In this episode, CEO of bitcoin mining company Iris Energy Dan Roberts joins us to discuss whether bitcoin can (and should) help fix renewable energy. Dan explains the problems that intermittent wind and solar energy create for power grids, and how his company works to solve them through bitcoin mining. He and Saifedean discuss whether grids would be better off only using reliable energy sources, how bitcoin’s difficulty adjustment forces miners to become more efficient, and why Iris Energy has chosen to mine bitcoin only. Dan also shares his views on why bitcoin’s game theoretic nature means it is set up to survive and why 51% attacks don’t represent a credible threat to the network’s security.
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Saifedean Ammous: [00:02:51] Hello and welcome to another episode of The Bitcoin Standard Podcast seminar. In today’s seminar our guest is Daniel Roberts! Daniel is the co-CEO of Iris Energy – one of the world’s leading institutional-grade data center companies mining Bitcoin. Dan has a depth of experience working infrastructure and energy, having previously been the second largest shareholder of Palisade Investment Partners in infrastructure fund management business, which managed over $6 billion in direct assets across 23 businesses.
We’re interested in talking to Daniel today about the mining industry and his experiences coming in to the mining industry in Bitcoin, and of course the recent turmoil in the mining industry.
So I’m sure there’ll be plenty to discuss! Dan thanks so much for joining us!
Daniel Roberts: Absolute pleasure. Thanks for having me!
Saifedean Ammous: Cheers! Tell us a little bit what [00:03:51] got you into the Bitcoin rabbit hole in the first place?
Daniel Roberts: Yeah, it wasn’t the smoothest start. I try to convince myself that others go through the same process, but that just makes me feel a bit better.
It was about 2013, Bitcoin was charging up on one of its bull runs, running up towards a thousand dollars a coin and we thought – wow, this is interesting. Bought a few, and then a little while later it crashed down to $500 and we thought – this is nonsense, silly magic internet money, sold it all.
You won’t like hearing this, but then went into Ethereum, the presale in 2014, did really well out of that. Played around with a few, I’ll be polite, alt coins. And then around 2017, the penny really dropped on Bitcoin as a monetary asset.
Works from yourself, Nick Szabo, Andreas Antonopoulos – some of his [00:04:51] presentations were fantastic. I watched an old one again last night and yeah, there’s obviously a lot more literature out there today communicating what Bitcoin is, but it was around 2017 that the penny dropped for myself and my brother Will.
Saifedean Ammous: Okay. And how did that lead then to Iris?
Daniel Roberts: So I think Iris Energy is the culmination of probably three things that led to its creation.
So the first was a discovery around this new one and zero technology, the ultimate store of value, the ultimate monetary asset. How do you get more involved in an asset like this? The second was my brother’s background. He was at one of the investment banks called Macquarie, Australia’s largest investment bank in their trading division, doing traditional mining, lending, financing derivatives – gold, [00:05:51] copper iron, et cetera.
And for the last year he was, their team actually set up a digital asset team within the bank. Started to get involved with the CME futures back end of 2017, invested balance sheet in Bitcoin mining, and that intersection of his traditional commodities background and venturing into digital asset space was the second aspect.
And then the third one was, my background is heavily renewables based and infrastructure development. So I started life at PWC, then moved to Macquarie also and worked across Sydney in London. Developing infrastructure projects, wind, solar renewable energy. And then when I moved back to Sydney and joined Palisade investment Partners – the infrastructure fund that you mentioned earlier we also then built out a portfolio of wind and solar farms.
And through [00:06:51] that process, we learned firsthand the impact that pushing all these intermittent renewables was having on these energy networks. And the opportunity with Bitcoin mining as we’ll no doubt get onto is to support that. So the three things were 1 – Bitcoin as this ultimate one and zero exponential asset, 2 – Will’s experience in traditional commodities and mining, understanding the cycles, cost of production, and 3 – my experience in traditional infrastructure, renewables energy markets.
Saifedean Ammous: Fascinating. How did you then start mining? What was the strategy from utilizing these intermittent energy sources for mining? This is the thing that really peaks my curiosity. I hear a lot about it but I, if you’ve heard some of my earlier podcasts here, I’m quite skeptical of the practicalities.
So this is why I wanted to chat to you about this, sell me on it!
Daniel Roberts: Absolutely! Very happy [00:07:51] to explain what we do and people form their own view. When we embarked on this business, what we learned was Bitcoin mining as an infrastructure-like play is heavily asymmetric. The cash flow yield is high, and it’s asymmetric. Because as the price of Bitcoin goes down, high cost miners switch off, low cost institutional miners like we’ve become get their share of the Bitcoin lowering our cost of production.
But on the flip side as Bitcoin rallies, we’ve hit this inflection point where you just can’t build enough real world capacity anymore to keep pace with this digital exponential asset. Back when Bitcoin was small, and it went on a parabolic run, the real world could build out more chips, data centers, power capacity to bring online more mining supply, to keep pace
Saifedean Ammous: Gaming rigs.
Daniel Roberts: Exactly. But like when your starting basis, a couple of years ago is 8 gigawatts of power, 8,000 [00:08:51] megawats and the Bitcoin price is $8,000-$10,000, and it rallies to 50 grand, all of a sudden to try and normalize minding profits, in that environment, you need 30 gigawatts of power. The entire global data center industry is 23.
You need $70 billion in capital in a sector that, you know, has had its challenges raising capital. Then finally, if you get the power, you get the capital, you’re still waiting 5, 6, 7 years of full manufacturing production of these specialized chips in the middle of a semiconductor shortage. So this asymmetry is enormous.
And I guess with our backgrounds, Will on the lending structured finance side into miners, where he saw a lot go wrong, yes things went right too, my background in infrastructure where our approach to investment was very much capital protection, downside, credit focused investment. For us when you’ve got such a profitable asymmetric underlying [00:09:51] project, the guiding philosophy since day one is – don’t stuff it up, don’t kick your own goal. How do you remove every attack vector possible in your business?
We don’t do shipping containers. We don’t do hosting contracts. We don’t go behind the meter. We don’t rely on leases short term and run around getting power, we own and operate our own vertically integrated data side of business.
Now that’s a long winded way of coming back to answering your question directly around the power. So how does that philosophy then apply to power? You want long term sustainable access to power. And I don’t mean sustainable in a green sense, I just mean you want long term access to power.
Saifedean Ammous: 24/7 cheap
Daniel Roberts: Not necessary, it doesn’t necessarily need to be 24/7 cheap, that’s nirvana. But you can get pretty close to that and still tick some really big boxes. So what we said is – we want to target a hundred percent renewables, because that’s what the world [00:10:51] wants, and that’s where the problem is, to be solved, which I can come to.
And we also don’t want to be accused of pushing up power prices for moms and dads, taking other power away from industry. And I can mount all the arguments, as no doubt you do, and have around why it’s unfair or it’s wrong that Bitcoin attracts so much criticism around its energy consumption.
As I said to someone yesterday, if you are so negative on Bitcoin, then you have nothing to worry about. Because if Bitcoin goes to zero, the amount of energy it will consume is zero. So if you’re right, no stress. If you’re wrong, then it means other people value it, and who are you to have an opinion?
So when it comes to intermittent renewables, what you’ve seen in a lot of these Western markets is the perfect storm over the last decade. Where you’ve seen decline of manufacturing industrial loads. You’ve seen buildout of residential rooftop solar PV, largely from government incentives, reducing net retail demand.
And then finally, you’ve had the [00:11:51] supply side decarbonization policies implemented by governments largely, pushing intermittent wind and solar onto these networks in the absence of a price signal. Like even 10 years ago, when we are doing this stuff in Europe, we had no idea of the unintended consequences and the havoc that this would wreak on the electricity networks, but it has. The problem that we can solve is to go into these markets with a truly flexible load and mop up that excess power.
And this isn’t the narrative around co-locating behind a wind farm or behind a solar farm and operating 30 or 40% of the day. It’s about recognizing that electricity markets are a melting pot. Different demand sources, different generation loads, they all come together in a market equilibrium in these deregulated markets, they set a price. The problem that needs solving is really often only at the edge of the curve. It’s 1% of the year. For most of the year power prices are good, [00:12:51] or low I should say.
Saifedean Ammous: Not this year, but generally.
Daniel Roberts: Not this year. Inflation or there’s some broader macro
Saifedean Ammous: Well inflation and also all of the infrastructure destruction in favor of medieval technology, which we’ll get to in a bit. But yeah, go on!
Daniel Roberts: So basically if you operate when the wind blows, the sun shines and then just switch off when there’s a weather event or a network outage or some other exogenous factor, then really by switching off 1% or 2% of the year, you can avoid a large part of the average power prices in these markets, because the skew in the power price distribution is such that a large proportion of the average power price is informed by a relatively small number of time intervals.
So you chop them out, your average price falls. And in some markets you can operate for big chunks of the year with negative power pricing. Two profit lines, in one you get paid to take power, and in one you get paid to monetize that into Bitcoin
Saifedean Ammous: I see. [00:13:51] So essentially what you’re saying is that because of the particularities of the transportation cost of energy and because of the fact that for the vast majority of the year, you don’t need anywhere near the peak demand.
And then for a few days when there’s a perfect storm, literally and figuratively in the sense of a storm that’s blowing and everybody’s turning up their heaters and demand is extremely high, at that point, you get that kind of extreme high demand, or conversely it’s at a time when it’s very hot and so everybody’s got their air conditioning on and you need all this extreme demand. And during those times yes, this is when solar and wind and these kind of intermittent energy sources are not helpful, essentially what you’re saying is that this is a pretty easy loss to take for these little periods of time.
You turn off the Bitcoin miners [00:14:51] and then for all the rest of the time, you’re getting very cheap energy?
Daniel Roberts: That’s exactly right. And we saw two days ago, or maybe even yesterday in Texas where power prices have peaked, and it’s been reported that over a thousand megawats of Bitcoin miners have switched off in response to that.
Yes. It’s easier to say – look, we’re doing a social good for the community, we’re helping support the market, we’re giving that power back to the market, and that is all true, but also fundamentally if you look at incentives, a Bitcoin miner does not have an incentive to operate with high power prices. Because you can’t make money.
Saifedean Ammous: Yeah.
Daniel Roberts: If you are effectively buying power at $300 a megawatt hour, and selling that into the Bitcoin network at $150, and you can easily switch off your computer, you switch off your computer. Self interests.
Saifedean Ammous: Exactly. And this is I think the thing that is so fantastic about the difficulty adjustment, I think Bitcoin mining might just be [00:15:51] the most competitive market in the world because there’s literally a computer out there measuring the difficulty of how hard the competition is.
And every time it gets easier, it just keeps making it harder. The more computers you give it, the more electricity you feed it, it just wants more. It keeps making it harder and harder. And it’s admirable. Obviously I’m a big fan of the difficulty adjustment, as I explained in The Bitcoin Standard, because it’s the way that we get hard money.
It ensures that no matter how much money and infrastructure and electricity goes into mining Bitcoin, we will always have 21 million Bitcoin. It also ensures that no matter how much crying goes into talking about Bitcoin, no matter how hard people cry, there is no way that your emotions can change the supply of Bitcoin.
The proof of work is just not aminable to emotional manipulation. The question [00:16:51] then for me is what happens. Because of this enormous competitiveness of the difficulty adjustment constantly forcing the miners to effectively get more efficient, how does this kind of solar and wind infrastructure compete with truly cheap energy sources that are stranded? Where you have – say a water source hundreds of miles away from a city with enormous amounts of energy coming out, and all you just need to do is just have a little water turbine and connect it to the miners. And you don’t even need any kind of serious infrastructure near it because you don’t need to sell the electricity through wires. So compare in my mind, I’m just thinking like an engineer here, compare how much infrastructure you need in order to build wind farms, and those wind turbines are just absolutely enormous.
Or the solar panels are extremely [00:17:51] complex photovoltaic cells that consume a lot of resources, versus, and these things have to be shipped through a supply chain all over the world. Like it’s not just a small little shop somewhere in China that makes these solar panels.
It’s a lot of small little shops all over the world that have to ship all of these little parts all over, so there is a lot of cost that goes into it, and if you compare it to a simple energy source, like a water turbine or to a giant nuclear plant, which usually most nuclear plants have to have excess capacity.
How can both of these stay on the network? If there’s a difficulty adjustment that’s constantly making it harder, it’s just always going to be much easier for the people that are using the far cheaper forms of energy isolated wind turbine, flared gas and so on, versus wind and solar infrastructure.
What do you think?
Daniel Roberts: All right. There’s a little bit in that [00:18:51] question. So I think at the heart of what you are saying, and I completely agree with, is Bitcoin miners want the lowest cost most secure form of energy to power their operations, particularly with hardware commoditization playing out and these chip efficiencies slowing down in terms of incremental progress.
It very much is becoming and has become around access to power, longevity, sustainability. And again, not necessarily in a green sense, but longevity of, and security of operations. So through that lens, we then step back and say – this dynamic globally, call it ESG, call it government policy, whatever you wanna call it has resulted in a lot of renewable penetration.
There’s been wind farms, there’s been solar farms built out, and there hasn’t been a price signal. We can also come to British Columbia, Canada, which is a slightly different [00:19:51] unique market where we’re solving a different problem.
But fundamentally someone’s built all these renewables. There’s a lot of stranded electricity. There’s an opportunity to go and mop up that stranded power. And if we talk about least cost lowest cost power, regardless of your views on renewables, marginal cost wind and marginal cost solar is basically rock bottom of the global cost curve. You have no commodity,
Saifedean Ammous: Particularly when government subsidies have paid for the installation and everything.
Daniel Roberts: Exactly! And I look at our business, we’re fixing problems. We’re fixing problems in energy markets that,
Saifedean Ammous: Bitcoin fixes everything!
Daniel Roberts: We’re fixing the money by securing the Bitcoin network, we’re fixing energy markets as a result of all this renewables penetration and providing that flexible load demand side battery and doing it in a way that gets us that social license to operate.
We want to embed ourselves in these communities, these energy markets, because we believe in Bitcoin. We believe it’s here for a very long time, if not indefinitely. We believe in [00:20:51] the future profitability and sustainability for our shareholders in terms of shareholder value. We need to continue as a going concern.
And for us that involves getting that social license to operate and delivering as many positive externalities into these markets as we can. And by mopping up all that surplus renewables, that yes has been overbuilt in many instances, but then giving the power back when the market needs that power. And by definition, it’s less profitable or unprofitable for us to mine, what a great opportunity to get a win-win for both ourselves and the markets in which we operate!
Saifedean Ammous: I see. I see the case now, in that governments have already spent an enormous amount of money and incentives to get people to build all of this infrastructure, and in many cases it’s sitting there essentially collecting dust because the problem, and this is where I’m interested in hearing more about your experience, you said, that led you into this, in thatž [00:21:51] from the way that I see it is that renewables are like soldiers who only show up to battles that you have already won, and they just show up to bask in the glory of having won the battle. But if you actually need them in a tough war, they’re all missing in action.
Usually these headlines come out always every May. Every May there’s a headline about Germany or one of these renewable countries has on this day achieved 80% or 70% or 90% of their energy consumption coming from renewables.
And it’s always sometime in May, it’s always a Sunday in May. Imagine Sunday, balmy Sunday in May in Germany, everybody’s just gone through a long cruel German winter and finally the weather is nice, everybody’s out. It’s a Sunday so all the factories are off, all the businesses are off and you [00:22:51] have very little amount of energy and then they turn down significantly the capacity from the fossil fuel plants or the nuclear plants or the hydroelectric plants, the reliable sources, and they run on wind. But of course, that’s no use in August when it’s boiling hot and there’s no breeze and solar can’t catch up.
And then it’s also no use in the middle of winter when it’s freezing cold, and solar obviously is zero and wind sometimes it blows and sometimes it doesn’t, who knows. It can be cold without the wind blowing, and with all of that you end up with, I think the fundamental problem as I see it is that you have to build reliable capacity, and when I say reliable, i mean fossil fuels or nuclear or hydroelectric that can reliably be there at any point in time to provide your maximum [00:23:51] demand. Imagine the worst case scenario – everybody’s got their heater on and their TV on, and everything is at its maximum. You need to have that reliable capacity built out from a reliable source.
Because at any point in time, solar and wind can both be zero, it could be nighttime and it could be not windy, and so both could be zero. So therefore you’re gonna need all that maximum capacity to come from somewhere that’s not dependent on the weather, that essentially is from the era after humans triumphed against the elements. Something from the time when we found those energy sources that don’t care about the position of the Sun and the moon. You just click a switch and the thing starts working.
You have to have that capacity. So if you’re building a nuclear or gas or a coal plant that’s going to provide that reliable maximum capacity, then effectively the renewable green stuff, the [00:24:51] solar and the wind is superfluous.
Sure, they’ll reduce your consumption of fuel to some extent, because when the wind is blowing and when the sun is shining, you’ll consume a little bit less fuel. But practically speaking from listening to the experience of actual engineers in Britain and Germany. From what I understand the cost of dialing up and down the fossil fuel generators or the nuclear generators or all of these other reliable forms of generation.
The cost of dialing it up and down in order to accommodate – oh, the wind is blowing, let’s turn down the diesel. Or, the sun is shining. Let’s turn down the gas, the cost of managing, increasing the load based on that rather than the predictable general schedule which they usually operate, where they know there’s a peak at this time, and there’s an increase at that time, the cost of trying to manage it based on the weather ends up being more expensive than the [00:25:51] reduction in the fuel. And it increases maintenance costs significantly. Increases fuel consumption and reduces life expectancy of the plants, because you’re essentially misusing them.
It’s just like a bad driver who’s abusing their car. Because these things weren’t made to run according to the wind. They’re postindustrial technology, not pre-industrial technology they’re made to work in any condition. Admirably these power plants have performed in the Saudi Desert and in the Canadian Arctic they’ve given people 24/7 electricity in all the most extreme conditions.
But I don’t think they can handle, I don’t think it looks like it, looking at what’s happening in places like Texas and California and Britain and Germany, it doesn’t look like they can handle having these renewables being stuck on the grid because of all the problems that are happening.
So I’m curious about what you think of that. What are [00:26:51] the problems that you’ve seen?
Daniel Roberts: So some really good points in there and a lot of common ground. I think first and foremost we need to caveat everything with – electricity markets are complex, and there’s a lot of factors that you can’t account for.
You can be at risk of making generalizations that get upset very quickly by introducing another variable from left field. So all through that lens, what I would say is – I agree. Fossil fuel generators I think have proven themselves not to be very good, flexible sources of load.
And when you introduce all these intermittent renewables and create that stress, either commercially or technically, on these gas and coal-fired power stations to try and throttle their production, it’s got issues. I remember five years ago speaking to one of the executives in one of Australia’s power companies who was speaking about how they were trying to get their coal-fired power station to operate a [00:27:51] little bit more flexibly to accommodate all those issues that you’ve outlined.
And apparently the coal-fired power station would physically start shaking, and they had to dial it down. Like it’s bad news, right? So no disagreements there. I think there is another way to solve this problem, and it all comes back to Bitcoin as a lot of things do – it is Bitcoin mining because you can solve the system flexibility on the demand side, rather than the generation side.
So flip it around, say – right, now we’ve got this hodgepodge generation fleet where sometimes we’ve got, I’ll make up numbers, 10 gigawatts of generation, sometimes we’ve got 25 gigawatts of generation because who knows when these wind farms and solar farms are going to generate, I hear you. And then you might have 8 or 9 gigawatts of base demand or 13 gigawatts of base demand.
The point I’m making is if you then augment that dynamic with Bitcoin mining to act as that buffer to effectively [00:28:51] simulate the flexibility on the generation side by throtling up and down on the demand side, you get to the same place. And not only do you get to the same place, you create a price signal in these markets to continue building out more electricity generation, continuing to expand the size of these power markets and by definition, make more power available to any other person or industry that can find a use case for electricity.
And as history shows, electricity consumption and human progress are very closely aligned. And Bitcoin is a way that can incentivize additional generation to come onto the networks and create stability and lower prices and greater security of supply for all the consumers in that market.
Saifedean Ammous: I see your point in that bringing in Bitcoin mining can help stabilize the load, but I’m curious here in – if you are adding this, let’s [00:29:51] take the example of you’ve got a hydrocarbon plant, whatever it is, coal gas or diesel, and then you’ve got a solar or wind plant, and they’re both working together, and you’re trying to get them to stop destroying each other so that people can have 24 hour electricity like we managed to have in the 1960s reliably.
If you bring in Bitcoin mining into that, like how many hours can you get a day on average, percentage wise? And is the idea from what you were saying, I think even if it might not be enough theoretically from the renewables, that because of the shifting loads, if you’re able to just monetize some of the extra energy all the time at the time when it is cheapest and available, because you have all of this extra excess that you don’t need, either coming from the coal [00:30:51] plant or the wind farm or the solar farm because of demand load and so on.
Because of that, you’re saying that it will in the long run lead to more power generation and cheaper electricity, right?
Daniel Roberts: Exactly. And look, electrons are homogenous. Once they get evacuated into the network from a generation, they’re all the same and the way a lot of these markets account for renewable energy versus non-renewable is to effectively bifurcate the asset that the renewable generator is producing at the point it is injected into the network, into the electron and then a renewable certificate of a description that varies across.
So if you wanted to use a hundred percent renewables in these markets, you need to procure the certificates. It’s validation that your underlying power source is a hundred percent renewables.
So to address your point, yes, when a Bitcoin miner [00:31:51] comes into these markets and mops up that excess low cost power, which by definition is cheap, by definition other people don’t want this surplus, then yes, it’s underwriting a base power price to restore profitability across the board to these generators and stability in the market.
Saifedean Ammous: Yeah, I guess the worry that I have here is obviously it’s good that Bitcoin is encouraging more investment in electricity, and I think the really powerful thing that Bitcoin is going to do in the long run is – by providing such a powerful incentive for anybody who has cheap electricity, to monetize it it’s just going to make everybody who has cheap electricity want to produce more of it and bring it to market. And it’s gonna allow the build-out of energy infrastructure, I think over time. And I can see the point that it helps reduce the waste from engaging in all these white elephant, [00:32:51] in many cases, projects where you have add a lot of extra load at many times, because of all this extra build-out in renewables.
But I present you the counterpoint that perhaps the better, I’m sure Bitcoin fixes this and it’s great that Bitcoin fixes this, but maybe the better way to fix this is to just not add renewables to the grid and run the grid reliably like they did for many decades where it just worked, where you had one big, giant plant where you added coal or gas or fossil fuels or nuclear fuels, and a bunch of engineers clicked a bunch of buttons, and then the entire town had 24/7 electricity all year round.
And, maybe there was a storm and some station would fall down once a year. The uptime generally, grid engineers, they describe their uptime in terms of nines, how many nines in terms of, ideally they wanna have four nines, which is 99.99% uptime.
And historically we’ve seen [00:33:51] industrialized societies add nines, they’ve got it to 90% and then 99% of the 99.9% and then 99.99%. And now we’re seeing the nines being lost and it’s absolutely astounding. It’s been normalized and people think of it in terms of – oh, there’s a climate crisis and this and that, but really it’s technological regression.
We had a more reliable grid and now the reliability of the grid is decreasing. And I think the scary thing here is that by providing governments a way to monetize making the grid unreliable, we just going to get more and more, it prolongs these projects by making them more and more sustainable so we end up with more renewables.
And here, of course, the difference between you and me is I don’t see the directive for reducing carbon emissions. I don’t think the idea that carbon emissions are bad, has any kind of merit behind it. They’re not destroying the Earth. Carbon [00:34:51] is a natural part of the Earth’s atmosphere that’s been there before us and will be there after us and we can’t destroy it or control it.
And I don’t think it’s destroying human civilization in any way, but I think if we try and stop using all of these reliable hydrocarbon emitting fuels, then yeah, we would destroy human civilization. At least take it back, at the very least, 500 – 600 years. Do you see this giving the renewable energy a new lease of life? And then how’s this worked out given the recent carnage in the Bitcoin mining industry?
Daniel Roberts: Yeah, so I think first and foremost, like I’m not agreeing or disagreeing with your perspective on hydrocarbons. We don’t even need to have that debate.
As a business, all I’m doing is identifying that there’s a problem and we can solve that. For whatever forces outside of my control, your control, we have got way too many renewables that have been overbuilt and the most value accretive thing for our business to do is [00:35:51] to go and monetize that excess renewable energy.
Now whether or not those renewables should have been built in the first place, whether or not they should have been built to the extent they have, like clearly if governments had their time again, would they have embarked on a decarbonization trajectory that mimicked and was identical to the one that we’ve gone down?
Probably not. Look at all the consequences. In nines example, like absolutely there are issues and we are trying to solve it.
Saifedean Ammous: They’re still going down the same path, I think if you listen to the people who have been identifying these problems, they’ve been talking about this stuff for many decades and generally they’ve been dismissed as cranks.
Obviously we’re not gonna get blackouts in places like Texas and California, it’s to say a few decades ago. But I think the problems they’ve identified as decades long, and they’re exacerbated. So we’re decommissioning more and more nuclear and gas and coal and diesel plants [00:36:51] and building more swings and slides effectively, which is
Daniel Roberts: I’m not disagreeing.
We are living in a world that’s becoming increasingly extreme and things are being normalized. And we are taking things too far. Like I think on any objective metric, you look back month by month, quarter by quarter, over the last few years, and you go – gee-whiz where are we going? This is a slippery slope in so many respects.
I completely agree. Like it probably has gone too far in many instances, but from a business perspective, all we want to do is to get long term sustainable access to power solve problems. The market wants renewable energy, the market wants sustainability, capital markets demand it. It is in our interest to deliver that.
And if you look at markets like British Columbia, it’s actually a completely different problem. It’s 98% renewable, majority of which is hydroelectricity. And they’ve got too much of [00:37:51] it which is funny because it actually provides or creates this counterintuitive problem where power prices need to go up because of it. And you might scratch your head, but it’s the way regulated markets work.
So they’re still commissioning large scale hydro in the north of the province, Site C that was signed off many years ago, has taken too long, probably run over budget, the usual. But in the meantime, the pulp and paper industry has closed down.
It’s no longer profitable, huge amount of load has been withdrawn for the market. The issue with an oversupply that’s created a result in a regulated market is someone still needs to pay the utility and amount of money to allow that utility to earn the regulated return on all the investment it’s made in generation and infrastructure.
It doesn’t matter how many people are using it, someone has to pay them for it. So all of a sudden you get this death spiral concept where as the number of users in a market goes [00:38:51] down, prices have to go up to deliver the same revenue line to the utility. Higher power prices knocked out more users of power prices go up, so on and so on.
So what we’ve done as a business is go into that market. Co-locate often adjacent to old pulp and paper mills that have closed down, leverage their electrical infrastructure, rehire a number of the locals and retrain them in our industry. And most importantly, deliver BC Hydro a market price for their power and an alternative material revenue line to avoid them needing to raise power prices for the rest of the province.
And we look at it through this lens and go – what a cracking problem to solve! We get cheap, renewable energy. We’re rehiring people, we’ve got community grants programs where we work with first nations schools, the red cross, sporting clubs, we give back to the communities and we’re actually objectively doing a lot of good in that market by virtue of our operations.
Saifedean Ammous: Yeah, and I agree. I think [00:39:51] in the case of hydroelectric power, I think it definitely makes sense. This is clearly the one where, you know it’s like oysters in food, everybody agrees that oysters are good. Vegans, carnivores, everybody will eat oysters. And I think hydroelectric power is like that.
It’s an exaggeration, but you can call it the renewable power, but it’s also reliable power usually. And it doesn’t need fuel, so wherever you find that it works, it’s usually like 3 cents per kilowatt hour, it’s much cheaper than other forms of power. But of course the problem is it doesn’t travel very quickly. It also is low carbon as considered to be low carbon because it doesn’t emit a lot of CO2.
So I imagine this is going to be something that will play a major role, but of course, it’s not it’s not a utopia because usually in many of those places, these power plants can create [00:40:51] problems, and creating dams and lakes can create environmental problems.
There’s no free lunch with any of those things. But how much would you say in the future, do you expect your business would be dominated by hydro or wind or solar, or what do you see in terms of the trends within these three? Or do you only do those three, or do you do other kinds of sources of energy?
Daniel Roberts: Look at the moment, we’ve been a hundred percent renewables since inception. The institutional market wants you to be renewable. They want to see that we’re progressing and getting that social license to operate. It makes sense for our business and most importantly, it, we believe it gives us a competitive edge because excess surplus renewable energy is the most cost competitive energy there is.
And if other people wanna build it, if other people wanna leverage government subsidies or accept below market returns for building out excess renewable capacity, [00:41:51] we can use it. Why not use it? Support the power market, mop up that surplus power and importantly give the power that is expensive by definition, people want back to the market in times they want it.
And I think it’s really worth articulating this because for many years utilities around the world, Australia’s the same, have been searching for flexibility of load. You read about things like pool pump schemes, where people will install a smart meter into their swimming pool pump out the back and try to get some flexible load of that. Incentivizing industrial manufacturing to ramp up and down their widget production. Aluminium smelting, big power user, very hard to operate that flexibly. Bitcoin mining is micro manufacturing.
Because if you step back,
Saifedean Ammous: That’s a great way of putting it.
Daniel Roberts: It’s done on such a micro level because not only have you got individual computers, so you’ve got thousands, tens of thousands of computers in a facility, [00:42:51] you can then break those each computer into additional flexibility because they’re running millions of algorithms. And all you do is adjust the frequency of the chips and you run less algorithms. And it’s so flexible, so micro, where you could optimize your power consumption live time and very accurately. And it just provides this incredibly valuable service into these utilities.
Saifedean Ammous: And so what are your thoughts on, you mine Bitcoin only. What are your thoughts on Bitcoin mining, why is Bitcoin mining different in your mind than other digital currencies?
Alt coins – politely.
Daniel Roberts: Look, we’ve all, maybe not all of us, but we’ve had experience with it. I think Bitcoin is a proven product. It’s been a finished product for a decade. It’s clearly got product market fit, even in a simple message as gold 2.0, it’s still 5% the market cap of gold.
It’s a [00:43:51] bit like going back a decade when YouTube was sub 10%, the market cap of blockbuster, clearly product market fit clearly more scalable. It’s just time and adoption. So for us, Bitcoin is what it’s this paradox right, on one hand Bitcoin is seen as a really risky asset, but it’s also the least risky asset that exists on this planet if you understand it.
And over time, I’m sure those characteristics become more and more accepted and valued in the market. And what’s happening outside of Bitcoin in terms of fair currencies and money and interest rates and all that sort of stuff is only contributing to that dynamic. I think when it comes to other digital currencies I think they’re still looking for product market fit.
Clearly there’s a lot of bad. And that’s come to the fore in the last few weeks, but personally, I only hold Bitcoin. I struggle to see the other assets as a [00:44:51] savings vehicle or an investment vehicle. Often I don’t understand the problem that they’re trying to solve. I think the experimentation is good.
I think ultimately as a world, we are moving in a direction where the skepticism of governments, technology companies encroachment on privacy, censorship, et cetera. And if this is a technology that can. Decentralize and disintermediate those central authorities and engage, allow us to engage in a peer to peer fashion, that is good.
But in terms of the investment case for other digital assets outside of Bitcoin, personally I struggle. And if I struggle, why would I get involved in that at a business level?
Saifedean Ammous: Yeah, I find there’s a fascinating difference in that, these other digital currencies are predominantly a phenomena that exists on exchanges.
Bitcoin exists on exchanges, but it has an enormous amount of industrial infrastructure that is distributed all over the world. [00:45:51] Thousands of locations all over the world hosting giant amounts of miners, hashing away every second to secure our coins. And you can see why, because ultimately with all the other digital currencies you don’t need the proof of work there, because you have alternative consensus mechanisms that essentially recreate fiat institutions.
It’s governance through political authority and not through consensus, which is the case of Bitcoin. And the only way that you can arrive consensus is through honest work effectively, is through just expending work.
Daniel Roberts: I think that’s right, Saifedean. Sorry to jump in, but I think you’re right!
They’re fundamentally different asset classes. Like Bitcoin proof of work, the process of gigawatts of power layering down this blockchain in digitized concrete every 10 minutes, the imutability, you can’t change the 21 million, you can’t censor transactions, you can’t take [00:46:51] anyone else’s Bitcoin. Like that is the innovation that underwrote this entire space.
But human nature is – how do I do more? How do I launch the next Bitcoin and launch my own coin and try and solve another problem? And that’s great. That’s human nature, ingenuity, et cetera. But I think that the rest of it is still looking for that product market fit. And Bitcoin is an asset you know is going to be here permanently. I’m not sure the same can be said for any other digital asset.
Even Ethereum, my understanding is if Amazon AWS woke up tomorrow and wanted to shut down the network, they probably could. So that’s not necessarily a bad thing, it’s just a very different proposition. And as an investor, if you wanna hold assets in that space, then you should be aware of the risks and also be very aware that Bitcoin is just a fundamentally different asset to everything else in the space.
Saifedean Ammous: Yeah, a great way of putting this is as Pierre Rochard says it, and I think also Michael Saylor has a version of this is – look, these things are claiming to be digital [00:47:51] assets that are going to be used in the applications. So if you need to use those applications, you’ll buy those things, spend them in that application, like you go to Chuck E Cheese and you buy the Chuck E Cheese tokens, and your kid goes and jumps around in their thing, and goes and uses the ride.
But there is no investible case there. You don’t take Chuck E Cheese tokens and keep them home and hold them on as a store of value and travel across the world carrying them, and recommend them to people to hold onto over time.
You don’t pass them onto your children. There’s no investible case there. That’s the fundamental difference. And it’s that search for novelty, ironically, it’s good initially in getting you the attention and getting you this kind of idea that – oh, the next Bitcoin, but in the long run it ends up really undermining the case for this being something that is stable, predictable, that’s going to be there.
Something that you could [00:48:51] feel comfortable telling your uncle – yeah, I think you could count on this thing and not have the rules changed tomorrow, not get rug pulled, not get all of these many myriad ways of failure that we keep seeing in this space.
Daniel Roberts: Exactly. Cause if you don’t have a velocity sink, then it’s very hard to track value and monetary energy in an asset. And a Chuck E Cheese token, if you are going in and out, what value is being left there in a residual to travel across time and space, to pull from some Austrian influence. Because monetary assets, they accrue through the network effect and gravitate around certain objective characteristics, scarcity, durability, transferability, portability, et cetera.
And if you, as a holder of a token, don’t have confidence in those objective metrics being met relative to another asset, your incentive is going to be to park your [00:49:51] asset and your wealth in the asset that best displays those characteristics. Act as a velocity sync, that velocity sync then attracts more value and it creates that network effect.
And this is why I think it’s very hard to beat Bitcoin because it’s a one and zero, it’s cracked at first, it’s got the network effect, it’s got the security. To launch another one and try to compete with it, it’s like – what do you achieve? Like ultimately Bitcoin’s programmable. You come up with something that’s like an order of magnitude better than another consensus pro protocol or another code update.
You cannot replicate the history, the brand name and the UTXO side of Bitcoin.
Saifedean Ammous: And the neutrality.
Daniel Roberts: It’s programmable money.
Saifedean Ammous: Yeah, exactly. It’s programmable. you can add anything to Bitcoin, but you can’t add neutrality to anything. You can’t just go and say – all right, we’re gonna create this coin and we’re gonna make this Frankenstein, and then one day we’re gonna have it get hit by lightning at night, and then it’s just go to go and be out there free. [00:50:51] You can’t do that. Frankenstein is fiction. If you make something, you will control it. And we’ve seen, the more successful a non Bitcoin digital asset is, the more centralized it is.
The more it has clearly visible and public figures that speak in its name and essentially do marketing campaigns for it. So it completely undermines the proposition of turning it into something that is investible. And I think this is why I, what I find interesting is I guess the fact that we see so much less investment in altcoin mining, in fact we see very little large scale operations in altcoin mining, I think shows that the nature of money there is a lot more short term.
It’s a lot more fleeting, people coming in for a month or two, or six, or a year or two. [00:51:51] So therefore there’s not a lot of conviction there in getting into the industry.
Getting into mining and making long term capital investments with actual, real world infrastructure that you can drop on your toe. Whereas, with trading with exchanges, there’s always a bunch of new, quick money with people playing around with their extra savings. Looking into getting into the next thing.
Daniel Roberts: Yeah, it’s right. And I think one of the other misunderstood things about altcoin mining versus Bitcoin mining is the fact that Bitcoin mining uses specialized equipment is a feature, not a bug. The fact that they are bricks if they’re not used for Bitcoin mining is a feature, not a bug. Because it only enhances the security of Bitcoin as a network. Because you are not exposed to an exogenous attack from all these other computers that can be repurposed towards causing problems [00:52:51] on the Bitcoin network.
And I won’t go down the rabbit hole of explaining why 51% attacks are such a meme and nonsense in a sense, because if they happen, they don’t mean much, there’s very limited capacity, the economics, anyway, I’m risking going down there.
And I think when you go down and look at the altcoins, how does the security work if let’s say that there’s a million computers in the world, you are using 10 of them to mine an altcoin, what’s the security of that network mean if a small fraction of the rest of the computers in the world can redirect and basically launch a tax on your altcoin?
Do you really wanna park your wealth in a token that is exposed to that? Doesn’t make sense to me.
Saifedean Ammous: Yeah. And ultimately, as we’ve seen, I think the really most important moment in the history of altcoins was the Ethereum DAO hack, and I think the real hack there was not the hack itself.
The real hack was that it [00:53:51] forced the people behind this essentially biggest supposed competitor to Bitcoin to take the mask off and say – sorry, the puppets fell off the puppet strings, we are gonna need to go and put back up the puppet show of decentralization, don’t mind the puppeteers, we’re just gonna reverse this and we’re gonna cancel it, then we’re gonna go back to being decentralized and imutable, don’t mind us. And I think that’s really what it is, ultimately it’s proof of individuals, it’s proof of individuals and proof of politics as well.
And I think that’s really the security risk, because in the long run that’s going to, one way or the other whatever legally happens, that’s either going to become a part of the securities industry, or it’s going to be clamped down upon. But it’s not going to continue as this perpetual Ponzi forever.
At least I hope so.
Daniel Roberts: Yeah. Look I think [00:54:51] that to the extent people are trying to compare Ethereum to Bitcoin, that’s not an unfair position, but I think once you get to the point where you accept Bitcoin is just fundamentally different to every other digital asset in so many respects, and then you look at the rest of the altcoins and the digital asset space through a fresh lens, don’t be anchored to what Bitcoin is, it’s separate, it’s off to the side, what can these guys solve? Undoubtedly, there’s going to be some good stuff that comes outta that space, right? Like it’s technology, it’s innovation. Yes, there is a lot of crap, there’s a lot of bad stuff, there’s rug pulling of retail, these centralized lending exchanges, it has been horrendous.
And I’m certainly not advocating for that. But I think if you can look at the technology and say, is there any harm? And yes, maybe there has been too much harm, but as long as there’s not harm and people are aware of the risks that they’re taking, then innovation is essentially good, and we shouldn’t necessarily discourage it as long as those negative externalities aren’t impacting [00:55:51] people.
Saifedean Ammous: Yeah. But also calling a scam a scam is also in its own way an innovation. Explaining why a scam is a scam is also in its own sense a free market activity. In fiat markets because everything is centralized, people think of regulation from the perspective of something that needs to be done by a central authority, and therefore their idea of what is good to invest in is wrapped in a way around official legitimation.
If the government says this thing is investible, then we invests in it and we put our money in it. And obviously our money is gonna come back. And then if our money doesn’t come back, then, we get angry and go on the street and demand to lynch the prime minister or whatever.
There is this kind of idea that we are owed and there is authority. Essentially, it’s the scam of government. [00:56:51] As an anarchist I see it as one big giant scam where people tell you we’re gonna solve your problem, but in reality they just take advantage of you. In fiat world regulation is centralized and it’s a monopoly and it’s a government agency that gives people the idea of this is right or that is wrong.
In a free market, there won’t be one agency. I think there will be a free market in regulation and a free market in reputation. People are free to introduce whatever they want, but also people are free to say whatever they want about others, and they’re free to associate with others, and they’re free to not associate with people who associate with Ponzi schemes or things that are fraudulent.
Therefore making it so that there is a high cost to engaging in this. So I think there would be private equivalence to the SEC and private equivalence to mechanisms of regulating financial markets, which depend on individual reputation and depend [00:57:51] on people needing to prove to others that they want to get their money.
If you exist in this framework where a license from the SEC doesn’t just allow you to take other people’s money because the government says you can, it’s very hard to convince people to give you their money so that you can invest it for them. So the only way to do it is to build the meticulous reputation and to get a kind of a rating or an endorsement from the something equivalent of a rating agency which in that case would be private market. So in that kind of world, I think we’d have a lot more emphasis on reputation and on success rather than just regulation because with the regulation you can just lobby.
And so we see this right now that Ethereum is pretty much getting away, or supposedly they’re trying to get away with the idea that they’re just a commodity like Bitcoin, that they’re just another market commodity. When clearly it is a security and clearly there’s a small group of people that control it. But they might get away with it in the [00:58:51] case of government regulation, because the SEC can be bought. There are people that you can lobby, there are politicians you can lobby.
But they would not be able to get away with it in a free market I think. In a free market all self-respecting financial institutions would not want to touch anything like this because they wouldn’t wanna subject themselves to the reputational consequences.
And regulational consequences of, we told people this was fine.
Daniel Roberts: Yeah. Look, humans are pretty good at self-regulating over time. I think all of which you’ve just said just makes the case for why we are very comfortable with Bitcoin, love mining Bitcoin and steer clear of the rest of it, just the ambiguity, the grayness, it’s just not who we are, not what we want to be involved in.
We’re just a humble Bitcoin miner. And yep, there’ll be innovation, there’ll be experimentation, I do look on a lot of it as negative as recent events that have [00:59:51] shown. But for us, it’s just Bitcoin. Every ten minutes there’s gonna be another block, there’s gonna be 21 million and you take a lot of solace and comfort in that.
Saifedean Ammous: Indeed.
Peter has a question for you.
Peter Young: Hi Dan, thanks for that, that was really interesting! I just wonder whether you could make the counter argument against using Bitcoin for balancing renewables because there’s a lot of companies out there that are using lots of renewables and have the potential to utilize this technology in order to increase capacity, but they’re not doing it.
So do you think they’re not doing it because they just don’t understand it, or do you think there are lots of good reasons why a renewables company wouldn’t actually want to make use of Bitcoin mining to try and balance their demand?
Daniel Roberts: So is the question around what other than Bitcoin mining could use the excess renewable energy or why [01:00:51] don’t renewable energy generators directly mine Bitcoin?
Peter Young: It’s essentially, if you were a energy company, why wouldn’t you use Bitcoin? Is there a counter argument to using it? Is there something they should be aware of on the negative side?
Daniel Roberts: Oh, I think there’s a difference between, energy companies don’t get involved in aluminium smelting. They don’t get involved in data centers typically. So for speculation around – are energy companies gonna start mining Bitcoin on their own balance sheet? My experience, and four years of conversations suggests beyond maybe a couple of isolated examples you probably won’t see that. Because it’s just cross pollinating two completely different business models.
In terms of general utility attitudes towards Bitcoin. Again, for that same time period, we’ve been speaking to utilities globally and increasingly so they’re becoming [01:01:51] more and more aware of the benefits of Bitcoin.
Bitcoin’s obviously becoming a lot more accepted. You never hear statements, oh if Bitcoin goes to zero or Bitcoin is used for criminal purposes, like all that sort of stuff seems to have been drowned out and we’ve woken up in a world where the majority of people accept Bitcoin at least as that neutral commodity out there.
So I think they increasingly are, like the evidence is there, they’re increasingly interested in Bitcoin mining because of the benefits, principally being that flexibility of new load in their market to support their generation assets can provide. Because there’s a lot of utilities in many Western economies that have got stranded assets that due to the changing nature of energy markets, decarbonization policies, renewables, just even other factors like current commodity price inflation, the ability to have on demand, flexible load is a [01:02:51] really valuable optionality for a lot of these utilities. Yeah, I think you’re gonna see more and more interest in the space from those guys.
Do I think that they’re gonna start mining Bitcoin directly en mass? Probably not.
Peter Young: And do you have a view about which regions of the world have the lowest hanging fruit when it comes to being able to utilize Bitcoin mining to do low balancing?
Daniel Roberts: I think if you step -back and you go – we wanna be in Western bankable jurisdictions because we wanna attract low cost institutional capital.
And there’s quite an interesting graphic from the gold space that shows the top five gold producing nations by cost per ounce mined, and it’s one set of nations. And then you’ve got top five goal producing nations by volume, and that’s where Australia, Canada, US, and you see institutional money drives capital allocation and [01:03:51] drives the markets in which these develop, so we will continue to focus on those markets.
But I think if you step back and you say, where have there been market values in Western economies as a result of whatever factors, it doesn’t matter. External, government, it doesn’t matter if there is excess energy and we can mop up that excess energy in a load profile that we can monetize profitably for our shareholders and then deliver positive externalities and a social good into that network.
Then tick tick, let’s have a look!
Saifedean Ammous: I’ll add in the interest of fairness and balance. If there are market failures, they are caused by government. In this podcast we recognize no other sources of market failure. As typical Austrians, basically market failure is a name that socialists give to – I don’t have enough money, basically. I’d like more of your money is market failure. People out there are doing things that end up pleasing [01:04:51] them rather than pleasing me, that’s a market failure, I need to stop them and take their money and have them give me some of that, and then the market will succeed in meeting my ends.
But I’m curious to get back to the Bitcoin mining business. What are your thoughts in terms of the recent crash in Bitcoin mining? It’s taken a big toll on a lot of miners, so we’ve heard a lot of miners have sold some of their coins, and who knows if we’ve seen the worst of it yet?
I think most miners seem to have been pretty bullish and many of them were on accumulated coins on leverage essentially, and now because the price had crashed a lot, they need to liquidate significant quantities. But as these things happen, Obviously the miners that liquidate are the ones that are least efficient, and the ones that stay in business are the ones that are most efficient. So
this kind of culling of the [01:05:51] herd takes out the miners that are mining at the highest cost. I’m wondering if you have any idea about where we stand right now, like at what cost would you switch on your mining gear generally, roughly. Obviously, it varies with different hardware and different other factors, but where do you think it is today? And how do you see this advancing?
Do you think we’re gonna witness another kind of crazy bubble that makes profitability available to people mining at 10, 12 cents per kilowatt hour? Which was the case up until a few months ago, when the difficulty wasn’t catching up and the price was very high.
Maybe not a few months, about a year ago or so. Or do you think this kind of big, giant crash is gonna make people a little bit more conservative? And so then we won’t get a [01:06:51] lot of increase. In other words, we’ll end up with mining cost being at a less spread out next time.
What do you think?
Daniel Roberts: Alright, a little bit to unpack. So this is why Bitcoin mining is such a sensational business model and it comes back to the heavy cash flow generative nature of it. I think it’s well understood that mining chips can be bought on kind of 9 to 12 to 15 month paybacks. So that prime phase is really profitable, right? Particularly in the face of hardware commoditization, longevity of that asset life.
But I think the key thing is, we’re at this inflection point in the industry where if Bitcoin survives, which in all likelihood will, then it’s likely to accrue more value, the real world can’t keep pace anymore. We saw that firsthand. Look at the hash rate and its inability to keep pace with the price since October, November, 2020. It hasn’t been [01:07:51] able to, and there’s some good charts online that you can see that. Because you can’t click your fingers and conjure up tens of gigawatts of power.
Saifedean Ammous: Sorry to interrupt you here. A little bit of a tangent, I think this is a very important point that people don’t understand when they bring up the 51% attack.
They think a government can just call Walmart and say – excuse me, we’d like 51% of the Bitcoin hash rate delivered to Virginia by the end of next week. It doesn’t work that way. You can’t just do that. These are highly competitive industries and the engineers that work on this stuff are in high demand, the raw material that goes into it is in high demand.
Everything is in high demand, and you can’t just go in and buy that market. It’s enormously competitive. People are constantly bidding up the price because Bitcoin is constantly growing. You are up against a moving target that is constantly increasing in terms of the size of this.
And yeah it’s not easy to increase the capacity very quickly. And when a government [01:08:51] has to act, even though the government might have more resources, it has to act centrally. But when you have, what the Bitcoin network is doing is far more decentralized, so you’ve got everybody in Australia, Norway, Brazil, Peru everywhere in the world, anybody who has an energy source is being motivated to think about utilizing it for Bitcoin mining. And you still can’t bring that much energy onboard quickly when the price begins to shoot up, as you were saying. But sorry, please go ahead. Sorry for the interruption.
Daniel Roberts: No, it’s good! And the funny thing is, let’s entertain a situation where all of a sudden someone can click their fingers and conjure up 10 gigawatts of power, bring forward four years of manufacturing production on these chips. Find $20 billion of freshly printed capital and bring online a controlled 51% of the new aggregated Bitcoin mining network. Now what are you gonna do? You can’t do anything, like you’re gonna try and double spend your own transaction.
Like how’s that gonna play out? You’re gonna try and censor transactions? That’s [01:09:51] great, so let’s play that out. First block, you win it. All right, censor everyone’s transactions, no one can transact. Well done. Let’s say probability falls in their favor. They can find two blocks in a row with only 51% of the hash rate, they censor those transactions. All right, well done. Didn’t get any revenue from it. three blocks, four blocks, five blocks. Let’s say 99% probability plays out and they get five blocks in a row. I’m making the 99% up, but let’s say 51% and they roll the dice the right way and get five blocks in a row. The sixth block the 49% gonna find, and guess what they’re going to do. Wowee, what a bounty in the mempool, I’m gonna take this transaction, this transaction, and I’m gonna make a fortune from including those transactions and behaving economically rationally to broadcast those transactions on the network and keep those transaction fees.
So if you are sitting there and you’ve invested tens of billions of dollars, you’re getting a block reward. What’s your point? What are you actually trying to achieve? All you’ve done is [01:10:51] just play around and not achieve anything.
Saifedean Ammous: Yeah, it does have an element of doctor evil cartoonist James Bond aspect of it that the US government has successfully managed that 51% attack Bitcoin.
And then okay, for a few days we’re gonna have late blocks, but you’re just putting a giant bounty out there for the other miners to get out there and make a lot more money from mining and eventually the network is gonna outgrow you and then you’re just going to be left with an enormous pile of very expensive bricks.
Unless you decide to cut your losses and start mining honestly, because that’s the only way that you could make money. And I think the problem with these kind of scenarios is yes, on a technical perspective, but also they vastly overestimate how much governments can think about the long term and how governments can maintain these kind of long term projects when you know, the obvious easy way out for everybody, and the incentive [01:11:51] compatible way for everyone is to just not do that and just buy Bitcoin if they understand what’s going on.
Daniel Roberts: Yeah. So I’m not disagreeing with you, but the best part about this argument is let’s assume governments are the ultimate efficiency in terms of capital allocation and execute it on this, it still doesn’t matter.
Again, it’s programmable. If this did emerge and there’s unintended consequences that you and I can’t anticipate, then the market can update the consensus protocol and fork around these guys anyway, so it just becomes so academic and a little bit silly to be honest.
So coming back to your other, and maybe one other point on that is you alluded to it, the incentive structure. The greatest innovation in Bitcoin in my mind is the game theoretical nature of the incentive structure. It’s not a blockchain or a buzzword or, proof of work and the difficulty adjustment is absolutely central to that, but it’s the way that it is game theoretically set up to survive and to encourage [01:12:51] people to behave in their self-interest to join the network, because they realize they can’t fight it.
If you can’t beat them, you have to join them. And I think that’s ultimately what propagates Bitcoin adoption over time because of that anti-fragile, self-reinforcing aspect.
Saifedean Ammous: Yeah, last week we hosted Giacomo Zucco in this podcast and we were discussing the different threats to Bitcoin.
And in one sense, the idea that I told him is that whatever your other business model is, it’s going to be very hard to beat holding Bitcoin as a business model in the long run, most likely. And in that case, it becomes more rational, even for people who are in charge of things like modern central banks to spend their time and resources on acquiring more Bitcoin, because ultimately this game is going to be scored not in the currency that they can create infinitely.
The people who brought glass beads to west [01:13:51] Africa, they did not accumulate a lot of glass beads. They sold the glass beads and got things that they wanted for them and accumulated gold. Ultimately if you really take Bitcoin seriously enough to want to attack it, you are gonna realize you’re probably not gonna succeed and you’re going to be spending time and money on attacking it. Time and money which could have been spent acquiring Sats at much cheaper, lower rate.
We saw this, I think with a lot of government officials as they come into contact with Bitcoin. There seems to be this kind of, I think it was Daniel Kravitz who called it the Bitcoin’s allurious nature or mystique or whatever, and as soon as they come in touch with it they just switch loyalty to Bitcoin. I wanna stack stats, I wanna get more stats. Because it’s a winning strategy for everybody to join this. You’re better off with Bitcoin on your side.
Daniel Roberts: Absolutely. If you’re a [01:14:51] nation that’s got energy resources and you are gonna learn that Bitcoin mining is a productive use for that energy source.
And all of a sudden you’ve got another sales pitch from Bitcoin or something that attracts people to Bitcoin goes, what is this asset? And then one by one people learn about it and go – wow, the penny drops. So Bitcoin mining is potentially a really good marketing tool for Bitcoin in spreading awareness by virtue of that profitability.
To come back and answer your other question around the state of the industry and power prices and hardware efficiencies. It might be worth just doing a bit of a case state. So we’ve always believed in diversification across different markets, geographies, et cetera, because of all the unknowns. Like any portfolio, don’t put all your eggs in one basket.
At the moment that’s playing out extraordinarily well because all of our operations today are based in British Columbia where regulated market power prices are the same price, 24/7, 365 days a year, [01:15:51] 98% renewable. Unimpacted today by what’s happening with gas and fuel prices elsewhere in the world.
If you look at Texas, we also have a project under development in west Texas, Where there’s an abundance of renewables and not enough transmission line capacity to export all of that power down to the load centers in the Southeast. Power prices have absolutely spiked. So if I put some meat on the bone and give you some numbers, last month, we generated Bitcoin at a cost per Bitcoin mined of about $8,800 per coin.
Now that’s using 5 cents US, maybe a little bit less, 4.90 cents US per kilowatt hour power. And high efficiency miners. So 30 watts per terrahash, latest generation, principally Bitmain. Now, if we compare that to what’s happening in Texas, where you see pool prices now around seven to 8 cents a kilowat hour, and you extrapolate that out one for one, then all of a sudden that’s a [01:16:51] 40% to 60% increase in your cost per Bitcoin mined.
So let’s round ours off to nine. Round it up a bit. If you add 40% to 60%, you’re at like $13,000 to $14,000 a coin, ouch. It’s not a great time to be mining there. Yes, you can switch off for a lot of the high time periods and probably claim some of that back at the expense of uptime, but fundamentally your cost of production on a base load basis is high.
Now that assumes that you’ve got 30 watts per terrahash efficiency. And as you mentioned earlier, people have got different hardware efficiencies. If you look at other manufacturers, a lot of the new generation is high thirties to high forties watts per terrahash. Now let’s use 40 as a made up number, but hypothetical let’s say your average efficiency is 40 Watts.
Then all of a sudden you are consuming 33% more power for every Bitcoin that you’re mining. So if you are at $13,000 to [01:17:51] $14,000 on 30 watts, then at 40 watts you’re closer to the current market price. So I think you are seeing a bit of stress in the industry and we’re emerging a really good position as a business by virtue of that low cost excess, renewable energy that I’ve always said 10 times on this podcast, but it does have benefits because of that predictability.
So it’s a really interesting time, particularly when you overlay different businesses, capital structures, what debt obligations they’ve got. It’s, Bitcoin stays around here for a little while. It will be interesting.
Saifedean Ammous: Yeah, I can imagine. I would say the way that I would make my piece with this is that Bitcoin is just a machine that’s out there to put the entire world on a very hard discipline training program, economic training program. It’s a new headmaster that is [01:18:51] coming to a very truant school with very bad students.
And this guy’s gotten a reputation across the entire county for sorting out problematic schools. and Bitcoin is about to school pretty much all inefficiency. Because anywhere you find inefficiency, Bitcoin can capitalize on it. So anywhere where people are making a crappy currency, people will escape that currency and use Bitcoin.
So Bitcoin thrives on that and anywhere where people are wasting energy, where you have an enormous amount of energy that’s going to waste. Bitcoin can come and feed on that. So it’s this amazing machine where we feed it our waste and it gives us a high tech, super intelligent replacement for the worst institution humanity has ever devised, which is central banks.
So it’s a nice trade off. We replace central banks with electricity, which I think [01:19:51] is a very good trade off.
Daniel Roberts: Yeah, and it is a brutal market, but if you get it right it’s such a great business because if, let’s go back to our numbers of $9,000 per Bitcoin mined, and we’ve articulated where that might fit in the cost curve, so people say – oh, so you’ll switch off when Bitcoin hits $9,000? No, that’s not how it works because if Bitcoin starts going down or stays here, let alone starts going down. You are likely to see higher cost miners capitulate and have to switch off. And the lower Bitcoin goes, the more high cost miners can’t pay their power bill and gonna switch off, the difficulty will adjust, we’ll start receiving more Bitcoin every day because our share of the network will naturally float up. We receive a volume hedge.
So all of a sudden, if half the network shuts down, our cost of production is halved by virtue of the fact that we are mining twice as many Bitcoin. [01:20:51] So this is why I’ve mentioned the word asymmetric a few times, cuz it’s asymmetric on the way down, if you get the cost curve positioning right, where you basically take other people’s Bitcoin as they have to switch off, and it’s asymmetric on the way up because the real world infrastructure task can no longer scale exponentially with this digital asset.
Saifedean Ammous: Indeed. Alright, I guess this pretty much covers everything that I had in mind.
Anybody else have any other questions or Dan, do you have any other questions or anything else you’d like to add? Anything else you want to mention?
Daniel Roberts: No. Look, I think we’re in a world of any very interesting times. There’s a lot of extremes. There’s a lot of change and I think your ability to put thoughts in people’s minds and challenge and make people think and encourage that open debate is a really strong attribute. And yeah, well done.
You’ve done a lot for the space and challenging people’s thought process more broadly around the world. [01:21:51] So it’s always good to see your tweets and I do have a wry smile from time to time!
Saifedean Ammous: I’m glad to hear that, sir. Thank you very much. It’s been a pleasure chatting to you, and I wish you all the best of luck with your business eating up all the world’s energy waste!
Daniel Roberts: Thanks Saifedean. Thanks Peter. Appreciate the time!
Saifedean Ammous: Cheers. Have a good day. Bye-bye.