to deploy solar energy and wind energy and they are coming after this market in a very very big way so i think if you're in the mining business and you own physical plant assets whether it's captive power whether it's captive hosting be prepared that there's

07:47

a new competitor that is very big very well capitalized who's about to enter this marketplace and the dynamics in the business are about to change it's not about being vertically integrated anymore and those of you who saw my presentation at mining disrupt understand that it's a very poor return on assets to invest in infrastructure when you can instead invest in minors and this is continuing to play out here where the power companies want to own that infrastructure and they want to partner with miners and eventually

08:18

become miners themselves and so the economics and mining are shifting where miners need to partner with the power companies and let them do the hosting let them do the infrastructure versus trying to be vertically integrated because that's a very poor use of your own capital so what are the implications the global network hash rate is most probably going to increase by substantially more than most of the projections to date if you believe in the projections by beiruta we'll be at 260 to 300 extra hash at the end of next year

08:50

which is over two times where we are today as we come into 2023 one year away from the next having with the excess capacity the power companies are going to bring online which measures in gigawatts in size our expectation is the global hash rate will be nearing 500 exahash as we go into the next avenue how many of you can grow your capacity fast enough to maintain the number of bitcoin you're producing today at that level of global hash rate and where does bitcoin need to be for you to operate a profitable business

09:26

you need to start thinking about that mining rewards are going to go down because of that growth in action hash and so if you're not scaling your business capacity your fleet of miners the power efficiency of your miners you're going to be faced with some really challenging decisions come 2024 when the reward rate goes down by 50 percent so who survives in this business the traditional model of miners that are vertically integrated with hosting is going to change the power companies are going to play a much bigger role

10:04

as they take on more of that business and the large enterprise scale miners who partner with the power companies are going to be effectively slowly but surely affecting all of the small and medium-sized miners who are not going to have the capital or the ability to remain in business as the hash rate grows and economics change so the last one standing are going to be the large-scale miners with very low costs of production and the large power companies who partner with them so miners need to get agile and they need to get big

10:41

because the power companies are coming and i think you got to be prepared and with that thank you very much [Applause]

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