Marathon Digital Holdings (MARA) - Chardan Leadership Call

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welcome to this installment of our elite industry leadership series i'm brian dobson head of spank and disruptive technology equity research at chardon capital markets as always i'll start the call on interesting note with some important disclosures so during this call we will not be discussing chardonnay research any discussions about research should be coordinated between a participant and their respective salesperson our compliance teams asked me to read this statement for the investor call by participating in this call our speakers

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attest that they have made chardon aware of any potential conflicts and they will not discuss any material non-public or confidential information that they are aware of that may breach their legal regulatory or fiduciary responsibility to any parties uh so with the disclosures out of the way it's my pleasure to introduce fred thiel ceo and chairman of the board of directors at marathon digital holdings uh we launched coverage of marathon last month and our research is available upon request fred thank you so much for joining us this

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morning great to be here it's great to be here with you as well so let's get into uh i guess a big picture question let's delve into some of the the recent events pressing the industry um so as you take survey of the global landscape what do i think as the global that will shape the bitcoin mining sector over the next few years and i suppose further upon that how do you position prosper in that type of environment well i think one of the key things uh you have to think about with bitcoin mining is we're driven by kind of the

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macroeconomic environment because that drives the price of bitcoin and the price of bitcoin right now is uh in its winter period uh you know some people might say that's due to the cyclicality it's in its traditional winter i think this is more driven by really the macro environment you know we went through a major de-risking uh of assets uh earlier this year that's impacted both equities but also any kind of risk on asset and crypto certainly is one of those and bitcoin being the kind of biggest of the

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cryptos um was also affected by that we also see the dollar coming up in value you know the dollar in euro today hit parity um that's something that you know hasn't happened in 20 years and acid allocators are looking where do they put their money and you know bitcoin is viewed as by some as a store of value um and so obviously you're looking at what's happening with bitcoin what's happening with the dollar if the dollar continues to strengthen well you'll keep your money and fiat effectively your assets

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and fiat and fiat denominated assets for the time being so i think until the fed and the macro environment kind of eases somewhat and risk on becomes a little bit more palatable i think we're gonna see bitcoin trading in kind of this choppy area uh kind of between eighteen thousand and twenty two thousand dollars um you know things that could change that obviously um you know fed easing off on interest rate hikes you know there is a point where the fed can't raise interest rates higher um you know where all of a sudden it

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becomes that they can't even pay the interest on their debt so i think you know we're likely based on the inflation print we saw today we'll see you know another aggressive uh rise in another rate increase most probably you know 75 basis points possibly 100 basis points but we're coming to a point where they can't raise any more i think the fed's being driven by a couple of things and again i'm not giving financial advice is it just my opinion but i think that the fed is being driven

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really by they need to get interest rates up so they can cut interest rates when we get into the recession and they can stimulate the economy um you know it's really hard to cut rates when rates are 1.75 whatever um they are currently so i think that's kind of weighing on on kind of bitcoin um energy costs are also impacting bitcoin there are you know some miners whose uh energy pricing uh coming off the grid especially in texas where you know there's heatwave has been going on uh you know it's impacting them in two ways

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spot market pricing for energy is very high and the amount of curtailment being done meaning shutting down mining rigs because the grid needs the energy is also running high and if you look uh within the texas grid you know one of the challenges with this high amount of heat is a lot of the renewable energy sources being wind in texas aren't operating as efficiently because of the heat and so they're relying more on traditional uh base load which is uh you know nuclear coal natural gas which drives the energy prices up

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so i think bitcoin miners are kind of getting pressured by both um energy costs and the low uh value of bitcoin uh you've seen bitcoin miners selling bitcoin your marathon hasn't sold any bitcoin yet um and you know we are i think we have you know over ten thousand bitcoin our balance sheet today and continue to add to that um that's more due to the differentiated model that we operate where we're very asset light we don't have these big infrastructure assets that uh other miners own that they have to continue to

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fund you know hundreds of employees operations and things like that so it gives our model some differentiation there but i think you know longer term uh or midterm uh we'll see bitcoin uh move start moving back up as the kind of risk on environment becomes a little bit more palatable when the fed kind of stops hiking uh you know likely bitcoin will be one of the first movers up uh equities will still have a drag because of earnings due to the recession so we're um you know mildly bullish uh on bitcoin's kind

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of midterm uh increases and you know again cyclically as we go into a having event which happens in kind of spring of 2024 there's traditionally kind of an uptick in the value of bitcoin so uh we're bullish from that perspective as well um i think outside of that the capital markets are also affecting bitcoin miners and the uh you know last year was very easy to raise capital um so miners were able to invest in more infrastructure they're able to place large orders with the mining rig providers mining rigs were at

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all-time high prices uh and now in the depths of winter uh you know there's a lack of capital it's very hard for certain miners to raise capital you know there were miners who took on a lot of debt last year and the year before to finance mining rigs at kind of double-digit interest rates um and they're having some challenges servicing those miners who put deposits on mining rigs with the large hardware manufacturers are sitting in situations where they maybe can't complete those payments uh the balance of payments that they

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have to do because uh they haven't been able to raise money and didn't have the cash on the balance sheet i think you know in our particular case we have the benefit that our orders uh our large orders with uh bit main are have a price protection mechanism in them whereby um you know the price is adjusted just before delivery and so we're seeing some benefit of that as we announced recently uh which you know means that we have to pay use less capex to uh acquire the balance of those miners so i think you're seeing

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some miners who are under you know just liquidity pressure um i think you're going to see some consolidation in the space smaller miners consolidating with the bigger miners or smaller miners consolidating together um we're going to see more capacity which has been a res constraint become available as miners who have built this capacity uh now can't afford to put machines uh of their own into the shelves uh so to say uh you know we're getting a lot of calls certainly from people saying hey you know

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you need capacity uh and not being an owner of infrastructure we're sitting a little bit in the cat bird seat i guess you could say in that we have a lot of miners and uh you know that are going to be coming in in the back half of this year and you know we uh are obviously very open to talking to people about where we could host those so i think generally speaking miners are going to be under kind of pressure um but i think that's going to ease as bitcoin price starts moving up and as we get into um cooler season when mining rigs can

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operate more effectively but you know the benefit is that the global hash rate which drives kind of the productivity of our miners is not going to be as large as it was originally forecasted to be last year bedout was forecasting the global hash rate to be you know 360 375 at the end of this year up from 190 at the end of last year you know now the forecasts are 250 to 275.

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um so that lower global hash rate means that there are fewer miners competing for a fixed number of bitcoin because bitcoin's a zero-sum game there are 900 bitcoin awarded per day uh at least up until the habiting when it'll drop to 450 and so the fewer mining rigs that are operating means the higher the number of bitcoin that each respective miner can get so um you know i think it's generally good for the industry i think the other thing is really this shows is how smart the bitcoin network really is you think about it as

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times are good margins are fat people invest the difficulty rate goes up productivity on a per mining rig basis goes down and then as the business gets tighter margins get thinner people start turning off miners the productivity goes back and increases so it's this very interesting uh sort of ecosystem if you would that continually is self-balancing it's a you know a brilliant concept when you think about it you know there are not many economic models that operate that way so it was a long answer to your question

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but i think there were a lot of points that i had to get in there that was uh that that was a great very fulsome answer definitely looking forward to delving into that ecosystem as you put it um i guess just to touch on a couple of the things that you mentioned uh when it comes to energy curtailment do you expect to see more of that and for those containments to last longer particularly in areas with call it a heavier reliance on green energy over the summer or you know i guess what what are you seeing in that in that

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environment yeah so let me unpack that question because there are a lot of aspects to it um yeah so just generally speaking if you look at the energy markets and i'll use texas and air cot as an example it's an unregulated energy market and essentially uh the bitcoin miners in texas have a very good relationship with aircock whereby when the grid needs more energy such as right now with the heat wave going on in texas um you know bitcoin miners have curtailed a gigawatt of power which is you know a considerable amount of power um

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[Music] on the scale of things um and essentially giving back that power to the grid so they can give it to consumers the funny thing about energy is that um you know most people think that you know we use a constant amount of energy and it's not true actually you know most energy load on the grid is between 4 pm and 9 pm why is that well consumers come home they turn on their air conditioners they cook food they wash their clothes um you know they're watching tv etc commercial load if you would is kind of

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constant during the day but it starts tapering off at 4 pm and so if you think about how the energy grid operates uh you have what's called base load which is the type of energy you can't turn on and off easily and that's basically nuclear at the bottom which you know once it's on you don't you can't really dial it up or dial it down very easily it's very complicated to do that and so that runs in the base that's the bottom energy then above that comes coal and coal has some similarities to

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nuclear in that it's very hard to dial up and down a coal plant it takes days to adjust its uh its energy generation and most coal plants to operate efficiently have to operate at a fairly high capacity and so there's not a lot of room for excess so what then happens is natural gas plays this kind of role of a buffer and uh you know it can do so 24 7 when needed such as now during the heat wave or in cooler periods or during the night and you know during the mornings uh it may not be needed and therefore they can

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dial it back and these are called peaker or shaver plants where uh it's essentially like a big jet engine that you can turn on in you know a few hours you can run it and then you can turn it off fairly easily and so it's adjustable in its load that it can provide and then comes renewable so there's this concept called let me just on the renewable you know in texas for example it's predominantly wind energy wind blows in the afternoons and evenings which is when that energy is most needed but if the energy isn't needed it's the

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first energy to be curtailed and so if you think about that stack of energy types i mentioned nuclear coal natural gas and then comes renewable well you when you don't need energy you work from the top down and shut things off so you shut off the renewable then you shut off natural gas then you can't shut off the coal in nuclear really because at the end of the day everybody expects electrons to come out of the plug whenever you plug something in so that renewable energy gets shut down first and so from a curtailment perspective um you

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know that means the grid needs energy so it's going to draw on that renewable if it's available and so in the case of texas if the wind is blowing you have that wind energy but right now with the high heat wave the wind has decreased so you don't have that much to draw on and so for that reason there's even more of a need for curtailment but if you didn't have these bitcoin miners consuming energy predominantly you know good mix of new of uh rather renewable uh together with the grid energy then you wouldn't have this

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buffer that could be given back to the grid when it needed so a bitcoin miners fill a kind of role as a type of capacitor for the energy grid more importantly if you locate your miners behind the meter at the point of power generation at a renewable plant which is predominantly our strategy where you essentially so we are citing our miners at a large wind farm in west texas this wind farm gives us energy uh whenever it's running and then otherwise we take energy off the grid by us providing that wind farm with a

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base load consumption we provide them revenues and therefore the profitability so they can afford to operate that plant more efficiently lowering the general cost to produce electricity but more importantly it gives them an incentive to add more capacity one of the challenges however in the electrical industry the electrical transmission industry is the grid it has congestion points think of it as plumbing and if you have a lot of electricity in one part of texas and you have a lot of demand in another part of

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texas you have to ship it through the grid from its point of generation to its point of consumption and if the grid doesn't have the bandwidth in other words if the pipes aren't thick big enough then you can't transport more electricity than the pipes can have capacity for and so what ends up happening is you get grid congestion which is it doesn't matter how much power you could generate in west texas you can't get it to east texas because the grid can only transport so much so that's another place where bitcoin

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miners play a very important role for the grid is that we can consume power at the point of power generation when it can't be shipped onto the grid so we provide the generator another way of being profitable in that it's electricity that otherwise would be wasted and it's amazing the amount of electricity that is wasted due to grid congestion and curtailment you know few people realize but upwards of eight to ten percent of the power that's generated in the u.

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s is wasted just due to heat meaning it loses its energy as it's transported over the grid due to impedance or resistance which generates heat that is a huge amount of energy more energy than all the bitcoin miners in the world consume alone and in the usa by way of example we generate and consume about four terawatts per hour and you know eight to ten percent of that is you know hundreds of gigawatts which is more than all the bitcoin miners in the world consume so there's a lot of energy waste so bitcoin miners play that role of

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load balancing if you would but for the grid especially now renewable can act as a bit of a supplement but if the wind doesn't blow then the renewable is not really generating and so you get this double whammy it's kind of like in the winter storm that hit texas a few years back it was so cold that the natural gas pipeline valves froze and so you couldn't get the natural gas to the gas plants to generate the electricity so when the infrastructure is impacted by the climate it's kind of a double

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whammy but i think texas is doing really well right now it seems that um you know by bitcoin miners shutting down that extra gigawatt of power is certainly helping balance things out and uh you know it'll be very interesting to see you know in a few weeks when people look back and say you know how did the grid do and you know were bitcoin miners responsive and collaborative with the grid operators i think it'll be a positive story yeah that's excellent um so i guess as you're as you're as you're thinking about that

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evolving shape of you know energy and and great infrastructure how how how do you just have the the industry's head landscape right now and how do you see that competitive landscape maturing and evolving over the course of the next year um so i think in the energy world you've got this challenge that um we want to build lots of renewable energy we don't want to build more fossil fuel energy there are things like methane gas capture for power generation which work well at small scale that you can't do that at

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large scale and so you need to build up more renewable energy and the challenge with renewable energy is it's not available 24 7. so you need to have battery capacity and technology to store the energy so that you can make it more available or you just have to over build so much energy renewable energy that it becomes financially unviable so i think the whole energy sector is going to go through kind of a rethinking where you're going to see wind farms with solar combined so that you get more coverage because the sun shines 9 a.m to

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kind of 3 p.m from a solar energy generation perspective and then the wind works in the afternoons and evenings so you get almost 60 70 coverage that way but that will require the grid congestion issue to get solved because now you're generating a lot more energy in places that don't have consumers that you need to get it so then you start looking at things like hydrogen and do you build out excess renewable energy capacity such that you can electrolyze hydrogen out of water you split hydrogen and oxygen molecules

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and then burn that hydrogen which is clean uh when the wind or sun isn't shining or blowing so that you have 24 7 coverage so that's a technology that still has to become economically feasible at scale just like batteries have to become economically feasible at scale so when you look at the competitive environment within the the bitcoin mining industry it really comes down to being very agile how do you operate um such that you're able to cite your miners at locations where you have this low cost of energy

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um and you have high availability um such that you can operate very productively at low cost uh even when we're in a kind of winter for bitcoin and crypto and i think the uh bitcoin miners that invest heavily in owning their infrastructure they don't have the ability to pick up their systems and move and i think competitively that's a big differentiation in our model versus most others in that we can decide where we want to cite our miners based on economic incentives and um business reasons we're

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not thinking about 20-year projects of owning infrastructure and you know these bitcoin mining data centers um are a bit unique in that unlike a traditional data center which is a 20-year kind of life investment um in the world of bitcoin the technology is advancing so quickly that for example you build a container field where you house these bitcoin miners in uh effectively what are cargo containers modified cargo containers um with great air flow through them and then lo and behold this technology called immersion comes along where and

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all of a sudden you want to put bitcoin miners in this non-conductive fluid or dielectric fluid as it's called whereby you can keep them cool and run them even when it's very hot out and so all of a sudden you need to rip and replace all this infrastructure you just invested in and so these bitcoin mining operations every five years or so you're having to do major upgrades to them and uh you have whole new machines they have new form factors they have new they're more energy efficient and so we're all driven to continually

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upgrade our systems well it's a very different model than traditional data centers where you invest for 20 years and it's a great uh you know investment that has a good return well bitcoin mining infrastructure you really have to look at it as a about 70 to 80 percent of that infrastructure has a five-year life you know the containers have to be replaced every five years most probably as the technology changes if you have a building the building doesn't have to change but what's inside the building

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has to change uh as you move maybe to immersion so i think we're seeing a period where owning infrastructure isn't maybe the best way of getting a return on your assets and i think you're going to see a lot of the bigger miners the kind of riots and cores look at their business and say where they may bifurcate essentially their infrastructure business from their actual self-mining business and essentially spin out the infrastructure part of their business as a traditional data center business and finance it that way

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and then run their self-mining business kind of as a separate entity that you know leverages the infrastructure business but um is a separate business uh much more like our model at that point yeah the the asset light uh aspect to your business model is very compelling and that's a very interesting kind of forecast for i guess a consolidated business models across the across the sector so at this point i'd like to uh remind uh investors listening to the call that you can drop a question in the q a or email it to me directly you can open

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up the uh the call for for a participant questions at the end so switching gears a little bit um let's talk about the global hash rate so given the the lower bitcoin price how do you believe the hash rate will react and you know if you expect to decline how how low could it go so uh if you look at the global fleet of mining rigs the actual computers if you would that are installed you know most people think um there are tens of millions of these things they're actually fewer than four million of them installed globally um

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and of that fleet roughly 20-ish percent are old generation miners so the equivalent of s9s or s17s which are bitmain machines the s9 is six seven years old at this point it's four to five times less energy efficient than the current s19 generation and so those miners are reaching a point at a bitcoin price of kind of 18 19 000 where uh with the global hash rate at around 200 exahash where we are today 200 to 220 they're borderline profitable and so you're starting to see people shut those down now while they make up a

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you know good portion of the fleet overall from a perspective of how much hash rate they actually generate it's you know five to seven percent of the global hash rate so as those machines come off you'll see that hash rate number drop the global hash rate number dropped five to seven percent we're already seeing the difficulty rate which is kind of the measure of that decrease a couple of percentage points at each adjustment period more recently that being said minors like marathon are in the process of expanding their

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capacity you know we're growing by nearly six times over the next 12 months so we're going six fold over 12 months so we're adding you know nearly 20 extra hash additional capacity to what we currently have well so you need number has to go up then to compensate so and there are other miners who are growing as well so i think what you're going to see is less of a decrease and more of a slower increase and so you know as i said earlier while last year bedout was forecasting in the high 300s and is now forecasting

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in the high 200s you know i think the at the low end we'll see maybe exiting this year at uh you know a hash rate of around 250 and at the high end maybe 275 um which is still you know it's uh 30 40 growth year over year um over last year but less than the 80 growth that was initially forecasted so um i think you know that'll bode well for the miners that have rigs operating can produce bitcoin so do you think that um you know call it well-positioned well-financed miners such as yourself they'll continue to grow hash whereas

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you'll see some of the smaller players that are you know running into some obstacles perhaps curtail and that's that's where the ships are going to be or do you expect you know curtailment from some larger players as well well i think some larger players have already announced decreases in their build-outs you know core uh announced that um they're expected global their expected hash rate at the end of the year would not be as large as they had initially forecasted i don't know what riot has announced

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recently in that regard but i think generally speaking the larger miners are going to continue along with their plans of expansion and where you'll see the you know slow down in growth will be in the smaller miners who just can't pay for the miners they need to grow they may have the capacity meaning infrastructure they just can't pay for the miners to grow they put money on their initial deposits they aren't able necessarily to make the second deposit payment or the final payment and so i think that's where you're going to see

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the decrease uh you know what does that mean greater consolidation of hash rate amongst the large miners um but i think you're also going to start seeing um more mining outside of the u.s starting to grow because energy prices in the u.s and just the ability the capacity to grow in the u.s is getting tighter from a available electrical electricity perspective i think there are new regions in latin america for example where you're going to see growth i think there will be growth in hash rate in russia mostly because there's a ton of idle

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nuclear assets in russia there's a lot of cheap nuclear energy and i think you know russia is going to view crypto as a tool to use to essentially be able to you know fund some trade uh not from a perspective of sanction busting so much as just it's it's you know it's a different currency you can use if you can't pay for things in dollars and you nobody wants to receive rubles then you have to acquire that foreign currency well if you can mine bitcoin then you can use that to pay for things

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so i think you're going to see russia as a percentage of the global hash rate grow you know china is there's still a lot of mining going on in china regardless of the ban um it's happening kind of under the radar screen so you may see some more expansion there though i don't think that'll be large in scale but i think you'll see expansion in in latin america and uh you know there's some opportunities in africa that i think aren't necessarily executable in the short term but for

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example kenya has you know 17 gigawatts of geothermal power um that they don't really have a lot of consumption for and so that's a place i know a lot of people are starting to look at to see you know how could you do it the middle east um is looking to expand uh you know united emirates saudi arabia countries like that that have you know the ability to generate huge amounts of solar energy uh are looking at bitcoin mining as a way to um help fund not just that expansion but also the combination of bitcoin mining

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with electrolyzing hydrogen uh you know i know saudi arabia is uh iran saudi aramco is considering becoming the largest manufacturer or producer of hydrogen in the world um and to do that they need to electrolyze it and you know putting some bitcoin mining on all that solar power would be a great way to help finance that so i think you're going to see those markets start expanding as well and so that'll drive expansion in 2023 if the market in the us remains constrained um and into 2024.

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those are those are all pretty pretty exciting markets for for my name moving forward over the next couple years i guess just going back to russia if uh the country were to take the pack that you laid out do you think that that might drive further international trade adoption for bitcoin well i i think uh you know if you go back to what was in the news you know six nine months ago saudi arabia said you know we maybe should be thinking about you know moving off of the petro dollar and moving to a basket of currencies and one of the

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currencies included in that basket was bitcoin um the benefit to bitcoin um [Music] over a sovereign currency or fiat currency uh like the ruble the dollar the pound the euro swiss franc etc is that it's not controlled by any one government and so you know imagine you're a commodity producer whether it's oil natural gas nickel coal whatever it might be and you're selling your commodity in dollars now the u.

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s has weaponized the dollar so okay i don't want to hold my foreign reserves in dollars maybe let me hold them in something else well there aren't many global currencies that have the uh scale and liquidity of the us dollar out there uh you certainly couldn't do it in swiss francs you know saudi arabia couldn't price oil and swiss francs and keep all their money in swiss francs um the euro has a lot of volatility to it and uh you know the euro has issues where you know the european governments may decide to devalue the euro you know

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look at what's happening vis-a-vis the dollar right now you know in europe because of the tight economic environment they have not raised interest rates at the same tact as the u.s and so therefore the euro is falling behind the dollar and decreasing in value well you know imagine if you were holding your assets in euros right now instead of dollars you wouldn't be a very happy person but um and you know obviously there's a lot of volatility in bitcoin today so that may not be the ideal place to hold your

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assets um if you're looking for long-term holdings i think it does but you know in the short term it's certainly been very volatile so if you price your uh commodity in in bitcoin however you can always convert it to another asset once you've received that bitcoin you could convert it to gold if you think that's better you could convert it to dollars pounds swiss francs yen whatever you want to do but you know what's happening in the macro in the markets today internationally is almost every currency

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other than the dollar is losing value and that's driven by the fed's policy of raising interest rates there's this you know people are getting good yield on their dollar denominated assets and so once the fed kind of takes the foot off the uh the break uh and uh on interest rates or rather you know applies the break to interest rates then uh you know you may see a weakening of the dollar and at that point all of a sudden people are going to be looking to where to put their money and you know bitcoin may very well be a benefactor of

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that but i think i would expect to see a certain number of commodity producing nations start pricing their commodities in a basket of currencies and one of which will definitely be bitcoin and you know you may see russia start doing that you may see saudi arabia start doing that the oil producers um you know certainly some african countries will do that as well i think so you mentioned some price protections that you have on contracts and check what will be price what what's your address protections work well essentially you know the way a

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miner procures miners is there's three payments you put a deposit down at the time of order which is somewhere between 30 and 40 percent you six months before receiving the miners you pay your second deposit which is somewhere between 30 and 40 percent and then the last payment is the balance of what's owed if you have a uh a an agreement to purchase the miners that is based on a price protection mechanism like some of our agreements then that last payment is kind of trued up based on kind of where the price of

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bitcoin is and what the market price for the mining rigs is and you know mining rig pricing follows bitcoin fairly closely so if you placed an order at the peak in november and you're now receiving those miners uh you know where we are today then you know bitcoin has dropped by 60 70 percent mining rig prices um have dropped not as much um but you know you've seen anywhere from 20 to 35 percent depending on the model of minor that's dropped and so the pricing is adjusted accordingly um now you know mining manufacturers also sell miners

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based on fixed price agreements um and if you bought miners based on a fixed price agreement um at the peak then that's not a good thing because you don't have that price protection mechanism and you know some people may have done that so but that's essentially how it works um so yeah if you do have that sort of price protection mechanism then you know uh in an ideal world that last payment you make uh basically you don't have to make it because you've already paid for everything through the deposits that you

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made and i suppose with call it bitcoin hovering below twenty thousand dollars right now what are your thoughts on huddling coins and have your views changed at all or is that still the you know a core strategy so we are long-term bullish on bitcoin um [Music] and i think generally speaking most bitcoin miners are long-term bullish on bitcoin or they wouldn't be in the business certainly you wouldn't be invested in the amount of capex that you invest in this industry if you weren't uh long-term bullish on bitcoin so what

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really drives miners hobbling or uh decision is more a liquidity need issue and so you can see you know core sold 75 percent of their bitcoin holdings because they needed to pay down debt restructure debt um you know riot has sold bitcoin um to fund operations and uh you know capex requirements so i think you know miners that have liquidity needs clearly are uh having to sell uh their bitcoin because it's you know an asset they hold um and you know you can look at just the price points where these miners have

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sold you know they didn't sell it at fifty thousand they didn't sell it forty thousand they didn't sell it thirty thousand they started selling it around 20 000. um you know again we're bullish um our you know liquidity is still very strong so we haven't had a need to sell bitcoin you know that being said would we sell bitcoin if we had to of course you know that's just prudent business operations uh but long term we're bullish on bitcoin and therefore you know our uh our inclination is to hold our bitcoin

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um and you know we have borrowing facilities where we can collateralize our bitcoin if we want to and we've been you know making sure that you know we don't have uh you know significant amounts out on any of those lines and you know generally speaking marathon is very has very little debt and we have a convertible note out there which matures in four years um but uh other than that we just have a small amount out on a revolver so you know we're very good in that regard excellent before we open the call for uh for

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for q a from our audience um let's talk a little bit about consolidation m a in the industry i guess what are your thoughts there do you think that this is an opportunity for larger players to consolidate or you know perhaps you could expand on your idea that you know business models will become more streamlined as companies break themselves apart yeah i think you know consolidation is driven by a couple of things um you would want to acquire another miner because either it gives you access to um very low cost mining rigs

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and or hosting capacity because somebody has built out hosting capacity um and they have mining rigs running and they're operating at a very low energy cost maybe so then you have to look at for how long uh are those energy contracts priced in uh or the hosting priced in what is the age of the mining rigs what's the economic life left on them you know as we come into the having event in 2024 um you know unless bitcoin doubles in price uh you know the uh profitability is going to decrease even further from where it is today and so

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you need to have the most energy efficient miners so if somebody has older generation miners um would you really want to acquire those knowing that within less than two years we're in a having event and so you have to kind of look at what's the economic life left on the miners you would be acquiring you know what are the value the energy contracts they have the hosting sites that they have and kind of do your calculus is it better to go acquire new miners that are more energy efficient uh contract new

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sites or build new sites or is it better to acquire and uh you know no different than in any other industry the difference is you know we have this having event which is driving a um kind of time value uh part of the equation so kind of like an option agree you know option contracts you have the intrinsic value and then you have the time value well the time value is now less than two years and so you have to if you're going to do something you want to pay back in a short period of time so for highly distressed assets i think

40:32

there'll be a good opportunities for consolidation i think it gets a little more difficult the bigger the miner is that wants to be acquired the harder that deal is going to be to get done because it's typically going to be more complex and you come into this the time value of you know the investment so i think you're going to see a lot of consolidation amongst the smaller miners um by either the big ones or smaller miners just merging together um but i think it's going to be much harder for um

41:04

you know two large miners to come together you know if uh core and riot were to go together i mean they have similar business models they operate you know self-mining and hosting operations uh they have large infrastructure um could they do it yes possibly you know but the question is would one plus one equal three there no you know best case it would equal two so then you're going to reap some synergies of sg a and things like that but otherwise not a lot so um you know would it make sense for a marathon to acquire one of those big

41:39

miners or to merge with one of them well we provide the benefit to a large uh you know a minor that has lots of hosting capacity available that we have a lot of minors available so there's some synergies there but um outside of that i don't think any of those larger mergers necessarily pencil at this point and we'll see uh you know and we'll kind of see you know how the market develops where evaluations are and you know what happens with the price of bitcoin um worst case scenario is nothing happens

42:09

but there's no acquisitions because it just doesn't make sense people don't have you know they're they're the publicly traded miners their equity isn't worth enough to do a deal uh it would be too dilutive or whatever it might be but i i think you're going to see some consolidation definitely and most probably towards the back half of this year so i and and i would imagine that any deal of note crosses your desk are you seeing a lot of distressed assets or is that you know something that might be

42:39

yet to come if prices remain at these levels um i think people are feeling some pain and it's causing them to dial back growth uh i don't think we're quite at the point where you're seeing you know any minors of note uh starting to sell off assets um you know you have um just in the marketplace today you have uh things like uh you know everybody's familiar with the company celsius some people may not know but celsius has a mining operation actually and and that business um you know is likely uh going to become a

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distressed asset that will be for sale um and you have other miners who just have too much debt and uh you know they have borrowed money from people like galaxy and nida and others to finance their miners purchases and now those they're defaulting on those payments and um the um you know ny dig and galaxy and those are uh essentially foreclosing on those mining rigs and uh you know they don't want to be in the mining business so they're likely going to sell those rigs and the hosting agreements for where

43:50

they are hosted um and so you're going to see some of those opportunities come to market and so it's kind of the uh they don't want to be in the loan to own business but you know miners may look at buying essentially foreclosed miners uh which is a lot less expensive than buying a whole mining company right so you also have to look at the risk you know asset purchases of foreclosed miners could be a very attractive way of consolidation that's kind of not the traditional model excellent so now um i'll open it up for

44:23

a few questions we've received from the audience uh the first uh wants to tap your insights on the energy market so i guess what's your outlook for energy prices over the next 24 months so i think uh generally speaking if you look at energy futures which are kind of you know future markets or predictive markets um two years out the expectation is we'll see energy prices substantially lower than where they are today you know i think there's a fair amount of argument that can be made for um there's more demand than there is supply

45:00

for energy and we had a few years of artificially low pricing on energy because producers had just overproduced and then they scaled back well now everybody is busy scaling up the question is are they going to scale up so much that we're back where we were before or are they going to be more prudent and not scale up to that extent you got to realize that energy markets are self-balancing so if energy prices get too high then people start shifting the type of energy they're using um and so you know if oil

45:33

prices start getting too high then people start moving to things like natural gas and other sources for energy you could even get to a point where there's an incentive to start building more nuclear and not nuclear in the sense of traditional large central utility nuclear power plants like three mile island or fukushiyama but what are called small modular reactors smrs which are essentially mass-produced assembly line excuse me miners that uh miners nuclear uh facilities that are kind of 100 megawatt capacity

46:08

that uh don't require all the liquid cooling that are much safer that operate more like the nuclear systems you see on u.s navy vessels um which are very safe they're small they're easy to maintain easy to manage they run for years they don't generate a lot of nuclear waste and then you have fusion energy which is still five to ten years out at the earliest but i think smrs will be a form of energy that you'll start seeing being deployed i think the first one is scheduled to go live um within the next five or six years in

46:40

wyoming and then you'll see kind of those come on but you know two years out i think everybody's expecting energy prices to come back down natural gas future pricing oil future pricing i think is all expected to come down um you're also going to see a shift in uh you know consumption uh in the u.

46:56

s the expectation is by 2030 uh you know uh electric vehicles will make up a majority of new vehicle sales and so as that transition happens there's less gasoline that's needed because more and more of the vehicle fleet starts transitioning to ev now that means more electricity will be needed and that will be predominantly driven through renewable energy expansion so i think you know the fossil fuel markets longer term we'll see a decline in price as we move more towards renewable and continue to grow that out and as our

47:31

consumption shifts from natural gas and fossil fuels to electricity coming predominantly from renewable sources yes very exciting to us in the energy market certainly um our next question from the audience pertains to your business model um [Music] you have an asset light model right now what are your thoughts about not owning the capacity to energize miners right away i guess how would you compare and contrast those two models right now and i know that we touched upon that a little bit earlier um but i guess just to just to follow up on

48:16

it so yeah it's i think if the person asking the question is asking is it better to not energize than to energize it's always better to energize as soon as you can because you if you have the miners you want to make them productive um so if you own the energy asset the the challenge is um you know it takes anywhere from a year to two years to build out a facility before you can turn on the miners uh and that's if you can get the permission permits from ericot or whatever regulator you're using you

48:49

know hopefully you're not trying to build mining capacity in new york state because that's likely not gonna you're likely not gonna be able to ever turn those miners on um but there are other states the dakotas for example oklahoma and other places like that where there are great opportunities to build mining facilities but the challenge is it's a it's a timing issue right um you know if i can buy miners today and find places to host them uh where i don't have to build out the facility then my time to mining is much

49:16

shorter and the acid light model lets us do that the only time the acid light model has a constraint on it is when hosting is constrained there isn't available hosting capacity and while that was kind of the market conditions over the past uh 12 months we're now starting to see that free up because people built have invested a lot over the last 18 months in new hosting capacity they're now not able to buy the miners to put them in those hosting facilities and so we're now seeing uh readily available

49:46

uh hosting sites uh for people to put minors in so i think we're going into a period where our model starts making a whole lot of sense uh and then over time you we'll have to see the uh you know i personally believe that the energy companies are going to come into this space uh in a big way especially the renewable energy providers and certainly you know the location we're at in west texas which is on a wind farm that renewable energy operator is very interested in coming into this space we'll have to see after this winter you

50:21

know how much interest they have in growing that but i think generally speaking renewable energy operators are very interested in partnering with miners because it's a great baseload customer for them so it just makes economic sense as to whether they become miners themselves that's a different strategy possibly but i think what you will see is um you know renewable energy operators looking at data centers as a base load customer and you know a certain portion of that will be bitcoin mining a certain portion of it may be

50:49

high performance on demand computing and all of web 3.0 is kind of driving a shift from um these data centers that are you know traditional data centers that are on 24 7 365 where your data and your application are running in parallel together co-located to a model in web 3.0 where the data is residing on the blockchain and your compute power is only used on demand so i only need to turn on my ai modeling system when i need to generate a new model it doesn't need to run 24 7 365. so i'll co-locate that in

51:26

some facility where i can do on-demand computing turn it on and off at need and so i think that's where you're going to see these renewable sites these data centers that are focused on bitcoin mining and high performance on demand computing and what that then drives is you'll be lots of capacity in the marketplace and it won't make economic sense to be vertically integrated uh as a miner you'll just it's you'll be better off um to use third-party data centers and you know there's a for some people of some scale

51:58

it makes sense to own your own data centers but for other people it doesn't um and you know there's a reason why amazon aws services netflix and people like that it doesn't make sense for netflix to own their own data centers um because what they need is a highly distributed system and the bigger a miner gets actually the more important it becomes to have that highly distributed diversified sites etc and operating lots of sites yourself um becomes uh you know very expensive and uh you know highly capital intensive and

52:29

so i think over time the model will move to acid light generally speaking in this industry interesting that that dovetails with our final question from the audience which is would you describe the tone of negotiations for new hosting deals you know how are those evolving recently and are you comfortable with your current pace of signings so i think conversations are getting easier for the buyer uh in which this particular case that's us um because capacity is becoming more and more available and you know a hosting

53:08

provider has built out capacity they have epa's power purchase agreements where they have to take the energy and so they want to get the slots filled as quickly as possible and we are we can move very quickly because we have miners available to plug into slots um so it's certainly been easier uh for us uh in that regard so yeah i think what you'll see is uh while we have been very quiet and kind of discussing our hosting agreements uh i think you'll see that kind of pace of that likely pick up as capacity opens up

53:46

excellent well fred i always enjoy speaking with you i learned something new every time i think that this has been a a great use of an hour um for for our audience and i i i really enjoyed hearing your thoughts on the sector and on marathon so thank you very much for joining us well thank you very much for having me it's always a pleasure and uh you know always open to answering lots of questions

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