WBD441 Audio Transcription
The State of Bitcoin Mining with Amanda Fabiano & Jaime Leverton
Interview date: Wednesday 22nd December
Note: the following is a transcription of my interview with Amanda Fabiano & Jaime Leverton. I have reviewed the transcription but if you find any mistakes, please feel free to email me. You can listen to the original recording here.
In this interview, I talk to Amanda Fabiano, Head of Mining at Galaxy Digital and Jaime Leverton, CEO Hut 8 Mining. We discuss the current ASIC and mining markets, running operations in an uncertain industry during uncertain times, ESG FUD and the future of mining.
“It’s really only been this calendar year that all public miners started to hold almost all of their output… miners used to be the source of incremental liquidity of bitcoin into the system, but now that so many miners are holding, it is restricting supply.”
— Jaime Leverton
Interview Transcription
Peter McCormack: Morning, Amanda. Why are you laughing?
Amanda Fabiano: Just laughing at your clap!
Peter McCormack: Laughing at my clap! Finally, we did this.
Amanda Fabiano: Finally.
Peter McCormack: After threatening to do it for a long time. And, Jaime, oh my God, finally we get you on the podcast.
Jaime Leverton: I know, I'm so excited to be here.
Peter McCormack: First time ever.
Jaime Leverton: It's very wonderful.
Peter McCormack: Thank you.
Jaime Leverton: In person, even better.
Peter McCormack: In person, even better. It's good to get you both on, talk a bit about mining, hopefully you're going to educate me a little bit about what's going on. Okay, I want to start by talking about how mining has become something big and weird and amazing, and totally beyond anything, I think, Satoshi predicted. Mining originally was there to secure the blockchain.
Jaime Leverton: Still is.
Peter McCormack: Yes, but to do it on your computer. But it's become this whole big other thing now, which is being debated across the world in terms of energy, but it's being talked about as stabilising the energy grid. How do you take it all in, where mining has got to?
Amanda Fabiano: So, I started in mining 2017, when I was the class of 2017. I started in Fidelity, obviously, and I dove into mining because no one was really paying attention to it. And it was really the foundation of the network, and I was shocked that no one cared about it as much as they should have. I could have never predicted the rise of what happened over the past four years.
So now, we have people talking about mining every day. We saw a shift happen, I think, after the last halving. In 2020, people started to talk about mining up until the halving, and I thought it was just a trend. But then it never really stopped, and now it's getting even more intensified. I think that's because of the rise of public mining companies and just the rise of hashrate, and how important it is for the network. So, I'm excited to see it come along.
Jaime Leverton: Yeah, it's funny because Canada really played aggressively in 2017. We had a lot of companies go public as mining companies in Canada, more so than in the US in that cycle. So, it's fascinating to see the rise of miners in the US now in this cycle, and really just how much is happening in the North American space, at a rate that we absolutely couldn't have predicted.
Peter McCormack: What's it been like for you, Jaime, coming in about a year ago?
Jaime Leverton: Yeah, my one-year anniversary was last week. So, it's been fascinating. Obviously, I've come from the traditional technology space and data centre space; but at the end of the day, it's all very, very similar, as far as the motions of how we run our mining farms, and how server farms are run. It's different outputs, it's a different end use case, but ultimately it's server farms that we're running.
Amanda Fabiano: It's really funny, when Jaime first started we had a conversation and she called me and was like, "Is this really how your order ASICs; is this legit?" I was like, "Welcome to the circus, Jaime, things get really weird in mining"!
Jaime Leverton: I couldn't believe that first contract. I've never signed worse terms in my 22-year career; I couldn't believe it, and that's why I called Amanda. And luckily, Amanda's been a friend to me since I got into the industry. You need to have somebody to call to be like, "Am I getting completely hosed, or is this real?" because it's wild.
Peter McCormack: What were the weird terms? Is it, "We'll charge you what we want, when we want and deliver them when we want"?
Jaime Leverton: And you pay upfront, so you transferred, in our case, tens of millions of dollars, and then you hope that you get quality product in return in the timeline that you think. But if you don't, your options are, go to China and sue, which is never going to happen. So, it is completely trust-based at the end of the day.
Amanda Fabiano: Even that, actually, has come a long way. So, you used to have to pay 100% upfront.
Peter McCormack: Well, I did that. Outside of my recent -- I told you this morning, I've bought some S19s off Compass, just to have my little contribution to mining. But back in 2017, I thought I was going to be a miner, and I completely fucked it up. But I bought 70 S9s from Bitmain, and I had to convert my Bitcoin into Bitcoin Cash to buy it and then make the transfer. You hope they receive it, and then I had to wait months for my ASICs.
Jaime Leverton: Why Bitcoin Cash?
Peter McCormack: That's all they would accept at the time, because they were trying to push Bitcoin Cash; you remember that?
Amanda Fabiano: Yeah. I mean, it has changed slightly, but it does go back to how chips are made. So, Bitmain and MicroBT, they have to upfront pay at the foundry. And then also, every node that they make is a lot of R&D development, so it costs a lot of money for them to create the new machines. So at the beginning, I kind of got it; but now, it seems like it should be changing, contracts should be changing, there should be a little bit more reliability, so I'd love to see that shift.
I'm actually pretty bullish on Blockstream's news, with Spondoolies' acquisition, and hopefully that will help the ASIC market and bring some maturity to it. But the ASIC supply chain is a challenging beast for miners for sure.
Jaime Leverton: Yeah, and the contract terms also make it really, really difficult to get traditional forms of financing against the mining infrastructure. If you're buying enterprise-grade tech, you can always get very low-interest financing applied to it; but because of the terms involved here, we end up having to pay a lot more if we want traditional financing options on the equipment.
Amanda Fabiano: I also finance miners, so at Galaxy we mine on our own, and then we do miner finance. And even for me, it's really difficult to get comfortable with terms of a contract. So, I wait either until the machine comes in, or I provide machines for financing, because otherwise you don't know what the terms of the contract are going to look like, and when the machines will come. And you're relying on that Bitcoin that they mine to pay you back.
Peter McCormack: There are two main ASIC suppliers, right; is it Bitmain and Whatsminer?
Amanda Fabiano: MicroBT.
Peter McCormack: MicroBT. Do they make the Whatsminer?
Amanda Fabiano: Yes.
Peter McCormack: What other ASIC manufacturers are there?
Amanda Fabiano: So there's Canaan, there's INNOSILICON, there's a couple of new ones, like MinerVa, and I think that's pretty much it.
Peter McCormack: Are they all based out of China though?
Amanda Fabiano: Yeah, so MicroBT and Bitmain are based out of China, but they've now moved and created more facilities outside of China, which as a US miner, it's really great, because you're slapped with a 28% sales tax when you transfer machines from China to the US. So, that was the Trump Tax that came out a while back.
Peter McCormack: Trump, you dick! So basically, all miners are 30% more expensive now because of that?
Amanda Fabiano: Well, the great news is, is that MicroBT and Bitmain have facilities outside of China now.
Peter McCormack: Oh, they do, right.
Jaime Leverton: So, if they're manufactured outside of China, the tax doesn't apply. And in Canada, we don't have the Trump Tax.
Peter McCormack: How much of the market do they have between them?
Amanda Fabiano: Well over 80%, I'd say.
Jaime Leverton: For sure, the lion's share. Bitmain is the dominant player, and then MicroBT would be second.
Peter McCormack: So, it's essentially a duopoly?
Amanda Fabiano: Yeah, but even that, so Bitmain uses TSMC and MicroBT uses Samsung, so it comes down to space at the foundry. So, TSMC has more capacity, and I was shocked last year when TSMC came out and said they had the 5-nanometer node coming, and Bitmain was actually one of a handful of clients that got space on that node. Now, it's probably really small space compared to, like, Apple, but it still is pretty cool for Bitcoin mining.
Now, on the opposite end, MicroBT uses Samsung, which creates its own products. So, Samsung is always going to create their products before they give space to an external client, so they have a little bit less market share, I'd say, than Bitmain.
Peter McCormack: Is there a supply issue now with ASICs?
Jaime Leverton: It's hard to say. So, there's a ton of volume expected in 2022, but the reality of what will actually ship is hard to say.
Amanda Fabiano: So we study and really look at all the public mining companies, because that allows us to have insight into the future network hashrate. And according to public company announcements, we're expecting 414 Petahashes to come online over the next year.
Peter McCormack: What does that mean?
Amanda Fabiano: It's massive. It's massive amounts of money and capital and ASICs being produced.
Jaime Leverton: Exahash.
Amanda Fabiano: Exahash, yeah, shit! 141 Exahash, yeah.
Peter McCormack: Okay. I still don't know what that means. How many ASICs is that?
Amanda Fabiano: It's a lot of ASICs.
Jaime Leverton: What is that a unit quantity? It's hard.
Peter McCormack: What is that, doubling the capacity?
Amanda Fabiano: It's double, essentially double current network hashrate.
Peter McCormack: So, it's going to halve your profitability, unless we double in price.
Jaime Leverton: And that's just the public's. It doesn't include any private demand.
Amanda Fabiano: And there are some massive private companies, massive private companies.
Jaime Leverton: In fact, the largest miners are private.
Peter McCormack: Core Scientific, one of them?
Jaime Leverton: Core is coming to market through a public SPAC; they're included in the 141.
Peter McCormack: Okay. So, who are the private ones, do we know? Can we say; is it a secret?
Jaime Leverton: I don't know.
Amanda Fabiano: Atlas is a huge private miner. They were based out of China and are now moving over. So, they have announced deals with Core and Compute North, both 200-megawatt facilities in total, that we know is coming online in the US.
Peter McCormack: But if these all come online, a lot of the older machines that are still hashing right now, the S9s, will start to go offline, right?
Amanda Fabiano: Yeah, I think so, I think because they won't be as profitable, unless their costs of electricity are super low.
Peter McCormack: That's a massive increase in supply. We're going to need Michael Saylor to buy a lot more Bitcoin!
Jaime Leverton: Luckily, he bought more this morning.
Peter McCormack: It's not enough!
Jaime Leverton: He's consistent!
Amanda Fabiano: The interesting part though is, when will they get delivered? So, that's the inconsistency that we just don't know.
Jaime Leverton: And we're not sure exact quantities of foundry allocation to ASICs, period. There's estimates, but we don't know how much they're really getting, and we don't know if they know yet.
Amanda Fabiano: That's like the Holy Grail.
Jaime Leverton: Yeah.
Peter McCormack: Do you think it's down to their own operations being a bit sketchy, or is it just the chip shortage at the moment?
Jaime Leverton: Chip shortage.
Peter McCormack: Chip shortage. And, are you guys having to consider into your plans, in your risk analysis, potential of China maybe dropping a few little bombs on Taiwan; do you have to think about this?
Jaime Leverton: We think about all risks. That's probably not one that keeps me up at night.
Peter McCormack: It keeps me up at night.
Amanda Fabiano: I've definitely thought of that before. I think there are larger issues though. I like to think I wouldn't just be thinking about how much Bitcoin I mine if that happens, but it is something that should be considered, right, it's scary.
Peter McCormack: So, what's being done here in the US; are foundries being built here?
Jaime Leverton: Yes, but a new foundry takes five years.
Peter McCormack: Really? Why does it take so long?
Amanda Fabiano: There are only two companies that make machines that create the nodes for the foundries, so it's just supply chain all the way down to machine creation.
Peter McCormack: Okay. What do we know about what Blockstream's doing then?
Amanda Fabiano: Just what they announced publicly, Peter!
Peter McCormack: How about in the mining space?
Amanda Fabiano: So, Blockstream acquired Spondoolies. Spondoolies was an Israeli-based company that created Bitcoin miners back, I think, in the 2016 timeframe, but I think they're trying to create their own ASIC, which I think would be great. And Square also recently announced that they're looking into creating some type of ASIC machine for miners.
Peter McCormack: But the time it will take them to be able to make a dent within that market will be challenging.
Jaime Leverton: Yeah, I mean Bitmain and MicroBT definitely have a very long head start.
Peter McCormack: And there'll be some tests and learning, creating their own ASICs, because I remember when -- I bought some DragonMints as well. They were a piece of shit, but 70 of those, a complete waste of money. But it's going to take some time for them to get up to speed, or even become competitive. So, it feels like Bitmain and MicroBT have got a real stranglehold on the market?
Jaime Leverton: Certainly, they do now. It will be interesting to see if large tech starts to get interested in this space. That could be a gamechanger for sure.
Peter McCormack: Such as someone like Samsung?
Jaime Leverton: Samsung, Intel, AMD, Nvidia.
Peter McCormack: Is that a prediction or a hope?
Jaime Leverton: I think it's an inevitability that large tech will come into this space. Increasing recognition that digital assets are here to stay will necessitate that.
Peter McCormack: Bitcoin, Jaime. Bitcoin is here to stay.
Jaime Leverton: I'm not a maxi, you know that, Peter.
Amanda Fabiano: I am, I'm here, yeah.
Jaime Leverton: She's here.
Amanda Fabiano: With my raspy voice!
Jaime Leverton: We're all still friends!
Peter McCormack: We've got a table between us!
Jaime Leverton: We don't!
Peter McCormack: I mean, that would be super interesting. What is the size of the market in terms of ASICs? Do we know annual revenue for manufacture?
Amanda Fabiano: We don't know any of that.
Peter McCormack: Do you think it's billions, though?
Amanda Fabiano: It probably is. I think the closest we get to understanding it is tracking public mining companies. We didn't have that two or three years ago, there were only a few. Now, there's more, so it allows us more insight into understanding how big Bitmain and MicroBT are. Because, public mining companies announce a few things that help them with their stock price. They announce their current hashrate, their future hashrate, when they buy machines, how many machines they buy, and the cost it costs them to mine a Bitcoin.
So, I think because everyone is aligning around those metrics, we're now able to see more into the other side of things that we don't know, like understanding how much Bitcoin ASICs are created would be literally the Holy Grail. I thought we were going to get there. There were rumours that Bitmain and MicroBT might IPO, which would require them to provide information. But I think because they're killing it, they don't have to, they don't need capital.
Jaime Leverton: And we also don't know if and how much they're self-mining.
Amanda Fabiano: That's a good point too.
Jaime Leverton: It could be really any amount.
Peter McCormack: Are they definitely self-mining; do we know they are?
Jaime Leverton: We don't know.
Peter McCormack: We don't know. What a mysterious industry.
Amanda Fabiano: We know that Bitmain at least used to a lot. There were always coupons that were dropped right before they put out a new machine. And I saw machines that came in that were knew, but were stepped on and had weird hash boards, and it was weird. So, I don't know if they still do, but there's been rumours of it in the past.
Peter McCormack: So, they were selling off their gear as new, that they'd been using?
Amanda Fabiano: Yeah.
Peter McCormack: Cheeky! Can you guys say how much you guys spent on ASICs, if you're public companies?
Jaime Leverton: Every time we order, we publish what we paid basically per terahash. So, our last two orders were around $50 a terahash.
Peter McCormack: I have no idea what that equates to in terms of how much you spent?
Amanda Fabiano: It depends on the machines, so the machines have a certain amount of output of terahash, and you get billed based on that, which is also an interesting fact. You don't get your final bill until they do a final run of the machine and they see how much on average that machine works for. So, that's also something that I think is kind of fascinating.
Jaime Leverton: Yeah, it's not like we're buying units of machines, we're buying hashrate, terahash, and then ultimately the mix that gets delivered will get you to that terahash, but not necessarily in uniform machine types.
Peter McCormack: And, do you have to retest yourself when they come in?
Jaime Leverton: Well, you plug them in, you're not necessarily testing them. You test them when you power them up.
Peter McCormack: Do you always get the hashrate that they promise?
Amanda Fabiano: There's a plus or minus 5% that they give you, but it's actually kind of funny, because say if you have a machine that is supposed to be, like, 100-tera hashrate, let's just throw that number out that, and they'll sell you a machine that's 102-terahash for a little bit more, even though it's between that plus or minus 5%. It's an interesting dynamic.
Peter McCormack: They take the upside.
Amanda Fabiano: Yeah. You have to have buffer when you're purchasing machines, both in terms of building and then also for capital.
Peter McCormack: What a weird industry this is?
Amanda Fabiano: It is.
Jaime Leverton: This year, we've actually become an authorised repair centre for MicroBT as well. So, we're now repairing most of MicroBT equipment for miners across North America and Northern Europe, so this has given us a really interesting window more deeply into the supply chain, because we're now a parts depot as well, and obviously it's an incremental revenue line for us, which puts us closer, strategically, within the supply chain.
Peter McCormack: What's the benefit to these companies going public? Explain that to me as somebody -- I'm not a guy who runs businesses.
Jaime Leverton: The ASIC manufacturers going public, or miners going public?
Peter McCormack: No, you; miners going public. Why have we seen so many? Because, outside of the miners, what is it, we have Coinbase; do we have any others?
Amanda Fabiano: Galaxy.
Peter McCormack: Galaxy, of course, yeah!
Jaime Leverton: Voyager Digital.
Peter McCormack: Yeah. But why are so many miners going public?
Jaime Leverton: Access to capital. Because, our access to capital outside of public markets is very expensive and difficult to come by at quantum, and it's all about capital. You need capital at scale to buy equipment at scale and to get better pricing, and then of course your power costs are very, very high. So, it is an incredibly capital-intensive business, and being public is your best way to access the lowest cost of capital available for this industry.
Amanda Fabiano: I'd also say that's especially if you want to hold your Bitcoin. So, if you want to hold your Bitcoin long term, you need access to capital, because you don't want to spend the Bitcoin that you're mining, beyond your operational cost.
Jaime Leverton: Which is a relatively new phenomenon. So, Hut 8's always held Bitcoin on balance sheet, but historically we were the only public miner to do so, and we had to spend a long time explaining why we had taken that strategy, because most miners would sell everything, until this year. It's really only been this calendar year that all public miners essentially started to hold almost all of their output, which is interesting in how it affects the supply signal. Because, miners used to be the source of incremental liquidity of Bitcoin into the system; but now that so many miners are holding, it is restricting supply.
Peter McCormack: Well, Plan₿'s stock-to-flow model is based on the assumption that there's 900 Bitcoin a day that comes to the market. But if the miners aren't selling, the stock-to-flow's different.
Jaime Leverton: I would also say there's more companies that will give debt to miners than four years ago.
Amanda Fabiano: For sure, but it's not cheap debt, not cheap. It's hard to understand from an investor perspective. You're like, "Hey, I have these machines coming in. Don't know the final price; we'll let you know in seven months".
Jaime Leverton: And then they want to see the contract, and you give them the contract and they're like, "No, no".
Amanda Fabiano: And they're like, "What's hashrate going to be?" and you're like, "Well, it could be anywhere between this and this; we're not sure". "What's Bitcoin price going to be?" and you're like, "It can be between these ranges". So, it's sometimes difficult to get investors comfortable, which means that you pay a higher cost for debt.
Peter McCormack: Are you still holding all of the Bitcoin that you mine, Jaime?
Jaime Leverton: I have not sold a Bitcoin since the first week of January.
Peter McCormack: Since the first week of January. And, is this something that you just review on a monthly basis, constant basis?
Jaime Leverton: Constant. We're always considering our treasury management, and we definitely take feedback from our investors as well. Right now, the investor sentiment is very much in favour of holding all Bitcoin.
Peter McCormack: Is it similar for you?
Amanda Fabiano: We hold right now, yeah. I think treasury management will be a key differentiator for big public mining companies going forward. I think there's a lot of really interesting things that you can do with the Bitcoin that you can hold, and I feel that that will be something that, if they get their head wrapped around certain situations that can be quite good for them, that they'll be better longer term.
Jaime Leverton: Yeah, as an example, 1,000 of our Bitcoin, we have in a yield account with Galaxy, and we also have a revolver that's wrapped around that, and this is a product that has only become available to us this year. But it means that we're actually now able to generate fiat from the Bitcoin while it sits with a secure counterparty.
Peter McCormack: Interesting. But you can borrow against the Bitcoin?
Jaime Leverton: Yeah. During the bear market, when it was really difficult for miners to raise capital, we used the Bitcoin on our balance sheet as collateral to get a loan.
Peter McCormack: Because it feels like there are more people coming into the market who are willing to loan against Bitcoin. I think this week, Goldman Sachs are even considering it.
Jaime Leverton: Yes.
Amanda Fabiano: I think that's one of my favourite things of where I sit. So, we PROP mine, so we mine for ourselves at Galaxy, and then because of that, I'm able to see, what are the products that I would want to create? And I can create products for my friends, like Jaime, in the space that help them with their treasury management strategy. So, that's been a lot of the focus that I've been working on over the past year.
Peter McCormack: It's such a weird, fascinating industry. I still struggle to get my head around it; I don't know how you do it. I mean, for you, Jaime, it must be such a different world from a year ago when you came into this?
Jaime Leverton: Yeah, when I came in, I did not sleep for the first six weeks. I panic-dialled Amanda every second day. It is a big, big curve to come from traditional tech to this space and figure out how to make it all work. And obviously, we're really, really focused on managing the balance sheet and creating value for shareholders, that's my job; and how to manage risk in all of this, with all of the opaqueness that is involved in the industry. It's very, very complex.
Peter McCormack: You won't go back though?
Jaime Leverton: Never, never!
Peter McCormack: It's so much more fun!
Jaime Leverton: It is so fun, and I've stopped sleeping. I literally just have naps, because your brain can't shut off for any extended period of time. There's so much to do, there's so much to think through, and the kind of energy that comes from that, there's nothing like it.
Peter McCormack: I woke up at 4.00am this morning, and I was annoyed it wasn't 6.00am, which is my usual get-up time, so I just got up, just started working!
Jaime Leverton: Yeah, just start working.
Peter McCormack: I could be shattered later.
Jaime Leverton: You won't though.
Peter McCormack: I probably will be.
Jaime Leverton: Oh, you're weak, Peter.
Peter McCormack: Jesus!
Amanda Fabiano: I like to sleep, I'm not going to lie; I really like sleep, but I also like Bitcoin mining.
Peter McCormack: Well, listen, it's good you're in, Jaime, and I'm glad you're not sleeping and enjoying working around the clock on this. One of the things that I keep thinking about is that, back in 2017 when I had my disastrous effort at mining, when I essentially bought 140 ASICs, well 70 S9s and 70 DragonMints, and I bought them; they were delivered in December, had a really great first month, okay second month, breakeven third month, then I got screwed for months on end, because I didn't know what I was doing.
But really, the point I'm trying to get to is that this market can go up and down, and there's been a huge investment in Bitcoin mining, especially here in the US, right, with the migration out of China, and it feels like this investment at the moment is unrelenting. But at the same time, the price has been pretty much -- the price is actually, I think it's below February, I think we were higher in February; we don't know where this is going. We don't know if we're going to go up to $100,000, we don't know if we're going to drop back down to $30,000.
How the hell do you start planning for that, because you can be cautious, but your competitors could be investing and building new infrastructure and you can be behind them; or, you could be adventurous and if the price goes up, great, but if it drops, you're left with all this infrastructure that you don't need? How the fuck do you plan this?
Jaime Leverton: I think we all have different strategies.
Peter McCormack: This is why you don't sleep!
Jaime Leverton: This is why I don't sleep! And not all miners have the same strategy, for sure, and I think that's the beauty of choice for investors. You can figure out which mining strategy makes more sense to you and you have more comfort with. We have a more diversified strategy, so we have multiple lines of revenue, we're not just pure play on Bitcoin mining; we also mine other digital assets.
Peter McCormack: You mean shitcoins?
Jaime Leverton: Well, we mine other digital assets, but we only get paid in Bitcoin, directly out of the pool. So, it's all about really reducing our risk on compression of Bitcoin mining economics, by being able to mine alternate blockchains that have different margin profiles, but still getting paid in Bitcoin, and still stacking Bitcoin at the end of the day on balance sheet.
Peter McCormack: So, what other shitcoins do you mine?
Jaime Leverton: So, the only other asset that we mine is Ethereum; I will not say "shitcoin"!
Amanda Fabiano: You just did.
Peter McCormack: You just did!
Jaime Leverton: We mine Ethereum with Luxor's mining pool, which allows us to mine Ethereum, but get paid in Bitcoin directly out of the pool.
Peter McCormack: Okay, so it's just Ethereum?
Jaime Leverton: It's just Ethereum, and doing this strategy allows us to mine a Bitcoin for less than Can$3,000.
Peter McCormack: Wow. I use the Luxor mining pool, and I'm okay with Luxor, but I only mine Bitcoin.
Jaime Leverton: I don't judge!
Peter McCormack: If you'd have said BSV, we would have had a problem!
Jaime Leverton: I did not, and I do not.
Peter McCormack: Good. Do you guys mine other stuff?
Amanda Fabiano: No, we mine Bitcoin.
Peter McCormack: Yes. We love you, Amanda. Okay, another thing I really want to talk about is that there has been a lot of pressure on the mining industry with the ESG people, and I'm not going to pick a side, because I am somebody who believes global warming is an issue and is happening, I'm not a denier. I believe it's caused by humans, I don't know the solution, I think governments will fuck it up if they try; but whatever it is, it is still a lens on the industry. What do you feel about the progress that's been made on moving Bitcoin mining to be more from sustainable sources?
Amanda Fabiano: So, I think that's going to naturally happen, because miners need the lowest cost of electricity. So hopefully, over time, sustainable sources will be the lowest cost of electricity. I think the industry as a whole has come together. Like, Jaime and I, I know this is a contentious topic for some, but we're founding members of the Bitcoin Mining Council.
We saw early on, starting to talk to investors in January of last year, that the ESG angle is really big for them to check off to get comfortable with it. And behind the scenes, we know that most miners are trying to go and have the lowest cost of electricity, which is sustainable. So, we decided to come together as an industry, even though we're all competitors with each other, and say, "Let's just share our data, and hopefully that will dispel some of the FUD". It's really hard to dispel FUD in mainstream media when we have no data to back it up.
So, I've been pretty excited about the data that we've put out over the past year. I think hopefully, it's helped. I've seen it help in investor conversations.
Jaime Leverton: Yeah, the noise and the fervour around it has certainly died down since we brought the data out, and started basically sharing our collective narrative based on facts.
Peter McCormack: I'm not anti-Mining Council. At first I had my suspicious concerns, like everybody, because these centralised organisations never really work out well for Bitcoin, but it doesn't actually seem to have been an issue with the Bitcoin Mining Council; actually, it seems to have just produced really good data. So, I accept it's a good thing and I congratulate the people on working hard on that.
Do you feel a collective pressure to source from more renewable sources; or as a business, will you just always buy the cheapest source?
Jaime Leverton: No, there's definitely pressure. Our original sites are in Alberta, so our two sites are in Alberta, which is traditionally a fossil fuel-based grid. But Alberta is doing a ton of work to bring renewables into the grid mix, and they've got a goal. They're at 20% renewables on grid now, with a goal to get up to 30% within the next five years, and they're on track to do that. Texas is doing the same type of investment in renewables on their grid.
The nice thing about miners is we're a stable off-taker. We really do work in conjunction with the grid. My best example is our primary site is the city of Medicine Hat.
Peter McCormack: I know Medicine Hat.
Jaime Leverton: They're an independent power authority within the province of Alberta, because they have so much natural gas. But a lot of that energy was sitting idle for peak demand. So, we came in, we monetised that energy that was just sitting there idle. We're now the second largest contributor of revenue directly to the city; and when the city needs the power, we shut down and give it back. So, we've made a completely efficient system, we haven't created new energy, we've just monetised what was there for peak.
Peter McCormack: Yeah, also I sometimes feel that it's a bit unfair. If you're taking power out of the grid, then that's down to the grid for how they source the power. You're just a buyer like any other business. It's very different from, say, I don't know, spinning up an old coal mine just to mine Bitcoin. I think you have a lot more responsibility when you are directly creating the power from dirty sources. But when you're buying from the grid, it's a little bit unfair just to pick on one industry.
Jaime Leverton: It's complex, for sure. And in Canada, we have a carbon tax. So we, as miners using fossil fuels, we pay a carbon tax that goes towards building more renewables into the grid. So, we are part of the solution through our tax base, and through our workload. But then, we also announced yesterday that we will be carbon neutral by 2025, which means not only will we be paying the carbon tax, but we'll also be buying offsets as well.
Peter McCormack: Carbon neutral? Your move, Amanda!
Amanda Fabiano: I think that Bitcoin just gets picked on.
Peter McCormack: Of course it does.
Amanda Fabiano: It's the easiest thing to pick on. They're like, "Oh, it uses energy". Everything in this world uses energy, so it's just a tough conversation to have, because we all use energy in everything that we do in life, and energy is going to continue to be needed for all the things that we do as a civilisation. I think miners will have their own strategies for what works for their company, what works for their philosophy, what works for their investors, and we'll see that play out over time and we'll see who wins.
Peter McCormack: But this "stabilising the grid" is just an unbelievable phenomenon from Bitcoin mining. It feels like it's only something that's been talked about for maybe the last year. I mean, it's a great defence for Bitcoin in that, if you want to shut down Bitcoin, you're going to take away jobs, and you're going to take away something that's stabilising the grid. I met with Governor Abbott in Texas, and he was talking about their -- because they've got their own energy grid, is it ERCOT?
Amanda Fabiano: ERCOT.
Peter McCormack: Yeah, he was talking about that Bitcoin mining will help them stabilise their own grid. So, that's going to provide hopefully some regulatory protection?
Amanda Fabiano: Yeah, and I think there's also off-grid miners that use behind-the-meter mining, so Greenwich, for example, was one in upstate New York, and they got a lot of flak; New York state kind of gave them a lot of trouble. But at the end of the day, mining is going to continue to happen and miners are very savvy in finding energy sources. And the ability to turn on and off on demand will give miners more flexibility than traditional industries.
The other thing that's never talked about is, we talk about Amazon and Facebook data centres, and they're built very differently, which requires redundancy and air-conditioning and more expensive bills, and we just let that be and we just shit on Bitcoin mining for their energy usage. The topic, I feel like I hope we've changed the narrative a little bit this year. I hope to see it change in the future too, because I think more people are becoming more -- interesting ways of using energy.
Peter McCormack: So, are Facebook boiling polar bears?
Jaime Leverton: Yeah, of course.
Peter McCormack: They are?
Jaime Leverton: Well, maybe not boiling polar bears!
Peter McCormack: You know what I mean!
Jaime Leverton: Look, to Amanda's point, all of our facilities use free air-cooling. We don't pay any CapEx or OpEx, or use any energy to cool; we literally have louvres. We're in cold climates, and Mother Nature does the work.
Peter McCormack: I've seen some people, they're putting their miners in liquid.
Jaime Leverton: Immersion cooling.
Peter McCormack: What the hell is that, and why are those things not blowing up?
Amanda Fabiano: You can overclock your machines, you can get more hashrate out of the machines, and it also helps in climates where it's humid to free your machine to operate appropriately.
Peter McCormack: But how do they not blow up?
Amanda Fabiano: It's specialised. It's dielectric fluid. So BitCool, for example, is one of them that's made specifically for Bitcoin miners.
Peter McCormack: Wow, fascinating. In terms of another thing, by the way, that isn't mentioned, because I've brought this up a few times, because Dan Moorhead wrote a really excellent piece saying, "We keep talking about the E with Bitcoin mining, but we never talk about the S and the G". I feel like that's something we can be pushing back on, to say, "Hold up a second, Democrats, let's look at the S and the G".
Jaime Leverton: Yeah, so when we published yesterday our commitments to ESG, we published commitments in all three letters. And I think that is very important. Right now, we're all focussed on the E, but there's a much bigger narrative that requires time and attention, and so that's how we tackled it this week, where all of our metrics are public, they're auditable and we hold ourselves accountable to them, not just the energy side.
Peter McCormack: Is there anything more transparent than Bitcoin miners?!
Amanda Fabiano: I don't think so!
Jaime Leverton: Definitely not the ASIC manufacturing companies.
Peter McCormack: Well, yeah. I'm talking about the actual miners. Yeah, fascinating. I think the S and the G side of things needs pushing a bit more, especially as we, I mean was it yesterday that the person from Stellar was shouting the energy FUD, with regards to literally dumping on Bitcoin, in front of Congress? I didn't see the hearing.
Jaime Leverton: I didn't see it.
Peter McCormack: So, not only are we fighting the regulators, but we're fighting the shitcoiners, who are attacking Bitcoin, to promote their shitcoin, which I find particularly annoying; looking more towards you here, Amanda.
Amanda Fabiano: Yeah, so interesting dynamic for me. I work for Galaxy, we do a lot of different things with different coins. My team focuses on Bitcoin mining. The part that drives me crazy is when, like the Infrastructure Bill came out, and all of a sudden, we wanted to be one industry. Then a week later, it's like proof of stake is the way, and proof of work uses too much energy. So, it seems like there's sometimes a divide in the industry when it's convenient, and then also a unification in the industry when it's also convenient.
Peter McCormack: What do you think about proof of stake? It's good for getting Bitcoin. I'm sorry, I'm being mean!
Jaime Leverton: I think proof of stake favours the holder, which requires capital. I think it's more centralised and I think it discriminates from open participation.
Peter McCormack: What's the regulatory situation like in Canada; how does it compare, say, to the US?
Jaime Leverton: It's not a hot topic in Canada right now, so we don't have the action that we're seeing come out of the SEC.
Peter McCormack: Right, okay. So, let's talk about the US then, because I think it's super interesting. And one of the things I find really interesting is, there seems to be more and more people within Congress who are actually batting for Bitcoin and trying to defend it. I mentioned this morning Ted Budd?
Amanda Fabiano: I didn't watch yesterday.
Peter McCormack: Somebody put out on Twitter that Ted Budd came out and was in defence, and was saying, "Why would we overregulate this and push this into other countries?" I feel like, and I don’t' know the numbers, but the majority of Bitcoin companies are here in the US, the large ones, and I would estimate proportionately, as I said to your earlier, I think proportionately Americans may own a lot more Bitcoin than the rest of the world.
So, it would be a China-style own goal for them to ban Bitcoin, and actually they should embrace it. And at a time of currency wars, when China's pushing its CBDC, I think Bitcoin is a very American idea and great for America.
Amanda Fabiano: I think Bitcoin's great for everywhere. I love the narrative of Bitcoin being great for places that don't have the amount of wealth and capital that we have in America. I think it's also great for me; I'm an American, so I see value in it for multiple reasons, it's obviously multi-layered. But that's a really good point; there's a lot of innovation in Bitcoin companies happening within the States and it would be really sad to see them shut it down.
Jaime Leverton: And again, it's a race for capital, an access to capital; and the most liquid capital market on the planet is the US market.
Peter McCormack: Interesting. So, talk to me about your capital-raising strategies then, what are the different ones you use?
Jaime Leverton: So, we originally only traded on the Toronto Stock Exchange. We dual-listed on the Nasdaq in June, to specifically get access to the US market and US liquidity. Our capital-raising strategy has evolved significantly as the shareholder base is starting to evolve. So, miners used to be heavily dependent on retail investors and hedge funds, and we would generally only see unit deals done, because hedge funds are looking for a warrant to play in riskier spaces like this one.
But the last capital raise that we did in September was the first of quantum that wasn't a unit deal, it was common only. We raised US$172.5 million, and for the first time it brought more long, traditional institutions. So, we're seeing a very significant shift in a short period of time, as far as the investor base coming into the world of mining.
Peter McCormack: Have you considered doing anything like MicroStrategy, and raising capital just to buy Bitcoin and put it on the balance sheet?
Jaime Leverton: So, all of the Bitcoin on our balance sheet is self-mined, and that's what we're comfortable with.
Amanda Fabiano: The cost to mine is cheaper than what you can buy Bitcoin --
Jaime Leverton: Absolutely.
Peter McCormack: But didn't Marathon announce that they were going to buy?
Jaime Leverton: They bought a lot, yeah.
Peter McCormack: Why do you think; could you even speculate why they would do that?
Jaime Leverton: Well, they're a newer mining entity, so they wanted Bitcoin on balance sheet, and they didn't have much hashrate hashing to mine themselves; and they were able to access the capital markets and raise significant amounts of capital, so they put it to work in both ways.
Peter McCormack: The whole industry's crazy. All right, let's talk about the future of mining; what is there to look forward to? What are you both individually and collectively thinking about; what's on your minds?
Jaime Leverton: Okay, this is going to be controversial.
Peter McCormack: Yes! This is what we're here for!
Jaime Leverton: I'm very much down the rabbit hole right now on Web 3.0 and the metaverse and how we, as a diversified mining company, can start to think about how we can play in this ecosystem, but as a continued infrastructure participant. So, I think also, because we have Bitcoin on balance sheet, and we are starting to make yield on that, and thinking about a long-term view of how we continue to expand our treasury management strategy and how that balance sheet works for us, and could potentially participate in this next massive wave of innovation that's going to come in the world of 3.0, that's what I'm super excited about, down the rabbit hole on, and it's not a pure Bitcoin play. But Bitcoin has made this all possible.
Peter McCormack: Interesting. I'm not a big fan of Web 3.0, as it's been redefined.
Jaime Leverton: Okay, how do you see it being redefined?
Peter McCormack: Web 3.0, prior to any of this blockchain industry coming out, Web 3.0 was about a decentralised web and owning data. I feel like Chris Dixon and a16z, and some of the other people in Silicon Valley, have redefined the narrative to be based on protocols that require tokens to run Web 3.0, which I think is a distraction to the things that we really need, which is privacy and protection of data and Bitcoin.
There's an incentive for them to push these protocols, I believe, because they get to see massive returns for limited investment with limited risk, and I think that's why they've redefined Web 3.0 as a world of tokens and NFTs, rather than a world of what actually users need, which is, I think, with all the hacks we've had, all the data hacks we've had, I think we need privacy and protection of data, and I think that comes from decentralisation.
Prior to Bitcoin, people were able to decentralise things without a token. I mean, BitTorrent was done without a token, and it decentralised file sharing. Napster was able to be closed down eventually, but it still decentralised file sharing, and I just feel that token narrative is misleading, and I think it places an onerous task for people who want to use the web on understanding very complex things that they might lose money on. That's my issue with it.
Jaime Leverton: But that's not the way it needs to play out.
Peter McCormack: It's the way it is being played out right now. It's becoming a meme, in some ways.
Jaime Leverton: But it doesn't have to be.
Peter McCormack: Well, I hope not. I hope Web 3.0 isn't really Web a16z, because that's what it feels like to me.
Jaime Leverton: Interesting.
Peter McCormack: And I know a lot of the web infrastructure grew and a lot of the companies and products grew because of companies like that investing in it. But I also feel like there's a lot of work that needs to be done which doesn't require tokens, which is improving the web infrastructure for what the users need, not what VCs want to sell. I think that narrative being redefined for me is mildly concerning.
Jaime Leverton: I'm still very much in the camp of Web 3.0 is putting the user in control of their data.
Peter McCormack: We're good then!
Jaime Leverton: It's so exciting when you think about a world where that's true.
Peter McCormack: Well, it is, which is why I think metaverse wars, which is coming, we've got the centralised Facebook metaverse from Zuck versus the decentralised metaverse from Cameron and Tyler, which is going to be the epic tech battle of the next decade, which I cannot fucking wait to watch play out!
Jaime Leverton: I know, it's so exciting!
Peter McCormack: What was it, is it Jaws 2, the Revenge of Jaws? It's like the revenge movie now. This is where they get to fucking stomp on Zuck and say, "We're right, because we went decentralised and nobody trusts you and your bullshit, Zuck". Sorry, I'm just getting a bit passionate now.
Jaime Leverton: No, I think we are just in such interesting times.
Peter McCormack: Are you going to plug into the metaverse?
Jaime Leverton: Plug in?
Peter McCormack: Yeah, what do you want to do in the metaverse?
Jaime Leverton: I went so far down the rabbit hole, I was shopping for real estate the other day in the metaverse. I pulled myself back from it, but just the ability to really dream about a decentralised world, a digital world, where you control yourself, your person in that environment, I think it's fascinating. I think it's too early to say how it's going to play out, and who the winners and losers are, but it's an incredible opportunity to really imagine a different web world.
Peter McCormack: Are you going to be a Web 3.0 realtor. You say realtor? I'm trying to use your language. We call them estate agents.
Jaime Leverton: Real estate agent, or realtor. No, definitely not.
Peter McCormack: You're just buying for yourself?
Jaime Leverton: Well, I don't know. I'm just dreaming. I'm dreaming and imaging how this could all move. Barbados has announced a digital embassy.
Peter McCormack: It has?
Jaime Leverton: Yeah.
Peter McCormack: What does that mean?
Jaime Leverton: They're setting up an embassy in the metaverse.
Peter McCormack: Really? Which metaverse though?
Jaime Leverton: I don't know where they bought the real estate, do you remember?
Peter McCormack: Is it Zuck's?
Jaime Leverton: No, decentral.
Peter McCormack: So, we're going to have the multi-metaverse?
Jaime Leverton: Potentially.
Peter McCormack: What are you going to do in the metaverse?
Amanda Fabiano: No.
Peter McCormack: You're not, you're just no!
Amanda Fabiano: Look, I focus my time on Bitcoin mining. I think there's so much that can be done there, I find that fascinating. I think that there's a lot that's going to happen over the next year in mining, and that's where I want to focus all of my time.
Peter McCormack: 100%. Well, you tell me about the future of mining then; what's on your mind?
Amanda Fabiano: So, like I said earlier, I think treasury management strategies will become really interesting next year, I think hashrate growth will become interesting. We'll see who actually delivers on what they said they were going to do, which is what I track very closely. I also think we're going to see some M&A in mining, I think it's inevitable.
Jaime Leverton: It's ripe for consolidation with as much activity as we're seeing.
Peter McCormack: Yeah. So, we were talking about this this morning when we grabbed a coffee, and I was trying to understand, where are the efficiencies in mining; is it purchasing power?
Amanda Fabiano: Purchasing power's huge, but I also think operation's huge right now. So, you need to have someone that knows how to operate a mining site and knows how to scale, in order to get to the scale that you want to be at. I think that is something that is pretty lacking in the space.
Peter McCormack: Do you think Bitcoin mining is decentralised enough, because we saw the shutdown in China, I saw this incredible chart in Ryan Selkis's report; did you see his report?
Jaime Leverton: I did, yeah.
Peter McCormack: The chart where China switched off and the distribution of mining, a lot of this has moved to the US. Are we decentralised enough? Do you, as companies, think about putting operations in other countries?
Amanda Fabiano: Yeah, we look everywhere. We look for the cheapest energy that exists. I think it's decentralised enough. I think one of the really cool things that popped up this year was really at-home mining, or individuals mining Bitcoin. I think that's been something that I've loved to watch happen. One person that I absolutely love on Twitter is EconAlchemist. He does at-home mining videos and he'll do at-home consulting for people that want to mine.
I think Steve's Black Box is an incredible feature. And even if it's one machine at people's houses, it's awesome; Steve from Upstream Data.
Peter McCormack: Steve Barbour?
Amanda Fabiano: Steve Barbour, good friend.
Peter McCormack: Yeah, what's his Black Box?
Amanda Fabiano: It's an individual box, a black box, that's set up for you to have at-home mining, and you can put it outside your house. And he created it so the noise isn't as bad, because the mining noise is kind of an issue. I've also seen videos pop up of people heating their homes with miners, which is pretty fascinating.
Peter McCormack: So, can it be profitable to mine at home; I always thought the power was too expensive?
Amanda Fabiano: Power is super expensive. I think it depends on your ideology. So, if you think that Bitcoin is going to be worth a lot more in the future, maybe you're willing to lose dollars now, because you're holding your Bitcoin. So, it just comes down to what you're comfortable with. You also might just want to be part of mining Bitcoin.
I talked to some guy at a BitDevs Meetup recently who made me think twice. He was like, "I mine Bitcoin at home, not because it's profitable, because I want non-KYC Bitcoin". So, I thought that was pretty fascinating too. So, I think people have different reasons for it. But it's cool to see it pop up as a trend.
Peter McCormack: And then it's helpful to have a company like Compass, they obviously sponsor, but they're making it easy for anyone to be able to purchase ASICs.
Amanda Fabiano: Yeah, full disclosure, we led the round in Compass's seed round, and I think what they have created has been really awesome for individuals to become part of mining. Compass is for individuals, but there's also people that come to us and they're like, "Hey, I have a bunch of money I want to put into Bitcoin mining, I don't know where to get started". So, they're able to also serve a different clientele too.
So, I think what they're doing is great. I think there's been some delays on sites that people have been upset about, but that truly is the unsexy part of mining. The building part of it is really hard. So, I know they've tried to make their customers really happy, and we've been working really hard behind the scenes on getting people up and running; but mining is difficult. It's physical infrastructure, and not everything goes according to plan.
Jaime Leverton: Certainly not in our current COVID constraints, supply chain, logistical nightmare environment. We are battling every single day supply chains and logistics.
Amanda Fabiano: I'll give you an example of that. So, we use a really great shipping and logistics company. The beginning of the year was budgeting $150 per ASIC to ship over. We paid $500 per ASIC last month.
Peter McCormack: Holy shit!
Jaime Leverton: Everything's coming on chartered planes.
Peter McCormack: Yeah, interesting, because I've just ordered a bunch of football shirts. Normally, they would be manufactured in China, but they're manufacturing them now in Turkey because they can come by lorry. So, it's more expensive, but what they've said is you've got a guaranteed delivery date. I can tell you it's 80 days. I don't have to tell you, "Well, it could be 60, but it could be 140, and I don't know the price of shipping, so I can't give you a price now".
Amanda Fabiano: I would love guaranteed delivery dates on literally anything.
Jaime Leverton: I don't even know how it's possible. Climate change kind of piles on too, and where it's hurt us in the last month, all of our equipment normally lands in Vancouver, and then it trucks to our site in Alberta. But Vancouver has had massive flooding, which has shut down all of the roadways around the city. So, the only way you can get things out of Vancouver is to fly them out.
Peter McCormack: There's no roads?
Jaime Leverton: There have been no inland roads, they've all flooded out, three times now.
Peter McCormack: Is this unusual for Vancouver?
Jaime Leverton: Incredibly unusual. So, just when you think you've got it figured out, some other new, crazy, unforeseen thing happens and you're jammed again. It is an absolute juggernaut right now.
Amanda Fabiano: I think that's my favourite part about it though, you're always figuring out something new.
Jaime Leverton: She's a masochist!
Peter McCormack: Yeah, "What's happened?" "We've just had aliens land, attacked our centre!"
Jaime Leverton: You never, ever know, but everything's exponentially more complicated right now.
Peter McCormack: Well, listen, I think you're both doing brilliant jobs and I love you both. Sorry I gave you a hard time, Jaime.
Jaime Leverton: It's okay, Peter. Healthy debate.
Peter McCormack: We're a Bitcoin show and we've got to shit on the shitcoins! Jaime, tell people where to follow you and the amazing work Hut 8 are doing.
Jaime Leverton: So, I'm @jaimeleverton on Twitter, I think I'm one of the only Levertons on LinkedIn, and we're hut8mining.com.
Peter McCormack: Sorry, I should have said, also Amanda; I'll just nod at you!
Amanda Fabiano: I'm on Twitter too @amanda_fabiano, and we have a Galaxy website.
Jaime Leverton: What is it?
Amanda Fabiano: Galaxydigital.io. We don't really have much on mining there, but we do have a 12-week course, if you want to learn about mining, that we put on in the summer.
Peter McCormack: Are you going to that mining conference in Texas at the end of February; Scott Offord, I think, is running it?
Amanda Fabiano: No, I'm not going to that, but we have people from our team at all kinds of events.
Peter McCormack: I might be going to that one.
Amanda Fabiano: Very nice.
Peter McCormack: Austin, do you want to come and say hello? Do you want to say hello to the camera, just because you came in? Just come round and say hello.
Austin: It's been good to listen to what you guys have been talking about.
Peter McCormack: Anything you want to add, any closing thoughts before we close down the show; any Bitcoin mining closing thoughts?
Austin: No, nothing in short form.
Peter McCormack: There we go.
Austin: I think they covered it well, yeah.
Peter McCormack: They crushed it. Thank you so much for coming on.
Amanda Fabiano: Thanks, Peter.
Jaime Leverton: Thanks, Peter.
