WBD585 Audio Transcription

Bitcoin Mining in Distress with Nick Hansen

Release date: Friday 25th November

Note: the following is a transcription of my interview with Nick Hansen. 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.

Nick Hansen is the CEO of Bitcoin mining software firm Luxor Technologies. In this interview, we discuss the distress within the Bitcoin mining industry caused by a perfect storm of leverage, stagnant value, huge growth in capacity, energy price shocks and wider headwinds affecting investment. This could become a national security issue.

“This time last year, most profitable time to mine ever in Bitcoin; people shovelling money in as quickly as they can. Less than 12 months later, it’s the least profitable time to mine ever. It’s very difficult to make massive strategic pivots in that amount of time.”

— Nick Hansen

Interview Transcription

Peter McCormack: All right, dude.  How are you doing?

Nick Hansen: Good.  How are you doing?

Peter McCormack: Good, man, good to see you again, good to get you back on the pod; excited to hear about how Luxor is doing and also to talk about your Star Trek badge!

Nick Hansen: That is not Star Trek, that's the old Luxor logo, but we'll take it.

Peter McCormack: You don't press that and beam up?

Nick Hansen: No, apparently not!

Peter McCormack: Man, dude, there's a lot to get into.

Nick Hansen: Okay.  You tell me where you want to start and I'll go there.

Peter McCormack: Everything's kind of fucked at the moment.

Nick Hansen: Yeah.

Peter McCormack: But I want to be positive, and we should get there and talk about the positives.  Harry Sudock would say to us, "Everything is good for Bitcoin", so it'll be interesting to work through how the events of the last week, two weeks have --

Nick Hansen: What are you talking about?  I don't know what we've going to talk about given there hasn't really been anything going on in the last week, so I'm worried about what we're going to talk about for two hours here!

Peter McCormack: Well, it's interesting, and the last two weeks we haven't had a football match and you're obviously now a soccer fan --

Nick Hansen: Well, no, the pound is greater than the dollar, so we're back to football, it's no longer soccer, we're back to football but we'll see.

Peter McCormack: You're a football fan now, and we haven't had a game on this week, so it's been pretty quiet but a few things have happened in the crypto/Bitcoin industry.  I originally wanted to talk to you about mining.

Nick Hansen: We can talk about mining; I kind of know more about mining than other things, but obviously we are exposed to this as much as anybody; where do you want to start?

Peter McCormack: Well, let's start with mining because miners have been under a lot of pressure, some huge companies are under a lot of pressure, some appear to be folding or in deep distress, and I'm kind of wondering how we got here.  There's such a changing narrative, like I saw a really good tweet this morning from Hodlonaut where he said one of the reasons the Bitcoin price has supressed is that people have been buying fake Bitcoin.  I think what he's trying to say is that if people are trading on FTX and buying Bitcoin and it turns out they've got Bitcoin liabilities of $1.4 billion -- what are they holding 1.4 Bitcoin?

Danny Knowles: Zero, I think.

Nick Hansen: Yeah, they own effectively zero Bitcoin.

Peter McCormack: Yeah.  Does that mean they've basically been spot selling air and therefore, whatever the buying pressure or selling pressure is -- it could work the other way of selling as well, but have we not been getting a true Bitcoin price; has everything that's happened with LUNA, FTX supressed the price so much that actually, this has brought more pressure on mining that would have existed?  Like, if none of this bullshit had happened, what would happen to the price?  But we can come back to that; let's just talk about what's been happening with mining.

For anyone listening who doesn't understand mining, who hasn't spent too much time, let's talk a little bit about the growth.  You explain the growth of mining since the last cycle; we've got large public companies now.

Nick Hansen: Okay.  So, the last time we chatted, almost exactly a year ago, it was 25 October, we were in potentially the highest margin environment that had existed for a long time.  We had a 42 cent hash price; we've actually moved to using petahash because it's down so much, it's about 0.55 cents now, so we use petahash.  So, we've been $420 her petahash per second per day, now we're $55.

Peter McCormack: All right, I'm going to pause you there.  I think explain the pricing of hashrate.

Nick Hansen: Okay.

Peter McCormack: The reason I ask for that is I mine, I'm a miner, and I never look at that; what I look at is how much Bitcoin have I mined, what's the value and what did it cost me to mine that much?

Nick Hansen: Right, yeah.  So, a mining machine produces this compute power called hashrate, and we measure it in hashes per second.  Generally, around the time we were talking last time, one terahash per second per day would have produced around 42 cents, and today, it produces about 5.5 cents.  The prototypical miner right now is called an S19j Pro, we just call them J Pros.  The J Pro produces 100 terahash and so, today, it'll be producing about $5.5 a day; this time last year, it would have been producing $42 worth of Bitcoin per day.  The parameters that go into that calculation are actually very simple; it's Bitcoin price on the day, it's the coinbase reward, the transaction fee, all that stuff multiplied together divided by the network difficulty. 

So, at this time last year, we had actually just gone through the China ban, which we had just started to recover from, so in May of 2021, about half of the hashrate, or even a little bit more of the hashrate, came off the network which caused difficulty to go down, hash price shot through the roof because Bitcoin price was rocketing as well at that time, and so we went into this, I actually use the term golden age of mining.  I think I even said, "This level of margin's not going to exist for long because if you go into any industry and find you have 80% to 90% margins, they're going to be pouring money in, they're going to be pouring money into that".

One of the things I want to talk about on this pod is how this is reminiscent of energy cycles, and we're actually seeing the coincidence of an energy cycle, which doesn't correspond with Bitcoin, they have their own cycle.  Bitcoin mining, they have their own cycle, and we starting to see this coincidence of those two events right now producing the lowest margin environment that we've ever been in for Bitcoin mining.

Peter McCormack: All right, so, Danny's pulled up the network data chart showing -- so this is hash price?

Nick Hansen: The hash price, yeah, so this is hash price over the last year.  So, we were talking towards the left end of that chart; you can see we changed it to petahash per second per day now rather than terahash just because it's a little more intuitive.  Actually, as switched to petahash per second per day because it's the same order of magnitude as a barrel of oil.  So, a barrel of oil I think is between $80 and $90 today, I didn't look it up before, but now the petahash is about $55.

Peter McCormack: Okay, so it was about $375 per petahash?

Nick Hansen: Which is around ten machines.

Peter McCormack: Okay, but per machine, it's about $5, $5.50?

Nick Hansen: Yeah, for that particular machine.  Machines have come a long way; the latest model from Bitmain is an S19 XP Hydro, and that thing does 257 terahash per second.

Peter McCormack: Hold on, was that a 2.5X?

Nick Hansen: 2.5X, but it also uses 5,200 watts of power, so it's not extremely more efficient, it's maybe about 30% more efficient than a J Pro, but it's just a massive foreign factor and consumes a ton of energy.

Peter McCormack: But if a miner's making about $5.5 a day, what I want to know is, well, based on 2 cents per kWh, what will its cost be, a daily cost on that?

Nick Hansen: 3 times 24, I don't know; I can't do the maths in my head, but it's profitable.

Peter McCormack: Is it profitable?

Nick Hansen: At two cents, yeah, I think even an S9 is going to be profitable at that rate.

Peter McCormack: Right, okay.  So, it's still profitable for most companies?

Nick Hansen: But nobody's paying two cents.

Peter McCormack: Right, so what are people paying?  I always thought that was like the target, the two cents was the target.

Nick Hansen: Yeah, that was the target in 2020.

Peter McCormack: But we've had an energy --

Nick Hansen: So, we're going into an energy cycle.  So, let's back up a little bit, so in 2010, back when oil was $150 to $200 a barrel on any given day, a high margin environment, investment was pouring into petroleum, drilling your wells, fracking, offshore, all of the ways that you can produce oil, they were funnelling money into that ecosystem.

Now, over the course of a couple of years, they overbuilt, caused the amount of production to skyrocket and crush the price.  Then during that time, in 2014, when their cycle ended, we were seeing oil companies going bankrupt, the ones that had high operating costs and low margins were going out of business, getting acquired.  Those assets were effectively being fire sold to other private equity or something, coincide similar with what's happening in Bitcoin mining today, but it took around seven years, six or seven years, for the washout, that washout to occur. 

Now we're starting to see that influx in investment, demand is up for petroleum products, and so we're starting to see more and more investment into that space as well as higher margins because price of oil is going up and demand is also going up.

Peter McCormack: So, what is the kind of breakeven price?

Nick Hansen: For a miner today?

Peter McCormack: Yeah.

Nick Hansen: So, it's going to be somewhere around 8 cents probably, but it's very difficult to even get 8 cents today.  So, I would say that the best miners that are signing new hosting contracts right now are probably getting close to 6, 6.5; that seems to be right now the floor, at least in the US, most developed countries.  There are places you can go where the economics are significantly different, call them OPEC+, they call them OPEC+ countries, so places like Russia, Kazakhstan, they have probably the lowest cost of energy right now, but American businesses aren't able to operate there.  So, you can't send your miners to Russia to get 2-cent power or whatever they have there because obviously, with what's going on over there, sanctions and things like that.

So right now, I would say the clearing price for hosting that is available to North American miners is around 6 to 6.5 cents.  The closer to 6 cents you get, there are other types of hosting agreements that come into place, things like profit shares, or you're potentially putting your machines in relatively riskier locations; Texas, the odds of a guerrilla army coming and stealing all of your machines, while not zero, very, very low.

Peter McCormack: Yeah.

Nick Hansen: Places in, say, Venezuela where you could get cheaper power, that becomes a little bit more risky, so you're going to start to move up that risk curve the closer you get to 6 cents, 6.5 cents.  Your average pleb miner that's doing ten machines, I would bet they're looking at around 8 to 8.5 cents right now.  So, J Pro, probably not profitable for somebody in that tier, and so we're really seeing a consolidation of mining into these mega-miners that are doing grid-scale-type mining.

Peter McCormack: Right, okay.  So, let's talk about what happened over this cycle, because like I say, we have these huge miners now, these huge public companies that have grown, they've grown so quickly; what happened there; why did we see that; was it just by virtue of the fact that it was so profitable?

Nick Hansen: Yeah, so given that margins were so high, it made a ton of sense to do anything you could to get new machines and get them online.  Marathon, this time last year, they were raising hundreds of millions of dollars, billions of dollars actually, and investing hundreds of millions of dollars into mining machines.  The way they were able to get access to that capital was due to the profitability of mining; the margin was so thick that you could effectively run a mining machine anywhere.  You could plug it in in the kitchen over there and it would probably produce $42 a day and it would cost you maybe $10 to run.

Peter McCormack: And heat up your kitchen.

Nick Hansen: And your kitchen would be 100 degrees!  But now, that same machine is going to produce a little bit less Bitcoin, $8 or $9-worth of Bitcoin, but your power cost is going to be a bit higher, and so now there's no margin to run those things, and so you have to be at what we call grid-scale, which is where the pub cos are at today, so your Core Scientific, Argo, Riot, CleanSpark, Iris are all at grids massive scale.

Peter McCormack: Just explain again what grid-scale means.

Nick Hansen: They're actually contributing to grid stability.  So, let's use Riot as a good example, they're really the prototype for this type of miner, they're close to just under 1 GW of total energy; 1 GW is on a scale on how much energy -- that's a ton of energy, the Bitcoin network probably uses around 11 GW right now. 

Peter McCormack: So, they're nearly 10%.

Nick Hansen: Of the total capacity?  I don't know if they have that all plugged in and if it's all mining Bitcoin, I don't know that specifically, but they're using that to do demand response.  So, in July of this year, power prices in ERCOT, which is the Texas grid, were through the roof and it made way more sense for them to turn off their machines and sell back the power that they had been allocated through their power purchase agreement back to the grid. 

So, when they released their July mining report, it showed very little Bitcoin mined, but they had a caveat that we also made close to $11 million in reselling the energy that we had back to the grid.  So, what that meant was the demand, the demand for energy, was significantly higher than the supply for energy on the grid, so they turned it off and allowed that supply to flow through.

Peter McCormack: Right.  This ERCOT case study that's been building in terms of grid stability with miners, is it happening anywhere else or is it just in Texas?

Nick Hansen: It's called demand response, or controllable load resourcing, and that's something that occurs on most grids.  You get some incentive from the RTO to send that energy back into the grid rather than consuming it, and there are entire business models built around this, factories --

Peter McCormack: I mean specifically with miners.

Nick Hansen: We think that miners use a ton of energy, but they don't actually use enough energy to really make a huge difference in grid stability, but they're getting there; they're building out tons and tons in Texas.  ERCOT's total generation capacity, last I checked, it was around 85 to 90 GW, and they have a, it's called a demand delta, of somewhere around 30 GW. 

So, we're actually getting to a portion of that being controlled by mining machines; you start to see a bit of stability introduced, but we need to add another zero to the number of miners in Texas, so going from a couple of GW worth of energy to 20 GW, and at that scale you would start to see significant grid stability, demand curve delta, compression. 

The demand curve delta's the delta between the amount of demand at the peak and the amount of demand at the low, at the trough, and whatever that difference is; we can start to see that really compress.  The reason's that's beneficial, reduces strain on the grid, makes it a more efficient grid because you're not turning on peaker plants and things like that during those high amplitude moments.

Danny Knowles: Do you want to explain what a peaker plant is?  I'm not sure everyone will know.

Nick Hansen: Oh yeah.  A peaker plant, it's usually a natural gas generator, and the reason they call it a peaker plant is because it only makes sense to turn on when the peak demand is high and people are willing to pay more for energy.  They turn on quickly, it's not as cheap to produce energy with them as some of the more stable baseload generators like coal and nuke, but it can be profitable, and that's why they exist.  They're the ones that come in during that high demand portion of the day.

Usually, if you're in Texas, it's probably midday when it's hot in the summers, everybody has the air conditioner on, businesses are running, people are home turning on dryers and all of that stuff.  And in the middle of the night is when there's lowest demand, and coincidentally that's when a lot of the wind kicks on is in the middle of the night, so that's a time when you'd want to be mining, and all the peaker plants will be turned off and that sort of thing.

Peter McCormack: Okay, so a lot of these miners are now in distress, and there are a couple of things that stand out to me; I guess one of the difficult decisions miners have is when to sell the Bitcoin they've mined.  I know a number of miners, the ones I spoke to, said straight up, "We're not selling Bitcoin, we're not selling any of the Bitcoin we've got", but they were using the Bitcoin for collateral or to take out loans to increase the size of their operations, so that was one thing that really stood out.  But then also, they were using the equipment as collateral to take out further loans. 

It feels to me the one problem that seems to have hit the industry is I think everyone expected Bitcoin to peak at a much higher price.  I don't think anyone I spoke to thought, if you said to them, "This cycle, where do you think Bitcoin will peak?" I don't think anyone would have said, "Yeah, around $60,000, $70,000", I think almost everybody expected we would hit over $100,000 Bitcoin.  I don't know why we didn't, you can come with a number of reasons why we didn't, but we didn't.

It feels like perhaps what's become the problem for these miners is that you never want to sell on the way down, so even when we hit $69,000 and we dropped, I think a lot of people felt it was going to come back, I did otherwise I would have sold some Bitcoin.  But now they've got in the position where they don't know when to sell, and it feels like some have had to wait until almost the bottom to start selling off, and also to service their debts, and then even some of those now can't service their debts.  Is there a consistent set of problems that have hit these miners; is it everything I've said; is it something else?

Nick Hansen: It's, yeah, certainly a confluence of events, things that you've mentioned.  Even if they had that high debt load, if the margins had stayed high, they would have been able to service it.  Even if Bitcoin price had gone down, maybe if difficultly had gone down with it or we had seen more transaction fee volume which would have increased hash price, miners would have been okay because the margins would have been high enough. 

So, let's get into the super-basic economics of how some of these mining loans work; they're generally very aggressive amortisation schedules, meaning your financing over, say, 24 months.  Imagine buying a car and paying it off in 24 months, it's going to be a very high payment relative to the value of the loan.  So, miners that have no debt are able to capture the bit of margin that they have and then call that their free cash flow.  Now the miners that have debt, they take that operating income and then they have to service the debt, and that's really where we're seeing miners start to fold, is because of the extra amortisation of the mining loans.

So, if I went and took out $100 million, or let's use even numbers, I took out $48 million, I have to pay $2 million a month over the course plus the interest on top of that.  So, if I make $4 million and I have to pay $2 million --

Peter McCormack: Happy days.

Nick Hansen: But then you have to pay the interest, your free cash flow is not negative, so you're drawing from the balance sheet.

Peter McCormack: Hold on, if you've got to pay $2 million plus interest but you're making $4 million a month --

Nick Hansen: Sorry, you have to pay $2 million in energy prices.

Peter McCormack: Oh, okay, yeah.

Nick Hansen: Then you have to pay $2 million on your mining loan and then you have whatever other operating expenses that you have plus the interest, you have what's called negative free cash flow, which means your mining operation, you have to draw cash from somewhere else, either that's from your balance sheet or some other operations that allow you to make income, but no longer is your mining operation producing free cash flow, and that becomes a very big problem.

So, that starts to trigger what we call covenants in these mining loans, and that's why we've seen big miners selling off batches of their machines, is they'd triggered some covenant with their lender where they have to reduce the overall exposure, either reduce the collateral, so they sell off some loans, pay back the debt early, or they go into a restructuring where, say, you tack on potentially a year or something like that to the note to reduce that end-of-the-month debt payment.

Peter McCormack: Do you think some of these companies have been reckless; have they been unlucky?  I know you probably don't want to throw people under the bus, but…

Nick Hansen: Yeah, I wouldn't throw anybody under the bus.  None of them seem to have been egregiously reckless, in my mind.  Around this time last year, everybody thought, "Buy more machines"; that's how you get a higher valuation, that's the equation.  So, they were just doing what the market told them to do, and then the market obviously changed direction pretty significantly.

One of the highest debt load companies is Core Scientific; they have some unsecured debt, they had secured debt, and then the secured debt is the most senior, meaning the debt that would get paid back in a bankruptcy scenario would be the debt on the machines themselves.  So right now, they have something like I think it's $836 million in total debt outstanding.

Danny Knowles: So, would the secured debt be the machines and the unsecured be the energy?

Nick Hansen: There's unsecured, which is not secured by anything; there are secured convertible notes, which is secured by any unencumbered mining machines, so if they'd owned them outright or infrastructure or other assets on the balance sheet, PPAs, collateral, that would all be included in that secured debt.

Peter McCormack: Is unsecured likely something you're just going to pay a higher rate on because it's unsecured?

Nick Hansen: Yes.

Peter McCormack: Okay.

Nick Hansen: Yeah.  Imagine you went and took a $50,000 loan to buy Bitcoin with and you didn't secure it with anything, that would be an example of an unsecured loan.

Peter McCormack: Well, it's a bit like if you go out and borrow against your Bitcoin, whatever your LTV is affects your rate.

Nick Hansen: Yeah, but that's secured, right.

Peter McCormack: But how much you're securing it affects the rate you pay.

Nick Hansen: Right.  So, these loans were 20% to 50% generally I would say; the median would probably be around 30% LTV, meaning you're holding about 30% of the value.  So, in the case of some of these loans, for example, I wrote down here that BlockFi lent Core Sci $52 million; that probably represents around $150 million-worth of total mining equipment that was purchased unfortunately around the peak.

Peter McCormack: $10,000 a machine-ish?

Nick Hansen: $10,000 a machine, so that probably represents somewhere around 15,000 machines; the numbers are actually nice and round if you kind of work into it that way, works out to about 15,000 machines, and unfortunately those 15,000 machines are depressed maybe, probably about 80%, since the loan was issued.  So during that time, I don't know if Core Sci, if they were doing covenants or making good on their covenants to BlockFi; most likely they were, meaning they sold Bitcoin, or sold something to pay down a portion of the loan early, but that's what's putting pressure on these miners.  That's just a very specific example of what's happening more ubiquitously across the entire public mining market.

Peter McCormack: Just on that point, when you take out a loan with a BlockFi, Ledn, any of these companies, you over-collateralise and then you hit a margin call price.  I wonder if their margin call prices are market prices for the machines. 

Nick Hansen: Yeah.

Peter McCormack: They do exist?

Nick Hansen: A lot of times, there are contracts that actually use Luxor's hash price rig index.  We go out and source the machine pricing across different models from around 35 different data sources and try to produce a reference rate for the value of a machine on any given day.  We have heard, and have seen, contracts that use that reference rate as the mark to market.  So, as you see the value of machines decreasing, the mark to market, the LTVs, start getting skewed and miners have to top up to pay.  And when I said covenants, that's effectively getting margin called based on the value of the collateral going down.

Peter McCormack: Okay, just another thing -- I've been taking a lot of notes here because you're just bringing up a few things that I want to ask about; you talked about the transaction volumes dropping, and therefore that affects the amount that miners earn for every block they find.  What's the range that we've been seeing in terms of percentage of the revenue that's coming from block reward versus transaction?

Nick Hansen: 1% or so of the total reward comes from transaction fees, 1% to 2%, very, very little.

Peter McCormack: Oh, so it's still very low.

Nick Hansen: Contrast that the bull run in late 2017 and 2018, we were seeing 150%, and that was also when the --

Peter McCormack: Hold on, you're saying the bottom is 1%?

Nick Hansen: The bottom, right now, is about 1%.  During 2017, 2018, we were seeing transaction fees being 150% of total block reward.

Peter McCormack: Was that when you would pay $50 to just get into a block?

Nick Hansen: More than that, but yeah; during that time, you were paying massive fees.  Right now, you can fit around 2,000 transactions per block, and there was just a massive backlog and people would --

Peter McCormack: Is there a chart for that?

Nick Hansen: Yeah, it's on Hashrate Index, so you can pull it up there.  So, during that time, transaction fees, as a percent of the block reward, were insanely high.  We also saw consistently that, pre mining ban, transaction fee volumes were much higher, double digits, teens, low teens, and post mining ban, it's never been the same.  So, this led a lot of people with tinfoil hats and conspiracy theorists to think, "Were the Chinese miners trying to inflate the amount of transaction fee in the block?"

Peter McCormack: For what reason?

Nick Hansen: To increase their total mining rewards.  So, they knew that they had the majority of the network, they would mine the majority of the blocks, you'd probably do some maths to figure out, "If I make sure that the amount of transaction fee is above a certain amount, my expected value from doing that activity is X".

Peter McCormack: Isn't that cost neutral because if they're actually having to spend the Bitcoin to put them in the transaction…?

Nick Hansen: Well, they're spending the Bitcoin but they're getting the Bitcoin back because they mine the blocks, and then the marginal transaction, so your or my transaction or whoever's, they have to pay that higher fee and then that gets captured.

Peter McCormack: So, they're driving up our fees?

Nick Hansen: Yes, there you go, yeah.

Peter McCormack: Okay.

Nick Hansen: That's average transaction fee.

Danny Knowles: As a percentage?

Peter McCormack: That's a percentage?

Nick Hansen: Then here it is as a percentage.

Peter McCormack: All right, okay. 

Nick Hansen: So, then you can see the mining ban there at the bottom right, and we've just never really recovered.

Peter McCormack: So, the mining ban, is that like mid-2021?

Nick Hansen: Mid-2021, yeah.

Peter McCormack: Okay, so 2019 to 2020 got up to about 10%, then there's a massive amount of activity, but that is also bull run time.

Nick Hansen: Yeah, bull runs cause transaction fees to go up and cause the hash price to go up.  Margins go up, everybody's making money, everybody's figuring out, "How can I lever up; how can I pour money in; how can I get ahead of this?"  Then they just expected that to go maybe another three to six months.

I think, if we had seen hash price above 15 to 20 cents for another three to six months, a lot of these miners would be in a much better position; they would have been able to get a little bit further through their very aggressive amortisation schedules, they would have had a more balanced sheet to withstand that negative free cash flow that we're seeing now, and I think they'd be a really good position to weather the bear market.  A mega-miner like that, they do produce positive cash flows, it's just when you add in the leverage, that's when things start to kind of break down.

Peter McCormack: Right, okay.  Do we know if the Lightning Network has reduced the number of transactions that go into block rewards?  So for example, we were selling our merch at the Pacific Bitcoin, as you know, and I would say I think we did maybe around 100 Bitcoin transactions, of which 5 would have been basechain; we still did them because people didn't have any Bitcoin in their Lightning wallet, and the rest were Lightning.  Now the Lightning ones, if the channel's already open, there's no transaction fee going to the miners, but the basechain ones there are.

Nick Hansen: Right.

Peter McCormack: Do we know if the Lightning Network is having that impact, or is Lightning Network just new transactions that wouldn't have happened?

Nick Hansen: So, it's hard to say, I don't know exactly; that is the theory.  If not conspiracy theorist about the Chinese miners producing transaction fees that introduce kind of a base layer of fee reward, that would be one of the other causes, or it's just lower interest in the network as a whole.  If I would have gone over and bought stuff from somebody that had a way to pay with Bitcoin, probably would have just done a basechain transaction because it would have been, what, 5 cents.  Lightning, right now, it's hard to really justify opening those channels just due to the economics being so in favour of using basechain currently.

Peter McCormack: Weren't miners meant to be using futures to protect themselves against these situations?

Nick Hansen: Okay, well, thank you for the meatball! 

Peter McCormack: I don't fully understand futures, I mean I do; I know you can hedge, I know historically from watching, is it Trading Places where they have the futures for the orange juice market and the futures are there to protect if the crop isn't as they expect, if there are storms or they don't harvest as many oranges, the futures give the farmers a stable price to have a stable income for their land.  My understanding was it was meant to be the same for Bitcoin miners, that the futures would exist for them to protect themselves for this kind of variability.

Nick Hansen: So, there's really no future product that exists today for hedging your outputs.  So, there are two; there's output of a Bitcoin mine, which is Bitcoin and generally dollars, Bitcoin miners most generally should be trying to get to dollars to reduce the risk on their operation, and then on the inputs, that's just energy.  So, there are some ways to hedge energy today; you could buy energy forwards, you can do different types of strategies.  If you know that your energy source is nat gas, you can try to buy nat gas forwards to lock in some of your input costs, but there isn't a great way to hedge your outputs today.

There are some bespoke products called physically delivered hashrate forwards, and what that means is, say you have 100 petahash of hashrate, I buy it from you at some value today, $55 of petahash today and I'll buy it from you for a 20% discount.  Then you lock in that value, so you then take, what's 20% of $55; is that $11?

Peter McCormack: 20% of $55? 

Nick Hansen: It's going to be $11 off, so I'll buy it from you for $44 and then you're locked in, so now you know where your outputs are going to be over the next 6 months.  The problem with that type of contract today is that it requires heavy collateralisation, meaning I have to collateralise as both the seller and the buyer.  The buyer has to put up whatever the value of that contract is on that day, and then the seller also needs put up that amount because there's nothing stopping the seller from just unplugging their machines or pointing them to some other pool or whatever, there's no physical constraint on that; that would be like a default scenario.  So, they generally need to be collateralised pretty heavily.

Luxor recently launched a new product called a Hashprice NDF; NDF stands for non-deliverable forward.  What does that mean?  It means that I don't actually, as a miner, have to deliver you the hashrate.  We look at the reference rate for what the value of that hashrate was and we settle the difference.  You don't have to collateralise nearly as much because we know what the bounds are on volatility and we can also introduce margin requirements, maintenance, things like that, and you're not actually exchanging physical hashrate.

If you're having to exchange physical hashrate, that introduces a lot more complexities, the contract gets much longer because you have to have verbiage around uptime and availability, and what are the default scenarios.  If I'm below my delivery schedule, can I top up; can I go buy hashrate and make my contract whole?  All of those things add complexity to a physically delivered contract, and so we really wanted to reduce that complexity by doing this NDF.

So, let's walk through the mechanics of what an NDF is like.  So you and I, we say in that same scenario, "We'll do a 30-day tenure, a 30-day contract".  Today, the hash price is $55; we've seen that 30-day tenure trade at about 2% to 3% discount to spot.  So, if you're going to buy my hash price, you offer me that discount, I sell it to you, and then over the course of the next 30 days, our Hashrate Index produces the reference rate every day, and then we settle daily using a time-weighted average, over the course of the contract.  Then we get to the end, say it's $60, I owe you the time-weighted average difference between $55 and $60; if it was linear, then I owe you $2.50 for that contract.

So, we can take collateral for that, and right now we say 30%, and when that take that collateral, the reason we're holding on to that is just to make sure that at the end, we can move the funds from the buyer to the seller, whichever side of the trade wins, and also that you're not going to default; and we know that over a 30-day tenure, there hasn't been a period where we've seen that much volatility ever since the conception of Bitcoin.  So, that's where 30% came from.

Peter McCormack: Right, okay.  Danny, can you bring up the hashrate chart?

Danny Knowles: Yeah.

Peter McCormack: So, we've spent the last 30 minutes-ish talking about the difficulties that all these mining companies are having.  Hashrate has skyrocketed, why?  Look at that; that's fucking unbelievable!

Nick Hansen: That's all time.

Peter McCormack: Yeah, but, Danny, if you go to the last year, it's the last year, everyone's been in pain, and essentially everyone's really been in pain from the drop in about May?

Danny Knowles: Even in the last three months.

Nick Hansen: The last three months is really the pain period.

Peter McCormack:  Yeah.

Nick Hansen: I would say, anything under about a 12- or 13-cent hash price is really going to be where things start to get iffy.

Peter McCormack: But the hashrate's up nearly 50%. 

Nick Hansen: Yes.

Peter McCormack: If you say the bottom's just 200, we're nearly at 300, it's about 40%.  How is hashrate up 40% when everyone's in pain?

Nick Hansen: Yeah, okay, great question.  So most, as I was mentioning about what happened this time last year, there was massive investment happening, but that investment doesn't just show up.  If I go buy 100,000 mining machines, they don't show up this month, or even next month, or the month after that; they probably are going to start showing up within six to nine months.  So, those machines were getting plugged in in late Q3, mid Q3, late Q3, and now they're all starting to come online. 

What I mean by those machines is when we saw the pub cos going in and investing and buying hundreds of thousands of mining machines; Marathon Digital famously bought 100,000 mining machines this time last year and they're now all starting to come online.  So, that hashrate that's coming online now is hashrate that was paid for a year ago and is now starting to show up, which is really going to crunch the margins on that investment.  So, it's going to be interesting to see how this plays out over the next, probably I would say 12 to 18 months.

Peter McCormack: Is there more to go, do you think?

Nick Hansen: I believe so, yeah, I believe there's still more to go, and I would say we're getting close to being somewhat saturated in the US market because our energy prices are a bit higher than you can find elsewhere, but I think there's still going to be mining done in other places.  There is some concern that maybe nation states are starting to turn on machines and mine at whatever it costs just to get around sanctions, that sort of thing.

Peter McCormack: Concern?

Nick Hansen: Well, I shouldn't say concern, but there are some rumours or theories that that may be where some of this hashrate is coming from.  Say Russia, they're sanctioned, they can't participate in the majority of the world's banking system currently for what they're doing over there, and they could be taking Bitcoin mining machines, plugging them into their effectively free natural gas generators and they mine no matter what, or they mine regardless of what the economics look like.  That could be a scenario that is playing out, and I think we're going to start to see, over the next 6 to 12 months, if that is the case. 

The reason I think it'll take that long is we're getting to the point of the marginal machine right now is not nearly as profitable, I mean your margins are single digits maybe, maybe low teens on those machines, and if the hashrate continues to grow, that margin's going to continue to come down.  And if we reach a point where the marginal machine has a 0% margin and the hashrate then continues to grow, we know that there's somebody out there that is mining at a loss and they may not care because the value that they're getting out that hashrate is greater than the economic reward at face value.

Peter McCormack: Then what happens to the public companies; is it a race between who can survive the longest?

Nick Hansen: If there are entities out there that are able to mine at effectively zero cost, there is no way for miners that have to pay for energy to compete.

Peter McCormack: So, that might require western nations to subsidise miners to keep the hashrate?

Nick Hansen: Yeah, if we want to keep hashrate in the US, that could potentially be a case.

Peter McCormack: That's what Jason Lowery talked about, didn't he?

Danny Knowles: I don't know, I've not heard that.

Peter McCormack: Mining as national security, I'm sure.

Danny Knowles: Oh, I have, yeah.

Nick Hansen: We talked about that on the pod last time, that mining is a matter of national security.  If the US Government wants to protect its Bitcoin constitutents, that would be something they need to do, is make sure that their Bitcoin holders within their country are protected from foreign influence and foreign intervention.

Peter McCormack: Per block mined, what is the difference in price that miners are earning between the current cycle and the previous cycle pre halving?

Nick Hansen: Pre halving?

Peter McCormack: Yeah, pre halving, so pre halving now, it was 6.25, we're now --

Nick Hansen: Yeah, so 13.5.

Peter McCormack: 6.5, wasn't it, and then 3.75?

Nick Hansen: It's 6.25 currently.

Peter McCormack: The next one will be 3.125.

Nick Hansen: Yes, exactly.

Peter McCormack: Yeah, so it was 12.5 last time.

Nick Hansen: What do you think the price was in April of 2020?  I don't remember.

Peter McCormack: Good question; let's have a guess.  April 2020 --

Danny Knowles: See who can get the closest.

Peter McCormack: I want to say around $18,000.

Nick Hansen: Oh no.

Danny Knowles: No.

Peter McCormack: Had we gone up after that?

Nick Hansen: That would be like $9,000.

Peter McCormack: Oh, that was pre-run?

Nick Hansen: Yeah.

Peter McCormack: When did the run start; was it June?

Nick Hansen: It was late 2020.

Danny Knowles: April 2020, it was about $7,000-ish, $7,000 to $8,000, something like that.

Nick Hansen: Okay, so a block of Bitcoin back then, in April 2020, pre halving, was 13.5 BTC.

Peter McCormack: 12.5.

Nick Hansen: Yeah, 12.5, it was about $94,500.  Now, a block is 6.25 times the spot price today is…

Danny Knowles: $16,500.

Nick Hansen: We'll say $17,000; it's $106,000, so it's actually a little bit more per block right now.

Peter McCormack: But a lot more competition.

Nick Hansen: But there's significantly more competition, probably over double the amount of competition.

Peter McCormack: Where I'm going with this is we are, what, a year and a half away from the next halving; where are we?

Nick Hansen: Yeah, it's going to be in late April, early May of 2024.

Peter McCormack: So, if the price doesn't recover, that's going to add even more pressure onto the miners.

Nick Hansen: So, we had that conversation internally last time; what's going to happen post halving?  During that time, in the two-ish months after halving, is when we saw the lowest hash price to date, I guess until now, was in that summer of 2020; that was the max pain event for miners to date.

Peter McCormack: Sorry to interrupt, does the hash price that you quote, is that the leveller, so you can ignore block reward and the halvings?

Nick Hansen: You can ignore block reward, halvings, difficulty, all of that stuff, that number that Luxor produces, the Luxor Hashprice Index, is the aggregation of all of those metrics into one reference rate that we use for the value of hashrate.  That time, it was around $70 petahash per second; we're now at $55.  So, that was, at that time, the lowest margin environment that we'd even seen, but now, it's even lower because the hash price is lower, energy prices are higher, your inputs are higher, your outputs are lower, the margin that you have to make in the middle as a miner is the lowest it's ever been.

Peter McCormack: Right, okay.  So, how do you think this is going to play out over the next year?  What's going to happen with Core Scientific; are they just going to renegotiate?  What's going to happen with all these other large public miners?  I don't know the state of them all, but…

Nick Hansen: Yeah, so the lower the debt load currently, the better the miner is positioned, because as I mentioned, they can mine profitably, they will produce free cash flow at the end of the month.  If you plug in an S19 at Riot or Core Sci, it's the amortisation schedule of the debt that's going to be the killer.

Peter McCormack: That's the issue?

Nick Hansen: So, anybody that has high debt is in a very precarious position and is probably going to need to renegotiate some of that load.  The miners, like Riot, has a very low debt load; CleanSpark, very low debt load, and so those types of miners, they're also well positioned to accelerate through this because they are producing free cash flows means they can reinvest, that sort of thing.

Peter McCormack: And some have diversified their income streams.

Nick Hansen: True.  Hut 8 also has diversified income; they're trying to do high-performance compute and things like that, which make a ton of sense because really at the end of the day, most miners really are reminiscent of an energy company or a traditional data centre.  If they can monetise the input with some margin they should be doing that, and if there's a higher margin activity they could be doing, like doing high-performance compute or switching to a traditional data centre, that's something that makes a lot of sense for them as a business, especially as Bitcoin margins go down.

Peter McCormack: So, back to your internal discussions about the halving, could we see bloodbath in the mining industry if we don't see price recovery?

Nick Hansen: So, if we don't see a bit of relief from, specifically hash price, dollars per terahash, or petahash, I would say over the next two to three months, it'll be max pain for anybody that has a mining loan.  Another really interesting note is that most of the mining loans, the lenders won't lend over the halving; they won't lend over the halving because the economics, that is such a thing.

Peter McCormack: It's so unknown.

Nick Hansen: Yeah, there's such a big economic event, it's impossible to know, "My mining loan, am I ever going to get it paid back?"  So, most of them will not lend over the halving, so that means we are unwinding, so leverage is unwinding.  Every month that goes by that a miner doesn't default, the amount of leverage in mining is going down because they're paying down one more month of amortisation.  And so, as that progresses, we are slowly, slowly, unravelling, unwinding, but is someone going to capitulate before that?  We'll see.

Peter McCormack: There'll be some interesting distress deals perhaps?

Nick Hansen: Yeah, there are some big batches of machines that are coming across our trading desk, and we're seeing pretty aggressive pricing on them.

Peter McCormack: Give me an idea of price.

Nick Hansen: $15 a terahash.

Peter McCormack: What does that mean for a price of an ASIC; what can you get an S19 for now?

Nick Hansen: $1,500.

Peter McCormack: Fuck!  I paid $10,000 for mine!  Do you think that's a good buy?

Nick Hansen: So, you can look at it from an ROI perspective and actually, Bitmain will most likely -- yeah, so this chart actually, we try to normalise this across a lot of different models, and so it won't show that super --

Peter McCormack: Just explain this chart to the people listening.

Nick Hansen: So, the chart that we're looking at here is the ASIC Index, and like I mentioned, we produce this reference rate daily for a tranche of machines based on their efficiency levels.  So, the lowest there, the red line there, that's the most efficient machines, under 30 joules per terahash right now, and like I said, the J Pro I think is 32 joules per terahash.  So, that's the reference index.  I don't know, can you click on there and see what it shows?

Peter McCormack: Can you go up a touch, Danny?

Danny Knowles: Yeah.

Peter McCormack: Go up to "all"; I just want to see.  So, they do go up as well?

Nick Hansen: Oh yeah, absolutely.

Peter McCormack: I'll tell you what I'm thinking, these might make a good investment.

Nick Hansen: To buy and hold?

Peter McCormack: To buy and hold the machines themselves, because if you look there, from October 2021, what's that, that was like a 400% increase in the…

Nick Hansen: So, the bottom line here is actually S9s.  S9s, in the last cycle, that was the Bitcoin beta play; S9s were effectively free.  During the summer of 2020, people were selling S9s for scrap, $20.

Peter McCormack: I had 70 of them; I told you about this.

Nick Hansen: We talked about getting 140 of them.

Peter McCormack: Yeah, well, 70 were DragonMints.

Nick Hansen: Yeah.

Peter McCormack: So, even when I actually sold my S9s, nobody wanted the DragonMints; the DragonMints literally were $30 for scrap each.

Nick Hansen: That was only if they came with the power supply because I need that power supply for other machines because you can reuse the power supplies.

Peter McCormack: Yeah, but I'm trying to remember what I got, I want to say like $200 a machine, but I'd been previously offered $30 and I just hadn't got round to saying to the guy, like, "Yeah, get rid of them".  Then somebody approached me and said, "Have you got any machines?" I said, "Yeah, I've got 70 of them!"

So, what I'm thinking is, at the end of the year, we'll come to the end of the year, I've got a profitable podcast, I've got some money in the bank, if I don't spend that money, I have to pay corporation tax of 19%, but if I buy these machines, then I don't have to pay corporation tax because that's a capital investment; it's spending your profits.  So, would it make sense to, say I had $150,000 profit, should I go and buy 100 of these machines?

Nick Hansen: Yeah.

Peter McCormack: Because next year, they could be a 4X.

Nick Hansen: They could be.

Peter McCormack: It could be worse.

Nick Hansen: Could be worse, yeah.  Like I said, so the S9 was the beta play, you could buy them for effectively $20 a piece, and then there were some of them selling for $800, $900 at the top.

Peter McCormack: Yeah, maybe I got like $700…

Nick Hansen: In the pod, you said $600.

Peter McCormack: Was it $600?

Nick Hansen: Yeah.

Peter McCormack: I can't remember.  So, what's the play this time?

Nick Hansen: So, it's really hard to claim that right now, make the claim about is it a good investment right now, and the reason being is that you don't really know where hashrate's going, and the unknowns of hosting right now are really probably the biggest concern.  It's hard to find good hosting because they're really constrained; all the big miners have gobbled up the space, and so if you're looking for hosting options, you're generally looking at small, maybe potentially unexperienced operators, and their costs are pretty high.

Peter McCormack: What if you don't want to host them?

Nick Hansen: There is margin to be made.  I guess you could put them in your garage.

Peter McCormack: Can you not hold them for me?

Nick Hansen: I have a warehouse, yeah, but we can hold on to them.

Peter McCormack: I'm just wondering if that's good investment; I don't know.

Nick Hansen: Traditional wisdom would say no.

Peter McCormack: Okay.

Nick Hansen: If Bitcoin goes on a run, it's a high beta play; the value could be zero.  If hashrate continues ripping, hash price continues dropping and a J Pro becomes unprofitable at 10 cents, the value of those is going to be evaporated.

Peter McCormack: Down to what?

Nick Hansen: They're $1,500 today, people would probably be trying to get rid of them for $200.

Peter McCormack: Well, then it does…

Nick Hansen: Yeah, it would trade very similar to the way an S9 did.

Peter McCormack: You could buy 100 machines for $20,000.

Nick Hansen: People were doing that in the summer of 2020, and some folks were warehousing them.  So, if a J Pro got down to $6 or $8 a terahash, you'd probably want to start thinking about it because that would be, what, $600 or $800, but it's really hard to say what's going to happen with hash price, what's going to happen with these XPs. 

One good thing for miners to look forward to is that Bitmain did not release an exceptionally more efficient machine this year; they did last year, which was the XP, which increased efficiency by about 30%.  So, that means that if you had J Pros or 19 Pros or any of the S19 series, that you were going to be now competing with a miner that was 30% more efficient. 

So, that there obviously reduces your incentive to buy some of the later generations, but now we're seeing that, okay, they're only going to produce the XPs for the next year, and so I at least know where the floor of efficiency is and if I can maybe play games with that, or I can make an investment around that, that might make sense.

Peter McCormack: How much pressure does this put on the likes of Bitmain themselves as well? 

Nick Hansen: So, Bitmain made a really big gamble, or they made a really big push into what I call the Hydros, and that is a machine that comes purpose-built for liquid cooling.  If you've ever seen like a gaming PC that has those --

Peter McCormack: Yeah, seen it.

Nick Hansen: -- yeah, those hoses on them, they're like that.  It's not immersion where immersion you put the whole machine into some liquid, this one actually just has the hoses go onto the chips and cool it that way.  They made a really big push into those, and I was at WDMS a couple of days ago in Cancún and that was the message; they want to sell Hydros, they want to sell XP Hydros, and they think that that's the way to go.  They made a really big investment, and we'll see if it pays off.

Like you said, it does put a ton of pressure because there are not a lot of people buying new machines right now; there's no capital to invest in them.  Given the events of last week, there is no new capital coming either, so if you don't have money to go buy machines, the person that produces those machines is definitely going to be feeling some pretty major pressure. 

They're doing a lot of creative things to get machines off the shelves that looks like subsiding miners.  So, if you have sub 4-cent power, they'll give you basically a 50% LTV, but it's machines; they'll give you machines at 50% cost and you have to mine with them for a certain amount of time to effectively pay that back.  So, they're doing a lot of creative things like that and there are a lot of companies that are doing other similar creative things.

Peter McCormack: Shall we buy some miners, Danny?

Danny Knowles: I'm not sure, it sounds like a sketchy plan!

Nick Hansen: Yeah, sorry.  Cost averaging here may not be a terrible play.  A lot of folks are buying in smaller quantities; we started to see volumes tick up.  We do a brokerage business where we help miners that need machines acquire them, and we saw volumes start to pick up towards the end of Q3, in early Q4.  Most of Q3 was effectively dead; there was nobody investing in new mining machines because the value of them was in a freefall.  You can see from the chart there, from April to end of July, was just basically a vertical line down.

Then we sort of reached a little bit of a plateau, and that was when volumes started to pick up and that was when people felt like that they could reinvest, start making investments again with a little bit more certainty.

Danny Knowles: Do you think the Intel machines are going to disrupt this at all?

Nick Hansen: No, not right now; they're just not efficient enough yet.

Danny Knowles: Okay.

Nick Hansen: But I do think that if Intel continues to invest in this market, they will reach parity with the Bitmain machines.  So, Bitmain pretty much has a stranglehold over the -- I shouldn't say "stranglehold", that's rather negative -- they're competing at a really high level, and the way that they're able to do that is because of their relationship with TSMC; they get allocations that other people can't, they're able to produce more chips and more machines than other people can.  So, that's the reason they're able to continue to hold such a strong position in the market.

WhatsMiner would be second place; they're able to produce a lot of machines, just not as much as Bitmain.  Intel though, since they own their own production, they would be able to go out and compete with Bitmain head to head on a volume basis; they would be able to produce enough machines.  The only thing that's holding them back now is they just need to get to that efficiency level that it makes sense.

Peter McCormack: I talked about this on the show the other day, everything is kind of a derivative of the Bitcoin price; we can see it there, right?

Nick Hansen: Yeah, 100%.

Peter McCormack: It's exactly the same for our business, which is just a podcast, six people making content.  But our downloads, you could have a line there for our downloads and it would kind of track the Bitcoin price.

Danny Knowles: Well, there's a Bitcoin price on this, so you can overlay it.

Peter McCormack: Yeah, ours would quite similarly follow that.  I said this on the podcast the other day, what I don't understand is why people are not preparing for worst-case scenarios; we have, we conserve capital.  We produce a good show, we invest in the show, but when we're profitable, we put money by, we have to create a runway.  We've got a runway that protects us for about a year; we always want to be a year ahead.  So, if the market crashes or there are not enough sponsors about, we know we can keep making our show, I don't have to lay people off, we're protected.

Now, there are a lot of people involved here in mining who have been involved in Bitcoin longer than I have, they know this, and I don't understand why they have not prepared for these worst-case scenarios. 

Nick Hansen: Well, I think they were trying, but the problem is this just happened too quickly.  So, like you said, this time last year, most profitable time to mine ever in Bitcoin, people were shovelling money in as quickly as they can.  Less than 12 months later, it's the least profitable time to mine ever; it's very difficult to make massive strategic pivots in that amount of time.

Peter McCormack: Right, okay.  It's been hit in multiple angles, the increase; you've got an energy cycle, as you've mentioned previously, and then you've got a complete collapse in -- we've essentially had three Mt. Gox in the last six months, which hasn't really helped.  I wonder where the price would have been, I wonder whether if what Three Arrows Capital were doing, and FTX, and Alameda were doing was actually depressing the price.  I wonder if none of that had happened, whether the bull run would have gone on longer and we would have settled at a higher price.  I just don't know, but I have a feeling we got fucked by frauds.

Nick Hansen: New capital is delayed significantly now as a result of everything that's happened over the last six months, even more specifically the last week.  New capital coming into this industry, was sitting on the side lines, may never come into this industry as a result of what happened over the last week, and even six months.

Peter McCormack: Could that be a good thing; do you want my reasoning?

Nick Hansen: Yes.

Peter McCormack: It could reduce the volatility, in that massive amounts of capital come in in a very competitive market where you can see insane returns in a very short amount of time, and then you see all these capitulations.  Could it be that a kind of proof of work, a harder proof of work to create businesses in this industry will create better, more stable companies? 

Nick Hansen: It's easy said.  The largest exchange, and hopefully liquid exchange, said that we shouldn't be thinking about cost of capital, you need to maintain reserves, you need to be thinking about, "How can I keep a low leverage in this market because of the volatility?"  I think that, by adding in, like you said, all this new capital flowing in quickly, that becomes very attractive to lever that up, and that's when we get these big deleveraging events that we're seeing now.

Peter McCormack: It's the Ray Dalio cycle on crack.

Nick Hansen: Exactly, yeah, and again, poor miners are really bumping into two cycles that are occurring independent of each other; they are dependent on both of those cycles, but they're coming together at the same time, energy and Bitcoin cycle. 

If we could go back to that chart, I wanted to show one interesting thing, the hashrate, the rig index with Bitcoin price, the interesting part here -- yeah, put the Bitcoin price there.  So, Bitcoin has actually been rather flat since early July, you can see relative -- there have been some bits of volatility there, but the very interesting thing is the price of machines continuing to go down; that is a direct result of the ROIs.

Peter McCormack: Oversupply.

Nick Hansen: Yeah, the ROIs on those machines, oversupply ROIs.  The hash price continues to go down, hashrate continues to go up; that's what's causing those machines to continue to go down.  Now, we saw another big leg down here, we'll probably see a leg down in machine prices, but I think machine prices are getting back down to their reasonable levels, and I think that if you start doing some ROI calculations, we'll start to see a pretty reasonable price for machines here over the next three months or so.

Peter McCormack: Right, okay.  How has this all affected Luxor?  As a customer, I'm interested to know.

Nick Hansen: Yeah, absolutely. 

Peter McCormack: Just so people know, I mine and I bought my machines through Compass, and I am now a customer of yours.

Nick Hansen: Yeah.  So, Luxor is a Bitcoin-denominated company.  So, in that regard, obviously last year was significantly better.

Peter McCormack: Hold on, you use Bitcoin as a unit of account for the business?

Nick Hansen: No, we don't run it entirely on Bitcoin, but I denominate how Luxor is doing based on how much Bitcoin it produces in a month.

Peter McCormack: Okay.

Nick Hansen: So, we produced more Bitcoin than we've ever produced in any month in both August and in September, so that, from a Bitcoin-denominated perspective, is really good.  Unfortunately, that Bitcoin is worth a third of the value it was this time last year.  So, from a dollar perspective, November of last year was the best month we ever had, and probably almost every single crypto-based company was the same.  All the exchanges had record months, record quarters, people were selling tons and tons of machines; everything was amazing.

So a year later, we're feeling the pain.  Luxor's in a great spot relative to the rest of the market, but to say that things are amazing, it certainly wouldn't be truthful.  So, we're sitting here waiting to see like, "What is our next play?"  We haven't done off any layoffs, probably not going to have to do that in any significant amount over the next bit. 

Really, the big change in strategy for Luxor has been just around our hiring plan; we had a lot of folks that we wanted to get in to build the products that we're building, we're taking a pause on that just to see where does this market go?  And that seems to be the best companies in the industry are really trying to do that right now, they're basically just sitting tight, preserve capital, "Let's reduce expenses where we can, just maintain free cash flows and see where this goes over the next couple of months here".  Every month that you make it through with a green number at the end, that's a really good month, and that's really what we're trying to do here.

So, we produce net income, and all of that is great, so we don't really burn traditional venture-backed tech start-ups.  So in that regard, it's a lot less pressure than, say, some blockchain, metaverse company that doesn't have a product and doesn't generate any revenue, they were banking on that VC money, their runway has gone down significantly and now they're scrambling because there's no new capital coming into the space.

Peter McCormack: Right, have you not taken any investment?

Nick Hansen: So, we took our series A from NYDIG and that was it.  Actually, we have a new strategic partner; Hivemind Capital has come in, working with Jake Greenstein, Scarlett and Matt Zhang, and they're getting into the mining space here.  So, they came on late.  We put together something so they could be a part of the Luxor story, and really excited to get them on; the press release isn't out yet so breaking news.  But just them, we haven't raised any significant amount of capital since the series A that NYDIG led in late 2020.

Peter McCormack: Most companies, once they've raised a seed round, series A, they're always thinking about their series B.  Are you essentially just trying to build a company without raising capital as much as possible?

Nick Hansen: So, yeah.

Peter McCormack: Yeah, great.

Nick Hansen: That is 100%.  So, the story of the Luxor, we were bootstrapped, Eddie and I founded the company in 2017, actually August of 2017, and during that time, we just built this as a hobby, nights and weekends.  I was working at Salesforce, he was working at Nebulous Labs, actually I think he might have even still been in school for a little bit, and so we're just working on Luxor nights and weekends.

Then over the course of the next year and a half, we started releasing some products and started seeing people actually really liked using Luxor products, so we started generating a little bit of revenue and we got to the point where we had enough of a bankroll that I felt comfortable leaving my cushy Silicon Valley tech job to go become the CEO of a company of four in July of 2019; so, that's when I went full time.

Peter McCormack: How many people are you now?

Nick Hansen: 47.

Peter McCormack: Wow!  Congratulations.

Nick Hansen: Yeah, I appreciate that.  Over the end of 2019, the rest of the founders came full time, and then in 2020, we were going to go raise, we were going to do that jazzy pre-seed round, $1 million on $12 million or whatever it was, and then we bumped into COVID and we were like, "Okay, we're not going to raise in this market, we're not going to be able to.  We've got to figure out how to build products that continue to generate enough revenue for us to stay profitable".  So, we launched Luxor Switch; I credit Luxor Switch to keeping Luxor alive through 2020.

Late 2020, really started getting a lot of traction on all of the products, as of course the market was really starting to go in our favour, raised a series A round from NYDIG and ever since have not raised any capital; the reason being is we do generate a net income, which is an incredible feat and I congratulate the Luxor team for being able to do so. 

We were planning, we were thinking, "Should we put together a series B in Q1?" had some preliminary discussions and ultimately decided that it probably doesn't make sense just given valuations are getting crushed, and decided, "Okay, we'll hold off on that and we'll maybe push it to Q4 of this year" and then, of course, now we're probably not going to go raise I don't think, even if we wanted to; there's no new capital coming into crypto right now.

Peter McCormack: Well, listen, bear markets are for surviving, and if you're making more Bitcoin at the end of the month than you've ever made, your trajectory is great for coming out of these kinds of depressed prices.

Nick Hansen: Yeah.  We've got to really tighten the belt, making sure that we have really tight expense controls, things like that, that's really the one thing.  We're really thinking a lot about, "What is the bottom line?  How do we reduce expenses month over month?  Is there a way for us to cut cloud spend or marketing?" 

Peter McCormack: What?!  Fucking heresy!

Nick Hansen: Anything that we can do to make sure that the number's green at the end of the month is really where we're at right now.

Peter McCormack: Marketing is the one area I'd always say people should definitely not cut.

Nick Hansen: You should continue to double down.

Peter McCormack: Yeah, double down, especially if it's based on British football!  No. 

Nick Hansen: I know.

Peter McCormack: By the way, I appreciate you doing that, supporting the club.  What we've done with that football club we couldn't have done without you and the other sponsors.

Nick Hansen: It's insane what you guys have done.

Peter McCormack: Dude, it's unbelievable, and we're having the time of our lives, but actually it's making a real difference to people's lives; we've got more people playing football because of it.  My little town has got this seed of a project that people are getting excited about.  For the first time ever, the local ladies' team is being paid; it had never been paid and they're getting paid expenses, and you know what, they have to travel more than the men. 

So just out of interest, everything's geographic, right; so we're in the South Midlands League, the most the men's team ever has to travel is 1 hour and 20 minutes to a game.  There are less ladies' teams, and their division only has 12, and I go to as many of theirs as I can, and they have to go up to 2 hours 10, 2 hours 15 to a game sometimes, and they have to cover the cost of the petrol to get there.  So, they've never been paid, and based on the fact that we've got sponsors like you, they now have all new equipment, new shirts, new tracksuits, and they get expenses to cover their costs. 

We couldn't have done that without you or other people, and that's making a real difference.  This isn't just a vanity project, it's a genuinely interesting project that is changing the lives for some people, so I will always be grateful for you for doing that.

Nick Hansen: Yeah, I appreciate it, man.  It's been really exciting to see.  So, tell me, how does the promotion work?  Tell me how that works.

Peter McCormack: Okay.  So, well I say the goal is Premier League; realistically the goal is the Football League.  So, you've got the Premier League, Championship, League One, League Two; they're called the Professional Leagues. 

Nick Hansen: Okay.

Peter McCormack: It's a weird thing, they're called the Professional Leagues but really, if you're in the one below, which is the National League, that's still professional, but it's a hierarchy, and you can be promoted and relegated between them.  But the First Division under League Two, the National League, that's known as Step One; so, they refer to the divisions underneath as steps.  That's the one Wrexham are in, you know Ryan Reynolds, he bought Wrexham, that's there, they're in there.  We're in Step Six, so we're six promotions from the Professional Leagues, right?

Nick Hansen: Okay.

Peter McCormack: Okay, but what happens is, below the National League, it starts to split.  So, National League, then you go National League North and South, two separate divisions, so they only have to travel half a country.  And then Step Three, it splits again all way down to where we are.  The team who comes at the top of our division goes up.  Here we go, we've got the table up.

So, the team at the top goes up, and the next four go into a playoff; semi-finals, final, and so whoever wins that also -- so, only two can go up.  The thing is, you really want to avoid the playoffs because if you're in the playoffs and you just have one bad game, like we've lost one game, we should have won it but we didn't, and so if we go into the playoffs, you're at risk of this whole season, you have one bad game, you go out, and that would be devastating. 

So, our goal is we must win this league, we have to win it, so we just go one game at a time doing everything we can.  We are now top, we've played 15, we've only lost 1, we've got 42 points.  You can see, we're 12 points above Northampton Sileby, but they're got two games in hand, that means they've played two games less.

Nick Hansen: Okay.

Peter McCormack: So, if they win their two games, they'll be up to six points behind us, but that means we've got a buffer of two defeats; we can afford two more defeats and still be above them because of our goal difference.  So, what happens is, it comes down to how many points.  If you're on the same points, it then goes down to goal difference.  

Nick Hansen: Got it.

Peter McCormack: You know what goal difference is, right?

Nick Hansen: Yeah.

Peter McCormack: So, you would essentially say --

Nick Hansen: That nine-point game helped there.

Peter McCormack: What's that?

Danny Knowles: The nine-nil.

Peter McCormack: Yeah.  Did you say, "Nine-point game?"

Nick Hansen: Yeah.

Peter McCormack: We don't call them points; we call them goals!

Nick Hansen: Nine-goal.

Peter McCormack: Yeah.  So, it's going well.  The great thing this weekend is we didn't have a game; our game was postponed.  So, all our rivals had games and it was a chance for them to catch points up.  Northampton Sileby lost to Eaton Socon, and then Northampton Chenecks, they drew with Moulton.

So, we play next Saturday against Eaton Socon, it'll be a tough game but it's home; we should win.  Then we've got London Tigers, down near the bottom; we should win.  Then we've got Thame Reserves, even lower; we should beat them.  Then we've got Wellingborough Whitworth; we should beat them.  So, if we get through all of those four, we'll be halfway through the season and only have lost one game; it will be looking good. 

Then we've got the last game of this year, is Ampthill Town; now, they're our rivals, they will outperform based on that.  If we can win that, we then go into January, we play Langford.  So, my hope is we get past the first game in January, and we've played 21 games, and we've only lost 1.  We've then got two really tough games; we've got Sileby away, and Northampton Chenecks away, they're going to be two tough games.

Now, if we get through those with a couple of wins, you start to think, "Okay, this is close", but it's one game at a time.  My team is absolute warriors; every game they go in to fight, and they know, "One more win, one more win".

Nick Hansen: One more time, the top team does not go to the playoffs then?

Peter McCormack: The top team goes straight up.

Nick Hansen: Straight up?  Got it, okay.

Peter McCormack: The second, third, fourth and fifth go into playoffs.

Nick Hansen: Got it, a four-team playoff.

Peter McCormack: So, the way it works with my manager, this is really interesting, the difference between the manager and the chairman; he is only ever thinking about the next game. 

Nick Hansen: Okay.

Peter McCormack: All he's thinking about is Eaton Socon, "What are we going to do; how are we going to win that game?" that's all he's focusing on.  All I'm thinking on is next season because I've done everything I can, I've given him the resources, the players.  When we finish the end of the season, if we're promoted, I want to sit down with him on Monday and go, "Everything's ready for next season".  We're going to have to get maybe three or four new signings, we're going to have to spend more money, we've got to upgrade the ground; I need to be prepared and go, "It's ready for you".

I want to get from here into the League Two in ten years, six promotions in ten years; I don't think it's ever been done, I want to do it, okay.  That means I have to be ready every year.  We're allowed four slipups in ten years.

Nick Hansen: Okay.

Peter McCormack: I'd love to do it in six years.  I think we can do back-to-back-to-back promotions; I think we can do three, I think we can go six, five, four, three in three years.

Nick Hansen: Okay.

Peter McCormack: That's the goal, but it only happens with people like you.

Nick Hansen: Yeah, if you got another bull run, no problem.

Peter McCormack: Oh yeah, another bull run, it's like, "I'm going raise for four years!"

Nick Hansen: Listening to you talk about this is probably me going through the maths of hash price!  I'm like blown way, my wig is completely back and I'm trying to follow all of it.

Peter McCormack: Dude, I had no idea what the fuck you were talking about!  I was like, "Oh yeah, yeah".

Nick Hansen: I know, your eyes were completely glazed over and you're like, "What are you talking about?!"

Peter McCormack: I was thinking about, "All right, on Saturday, we're playing Eaton Socon, I'm going to be in Vegas, we're going to find a pub --" no, it's incredible.  I'll tell you some other incredible things off the back of it.

Nick Hansen: Okay.

Peter McCormack: The amount of merchandise we're selling, we sold $6,000 of merchandise at the Pacific Bitcoin Conference.

Nick Hansen: That's amazing.

Peter McCormack: Yeah, and all the merchandise we sell, that essentially will fund our ladies' team.

Nick Hansen: Yeah.

Peter McCormack: That's incredible.  There were people wandering around -- some guy said to me, he said, "I was in the airport in Austin, there's somebody's in a T-shirt that says, 'Bedford'", and it's hilarious; my little town is getting marketed around the world.  Our meetups, we have meetups once a month before a game; our previous one, we had nearly 70 there, Emma?  We had 70 people there coming to learn about Bitcoin; it's fucking amazing.

Nick Hansen: That's amazing, I love it.

Peter McCormack: It's the whole thing, I've just got to keep it going, man.  Come on, Bitcoin.

Nick Hansen: I love it.

Peter McCormack: Right, anything we didn't cover you want to cover?

Nick Hansen: No, I got it all on here.  Everything I talked about was good.  I owe you 100,000 sats.

Peter McCormack: What?!

Nick Hansen: I own you 100,000 sats.

Peter McCormack: Do you?!

Nick Hansen: We had two bets, one of them was, "What is the price of Bitcoin going to be?" at the end of our last podcast.  I think it was $61,000 and I said, "I'll take 'over', you take 'under'", and it was a little under.

Peter McCormack: Okay.

Nick Hansen: That hurts also.  And then we also talked about hash price, I said, "Is it going to go over 50 cents?" and it never did.

Peter McCormack: So, I bet on the hash price even though I don't know what the fuck is it?!

Nick Hansen: Yeah.

Peter McCormack: Jesus!

Nick Hansen: I mean, that's degeneracy at its max!

Peter McCormack: So, what was it, 50,000 sats on each?

Nick Hansen: 50,000 sats each.

Peter McCormack: What's 100,000 sats? 

Nick Hansen: It's like $20.

Danny Knowles: Yeah, $20.

Peter McCormack: I'll tell you what, pay and take a T-shirt.

Nick Hansen: Okay.

Peter McCormack: We'll sell you a T-shirt and you can take that back.

Nick Hansen: Absolutely.  That's really all I've got here, man.  This has been amazing.  Dude, appreciate it.

Danny Knowles: What's your bet for the next show?

Nick Hansen: I'm trying to think of something interesting.

Peter McCormack: I've got it, football, bring up the thing.

Nick Hansen: All right.

Peter McCormack: I'm going to give you a really crappy bet.  I've got an idea.  So, we've got 38 league games, right, we've played 15, we've won 14, we had 1 defeat.

Nick Hansen: Can we bet on goals?

Danny Knowles: That's quite a good bet because it's more random.

Peter McCormack: I think we could do points.  So, what does that aggregate out at points for the season?

Danny Knowles: Is it 110?

Peter McCormack: Yeah.  Divide 42 by 15; I'm not good enough to…

Danny Knowles: It's 106.

Nick Hansen: Yeah, 106 points.

Peter McCormack: Right, 100 points, under or over?

Danny Knowles: 100 points is, just to give you some background, it's like unheard of, it's very, very hard to get --

Peter McCormack: What's the maximum points?

Nick Hansen: I feel like I'm getting taken here!

Peter McCormack: No, what's the maximum points?

Nick Hansen: There's a chance I'm being taken!

Danny Knowles: Now let me see, I think it's 110.

Peter McCormack: 38 times 3.

Danny Knowles: 114.

Peter McCormack: 114 is the maximum points we can get, and I'm saying over 100.  Under or over?

Nick Hansen: Okay.  You're taking over.

Danny Knowles: Just for context, the maximum points in the Premier League ever, is it 95?

Peter McCormack: Yes.

Nick Hansen: Well, let's do 95. 

Peter McCormack: No, 100.  Well, I was going to say to you under or over 100.

Nick Hansen: If you give me 95, I'll take over, and my normal sports betting bet amount is 250,000 sats.

Danny Knowles: Sorry, that's not true; Man City got 100 points in…

Peter McCormack: No, I want to take over 100 points.

Nick Hansen: You want to take over?

Peter McCormack: I want to take over 100 points.

Nick Hansen: Okay, so you're moving the line, so I'll take under 100 points.

Peter McCormack: Yeah.

Nick Hansen: 250,000.

Peter McCormack: 250,000 sats, and you sponsor us next season.

Nick Hansen: We'll get to that!

Peter McCormack: All right, yeah, okay.  Let's get the man a T-shirt.  Look, tell people where to go.

Nick Hansen: Yeah, check us out, luxor.tech, or hashrateindex.com.  I'm Nick @hash_bender on both Telegram and Twitter, @LuxorTechTeam on Twitter, @hashrateindex on Twitter.  If you want to email me, nick@luxor.tech.  That's really it.  Tell me how bad my predictions are or whatever, love to chat about it.

Peter McCormack: Hopefully, next time we do this we've got a more positive Bitcoin environment to talk about.

Nick Hansen: And we're not talking about who's going bankrupt next, and, "How's your company doing?", and, "How's everybody?  Who's going to go out next?"  I don't know.

Peter McCormack: Hopefully, we'll be talking about another promotion.

Nick Hansen: That's what I want to talk about.

Peter McCormack: All right, man.  Thank you, Nick.  Take care, buddy.

Nick Hansen: Take care.