Bitcoin Inflation: Cost To Mine Will Skyrocket Next Year | Marathon Digital CEO Fred Thiel

Bitcoin and Crypto Mining: The Future

In this interview, Fred Thiel, CEO of Marathon Digital Holdings, discusses the future of Bitcoin and crypto mining. He talks about the potential drop in value of the US dollar and how Bitcoin can be a great hedge against it. He also discusses the impact of The Happening on miners and whether Bitcoin can breach new all-time highs within a year.

Potential Drop in Value of US Dollar

• The FED is likely going to pause at some point, causing the dollar to drop in value.

• Other banks are still raising interest rates, which will cause the dollar to drop in relation to them.

• Bitcoin is a great hedge against this potential drop in value.

Impact of The Happening on Miners

• The Happening results in miners receiving half as many Bitcoins for their hash rate.

• If the price of Bitcoin isn't substantially above $40,000 by The Happening based on current global hash rate trends, many miners will be challenged post-May next year.

Breaching New All-Time Highs Within a Year

• Three themes will be discussed: Can the price of Bitcoin breach new all-time highs within a year? What will drive Bitcoin adoption both in the short term and long term? What is the future of Bitcoin and crypto mining?

• Standard Chartered Bank predicts $100k BTC by end-of-year due to its status as a branded safe haven, perceived relative store of value, means of remittance, and outperformance compared to other assets.

• Central banks buying large amounts of gold tend to draw liquidity towards Bitcoin.

• International interest from family offices and people who are not Dollar denominated in their assets has increased due to inflation concerns.

Adoption of Bitcoin and its Technology

In this section, the speaker discusses the various ways in which Bitcoin adoption is expected to increase in the coming years.

Use Cases for Bitcoin Adoption

• Ordinals: A bitcoin-esque version of NFTs that stores graphic images and content in the four megabytes of block space.

• Side Chains: Register on the Bitcoin blockchain for security purposes, allowing users to operate a copy of the Bitcoin blockchain where they can store whatever they are tracking without having to do proof of work or proof mistake.

Increasing Wallet Addresses

• The number of wallet addresses with under 10 Bitcoins is increasing at a steady pace, indicating continued adoption.

• Lightning is getting easier to use, leading to new applications for identity healthcare data and other things on the Bitcoin blockchain.

Comparison with Internet Adoption

• The speaker believes that if Bitcoin follows the internet's adoption rate, we could see massive adoption over the next decade for all things that run on top of or adjacent to bitcoin.

• It is projected that perhaps 10 to 15 percent of the global population could use cryptos within ten years.

Two Different Models for Cryptocurrency Adoption

In this section, the speaker discusses two different models for cryptocurrency adoption.

Developing Countries

• In developing countries, financial transactions settlement and higher-order level things will likely be adopted first.

Developed Countries

• In developed countries, cryptocurrency may be adopted as an alternative investment asset class.

Adoption of Bitcoin and Stablecoins in Developing Countries

In this section, the speaker discusses the adoption of Bitcoin and stablecoins in developing countries due to the need for a safe place to hold funds that are not being debased.

Crypto Adoption in Developing Countries

• Consumer adoption of Bitcoin and stablecoins is accelerating rapidly in countries where people do not want to hold funds in banks.

• Unbanked people who have phones but no bank accounts can use crypto as an alternative.

• Institutional investors are also showing interest due to limited liquidity on exchanges.

Bitcoin Dominance

• Bitcoin dominance has reached its nine-month high, indicating sentiment towards it as a safe haven asset during times of crisis.

• Institutional investors are reaching out to miners and holders of large amounts of Bitcoin, indicating renewed institutional interest.

Stablecoins vs. Bitcoin

• Stablecoins like USDC or USDT offer liquidity but raise concerns about regulatory compliance.

• The fully decentralized nature of Bitcoin makes it attractive during times of fear and risk aversion.

Institutional Infrastructure

• High-level institutional infrastructure is being put in place by companies such as NASDAQ and Fidelity, indicating that institutional adoption is coming.

• BNY Mellon's involvement indicates that institutional demand is increasing.

Conclusion

In this section, the speaker concludes by discussing how even a small percentage allocation from 401ks could drive up the price of Bitcoin significantly.

Bitcoin Price Projections and Mining Costs

In this section, the speaker discusses Bitcoin price projections and mining costs leading up to The Halving in May of next year.

Bitcoin Price Projections

• Most analysts expect Bitcoin to be somewhere in the 30 to 50,000 range at the time of The Halving.

• Personal projections are significantly lower than that.

• A break-even price for the industry is projected to be around $40,000.

Mining Costs

• Miners receive their rewards from the blockchain for mining a block on a daily basis.

• The Halving results in miners receiving half as many Bitcoins going forward for their hash rate.

• If the price of Bitcoin isn't substantially above $40,000 come The Halving based on current global hash rate trends, then many miners will be found post-May next year because their cost to produce a Bitcoin has essentially doubled when you have the reward rate and global hash rate continues to accelerate.

• During crypto winter when Bitcoin was at $15,000, many miners were not profitable. Fast forward to The Halving plus growth of global hash rate now you end up in a place where if Bitcoin isn't north of $40k, same conditions will apply.

Marathon Digital Holdings' Break-even Point

In this section, the speaker talks about Marathon Digital Holdings' break-even point and how it compares with others in the industry.

Break-even Point

• A projected break-even price for the industry is around $40k during The Halving.

• Different miners have different break-even points driven by efficiency of their operations.

• Marathon Digital Holdings does not give a break-even number publicly but they are extremely well-positioned going into The Halving due to energy efficiency across their whole network.

• Their Energy Efficiency across their whole 23 acts of hash will likely be about 24 to 25 joules per terahash, where the industry average will be in the 40s.

Marathon Digital Holdings' Growth

In this section, the speaker discusses Marathon Digital Holdings' growth and how it is an indication of where the industry overall is headed.

Growth

• Marathon Digital Holdings increased production of Bitcoin by roughly 90% year on year between 2022 to 2023.

• In 2022, the company produced 360 Bitcoins. Over the course of last year or leading up into February 2023, it was 683.

• Marathon Digital Holdings is currently the largest Bitcoin miner in the US.

Bitcoin Mining Growth and Strategy

In this section, the speaker discusses the growth of bitcoin mining capacity from the beginning of last year to now. They also explain how they were able to finance their growth and maintain profitability despite increasing hash rates and difficulties.

Bitcoin Mining Capacity Growth

• At the beginning of last year, the company had around 3x a half of capacity running primarily in a facility in Montana.

• By the end of last year, they had doubled their capacity to about 7x a hash by turning on their first Texas facility.

• This year, they plan to more than triple their capacity from seven to over 23x a half.

Financing Growth and Maintaining Profitability

• The company was able to raise capital in 2020 and 2021 when markets were open and amenable to bitcoin miners raising capital.

• They did a convertible bond offering at the end of 2021 for approximately $750 million with a one percent coupon interest rate attached.

• When placing orders for bitcoin mining rigs, they typically place them with price protection involved so that if the price drops, vendors have to credit them back that amount.

• As they deployed hash rate growth in the back half of last year and through this spring, all that hash rate growth has been paid for already.

• The company is sitting in a great position financially because they've gotten rid of all short-term debt except for the convertible bond offering.

Maintaining Profitability Despite Increasing Hash Rates and Difficulties

• As the price of bitcoin moves up beyond the mid-20s and into the 30s, based on current global hash rate, the profitability to mine starts increasing pretty dramatically.

• If miners are able to operate their miners in a way that they can increase efficiency, they can potentially increase productivity and get to an efficiency level where they're really producing as much bitcoin as a particular site is capable of doing.

• As bitcoin price goes north of 30,000 in today's world, energy costs play less of a role because the margin in bitcoin is pretty substantial.

The Impact of AI on Bitcoin Mining

In this section, the speaker discusses how artificial intelligence (AI) can be used to increase efficiency and profitability in bitcoin mining operations.

Leveraging AI for Energy Efficiency

• Overclocking and underclocking machines can increase their profitable lifespan.

• AI can be used to control a mining operation like a system, allowing for huge benefits such as predicting energy spikes and making trade-off decisions about whether to curtail miners.

• Miners will use AI tools to drive their energy and curtailment decisions, fine-tune underclocking and overclocking, and determine when to sell Bitcoin based on predictive options.

Legislation, Regulation, and Environmental Impacts

• New York has placed a two-year moratorium on new fossil fuel-based cryptocurrency mining operations due to environmental concerns.

• Environmentalists believe that Bitcoin mining is environmentally unsound.

Overall, the speaker emphasizes the importance of using AI tools in bitcoin mining operations to increase efficiency and profitability while also considering the potential environmental impacts of these operations.

Energy Transmission in New York

The state of New York has a historical corridor for energy transmission from north to south, but lacks good transmission line capability East-West. Regulators are trying to prevent the revitalization of fossil fuel sites that have been shut off.

Lack of Transmission Line Capability

• New York has lots of transmission lines for energy from north to south.

• However, there is not a lot of good transmission line capability East-West in New York.

Moratorium on Fossil Fuel Mining

• Regulators in New York are preventing the revitalization of fossil fuel sites that have been shut off.

• The moratorium prohibits bringing back online already decommissioned natural gas or coal-based sites.

• The moratorium is targeting a specific industry and source of energy.

Criticism on Bitcoin Mining and Environment

There is criticism that Bitcoin mining is bad for the environment due to its high energy consumption and waste.

Environmental Impact

• Crypto mining globally accounts for about 140 million metric tons of CO2 produced per year, which is roughly 0.3% of all greenhouse emissions globally.

• Critics argue that crypto mining is a tremendous waste of energy since only a few miners actually get the reward.

Comparison with Other Energy Consumption

• The ATM network in the US uses over four times more energy than the Bitcoin Network uses globally.

• Video games, game consoles, and holiday lights in the US at Christmas use more energy than the global Bitcoin network does.

• The global Bitcoin network uses a fraction of one percent of the energy produced in the world.

Stranded Energy

• Bitcoin miners depend on buying very inexpensive stranded energy.

• Stranded energy is energy that can't be sold to the market because it would overload the grid.

• The grid operators regulate the energy generator's capacity in real-time to maintain balance between demand and supply.

Solar Energy and Bitcoin Mining

In this section, the speaker discusses how Bitcoin mining can help balance the grid by using excess solar energy during off-peak hours.

Solar Energy Production and Demand

• Peak demand for energy is between 4 PM to 9 PM.

• Between 9 AM to 3 PM, there is a surplus of solar energy that cannot be sold due to low demand.

• Renewable energy sources like wind and solar have limited operating hours and no storage capacity.

Bitcoin Mining as a Solution

• Bitcoin miners can use excess solar energy during off-peak hours when it would otherwise go unused.

• Bitcoin mining sites do not produce carbon emissions and consume renewable energy over 50% of the time.

• Bitcoin miners act as a balancing factor for the grid by shutting off instantly when needed.

Benefits of Bitcoin Mining for Consumers

• By buying excess renewable energy, Bitcoin miners lower the cost of energy for consumers.

• Without buyers like Bitcoin miners, renewable companies would have to raise prices to cover their operating costs.

• Educating oneself on energy markets is important in understanding how they work.

Importance of Grid Balancing

• In Texas, negative pricing occurs 20% of the time, meaning people are paid to take excess energy.

• The US produces more than enough energy than it uses with wasted capacity before turning on fossil fuels.

• Transmission lines are expensive to build without guaranteed customers.

Conclusion

• Bitcoin miners provide a guaranteed customer for renewable energy companies, incentivizing them to build more sites.

• Bitcoin mining provides a huge service to the grid and consumers by balancing the grid and lowering energy costs.

Methane and Renewable Energy

In this section, the speaker discusses the benefits of using methane gas as a renewable energy source for Bitcoin mining.

Methane Gas for Bitcoin Mining

• The speaker is a big believer in renewable energy and is actively looking at using methane gas for Bitcoin mining.

• Methane gas is 80 times more damaging to the environment than carbon dioxide, but it can be captured and converted into energy to run Bitcoin mines.

• There are thousands of landfills in the US where methane gas is either flared or cannot be converted to electricity due to lack of transmission lines or pipelines. Bitcoin miners can generate electricity by burning methane and capturing it, which decreases the damage that methane does.

• By taking renewable energy credits generated from converting methane into energy, Bitcoin miners can subsidize their costs to produce a Bitcoin, potentially reducing their energy costs to near zero.

Energy Costs in Bitcoin Mining

In this section, the speaker discusses how energy costs are the biggest component of mining Bitcoins.

Energy Costs in Mining Bitcoins

• Energy costs are by far the biggest input cost in mining Bitcoins.

• Depreciation of miners and non-cash charges like that play a role as well, but cash cost to produce a Bitcoin is mostly made up of energy costs.

Regulations on Mining Bitcoins

In this section, the speaker talks about regulations on mining Bitcoins in China and the US.

Regulations on Mining Bitcoins

• The speaker believes that the desire to prohibit Bitcoin in China had more to do with capital flight and currency control than energy consumption.

• In the US, there are concerns about Bitcoin's ability to allow people to operate outside of the traditional financial system. Some members of Congress would like to control how people manage their finances and have a central bank digital currency (CBDC).

• Having citizens holding a lot of capital in Bitcoin is viewed as a threat by some people in Washington. There is a contingency of people who believe that Bitcoin should convert to proof of stake like Ethereum and not use energy at all, but proof of work is highly decentralized which is safe.

Bitcoin and Marathon Digital Holdings

In this section, the speaker discusses the perception of Bitcoin's impact on the environment and how it has caused a divide among people who understand crypto. The speaker also talks about Marathon Digital Holdings' vision, which is primarily focused on Bitcoin and ancillary technologies.

Perception of Bitcoin

• Greenpeace funded an artist who created a sculpture to highlight the negative impact of Bitcoin on the environment.

• However, some Republicans are supportive of Bitcoin, and states like Arkansas are passing laws to protect the rights of Bitcoin miners.

• The US could lose its advantage in Bitcoin mining if it becomes more antagonistic towards it.

• China's prohibition of Bitcoin mining led to a consolidation of mining in the US, giving them an advantage.

Marathon Digital Holdings' Vision

• Marathon Digital Holdings started with mining Vanadium before moving into digital assets.

• Their vision is primarily focused on Bitcoin and ancillary technologies.

• They have built their own vertically integrated tech stack that includes their own mining pool, firmware for miners, controller board technology, and immersion technology customized with vendors.

• They plan to diversify along the technology axis by offering infrastructure solutions and technology solutions for mining.

Future Plans for Marathon Digital Holdings

In this section, the speaker talks about Marathon Digital Holdings' future plans. They do not plan to move into altcoins but will focus on side chains where they can offer infrastructure solutions. They will also offer technology solutions for mining.

Future Plans

• Marathon Digital Holdings does not plan to move into altcoins as there are no real altcoins that are big enough where coming in and Mining wouldn't crash the market.

• Ethereum has no mining; it's staking. The economic benefit of being a Staker when you can get 4.5% of your money in a bank account is not worth the risk.

• Marathon Digital Holdings plans to focus on side chains where they can offer infrastructure solutions and technology solutions for mining.

Future of Gaming

In this section, the speaker talks about the future of gaming. They believe that Ready Player One is a great preview of where gaming is headed, with total immersion and haptic technology. The speaker also mentions that there are no real altcoins big enough for Marathon Digital Holdings to move into.

Future of Gaming

• Ready Player One is a great preview of where gaming is headed, with total immersion and haptic technology.

• There are no real altcoins big enough for Marathon Digital Holdings to move into.

The Future of Gaming and Augmented Reality

In this section, Fred Wilson discusses the future of gaming and augmented reality. He talks about how Apple's new glasses will create huge opportunities for entertainment and games, and how full immersion in gaming will be possible through brain-machine interfaces that can directly stimulate the nervous system.

Augmented Reality

• Pokemon Go is an example of augmented reality where the real world is mixed with a game.

• Apple's new glasses will make it easy to blend virtual worlds with the real world, creating huge opportunities for entertainment and games.

Full Immersion

• Full immersion in gaming will be possible through brain-machine interfaces that can directly stimulate the nervous system.

• Elon Musk is working on an embedded brain product that can achieve this level of full immersion.

• This ultimate kind of gaming experience will be immersive, like going into a pod or something similar to being in the movie Avatar.

Metaverse

• The commercial world and social world will blend with games to create a metaverse.