SLP158 John Lee Quigley – How Does a Bitcoin Price Crash Impact Bitcoin Miners?

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John Lee Quigley of MinerUpdate and Adaptive Analysis joins me in this episode to talk about the impacts of bitcoin price drop on Bitcoin mining. We talk about: 

  • What the key costs are for miners
  • Who are the key players in bitcoin mining
  • Miner trends
  • Geographic dispersion
  • Vertical integration
  • Energy use

John Lee Quigley Links: 

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Stephan Livera links:

Podcast Transcript:

Stephan Livera:

John, welcome to the show.

John Lee Quigley:

Stephan, thanks for having me on.

Stephan Livera:

John. I’ve had a chance to read some of your work. I know you’re working with MinerUpdate and also you are writing a Bitcoin material at Adaptive Analysis as well. So I thought it would be good to get you on and talk about the mining world and other stuff that you’re seeing in kind of the Bitcoin world. Obviously, it’s been pretty crazy the last week or so. But let’s start with you. What, how did you get into Bitcoin and writing about Bitcoin mining?

John Lee Quigley:

Yeah, absolutely. So it’s actually a bit of an interesting story there. First of all, I was a bit of a finance man, was very interested in the markets and I was doing a degree in science in college and it wasn’t really doing it for me. So I just started to get very interested in the markets and started working my way up for a career in that. And I was doing a sales job in Dublin and I was walking by this bakery and it said the world’s first smart bakery. And I went there and I met the owner and he was showing me all these cool things he was saying, yeah, we have the fridge connected to the phone and it turns off at a specific time. And blah, blah blah and lots of things. And we also accept Bitcoin.

John Lee Quigley:

I was like, What is Bitcoin? And he gave the probably the worst description of Bitcoin I ever received. It was 2014 or 2015 at that time. So I went back, I gave it a Google and I tried to learn a bit more and I was thinking, wow, this is Ponzi Scheme for sure. I’m going to stick to monitoring the oil markets or looking at commodities or something like that for them. It’s stuck in my mind anyway. And that progressed with a finance career. On the second time I went to look back at it, I looked a bit deeper into it and I was like, wow, this is actually, this is an amazing technology here. This is something which is here to stay. And then at the end of 2017, I ended up leaving my job in finance and started working full time in the crypto industry and writing content and doing research.

Stephan Livera:

Awesome. And I know you’ve done a lot of work with MinerUpdate, so what’s your interest around Bitcoin mining? Why did you get into mining specifically?

John Lee Quigley:

Mining is always something which had interested me even when I was mostly writing about the markets and about the technology side of things. And the last few year I started working with the cofounders of MinerUpdate, Daniel and Mia, who were doing an absolutely fantastic job there. They had a great vision for the company. I was used to doing writing work with a lot of clients who really had an emphasis on pushing out high volumes of content but very low quality. And immediately working with Daniel and Mia, I could see their focus was something different. They very picky with the topics to be released on the website. And I really vibed with that. It was, it was a nice change. And then over 2019, we started working closer and closer together and I manage the content and the research now them. And they also hosted a conference in China in October last year, which was a huge success. And yeah, there’s going to be big things in store from MinerUpdate in the future.

Stephan Livera:

It seems to me like a very under-covered aspect of Bitcoin in some ways because if you think, okay, the man on the street and they look, they think about Bitcoin, they might hear about Bitcoin mining, but amongst certain parts of the industry, mining is not really discussed that often. And that was for me, it was something, it’s like, Oh, actually, I should cover this a bit more myself as well. So obviously the big news over the last week has been the recent price drop. We’ve gone from whatever 9,000 USD to at the time of recording now we’re sitting around $5,300. Right. And that’s obviously interesting when you’re looking at it from a mining perspective because a miner is thinking about, okay, at what price am I profitable, so what are some ways that you would think through that or you might, you know, because I know you speak a lot with miners obviously. What are some ways to think through that?

John Lee Quigley:

Well, firstly I think it’s worth pointing out that people now who have a lot of cash on the sidelines, it’s an opportune time for them because a lot of businesses are feeling the crunch. A lot of businesses are just running because they have access to easy credit and these businesses now, and the high quality ones can be picked up by people with cash on the sidelines and minings going to be very similar a lot. A lot of miners are just operating barely below the break even. On a few set open mining operation, you’re vulnerable two things, you’re vulnerable to price decreases and you’re vulnerable to an increase in difficulty level and you have little control over these, especially if you’re just operating below the break even. So the 40% close price drop we see on Thursday means a lot of miners now are going to either be operating below, their all in a break even ROI or for money, they’re going to drop a load of cashflow breakeven, which means they have to shut off the rigs. Maybe they want to sell their rigs on the market and those miners with huge cash balances can acquire them very cheap and really put the pressure on.

Stephan Livera:

Yeah, that’s fascinating to think about because there’s like this whole strategy game of playing for the long run and capital investment that you need to make, but then also keeping the lights running, maintenance costs in the interim, paying the electricity. How much of that can be managed by the miners who are say speculating on future price rise versus I need to be profitable right here and now. So John, in terms of the main costs that a Bitcoin miner faces, what are some of those and what are the ways that they normally pay for those?

John Lee Quigley:

So for the vast vast majority of miners, the biggest cost is going to be electricity. Very few miners can get access to very low electric rates. Miners in Szechuan, miners in Kazakhstan can get sub-three cents per kilowatt hour, electric rates or they’re the exception and not the rule. Outside of electricity the main costs are going to be maintaining the equipment labor, the factory or where are you going to place the rigs? Maybe some other hardware you might need like to hold the rigs in. So there’s a couple of ways miners can set up their operations from one perspective. They can try and purchase everything for their electric. They can try get a power purchase agreement. They can try and raise funds to purchase all the other expenses. And from that perspective, then they would just be depreciating their capital and they will be hoping that over the life span of what they’ve invested in, they turn a profit and make an ROI. On the other hand you can rent everything. You can rent the factories to leave the rigs in. You can rent the rigs, you can hire the labor, and from that perspective then it’s all operating expenditure. And if the returns you’re making a drop below your cash flow break even then it’s time to turn off your rigs.

Stephan Livera:

Right. And as the different miners will be operating at different price points on the curve, so to speak, then the Bitcoin price variation will dictate which miners turn off equipment. And it may even be the case that miners have different sets of equipment and they turn off some pieces of equipment and keep others on. Right?

John Lee Quigley:

Yeah. So we’re expanding a bit on this idea of the cost curve. So the idea of the cost curve is that miners who have lower costs, the lower cost you have, the exponentially greater a position you’re in, because your margins are bigger from the Bitcoin you’ve mined, you have more optionality. You can either hang on to the Bitcoin you generate to see if it has some upside potential or you can convert into cash. And this cash then gives you more options. You can upgrade or acquire hardware from miners who are under pressure. You can acquire hardware from the manufacturers. The lower or the higher up the cost curve you go, the more you’re going to be feeling the squeeze and the more vulnerable you are going to be to either price drops or difficulty increases. So this price drop we’ve seen on Thursday will probably wipe out a lot of miners. We haven’t seen the difficulty estimates, and drop just yet or a lot of miners would probably be forced to turn off their rigs. The miners who are lowest on the cost curve would probably acquire these rigs and the hash rate which comes offline, difficulty is going to adjust them words and then the big miners are in a great position again because the hardware they have acquired on the hardware they’ve deployed is now mining at a lower difficulty level so they have greater returns.

Stephan Livera:

Yeah. Nice summary. So let’s put that into context for the listeners. Can you give us just a rough idea of the ranges that you’re aware of? Obviously these things are shifting over time, but as at the time we are recording, it’s March 2020 the current price is about 5,300 USD. Do you know roughly where some of the miner break even costs would be? And you know, and like what an example would be where let’s say the miner at the low cost point can purchase equipment from the miner who’s at a higher cost point?

John Lee Quigley:

I can give you some very, very rough numbers. It’s been a while since I’ve looked into it, but it’s also worth noting that every miner will have a different cost because every miner has a different situation. They’ve acquired power at a different price, they’ve acquired rigs at a different price. And this is once again, what gives the big miners the big advantage because they can negotiate the best deals. They can have their costs down the lowest and they will have the biggest margins. So on the lowest end of the cost curve, miners can get electric rates at the mysterious, less than one kilowatt, less than 1 cent kilowatt hour. And I will believe these miners are probably mining for 2000 or less, but up the higher end of the cost curve. I normally take what the publicly listed companies are mining at, their cost because these are pretty inefficient miners because they have a lot of costs.

John Lee Quigley:

They have to pay a CEO salary, they have to pay high salaries for labor. They have to pay high accounting fees to the big four to meet the financial reporting standards. And I believe they were probably mining at $8,000 or $9,000 per bitcoin mined and then Charles Edward released a methodology and indicator on trading view, which estimates the average price or average cost of production based on the energy draw that Cambridge are estimating. And I believe it was about 6,500. He estimated the average cost of production across the industry was, so this price drop, is the biggest miners are remaining profitable but a lot of those in the middle and small end are just now unprofitable and will be forced to go offline.

Stephan Livera:

Right. Yeah. It’s a really interesting insight there because then as you’re saying, those less profitable miners will either turn off their equipment and wait or even go out of business and just sell that equipment to, probably one of the miners who is operating at a lower point on the cost curve. But there are also some I guess some lag time there would be some lag time involved with this as well because it takes time to ship those, to ship that equipment over or for people to negotiate these different rates and so on. And as I understand the lag time between ordering equipment and then actually being able to plug it in and turn it on, that can be very, very costly to a miner. Correct?

John Lee Quigley:

So there’s a big, like when you’re acquiring hardware, I’m turning it on because yeah, as you said, you need to broker deals, you need to source the hardware. A lot of time can go into it, it can be costly for the interest in paying is the same logic doesn’t apply to the downside. When price drops, 40 to 50%, people are just in a position to immediately turn off their rigs. And that’s why when we look at hash rate estimates, we see gradual declines and sometimes sharp falls. Honestly, it’s kind of the same for market as well. People gradually build up confidence and the market is gradually, gradually building off. And then when there’s some fear kicks in, it can catalyze a cascade of selling. Everybody wants to get able at one time.

Stephan Livera:

Yeah. And as you’re saying, there is a difference there between a big price drop and a big price jump, let’s say. So if there’s a big price drop, it’s easy for somebody to turn the mining off, but if there’s a big price rise, then a lot of people are scrambling to try and buy mining equipment and start up a mining operation, correct?

John Lee Quigley:

Yeah, absolutely. So it’s kind of like hashrate follows price, right? If price rises, miner margins increase, miners are thinking, Oh, it’d be nice to have more hash rate deployed now greater profits and people scrambled to get mining rigs. But this obviously takes some time.

Stephan Livera:

I suppose that would also be the cost and the time associated with integrating that mining rig into your warehouse or your factory or wherever your mining data center, whatever you want to call it. And you’d have to you know, configure it all and do all that stuff as well. Right. So that’s obviously an engineering cost and time.

John Lee Quigley:

Yeah. That also take some time. I’ve visited a mining farming in a Sichuan during the event, which Daniel and Mia hosted in October last year. And it just looked like the rigs were all put up in such a scramble. The wires were all over the place and it’s also China has such an advantage when it comes to mining. There are close to the manufacturers, they can get cheap labor. There’s maybe not the same regulatory standards when it comes to data centers and stuff like that.

Stephan Livera:

Yup. And you mentioned also, and this is, I think most people understand this, a big driver in the cost of your mining operation is the power arrangement that you have. And so there might be some small operations or let’s say somebody has basically free power kind of thing. In some certain marginal scenarios, people might just be able to plug in miners and basically just get it for almost free. But generally speaking at the professional level, once you having a certain size, you basically have to get these power agreements negotiated. And that might be a tension that you face with the local local government or state government where you want to try to have a good price, right? And reliable power. But that can be difficult for some miners to get, correct?

John Lee Quigley:

Yeah. So every miner will have their own unique circumstances in the region Sichuan. Where a lot of the hash rate is residing. It’s very much a high risk type environment and there’s an abundance of hydro-power and miners willl move into take advantage of days and they will set their facilities and rigs up as fast as possible. Sometimes they also face high risk because a lot of these farms are based in mountainous regions where there could be risk of mudslides. Some farms have been wiped out by mud slides before. Also, sometimes the bandwidth can be extremely low. So the miners need to use the best mining pool technologies. And then in let’s say a place like North America, the process is going to be a lot slower. The process of acquiring hardware, the process of hiring the right people of setting up the facility is just a lot longer curve and in a fast changing market, that puts North America at an extreme disadvantage, but it seems like they’re making some leaps and bounds. Once there’s clear regulation and we’re seeing some farms also set open in West Texas now so that they may pave the way for other farms and have a model on how North American miners can compete.

Stephan Livera:

Let’s talk about the mining industry and just a little bit of a breakdown then. So can you tell us who are some of the main well-known mining hardware manufacturers and how to think about that?

John Lee Quigley:

Yeah, so BitMain is the biggest by far. And often times they maybe get a bad rep. I think it’s people don’t like when, when one firm is dominant, they kind of want to want to see it’s downfall. Right. But BitMain in reality, I’ve done an outstanding job. They’ve there any reports I’ve heard about the rigs, the rigs have been highly reliable and under normal circumstances, their rigs ship on time and the orders you put in, you can be assured. You will, you will receive. And also doing a lot of works in order fields in the mining industry. They own AntPool. They own btc.com. They have a large share in viaBTC, that’s three mining pools. They also have BitDeer, which is a cloud mining platform. And they’re doing a lot of research in AI and really pushing, they’re really leading the way for making the most powerful and most efficient mining chips for a six and being a for a long, long time.

John Lee Quigley:

And it seems like there’ll be a leader for the foreseeable future. So they’re the dominant leader. Then the other hardware manufacturers would be Canaan, eBang, Innosilicon, and microBT and these five essentially make up the vast, vast majority of the market. The other hardware manufacturer which will be worth noting would be micro BT. So micro BT was founded by a former BitMain employee who designed the Antminer S7 and Antminer S9. And the AntMiner S9 was a big jump in power out efficiency of big basic mining rakes and the fact that it’s still being used online today is a Testament to that because before this, every time a new release of Bitcoin ASIC will come out, it would typically wipe out the previous generation, but over some disagreement. Then BitMain employee, Dr. Zuoxing Yang, left BitMain and has now set up. He has set up microBT and microBT produced the Whatsminer, series of mining rigs which are also very powerful, very efficient. And they’re starting to put the pressure on BitMain and eat away at some of their market share.

Stephan Livera:

And there are a range of different products that they offer. As I understand there’s what Antminer there’s what’s miner, Avalon miner. So as you’re saying then the BitMain product, the S9 is, well that’s the older product. But that’s one of the well known and well used pieces of equipment.

John Lee Quigley:

So each manufacturer has their own series of mining rigs. BitMain have the AntMiner series of mining rigs. Canon have the Avalon miner series of mining rigs, and microBT have the Whatsminer, a series of mining rigs.

Stephan Livera:

These all the ASIC equipment that is used for mining hardware. And then in terms of the actual mining companies an, actually maybe it would make actually maybe it would make sense to think of a mining pools as well. So in terms of mining pools, can you give us just another overview there in terms of who are the big names and sort of what roughly what kind of hash rate percentage they make up?

John Lee Quigley:

Yeah, so the biggest mining pools currently just speaking about Bitcoin would be Poolin, BTC.com. Antpool, ViaBTC, also Slushpool are typically in the top 10. We have some upcoming ones which are Luxor mining based in North America. They offer pooling services for a lot of cryptocurrencies and typically the top 4 or 5 will represent over 50% of the Bitcoin hash rate. So how it works is, let’s say I set up my mining operation and I control a small, small percentage of the total Bitcoin hash rate. I can generally expect payouts in proportion to what percentage I represent. Because I’m going to represent such a small percentage, it makes sense for me to pool my hash rate with other miners, which is done by each miner connecting to a mining pool. And then the mining pool essentially would pay you based on more regularly based on the hash rate that you submit to them.

John Lee Quigley:

They will send you a block header, you fill it with transactions, submit it and every time you every time a miner across the pool finds a block, a reward, may be paid out under one payout scheme. So a lot of people are concerned about the health of Bitcoin because just a small number of pools control such a large portion of the hash rate. Well, what you have to also bear mind is that people who are in the big climb mining business are extremely exposed to Bitcoin. They’ve made billions and billions of capital investment into this industry. And if they do something which harms the network, their balance sheet is both tied to the rigs they own and the value of Bitcoin itself. So if they do something which harms the industry and let’s say their rigs can’t be used to mine Bitcoin anymore, they can’t be used for anything else because they’re a six, they’re specific towards mining Bitcoin. So all of that money invested into rigs is gone and plus they’re directly exposed to Bitcoin. So if Bitcoin drops 50, 70, 90, 99%, then they also lose this value.

Stephan Livera:

And that could be said as one of the benefits of proof of work, which is that in order to do it, you have to put in all this capital investment into the equipment. And so that in some sense forces people to have skin in the game of Bitcoin because they can’t just mine it on, you know, on a normal computer and re-purpose that. It’s,one of those things where it’s the equipment you’re buying the SHA256 hashing mining equipment is basically only useful for this purpose. Correct?

John Lee Quigley:

It’s massive skin in the game. Absolutely. And any network which is using CPU or GPU to mine, think about how much CPU and GPS are in the world and available to attack that network. But in terms of Bitcoin, the whole world is striving to increase their hash rate. I can get their hands on more ASIC chips. So if you want to attack that network, you need to acquire these rigs off order miners, which is a hard, hard task and you will be paying huge, huge premiums for a task that is pretty much near impossible to complete.

Stephan Livera:

Yeah. And so you gave us an overview there on the large pools within Bitcoin. It’s also useful to understand that miners are not the same thing as pools as well. And that there may be mining companies who do not necessarily run their own pool. Right. so what are some of the, maybe some of the large mining companies who don’t necessarily run their own pool and they’re just running a mining operation?

John Lee Quigley:

Miners are typically typically private. So if you’re running a pool, you’re not in the mining business, you may have some factories or you may have shares in some factories. Well people who set up mining facilities, let’s say in China, they’re typically private and just industry professionals will know who they are, they’ll know where their factories are based, et cetera, et cetera. We’re seeing in regions like North America, more firms become more publicly known for some reason. For example, Layer 1 raised I believe $50 million with Peter Thiel being one of the lead investors. So when you’re operating in a regulated environment like that and you’re going to be doing fundraising, then these firms are going to be known for money of money. Of the actual pure mining firms are not known. One, which I can say the name of is Valor Hash, which is based in inaudible and they actually both operate a mining pool plus they have huge factories where I believe they host mining equipment and have some cloud mining contracts as well.

Stephan Livera:

Yeah, thanks for that context as a, yeah, it’s, it can be for somebody who’s not familiar with the space, it might difficult to appreciate the difference between, the mining pool and say the miners who are contributing hash power into a pool. And as you mentioned, we are seeing some shifts in the trends now with some US and North American mining, some in Canada as well. So I’ve noticed also that in some places around the world, there’s a use of those sea containers as a way of perhaps flexibility or agility to move those miners around. Do you have any comments around that as a business practice, as a mining practice?

John Lee Quigley:

It’s interesting for sure. And I also believe that there could be some benefits. I know some people are setting up like immersion cooling systems within containers, but, to be honest, I wouldn’t yeah, I wouldn’t be the best to comment on it because I haven’t experienced hands-on these containers and how to look around and really got to understand the details on it.

Stephan Livera:

Sure, sure. And also well we’re talking about layer one as I understand their strategy is a little bit more around vertical integration. So they’re not necessarily, well I think right now they are using other, you know, other mining equipment, but I think the aim is that they would eventually be producing their own mining equipment and also mining it. What are your thoughts on that as a strategy? Do you think that’s something we’ll start to see more of?

John Lee Quigley:

Yeah, it’s an interesting strategy. You’re spot on. They aim to be a vertically integrated mining company, which means they’re going to control all aspects of the production line. They’re going to produce their own ASIC deployed their own ASICS it is an interesting strategy. It would take a lot, a lot more capital, and it would take careful, careful planning. You would need to be in a place like where they are in West Texas to benefit from, such low electricity prices. But I suppose it puts you in a better position because you’re not as dependent on, you’re not as vulnerable to changes in the environment around you. You’re working on building your own ASICs. So if another hardware, if another series of hardware gets released, miners are scrambling to purchase this. You’re not so concerned with this because you’re focusing internally on pushing the performance of the ASICS which you’re manufacturing, making them more powerful, making them more efficient and making sure they can compete. So it takes more capital. It seems like they’re more insulated against the risks in that position.

Stephan Livera:

And would you also say that it’s, it’s also true or fair to say that Bitcoin mining is further decentralizing around the world? We’re seeing more geographic what’s the word diffusion around the world that it’s not all just concentrated in China over time

John Lee Quigley:

For sure. We’re seeing more of a transition towards areas where you can get very low electric from coal production such as in Iran and in has Kazakhstan and also we’re seeing more of a push towards North America. But let’s not say just yet that Hash rate is more distributed globally because really it remains to be seen and what the distribution will look like over the coming years. But for sure it’s looking more promising and there’s some more perspective regions popping up. It’s also worth noting as well that hash rate being located in one region may not be as bad as people make it out to be. So first of all, I pointed out that the miners are extremely, their incentives are tied to the health of the network, which is one point, but also there’s been some interesting work done on the software and technology side of things. Braiins have been working, hard on releasing Stratum version two, which is the protocol that miners use to connect the mining pools. And as part of version two miners will have the option to run their own full node, which essentially means that if they’re in a position where they feel there’s a risk of the big mining players, censorship censoring transactions, then they can render their own full node and choose what transactions to select in each box or in each block.

Stephan Livera:

Awesome. And listeners who are interested, check out my earlier interview with Jan Capek from Slushpool and Braiins who we spoke about a little bit about Stratum V2. So another one that I’ve heard of is a BitMain having a facility in Texas and I hear it’s 50 megawatts and that they’re going to 300 megawatts. So can you tell us a little bit about that idea that different facilities or different rather mining companies are setting up facilities in other locations around the world?

John Lee Quigley:

So my understanding of that, I haven’t been to West Texas, but from the people I’ve spoke to from the research I’ve done on the area, it seems to extremely promising area. They have huge amount of wind energy, renewable energy sources. Built up in West Texas, far West of the big consumers and, it’s very costly to transport that to the East. So it’s providing a big opportunity for miners to come in, set up their centers and and essentially tap into this very, very low electricity. And there’s even businesses such as HODL Ranch setting up, which their whole business model is to help Bitcoin miners set up the lowest cost center that they possibly can and even they have techniques to deal with the high levels of temperature in the region. So this huge abundance of energy on and plus I believe the energy market in Texas is unregulated, gives miners a huge opportunities to negotiate very, very low electric rates. And we’re seeing firms such as BitMain and Layer 1 launching their facilities in this region to capitalize on this. And that’s one of the beautiful things about Bitcoin mining is that it forces miners to source the lowest cost energy. Sometimes that’s bad, such as regions in Kazakhstan and Iran where they’re going to be using coal power or sometimes it’s extremely good people come in and take an abundance of renewable energy in regions such as Sichuan, West Texas, and there’s even regions in Africa which have an abundance of renewable electricity. And the consumer demand is just not there. And sometimes the cost of storing or wasting the energy is put on consumers in the region by increased electric prices. So if a Bitcoin mining operation can come in and take that energy and get to the lowest position on the cost curve, it’s a beautiful thing.

Stephan Livera:

Yeah, that’s a really interesting dynamic to see play out as well. So my understanding there is generally with electricity grids, they, can’t easily kind of stop and start, right? So that energy has to go somewhere. And so that means typically they would either have to turn on and off the base load power and then that can typically the base load power will be like the coal power or the you know, natural gas. Whereas in the kind of solar and wind power game, this is one of those things where because it’s costly to transport the electricity, then it sort of makes sense to have a Bitcoin miner there to soak that up, the excess amount that’s not being used. And that can be very cost effective. Now the, I guess the interesting question there is, what’s your view around the use of fossil fuels as opposed to renewables over time? Because to me, I get this sense that maybe it’s being overplayed a little bit. This idea of all it’s all going to be renewables when there might still be a case for a high percentage of fossil fuel, Bitcoin mining.

John Lee Quigley:

Absolutely there might be, there’s a push in some cases towards miners using fossil fuels. But I just believe that at this point in time, it’s not an issue. Bitcoin uses a fraction of the energy which is wasted, not wasted, necessarily, but used on other utilities and industries that could be considered wasteful. Bitcoin kind of gets the, the bad rep here because it’s an experimental technology, but things such as Christmas lights use a phenomenal amount of energy and the amount of energy which goes into running like say the Forex industry must also be phenomenal. So if people on the market believe that using this energy is worthwhile and they’re essentially putting their capital where their mouth is, then it’s a worthwhile allocation of capital.

Stephan Livera:

Yeah, I think so. And I think it’s one of those things where there is a, there’s a famous book by this name, it’s called The Moral Case for Fossil Fuels by Alex Epstein. And I think the other fundamental way to think on this is simply as you said, if that is what people voluntarily chose to spend their money on and the Bitcoin miner has successfully bid for that electricity, well then who is, who was everyone else to judge that? Because by the same token, are we going to have electricity, police run around and police someone’s use of Instagram and the smartphone battery power required for that and the cost required because ultimately it just comes down to what was the cost for that electricity. And if somebody was willing to pay for it, well then that’s that. How can we really start judging this one use of electricity versus another use of electricity.

John Lee Quigley:

Yeah, I’m all for this discussion but it can’t be just Bitcoin in isolation. Order industries need to be taken into account.

Stephan Livera:

So John, I know you’ve also got a new research paper coming in terms of hash rate. Can you tell us give us a bit a background. What are you looking at here with this research paper?

John Lee Quigley:

Yeah, so this year it was originally planned that a week before consensus we would MinerUpdate they would do their second conference in Chicago. But unfortunately this conference has been canceled due to coronavirus is smarting thing to do, the world is coming to a standstill and everybody’s essentially cancelling everything. So the idea was originally to do this research ahead of the conference and present the findings. At the momentwWe’re unsure of the timeframe of the research. We feel it’s an interesting area to explore, looking into hash rate as an asset, really defining it and making it transparent. What are the attributes of hash rate while makes it unique, where is it based, is it based at the rig or is it base at the mining pool. How does add variables in the outside environment impact the hash rate, which is produced by a rig such as heat, such as immersion cooling.

John Lee Quigley:

And then another angle is to look at how can this asset be valued on how can this asset be traded. So it would look at things like projecting how price and how difficulty would impact the value of hash rate. It would look at things such as risk associated with the asset. Maybe time value of money. Also how might a market to trade this asset look? How would a spot exchange where people can buy and sell? We feel this, this area is extremely interesting. It’s a big area for the future of the industry and it’s something we plan to look into more.

Stephan Livera:

And the aim for this research paper is this to be done mostly through discussion with the miners and pool operators or looking at the research in the area or what are the main vectors of inquiry that you’re going down for this?

John Lee Quigley:

So we’re still fleshing this out, the coronavirus has thrown a bit of a spanner in the works. We’re going to talk to people in the industry, we’re going to talk to researchers, come up a plan and then execute from there. But it’s still in early stages at the moment.

Stephan Livera:

Yeah. And as you mentioned, it’s a really interesting space that perhaps could have more thought and development done on that area. So for example, if you’re a miner and you are inherently short difficulty, i.e. You don’t want the difficulty to rise, then what scope is there for you to have some kind of financial instrument that allows you to trade that off?

John Lee Quigley:

Yeah. And as well people, people are going to be interested in speculating on this if the value of an asset is volatile. So, for example, the, the price drop on Thursday would have a huge impact on the value of a unit of hash rate. So speculators and other institutions will be extremely interested in trading such a volatile asset.

Stephan Livera:

Right? And so hypothetically, the miner might want to play less of a financial and capital markets game and just play the mining game and they would rather throw that risk off to somebody else who is willing to take on and speculate on that particular risk, right?

John Lee Quigley:

Yeah, absolutely. It gives the miner more optionality, right? They can reduce their debt exposure.

Stephan Livera:

So let’s walk that through as an example. So for argument’s sake, let’s say you’re a miner and you’re worried that the difficulty will rise, or you’re worried that, you know, there would be a, or there might be a big price drop for argument’s sake, they might put, they might have some sort of forward rate or some sort of future contract to sell at a certain rate so that they could lock in their prices and then do their business planning based on that locked in price rate. Is that kind of an example that you know, we might think through there or how would you modify that example?

John Lee Quigley:

Yeah, so let’s, let’s leave futures markets to the side for the moment because it gets extremely complicated when you think about it from a futures perspective. Well let’s say there is a spot exchange for hash rate and you know exactly how much one unit hash rate is worth. You have X a hundred units of hash rate and as it stands you are long the value of hash rate. You want your value of hash rate to go up because you own a hundred units of hash rate. Well at the same time you are long price so you want the price to go up because the price going up improves the value of your hash rate and at the same time you are short difficulty. You want the price or you want the difficulty to go down because it improves the value of your hash rate.

John Lee Quigley:

Well, let’s say you are concerned that the opposite is going to happen, that based on your knowledge and based on market dynamics, you believe the price is gonna drop and there’s some new hardware releases that your friend told you about. So difficulty is gonna come up. So you have exposure to a hundred units of hash rate. Well you are in a position where you want to decrease your exposure because of your unique knowledge. So you sell 50 units of hash rate on a spot exchange. Your mining rigs are still in your farm but 50% of your hash rate has been purchased by a speculator who now has exposure to the same variables you have exposure to.

Stephan Livera:

Yeah. and so, so that’s hopefully an interesting thing that might get explored a little bit further and might be made a little bit clearer for people in terms of how to think through that problem or how to think through that business. And I think another area that has perhaps shifted and morphed over time with Bitcoin is perhaps in the earlier years of Bitcoin, the mining game was kind of chasing the world around and chasing down the cheapest electricity and there wasn’t perhaps as much of a focus around the capital aspect of it and the funding aspect of it. And now we are starting to see more professionalized capital you know, capitalized operations in this area. So we’re seeing things like, Okay you know, the Layer one funded by Peter seal and some others and there might be more, more that can be done in, in that aspect on the capital side. Do you have any views on how that might change over time?

John Lee Quigley:

It just seems to me like the natural evolution of an industry. It comes back again to the cost curve. There’s huge exponentially greater advantages to being lower on the cost curve. And that will naturally drove people to seek greater capital, greater investment, get themselves into a lower position on the cost curve and get themselves into an exponentially greater position. I believe what we’ll see more of that. We’ll see more fundraising, we’ll see more industry become more regulated and we’ll see bigger and bigger players.

Stephan Livera:

Yeah, I think you’re right. So John, did you have any anything else you wanted to talk about in terms of what you’re doing with adaptive analysis or any other things that you’re writing about?

John Lee Quigley:

For Adaptive Analysis? A lot of the work I do is on Bitcoin and on the markets. So Adaptive Analysis is an essentially an agency that will produce content and writing services and our main value proposition is that we can is that we have, we have a good knowledge of the industry. We have a good knowledge of finance of Bitcoin and cryptocurrency in general. And we can produce high quality content. And personally I’ve been monitoring the markets for a long time now. My first first job out of college was in adrift as trading farm, and I’ve kept monitoring the markets on the underside. So something I’m gonna experiment with is I’m gonna start doing a market analysis newsletter and I’d see how that goes. And if it’s well received, then people find value in it. I’ll continue it. And I’m excited to start releasing some of my on the market pool traditional Bitcoin.

Stephan Livera:

Well, look, I think that’s gonna do it for today. So John make sure you let the listeners know where they can find you online.

John Lee Quigley:

Yeah, find me on Twitter @johnleequigley and make sure to follow MinerUpdate @MinerUpdate because there’s going to be exciting, exciting stuff from that company moving forward. Once the coronavirus dies down, we’re certainly looking to run the second phenomenal conference from MinerUpdate.

Stephan Livera:

Awesome. Well, look, thank you very much for joining me, John.

John Lee Quigley:

Thanks, Stephan. It’s been a pleasure.

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