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In a Chardan Leadership Call, Fred Thiel, CEO of Marathon Digital Holdings, engages in a discussion centered on the Bitcoin mining sector's dynamics and prospects. The call delves into how global events, such as the strengthening US dollar and evolving asset allocation trends, influence the industry. Thiel elaborates on the challenges posed by energy curtailment resulting from heatwaves and renewable energy dynamics, especially in Texas. The conversation highlights Marathon's strategic focus on harnessing renewable energy sources and its innovative asset-light approach to Bitcoin mining operations. The company's emphasis on leveraging renewable energy and its adaptability in dynamic energy markets is underscored throughout the dialogue.
Transcripts are autogenerated. May contain typos.
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 with some important disclosures.
During this call, we will not be discussing Chardon 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 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.
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. We launched coverage of Marathon last month, and our research is available upon request. Fred, thank you so much for joining us this morning.
Fred Thiel: Great to be here.
Brian Dobson: It's great to have you. So let’s jump into the recent events in the industry. When you take a global view, what are the macro trends you think will shape the Bitcoin mining sector in the next few years, and how do you position Marathon to prosper in that environment?
Fred Thiel: One of the key things to think about with Bitcoin mining is that we're driven by the macroeconomic environment because that drives the price of Bitcoin. Right now, Bitcoin is in its winter period, and some say this is due to the cyclicality of the market, but I believe it's more driven by the macro environment. We went through a major de-risking of assets earlier this year, which impacted both equities and risk-on assets like Bitcoin. Additionally, the dollar has increased in value, hitting parity with the euro, something that hasn’t happened in 20 years. As asset allocators decide where to put their money, some view Bitcoin as a store of value, but the current strength of the dollar means many are keeping their assets in fiat currencies for now.
Thiel continues: I think until the Fed and the macro environment ease somewhat and risk-on becomes more palatable, Bitcoin will likely trade between $18,000 and $22,000. The Fed easing on interest rates could change this. There’s a limit to how high they can raise rates before they can’t pay the interest on their debt, and I think we’re nearing that point. Based on the inflation print we saw today, we’ll likely see another aggressive interest rate hike—probably 75 or 100 basis points—but there will come a point where they can’t raise anymore.
Additionally, energy costs are impacting Bitcoin miners. In Texas, for example, spot market energy pricing is high, and miners are being curtailed, meaning they’re shutting down mining rigs because the grid needs the power. This, combined with the price of Bitcoin, is putting pressure on miners.
Marathon, however, has not sold any Bitcoin yet and continues to hold over 10,000 Bitcoin on its balance sheet. We operate a more asset-light model, which gives us a differentiating factor since we don’t own large infrastructure assets that require continuous funding.
I think mid-term, Bitcoin will move back up as the risk-on environment becomes more palatable when the Fed stops hiking. Bitcoin will likely be one of the first assets to move up, and we’re also looking forward to the 2024 halving event, which traditionally increases Bitcoin’s value.
Fred Thiel: Outside of that, the capital markets are also affecting Bitcoin miners. Last year, it was very easy to raise capital, so miners were able to invest more in infrastructure and place large orders for mining rigs. However, now in this Bitcoin winter, there is a lack of capital. Some miners took on significant debt last year at double-digit interest rates to finance their rigs, and they’re struggling to service that debt.
We, on the other hand, have price protection mechanisms in our agreements with Bitmain, so as Bitcoin prices have dropped, we’ve benefited from having to pay less capex to acquire the remaining rigs.
There are also miners under liquidity pressure who may be consolidating or struggling to complete payments on their mining rigs. This will likely result in more capacity becoming available as miners can't afford to deploy their machines. Marathon, with its asset-light model, is in a strong position to acquire capacity or host miners at these available sites.
The global hash rate was forecasted to be around 360 to 375 EH/s by the end of this year, but now those forecasts have been revised to 250 to 275 EH/s. The lower hash rate means fewer miners are competing for the fixed number of Bitcoin produced each day, which is good for well-positioned miners like Marathon.
One of the amazing things about the Bitcoin network is how it self-balances. When times are good and margins are fat, people invest, difficulty rises, and productivity decreases. But as business gets tighter, miners shut off, and productivity increases again. It's a very interesting ecosystem that continually self-corrects.
Brian Dobson: That was a great answer. Let’s move on to energy curtailment. Do you expect more curtailment to happen, particularly in areas with a higher reliance on green energy?
Fred Thiel: If you look at the energy markets, particularly in Texas and ERCOT, Bitcoin miners there have a very good relationship with the grid. When the grid needs more energy during heat waves, Bitcoin miners shut down their operations and give that power back to the grid. Most of the energy load happens between 4 PM and 9 PM when consumers come home, cook, and use air conditioning.
Energy types can be thought of in layers. At the base is nuclear, which runs consistently but can’t easily be dialed up or down. Above that is coal, which also doesn’t adjust easily. Natural gas serves as a buffer that can be dialed up or down, and finally, renewables like wind are the first to be curtailed when excess power isn’t needed.
The benefit of Bitcoin miners is that they can act as a load balancer for the grid. When there's excess renewable energy being produced but not enough grid demand, miners can consume that excess energy. When grid demand spikes, miners can curtail and allow that energy to go back to the grid.
If Bitcoin miners are located behind the meter at renewable energy generation sites, like our site in West Texas, they can provide a base load for renewable energy producers, making their operations more profitable and incentivizing the addition of more capacity.
One of the biggest challenges, however, is grid congestion. If you generate power in one part of Texas and need to transport it to another part, but the grid’s capacity is limited, you’ll run into bottlenecks. Bitcoin miners can consume power at the point of generation, reducing waste and providing financial incentives for generators.
As an example, the US wastes around 8-10% of the electricity generated due to heat loss during transmission. That’s more power than all the Bitcoin miners in the world use, highlighting the role miners can play in reducing energy waste.
Brian Dobson: That’s a fascinating insight into how miners interact with the grid. Let’s switch gears. How do you see the competitive landscape in Bitcoin mining evolving over the next year?
Fred Thiel: The energy sector will likely undergo a transformation as we move toward renewable energy. There will be a need for battery storage to make renewables more consistent, or we’ll need to overbuild renewable capacity. Wind and solar will probably be combined to provide more coverage, but grid congestion will still need to be solved.
Over the next few years, I think we’ll see more miners positioning themselves where low-cost energy is available. Marathon’s asset-light model allows us to be very agile, picking sites based on economic incentives rather than owning infrastructure that ties us down to one location.
The traditional data center model is also changing. Bitcoin mining infrastructure needs to be refreshed every five years due to advances in technology, unlike traditional data centers where investments are made for 20 years. For example, immersion cooling is a new technology that could require significant upgrades to existing mining infrastructure.
I think owning infrastructure may not be the best way to get returns in Bitcoin mining long-term. Larger miners might start spinning off their infrastructure business into separate entities to finance them as traditional data centers while keeping their mining operations separate.
Brian Dobson: That’s an interesting take on the future of the industry. Now, what about the global hash rate? Given the lower Bitcoin price, how do you think the hash rate will react?
Fred Thiel: The global fleet of mining rigs is fewer than four million machines, and roughly 20% of those are older, less efficient models. These older rigs are becoming unprofitable at today’s Bitcoin prices. As a result, we’re starting to see them being shut down, which could reduce the global hash rate by around 5-7%.
At the same time, miners like Marathon are adding capacity. We’re growing sixfold over the next 12 months, adding nearly 20 EH/s of new capacity. So, while the hash rate might decrease temporarily, it’s more likely that the growth rate will simply slow down.
I expect the global hash rate to be between 250 and 275 EH/s by the end of the year, which is still a 30-40% increase over last year, but less than the 80% growth that was initially forecasted.
Brian Dobson: Do you think well-financed miners like Marathon will continue to grow, while smaller players may struggle?
Fred Thiel: Yes, some larger miners have already announced reductions in their growth plans, while smaller miners might not be able to complete their payments on mining rigs. This will likely lead to more consolidation in the industry, with larger miners acquiring smaller ones.
Fred Thiel: Larger miners will likely continue their expansion plans, while smaller miners, who may not have the capital to purchase miners or complete their payments, could slow down. This could result in greater consolidation, with the larger miners taking over smaller ones or merging together. However, I don’t think we’ll see major mergers between large players as it might not be worth it from a synergies perspective.
I think we’ll also see more mining capacity expanding outside of the U.S. Places like Latin America and Russia will likely see growth, especially with Russia having a lot of idle nuclear assets and cheap energy. Russia could use Bitcoin mining to fund some trade, especially since it provides an alternative to holding reserves in rubles or other currencies.
Despite the ban, there is still Bitcoin mining happening in China, though it remains under the radar. Additionally, there are opportunities in Africa, such as Kenya’s geothermal power, which could be leveraged for Bitcoin mining. The Middle East, particularly the UAE and Saudi Arabia, are also looking at Bitcoin mining as a way to utilize solar energy and produce hydrogen.
These regions will likely see growth in mining in 2023, especially if energy prices in the U.S. remain constrained. If that happens, the global hash rate will likely continue to grow in those regions.
Brian Dobson: Going back to Russia, do you think if Russia starts using Bitcoin for trade, it could drive further international trade adoption of Bitcoin?
Fred Thiel: Absolutely. We’ve already seen talk about moving off the petrodollar, and some countries have considered using Bitcoin as part of a basket of currencies for international trade. The benefit of Bitcoin is that it isn’t controlled by any one government, unlike fiat currencies. This could make it attractive for commodity producers.
If you price your commodity in Bitcoin, you can always convert it to another asset afterward. For example, you could convert it to gold, dollars, or euros. Bitcoin provides a way to diversify and avoid the risks of holding one particular currency, especially with the dollar being weaponized in some cases.
I think we’ll see more commodity-producing nations start to price their commodities in a basket of currencies, including Bitcoin. This could include Russia, Saudi Arabia, and some African countries as well.
Brian Dobson: You mentioned price protections in your contracts. Can you explain how those work and how they protect you?
Fred Thiel: Essentially, when you buy mining rigs, there are three payments. You put a deposit down at the time of order, which is usually 30-40%. Six months before you receive the miners, you make a second deposit, also 30-40%. The final payment is based on a price protection mechanism where the price of the miners is adjusted just before delivery based on the current market price.
Since mining rig prices track the price of Bitcoin, this mechanism protects us from paying too much when Bitcoin prices fall. For example, if you placed an order at the peak in November, but you're receiving the rigs now, the price is adjusted to reflect the lower Bitcoin price. This can reduce the final payment significantly.
Brian Dobson: With Bitcoin hovering below $20,000, what are your thoughts on hodling coins? Has your strategy changed at all?
Fred Thiel: We remain long-term bullish on Bitcoin. Most miners are bullish, or they wouldn’t be in this business. However, the decision to hodl or sell is often driven by liquidity needs. Some miners, like Core, had to sell 75% of their Bitcoin holdings to pay down debt. Riot has sold Bitcoin to fund operations.
We haven't sold any Bitcoin because our liquidity is still strong. However, if we needed to, we would sell Bitcoin—it’s just prudent business. But for now, we’re holding and are still bullish on Bitcoin's long-term value.
Brian Dobson: Let’s talk about consolidation and M&A in the industry. Do you think larger players will use this opportunity to consolidate smaller ones?
Fred Thiel: Consolidation could happen for a few reasons. If a miner has access to low-cost mining rigs or hosting capacity, they could be a target for acquisition. But you also have to consider the age of their rigs and their energy contracts. With the halving event in 2024, older-generation rigs might not be worth acquiring because their profitability will decrease significantly unless Bitcoin’s price doubles.
Some smaller miners may merge to survive, but larger mergers between big miners like Core and Riot may not make sense. The synergies gained might not justify the complexities of such a deal.
At Marathon, we focus on miners with available capacity that aligns with our asset-light model. We’re in a good position to acquire foreclosed miners or hosting contracts without taking on the complexities of a full merger.
Brian Dobson: Are you seeing a lot of distressed assets in the market right now, or do you think that's yet to come?
Fred Thiel: We’re starting to see some distress, especially with companies like Celsius, which has a mining operation that may be up for sale. Some miners borrowed heavily from firms like Galaxy or NYDIG to buy rigs, and now they’re defaulting on those loans. Those firms don’t want to be in the mining business, so they’re likely to sell those rigs and hosting contracts. This will create opportunities for well-capitalized miners like us.
Asset purchases of foreclosed miners could be a very attractive way to consolidate without taking on the risks of a full acquisition. We’ll see more of this in the coming months.
Brian Dobson: Let’s open up the call for some questions from the audience. The first one is about the energy market. What’s your outlook for energy prices over the next 24 months?
Fred Thiel: If you look at energy futures, most experts expect energy prices to come down over the next two years. We had artificially low prices for a while, and now producers are scaling up, but they might be more prudent this time to avoid overproducing.
Energy markets are self-balancing. If oil prices get too high, people switch to natural gas or other energy sources. There’s also potential for more nuclear energy, especially with small modular reactors (SMRs), which are safer and more efficient. Some of these could come online in the next five to six years.
In the long term, as electric vehicles become more common, there will be less demand for gasoline, and more demand for electricity, which will likely come from renewable sources.
Brian Dobson: That’s a very exciting outlook for the energy market. The next question is about your business model. How do you compare the asset-light model with the option of owning the capacity to energize miners?
Fred Thiel: It’s always better to energize miners as soon as possible, whether you own the capacity or not. If you own the energy asset, it can take 1-2 years to build out a facility and get the necessary permits. With the asset-light model, we can place miners in existing hosting facilities and start generating Bitcoin much faster.
We’re starting to see more hosting capacity become available as miners who built out infrastructure now don’t have the capital to buy rigs. This opens up opportunities for us to deploy our miners quickly and efficiently.
In the long term, I believe energy companies will get more involved in Bitcoin mining, especially renewable energy providers. Our strategy of placing miners at renewable energy sites is beneficial for both the miners and the energy companies.
Over time, it may not make sense for miners to own their infrastructure. Similar to how companies like Netflix use Amazon Web Services instead of owning their own data centers, Bitcoin miners may move to an asset-light model as well.
Brian Dobson: That’s a great point. The final question from the audience is about hosting deals. How have negotiations been going recently, and are you comfortable with the pace of new signings?
Fred Thiel: Hosting deals are getting easier for buyers like us because more capacity is becoming available. Hosting providers have invested in building out capacity, and now they want to fill those slots as quickly as possible. We can move fast because we have miners ready to deploy. I think you’ll see us announce more hosting deals in the near future.
Brian Dobson: Fred, it’s always a pleasure speaking with you. I’ve learned so much during this hour, and I’m sure our audience has too. Thank you for joining us today.
Fred Thiel: Thank you for having me. It’s always great to share insights with you, and I’m happy to answer any more questions.
Brian Dobson: Thank you again, Fred. Before we wrap up, I want to remind everyone that you can request our research coverage of Marathon Digital Holdings from your Chardon Capital representative. As always, our compliance team would like me to remind participants that if you have any questions regarding research, those should be coordinated with your respective salesperson.
Fred, thank you again for sharing your insights today. It's been an enlightening conversation, and I'm sure our audience appreciates the transparency and depth of your responses.
Fred Thiel: Thank you, Brian. It’s been great to be part of this series, and I’m always happy to discuss Marathon’s journey and the broader Bitcoin mining industry. We look forward to continuing to drive innovation and growth in this space.
Brian Dobson: Absolutely. Thank you, Fred. And with that, we will close this installment of our Elite Industry Leadership series. We appreciate everyone tuning in, and we’ll see you in our next session.
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