70. The Future of Bitcoin Mining with Ben Gagnon

In this episode Saifedean talks to Ben Gagnon, Chief Mining Officer at Bifarms, a Canadian bitcoin mining company that accounts for 1-2% of global hash power. Ben tells the story of how he became involved in bitcoin after missing an opportunity to buy 100 bitcoin for $70 in 2010. He and Saifedean discuss when it makes sense for people and companies to mine bitcoin, whether it’s a good idea to invest in bitcoin mining companies, and how events such as China’s recent mining clampdown will affect the future of the industry.

Links referenced:

The following links relate to Ben’s comments about bitcoin regulation in China leading to a pump in Ethereum’s price during early 2017:

Podcast Transcript

[00:03:45] Saifedean Ammous: Hello, and welcome to another seminar of The Bitcoin Standard podcast. Today’s guest is Ben Gagnon, director of mining and information system at Bitfarms. Bitfarms is one of the largest north American miners. They probably control somewhere between 1% and 2% of the total Bitcoin hash rate.

They operate out of Quebec in Canada. And Ben has spent a lot of time in mining and I thought it would be good to get him and to get his experience and insight onto what is happening with the mining industry in general, in terms of its evolution, as well as more recent events like the China ban and the ramifications of that.

So Ben, thank you very much for joining us.

Ben Gagnon: Yeah, thanks Saif for having me on, very good to be here.  A little background about me and how I got into Bitcoin and Bitcoin mining in the first place. I found about Bitcoin back in 2010 in university. We were looking at an internet [00:04:45] forum where they were using that to trade files back and forth.

My friend and I were looking at mines, about a hundred dollars worth of Bitcoin back then was 70 cents, from a friend who was mining on a GPU in his dorm room. And we didn’t know at the time how big this was going to become. And we didn’t really see the use case outside of this forum that we were involved in.

So unfortunately we decided to go buy beer instead. We went to the grocery store to buy Natty Light, which was our college cheap beer of choice, and they didn’t even have that, so we ended up buying a hundred dollars worth of Natty Light. It’s a very, very bad choice. We watched Bitcoin go all the way up to 1200 and kicked ourselves the entire way.

Saifedean Ammous: What was the price of Bitcoin at that time? When you spent the hundred bucks.

Ben Gagnon: 73 cents.

Saifedean Ammous: 73 cents, yeah.

Ben Gagnon: And I bought Natty Light instead. So I don’t think anybody has a worst FOMO story and missing out opportunity than I do. I tried to buy my first miners back when [00:05:45] Butterfly Labs was selling Asics. They were selling Asics back in 2013.

I sent them a few thousand dollars and never received any miners. The next year I went to a Bitcoin ATM, picked up a few Bitcoins at an ATM when Bitcoin was around 440. And the year after that, I was working for a web development company and my boss up and quit his job one day to go and work for an Ethereum ICO called Digex.

It was the first ICO on the Ethereum network. And I looked at Ethereum and I said, this is my chance to not buy Natty Light again. But took all the money I had, bought some GPU’s, flew to Taiwan, set up a small GPU mine farm in my girlfriend’s family house, managed it remotely for a couple of months.

That was working out really well. I Took the machines that I had and the hash rate that I had, and I started,  going out to high net worth individuals, family, friends, family offices in Hong Kong, selling them on  this idea on this cashflow. That [00:06:45] worked out really well. I moved into China, set up my first Bitcoin mining and Ethereum mining facility in mainland China back in 2015.

 It was really easy to get going at the time, but by the time 2017 came around and Bitcoin price was skyrocketing from a thousand to $20,000, the political pressure and the corruption became immense, and I had to leave China. I went out to Hong Kong and Alberta, and I set up a flare gas and Bitcoin mining business.

And I did that for about two years trying to sell to oil and gas companies containerized turnkey mining. And that’s when Bitfarms picked me up. They saw an opportunity there to acquire my skill set, acquire my technologies and integrate it into their operations. So they picked me up at the end of 2019.

I started as director of mining and (???) systems. Made my way up the ladder here and now I just recently was promoted to chief mining [00:07:45] officer. So I oversee all of  our mining operations and strategy going forward.  A long path to get here, but you know, now sitting on top of about,  with Bitfarms, we’re sitting on top on top of about 1,5% to 2% of the Bitcoin network and growing quite rapidly.

Saifedean Ammous: Yeah, and you guys, all of your operations are in Quebec, is that correct?

Ben Gagnon: Yeah, currently we have five different mining facilities in We’ve got a sixth one under development, which will be ready shortly. It will be fully energized by the end of the month. And we’re doing some of the different international expansions that we started in Quebec.

Saifedean Ammous: Yeah, so I wanted to first, before we get into the big business side of the mining, I’m going to talk a little bit about the mom and pop shop level of mining. You’ve gone from a dorm room to working at a company that is about 2% of the Bitcoin hash rate in 2021, which is a lot of hash rate.

So you’ve [00:08:45] experienced working at all levels. So I’m wondering, what are your thoughts on people who don’t work in anything related to the mining industry getting a couple of miners and putting them in their basement or their garage, do you think it’s a good idea? Do you think people are better off just stacking or what do you think?

Ben Gagnon: I think everything with Bitcoin runs in the inverse of traditional industry. And the same is true with economies of scale. Most businesses would operate in an economy of scale that looks like an end where it doesn’t make sense at the small end, it makes a lot of sense as you scale up, but obviously there’s a point where the marginal return doesn’t make sense and you can’t continue to scale up and your reward does tail off, so you get this nice (???).

 Bitcoin functions like a U. And the reality is that, if you’re mining at a really small scale, especially if you’re in a situation where your power costs are not your true power costs, it makes a lot of sense to mine.  This is situations like dorm rooms or [00:09:45] condos, or you’ve got a lease where the power is attached to it, but you’re not fully utilizing it.

In these situations, it does make a ton of sense because you are taking advantage of an anomaly in the power markets. And you’re also able to deploy one or two miners without any real change in your infrastructure and without any significant effort on your part. It does make a lot of sense.

At the middle end, it doesn’t make any sense at all.  Once you have to start paying for new infrastructure bills and you’d have to start bringing in contractors, you’ve got to start building up teams and you’ve got to have repair staff. You’ve got to have technicians and you’ve got to negotiate on power purchases and you’ve got to negotiate on equipment.

You just can’t compete with someone who’s at our scale. And so it functions like a U  it makes a lot of sense on the high end and the bigger you get, the more it makes sense. On the small end, it does make a lot of sense as well, but the middle [00:10:45] range is incredibly tough to compete. I mean, there are some exceptions to that rule.

But you know, mostly I think they fall into that category of your energy cost isn’t your energy cost. With stranded gas or with flared gas and those sort of situations, you can get up to a few hundred KW. And then it might make sense for you, but if you’re a guy who’s looking to develop a 500 KW, a one megawatt, two megawatt farm, I think it’s really, really difficult to compete and make that make sense.

Saifedean Ammous: Yeah, I think that makes a lot of sense. And of course, you know, the most important factor might just be the the power costs. So if you’re in a situation where you don’t have to pay for it because you’re in a dorm room, then obviously that makes sense. But in terms of, if you’re running a mining business, you think the the scale is more important than the power cost?

In other words, if you could run a small few hundred kilowatt mining business , because you managed to get power at like  4 cents or 5 cents, [00:11:45] would that still not be able to compete with you guys at a small scale, you think?

Ben Gagnon: You can’t compete with us at that scale. You really can’t escape the power cost.

That’s the one variable that you can never get rid of. And it does drive the gross amount of your mining margin is just power costs and the efficiency of your equipment. If you are trying to do a  small farm, what ends up happening is you can’t afford the labor to help you out.

And so you end up with huge amounts of capital, huge amounts of investment,  and significant cash flows, but you can’t afford the labor to keep it up, and you can’t afford to do the repairs to keep it up and operational. And if it’s not up and operational, you’re not getting paid.  Nobody’s going to do that work for you.

So you just end up spending countless sleepless nights, doing the math. Well, you know, if I go to bed now I’m going to lose $500 or $600 or $800 or whatever that is. And you just start having a lot of sleepless [00:12:45] nights. It really doesn’t bode well for you. You know, you also have a huge learning curve in order to try and maintain this equipment.

To run one or two miners is fairly easy. To run hundreds or thousands, or we are tens of thousands of miners, it requires completely different infrastructure, skillset and amounts of people, really tough.

Saifedean Ammous: So is there some power costs where you think it begins to make sense? Like 2 cents per kilowatt hour, 3?

Ben Gagnon: The historical has always been 6 cents. I’m of the impression that long-term you want to be at 3 cents or below. I think if you could ever deploy below 3 cents, you should consider it. But the scale  is really a significant question. The China situation has affected that considerably.

You know, it’s now a lot more profitable to be mining on higher and higher cost of electricity because of the drop in difficulty and the drop in network hash rate. So you can [00:13:45] justify higher electricity costs for the moment. When it comes to infrastructure to support the mining you might take a year and a half, two years to pay that off.

And by that time the network is probably gonna recover and then you’re left with an asset that might not make sense, especially as we’re heading into the halving.

Saifedean Ammous: Yeah, I think my general impression of mining has always been that unless you have specific special competence in something in that field and you’re able to dedicate time into it and make it a job,  unless that’s the case, then you’re probably better off just doing whatever it is that you’re actually good at and buying Bitcoin because the notion that you’re just going to buy miners and have them run and make money, I mean it can happen on a small scale, but once it grows, it requires active management to handle it. It has its experts and it’s a highly competitive industry, you can’t just waltz in, ACE everything and figure everything out.

 For most people, the best way to [00:14:45] mine Bitcoin is to do whatever it is that you’re good at and then just buy Bitcoin. Because also, you know, the thing about investing in mining is that there’s a significant lead-up if you’re going to build up an operation yourself.  You need to start mobilizing capital now for building the miners and for building the hosting facilities. And that is money that you could be spending on buying Bitcoin and given how fast Bitcoin generally rises, this might not make sense because when you could witness Bitcoin rising 10x, and then you could have just bought Bitcoin during that time and you would have been better off.

For many people, I think it makes no sense, but now people are getting the option to invest in mining in some other way, which is to just buy stocks in miners.

And we’re seeing this trend growing across financial markets. So what do you think this growing financialization of mining and how do you think it affects Bitcoiners and investors and [00:15:45] the Bitcoin network?

Ben Gagnon: The securitization of Bitcoin and Bitcoin miners, I think is a really big and powerful concept.

Like most industries, as they get to higher and higher scale, they require more and more amounts of capital. And in order to get cheaper cost of capital, generally companies go public because it provides them greater opportunities to get more cash for less cost. And that’s what it’s going to take to compete in the Bitcoin mining network at scale.

It’s a trend that makes a lot of sense. It’s why we see so many Bitcoin miners going to NASDAQ and going to the US market.  Other markets are flocking to as well, but the US is really the primo market, where does you’re going to get the most amount of cash.

Markets are a very interesting concept, especially when we’re looking at inflation. The number one area where inflation peds into first is where you can buy things that are extremely liquid and the problem of inflation is a problem of excess liquidity [00:16:45] and no place to put it. And so it generally just goes into stock markets.

We saw last year during  COVID when they started ramping up money printing and quantitative easing and all these sorts of financial programs. It starts flooding into the stock market irregardless of what those companies are doing or producing, right? There’s no positive change in the underlying business for the most part.

But this is an easy place to park cash. If your cost of cash is very low, you put it into something that you think is a relatively safe return. And we can see the PE ratios of companies just blowing out to astronomical proportions.  When I was in college, they taught PE ratios of 12 to 14 as being a safe and average number.

There are now dozens and dozens of companies where PE ratios are several hundred or over a thousand. And you know, this is obviously not functional and rational market to be justifying a thousand years forward earnings into the share price, right? [00:17:45] So it’s really just a function of inflation liquidity.

And I think as the markets continue to create more and more cash, they’re going to look for better places to put it. And how overvalued can Walmart get or Facebook get, you know, there’s a limited amount of their scale and their growth, but, but Bitcoin’s price is really just a function of how much money they print.

And in that way, it’s unlimited. So I would think that as inflation happens, we should be seeing all of this cash pouring into the stock market. Investors will say, where are we going to get a safer return on our investment, and it’s probably going to be in the Bitcoin proxy stocks.

You know, people who have the coin on their balance sheet, people are invested in Bitcoin providing Bitcoin services, people who are mining in Bitcoin. We have a unique situation here with the Bitcoin publicly traded miners. If you track them the vast majority of the Bitcoin that they’re mining, they’re putting on their balance sheet. They’re not selling it anymore.

And this is a change that [00:18:45] we’ve seen over the last 12 months really. Before that, the vast majority of those companies were selling their Bitcoin to cover their operating costs. And you really functioned as a proxy to Bitcoin mining profitability, stock values. And now what we’re looking at is, hey here’s a way that you can compete with like a Grayscale digital trust.

 We’ve got a fixed amount of Bitcoin, we’ve got to low our cost to produce that Bitcoin cause we’re producing it significantly below other companies can purchase it for on market and it’s an amount of Bitcoin that’s growing every day. So if you’re looking at an equity-based Bitcoin proxy, do you want to invest in a fixed amount of Bitcoin? An amount of Bitcoin that can only be dollar cost averaged up over time as the price increases, you want to increase your stack, you have to pay higher and higher prices.

Or do you want to invest in a proxy that is producing Bitcoin for significantly below market value and adding those Bitcoins to their basis every single day. [00:19:45] And in which case, if you look at it in that lens, all the Bitcoin miners are going to function as like a leveraged Bitcoin play.

It provides a lot of investors with easy opportunity to get into mining and earn the same kind of rewards that they might be able to see by running their own operations without any of the overhead, any of the problems, any of the technical knowledge or understanding, through a mechanism that they already have set up. Whether that’s their IRA account or their normal brokerage account or their 401k or whatever that is, a lot of people already have this infrastructure in place. And it makes it really easy.

Saifedean Ammous: Yeah, absolutely. And I think it’s a beautiful illustration of the power of markets to allocate resources that you could be considering setting up your own mining farm and you could be getting electricity in your town for like 6 cents, 8 cents, and you think that’s a good cost and we’ll make good money out of it.

But if you’re able to invest in one of the Bitcoin [00:20:45] miners, they’re able to move the miners instead of having them in your town where there’s a high opportunity cost because that electricity could go to the city, and to the hospitals and to all the things that are needed in your town.

 You guys go and put the miners all the way out in the middle of nowhere in Canada next to some running water at electricity that basically has almost zero cost. Bitcoin mining  just keeps going to where it is most efficient. And even if, as an investor, you don’t know how to go put your own miners in Quebec on hydroelectric power, on cheap electricity, you can find it on the stock market.

It’s an amazing mechanism for allocating capital. And I think it’s an amazing mechanism for discovering what you were discussing earlier, which is discovering Bitcoin as a superior monetary asset, as you said, just how much can you overvalue Walmart? How much more valuation can you keep piling on to Walmart, which [00:21:45] ultimately has cash receipts that you can compare them to.

And these are in dollars and dollars are inflating and losing value. Whereas Bitcoin companies, they’re just stacking more and more Bitcoin. And that’s fundamentally the point that I talk about in The Bitcoin Standard, why it’s different from other forms of commodities and assets, which is that no matter how much it demands for it increases, the increase in the price cannot bring about an increase in the quantity.

And the world is just continuing to find more and more creative ways of holding that money that has this property. The securitization of Bitcoin miners is one of these.

Ben Gagnon: Yeah. I mean, it’s a really powerful thing. If you look at the PE ratios, I believe the highest PE ratio in the world right now is MicroStrategy.

And it’s because they’ve accumulated so much Bitcoin and the market understands that the price potential of all those Bitcoin holdings relative to the earnings of the company, that dwarf their actual business. And there’s just tremendous unlimited upside potential [00:22:45] there. I think the second one is probably Tesla and they had a high PE ratio even before they bought Bitcoin.

And I think buying Bitcoin was the only thing that they’ve ever done to actually justify their PE ratios because now they’re looking at, hey it’s not just a business, you actually have this underlying asset that’s improving in value. And I think it’s pretty telling to see a company like Tesla, which doesn’t have huge production volumes and is not actually, meeting their production targets that instead of investing in new production facilities, they invested in buying Bitcoin.

They have a fiduciary responsibility to their shareholders to allocate capital efficiently and provide the best return. And so they couldn’t have made that decision if they didn’t think that Bitcoin would provide a better return than just producing more cars. And it is probably the only thing that they’ve done to justify these high PE ratios.

Saifedean Ammous: Yeah, it’s a topic we’ve discussed extensively in this [00:23:45] podcast and I’m generally not the world’s biggest fan of electric cars. It is an older technology than internal combustion engines. But it’s fundamentally had a disadvantage because the range of internal combustion engine cars is always going to be much higher.

So in my mind, honestly I was kind of worried when Tesla started getting into Bitcoin, because I think this is a company that would only exist in fiat and it made no sense for them to start stacking Bitcoin very early when they’re one of the biggest companies in the world, because they might end up making electric cars for another thousand years just off of their Bitcoin stash.

If they start stacking seriously, but fortunately doge coin fixes this. The Elon Musk’s teenage-like attention span, got distracted with shiny little toys, and now he’s busy playing all these games. I think that’s probably for the better. But yeah, you’re right, it probably adds a serious value [00:24:45] to their balance sheet.

It’s not a big amount compared to what they have, but the fact that they bought it means that there’s a chance they might be buying more.  It strengthens their balance sheet.

Ben Gagnon: Yeah. I think you will see probably more and more publicly traded companies looking to acquire Bitcoin on their balance sheet and hold it on their balance sheet, just because of what that does mean for their business.

Why do you want to keep developing your core business? If it’s less profitable use of capital then than buying and holding onto Bitcoin, you literally have a legal responsibility to buy Bitcoin, if you believe that’s going to provide the best return for your shareholders. As the understanding of that continues to develop, I think you’ll start seeing a lot more publicly traded companies doing that. 

And we have seen a number of publicly traded companies that were in other forms of business, gambling, car rentals, whatever, start switching over to Bitcoin mining because their original business just can’t compete with mining Bitcoin.  It provides long-term growth, long-term value, and it’s going to be [00:25:45] the best return for their shareholders they can possibly invest in.

Saifedean Ammous: Yeah, absolutely. And you know a lot of fiat people think that this is a waste, what are you doing? What are all these miners doing? They’re just burning all these transactions. You could do all of these transactions on PayPal. You could do them on Visa. You don’t need to be burning all of this much money.

It’s insane, why do libertarians need their stupid money to burn so much money? And the way that I think about it is, what is being built here is a startup that is disrupting central banks. This is like the Uber of central banking. It’s disrupting what central banks do. It’s like the Amazon of bookshops and shopping malls.

It’s disrupting them and it’s able to offer their product with infinitely superior user experience at a much better cost. And of course, in the case of Bitcoin,  that manifests itself in the fact that the supply doesn’t get inflated. So it has what I like to call number go up [00:26:45] technology. If you’re investing in Bitcoin, if you’re investing in mining Bitcoin, or if you’re holding Bitcoin, what you’re doing is you’re identifying this market need for a decentralized alternative to central banks.

And you’re making a market speculation, market action, market decision that you want to allocate resources for this. And as long as people who do this continue to make positive returns and as long as it continues to grow, then what that is saying is the markets thinks this is a better, this is eating in the central bankers’ share.

This is eating market share from central banks and people who don’t see the value in that are people who have not ever thought about money as being a market good. And this is of course, a favorite theme of ours here in The Bitcoin Standard seminars. Almost all [00:27:45] monetary economics that people study is just, you know, there’s the central bank of the central bank decides things.

And then this is how money comes about from the central banks beneficience, but from the Austrian perspective, money is just a market good. And Bitcoin is the first time that we were able to put a market good money on the market to compete freely with government money because this one can’t be stopped by government money.

And so investing in it is not, it’s not gambling, it’s not speculation in the bad sense of the word. It’s speculation just like any other investment is speculation, in that putting your resources in the service of building something that is going to have a better value tomorrow. And that’s what Bitcoin is doing basically.

There’s nothing wrong with it. I think more and more people are going to discover it. And with increasing monetary inflation, all that’s going to happen is that it’s just going to emphasize this point that this central bank is just giving everybody money, and there’s this one [00:28:45] that, you know, everybody’s lost with all of this money, and there are these 21 million chairs out there for the planet to fight over because these are the only monetary system that is not insane.  The only monetary system that is not constantly leaking by creating more supply. And yeah, I think that’s how it’s going to happen.

But I’m wondering, what do you think is the value proposition for an investor to get into Bitcoin mining as opposed to just buying Bitcoin? So why should I go and buy stocks in a Bitcoin miner rather than Bitcoin? Is it just that it’s leveraged? And is it in fact leveraged or does it contain more risks to the downside maybe?

Ben Gagnon: Well, obviously you’re going to have an operator risk and a counterparty risk when it comes to Bitcoin mining that you wouldn’t have if you’re just buying and holding your own coins with your own private keys. That’s always a consideration to put in there, but you know, with risk does come reward and the way that you have to look at Bitcoin mining specifically is you have to look [00:29:45] at your base asset of Bitcoin and investing into the Bitcoin mining.

Is it going to earn you more Bitcoin over time than if you just, you know, by taking that Bitcoin, invest into Bitcoin miners, is going to earn you more Bitcoin over time than just buying and holding onto your Bitcoin. And it’s one of the few investments that you can make that looking over time, your opportunity cost is actually quite good with Bitcoin mining.

 You can’t really do that with any other industry. If you’re looking at, well should I keep mining iron ore or should I invest in Bitcoin? If I keep mining iron ore and I sell my iron ore and I buy Bitcoin over time, will I have more Bitcoin than if I didn’t in the original, right?

With Bitcoin, we can actually measure that pretty clearly. And it’s because the revenues are paid in Bitcoin, right? If you have to have an asset where the revenues are based in USD, and you’ve got to trace the profitability of Bitcoin, it’s like a dog chasing its tail, you’ll never be able to keep up.

If you look back on the price of Bitcoin miners over [00:30:45] time, what people originally paid for them, what the price was in Bitcoin, and then you run the cost versus the mining revenues. And you look at what’s a reasonable uptime, Bitcoin mining is one of the few things, if you’re going to invest in and sell your Bitcoin for to actually earn more Bitcoin.

That’s the whole reason why we exist as an industry, Bitcoin miners aren’t in it, because we think that we could earn more Bitcoin by just buying and holding. We’re in it because we think we’re going to get more Bitcoin by mining.

And if we set up our operations efficiently enough and low cost enough, that is mathematically provable. It’s not true for everybody, obviously some people are gonna lose in this game and generally speaking, those are going to be smaller players with high costs and who have not enough time and resources to keep their miners up online, running for low cost.

That’s just the way that you have to look at Bitcoin mining, as the opportunity cost for Bitcoin. And the bigger that the mines get, the more public that they are, they become audited, and you start having all these controls [00:31:45] in place that are trying to provide investors with all these assurances against the counterparty risk.

You know, hey it’s not like cloud mining, eight years ago where you had to take a risk that they were actually going to deliver your hash rate, or they’re not going to cancel your contract. I mean, we’re audited by a Big Four company we’ve been around for 4 years.

We’ve mined over 11,000 Bitcoin in North America to date. We have a predictable, provable audited track record of performance. And that’s how we try and alleviate those risks for investors. Obviously, newer players who are coming into this space are going to have to prove all of that out.

Because it is not the simplest thing in the world to deploy 10,000, 20,000 miners. It does require very specific engineering. It requires sourcing low cost energy, and good opportunities, it requires dealing with regulators and bureaucrats. It’s a process. That’s just how we have to look at it.

Saifedean Ammous: Yeah. Now in terms of power sources, you guys run on hydroelectric power in Quebec, [00:32:45] right?

Ben Gagnon: Yes.

Saifedean Ammous: So why do you guys choose hydroelectric?

Ben Gagnon: So this is something that we as a company did four years ago. We believe, I think from the beginning, that institutions were eventually going to adopt Bitcoin and more specifically Bitcoin mining.

And when they did come into this space, we wanted to make sure that we got all those boxes ticked for them. So when we started four years ago, we said we want to do all renewable electricity because we thought that was going to be important for institutional investors. You know, we went with a Big Four auditor.

We were the only one to do it at the time. We’re still the only one who does it. We went through the front door with the Ontario Securities Exchange Commission instead of doing a reverse takeover, we tried to tick all the single boxes that institutional investors would need so that now, that they are starting to adopt Bitcoin, and eventually they’ll start to adopt Bitcoin mining more specifically, because it does provide those better returns as a lever to Bitcoin, they’re going to look for those players like us, who meet all their investment criteria.

There are definitely [00:33:45] opportunities around to invest in other sorts of electricity. I don’t necessarily want to get into the environmental debate so much. The whole notion that we as an industry are causing a problem is foolish. We’re 10 basis points of the entire world’s electricity consumption and emissions output.

That’s really nothing. It’s not a runaway problem now, and it’s not a runaway problem looking into the future if you understand how we produce hardware over time, how that production capacity is fixed and the halving kicks in every four years to constantly readjust the economic incentive mechanism and displace these older, less efficient miners.

It’s not even as if we can grow exponentially. I think there is a fundamental misunderstanding by the market that thinks that as price goes up, hash rate goes up exponentially as well. And it just doesn’t, we’re subject to real-world constraints. And at the same time, our equipment is getting more and more efficient every single [00:34:45] year.

Much more so and much faster so than the traditional computing industry, something that’s not taken into consideration when people look at this. If you do take a look at the numbers, we’re not a problem. And Bitcoin is  actually solving a lot of environmental problems that people have never had the ability to address before, the flare gas is a huge one.

The concept of a Bitcoin battery, our curtailment program is really huge. And the vast majority of electricity out there in the world, or not the vast majority, but the number one use of electricity is waste. We produce all this electricity everywhere because you always have to have an excess supply relative to demand. If demand ever exceeds supply, you’d have blackouts.

It’s very, very apparent when demand exceeds supply. So we’re up there, we’re monetizing and soaking up this excess energy capacity that exists on the grid. You know, pretty much every publicly traded miner does operate on some [00:35:45] sort of a curtailment program. We operate on one in Quebec.

And most other miners also operate in some sort of curtailment programs. So if power spikes our miners turn off. The grid will reach into our facilities, cut the power temporarily until everybody’s homes have heated up, everybody’s appliances have turned off.

And maybe it’s 15 minutes, maybe it’s 30, maybe it’s an hour, maybe it’s a couple of hours. In no situation is somebody’s home going cold because we’re mining Bitcoin in Quebec. In fact, what we’re doing is we’re providing a huge economic boon to the province because  if we don’t take up this electricity, they’ve got to push it down even further into New York. Lose a bunch more electricity on the way through transmission and resistance.

And then they sell it to New York for half the price. This is an economic boon for the province. If anything, they should be selling more and more electricity to Bitcoin miners because it will provide them with the most revenue for their province. Selling it to New York is actually the least profitable thing [00:36:45] that they can do.

And they have huge amounts of excess capacity in Quebec. The situation where mining is going to be the most profitable are the areas where the infrastructure has been built up, and is being underutilized. And so in Quebec, we have a situation where they built up tons of gigawatts worth of power for logging, for iron ore mining, for smelting, for, for paper mills, all these different things.

And over time, that industry has either become extremely more efficient or has been outsourced to third world countries. But the power is still there. The dams are still there and nobody’s utilizing it, right? So this is a situation where it’s actually even worse because if you don’t have a consumer like us, it has to go into the ground and going into the ground is actually not good for the environment.

 Saifedean Ammous: Yeah, absolutely. In order to be able to give people what modern civilization [00:37:45] is all about, it’s 24 hour access to all the energy that you need. And really there are two kinds of people in the world. The people who have this and people who don’t. This is an enormously important thing.

And it’s something that was built in the early part of the 20th century. You could give a house 24 hours of electricity maybe a hundred years ago, or maybe a few years before or after, a couple of decades before or after, but it’s been there for a century and it’s not an impossible thing to do.

And it’s astonishing to see that in many places that have solved this problem many, many decades ago, they’re failing to solve this problem today. But one of the reasons in which they fail is that, the challenge with it is that the demand spikes in specific periods. On hot days in the afternoon, everybody gets home and turns on their air conditioner, turns on the TV, and turns on a whole bunch of other devices.

And that causes a big, giant spike in [00:38:45] electricity that is bigger than what the demand usually is. So in order to be able to give people 24 hour electricity where they can just go home and not have to worry about not being able to turn on the air conditioning or the heating and not being able to cook.

You need to have a power plant that can provide full capacity for the highest amount of demand that you get. And that means that the majority of that plant’s capacity is going to necessarily be idle for the majority of the plant’s life. You build say a hundred megawatt plant because that’s the maximum capacity for the area that you’re at.

But for the majority of it, for the majority of its life is going to be running below 50, maybe. And all of that excess  capacity,  you could utilize it. You could make good money from it if you ran it on the side, in order to mine Bitcoin. This is what people don’t get. They think all of the Bitcoin mining that is taking place [00:39:45] is just all of these massively expensive electricity that’s being taken away from people and driving up people’s costs, but it isn’t. In fact, if anything, it’s bringing down people’s power costs because if your power company, whatever energy source it’s using, if it can sell part of the energy of the idle capacity that it has laying around for the majority of the year, if it can sell that to the Bitcoin network, it can make a lot more profit from the Bitcoin that’s working.

It can bring your power prices down. It’ll become more competitive.

Ben Gagnon: Yeah. The peak demand thing is a problem that we’ve never been able to solve before Bitcoin. And the reality is that when you add in more intermittent sources, especially when your base load demand is coming from something like coal which  can’t turn on very rapidly and can’t turn off very rapidly.

The reality of the situation is you actually just produce more power and you can’t use it. So a lot of this wind and a lot of the solar is producing excess power if the base load [00:40:45] is primarily coal that people can’t use. You know, you actually have to have a huge gas component in there to be able to throttle down as wind and solar pick up.

And that does provide a huge drain on those resources and there’s always an excess. Where I think Bitcoin is going to be, in a couple of decades down the road is pretty much near every single substation. You’re going to see containerized Bitcoin mines sitting there waiting to monetize excess power on the grid for whatever price that is because they have a similar situation with flare gas or stranded gas.

Essentially, if you can’t use that energy resource, the value is zero. But if you can monetize it through Bitcoin mining, and your base cost is zero, it’s always going to be profitable, even if you have outdated, old, inefficient computing hardware. And so this is going to be kind of like a miner’s last resort.

I’m assuming you’re going to get people who are investing in new gen hardware. They might be operating in large scale [00:41:45] facilities and the older scale hardware is going to cycle out and operate in these kind of peak demand capacities or low demand capacities, where they’re able to monetize that excess instead of putting it back into the ground.

Especially when it comes to renewables like hydro. Wind and solar, not as much but for hydro, if we’re talking about investing in new hydroelectric dam, one of the times your ROI is measured in decades. Now you’re looking at a 30, 35 year ROI on a new hydroplant. Especially if you’re looking at a third world country who wants to develop this asset for providing power to their population,  you’re going to build a power plant that’s larger than you need right now, in order to plan for the future. You integrate a small amount of Bitcoin mining into this plant, and you’re going to drastically cut that ROI down from 30, 35 years to 15 to 20 years with a few percentage points of Bitcoin mining, in which case you’ve dramatically changed that investment, right?

And you’re going to attract a lot more investment [00:42:45] from a lot more different groups of people who add to the returns better, the risk is lower. It should facilitate significantly greater energy production and energy investment over time. And I think we’re at the very early stages of this.

The energy companies are starting to realize that we are potentially their best customer. Because if you look at other data centers like a Facebook or a Google, they can’t ever have an offline. Instead of being able to turn off, like we can, they actually have to have diesel generators as backups, because if they ever for half a second, weren’t able to provide service to you as a customer, people would be upset and start looking for alternatives.

You have to be able to tweet every second or post on Facebook every second, or take your selfie and post it on Instagram every second. And you know, all of those need to be available for everybody else to view.

With Bitcoin miners, there’s a cost benefit for us, we can just turn off temporarily. It’s not as if the Bitcoin network stops, it’s not as if transactions don’t get processed. There’s just a cost for [00:43:45] turning off and there’s necessarily a reward for turning off for that amount of time.

Saifedean Ammous: Yeah, absolutely. A good way of thinking about it is that Bitcoin doesn’t really compete with any of our uses because the vast majority of people pay a much higher cost of electricity than Bitcoin pays. So we’re competing on totally different markets, effectively.

Bitcoin is not going to run on the electricity that is connected to anybody’s home, unless that person happens to have extremely cheap power, in which case they have a lot of excess capacity in that situation. So it’s kind of like a pet that you have that only eats the leftovers. You don’t have to pay money to feed this pet because they’ll just eat the things that you don’t eat from your food.

And that’s kind of what Bitcoin does, as you said the biggest single use of electricity is waste. Electricity is just not something that you can [00:44:45] conserve very easily. And so a lot of it gets lost and  it’s not entirely accurate to call it waste because it’s necessary in order to make it happen.

Unless you invent a way in which that electricity doesn’t get lost, it’s baked. Into the technology, it’s a feature. So you can’t really call it waste because that’s the only way to make it happen. But still, there are enormous quantities of that electricity, whether it’s methane flare gas or excess capacity on hydroelectric dams and all of that can be monetized by Bitcoin and  the beauty for me in the whole thing, the poetic justice of it is that and I write about this in my next book, in The Fiat Standard, which is coming out soon in December.

And you can pre-order it from saifedean.com/tfs, the beautiful poetic justice of it is that Bitcoin growing takes away seigniorage from governments and central bank. And then dedicates that seigniorage to anybody who has cheap electricity anywhere, gives them more [00:45:45] money and tells them, hey go invest in more cheap electricity, make cheap electricity, make more of one of the most amazing inventions of the human race that has completely transformed our lives.

And that has made our lives so much better that basically nobody who has electricity, who can have electricity chooses to live without it. Everybody wants to have electricity in their life, who can. And everybody who can chooses to do so. Governments have spent a lot of time destroying our capacity to develop energy.

You look at the amount of subsidies that they give to unreliable sources of energy that are ruining the grid and raising power prices all over the world, wherever they implement these programs, and Bitcoin is like the Robin Hood of the energy markets. It takes from the government. It takes seigniorage from the government and then it gives it to the producers of cheap, reliable electricity.

Cause that’s really what Bitcoin needs. [00:46:45] Bitcoin needs cheap electricity and also reliable electricity. And so it gives the people who produce cheap and reliable electricity, more resources in order to make more and more of it. And I think that’s just amazing. It’s a global bounty for the development of cheap electricity which I think, we’re only at the beginning of it, but imagine another 10 years of Bitcoin and then imagine how much mining grows and then imagine how much cheap electricity is going to be financed through investment in Bitcoin mining.

And then think about the implications for people all over the world that are going to be able to get more and cheaper electricity because of it. It’s absolutely amazing.

Ben Gagnon: Yeah. It’s an economic boon for everybody and having more stable electric grid at lower prices, that benefits every single person on that electric grid.

Whether they’re a residential customer or a business customer or they’re the actual electricity producer themselves. I would think that [00:47:45] also the publicly traded miners have the greatest ability converse that central bank printing press directly into Bitcoin, because what is going to happen is  you’re going to have direct input basically from the federal reserve into investors, into the stock market.

And there’s only a limited amount of places where you can allocate that capital.  We have a fixed amount of Bitcoin mining machines that can be produced every single month. The lead times on miners are long. Historically they’ve been about six to eight months, now they’re 12 months plus.  The situation with China has changed that a little bit, but  chip shortage is the chip shortage.

And if you look at the new payment times and the payment terms with boundaries like TSMC or Samsung, we’ve gone from three to four months out to 12 months. And so for us to change our supply lines, it takes over a year. An increased amount of capital thrown at the industry does not increase the amount of miners [00:48:45] produced.

In which case, what he started doing with all this capital that is being thrown in Bitcoin miners, they probably started doing the Michael Saylor approach and just buying Bitcoin, because if you can’t buy more Bitcoin mining machines and you can’t invest in more infrastructure what else are you going to do?

What else is a better return on your capital? You’re not going to hold onto cash. We know that cash is earning at basically a negative yield. You’re going to invest into Bitcoin. And so we’re going to be a very, very efficient mechanism for taking central bank printing presses and running it directly into the Bitcoin system in a way that private entities just never could do, and entrepreneurs  seven, eight years ago could never do.

When I started my Bitcoin mining company six years ago, it’s not as if we had access to bank funds or anything like that. Everything had to be bootstrapped with your own personal cash, family and friends or investors. And now the markets are going to do that for us, and it’s going to be up to us in order to allocate that capital [00:49:45] efficiently.

Bitcoin’s your best return, that’s where it’s going to go. So we’re going to have a massive ability to do that.  If you look at stock markets around the world and you want to look at absolute yield, the places where they have the best yields are the places where inflation is happening the most. Like the Caracas stock market is the best performing stock market, I think globally.

And it’s not because those businesses are incredible. You know, it’s not because they’re producing more goods at great prices. It’s just a matter of the printing press going directly into the equity markets. And in the US we have the largest printing press in the world and the largest equity market.

So it is able to absorb a larger printing press, but there are limits to all of these things. And I think that’s primarily what’s driven up the FANG stocks more so than everything else, because people think they have higher scalability and you can continuously throw more cash at them, but there are only so many users of these products in the world.

They can only be on your services so many hours in a day. You can’t [00:50:45] scale up more than the global population and you can’t scale up more than 24 hours in a day. Now there are limits to all of these different things, whereas Bitcoin is, is truly unlimited in that potential.

Saifedean Ammous: Yeah, absolutely. I’m wondering what do you think of the possibility of mining with intermittent energy sources like wind and solar? Do you think this is something that’s sustainable or is it likely that it will only survive at this stage because these things are subsidized? Do you see a way in which it can be run profitably sustainably?

Ben Gagnon: Well, I mean it is profitable right now because of the subsidies. You can get solar power right now for 3 cents or under, which is globally competitive. The time when the solar is not plugged in, you have to be tied into the grid. But this is all a balancing mechanism. One of the things with the intermittent power sources is that they generally have a power purchase agreement with the utility.

If they produce more power than they’re allowed to sell, that goes into the ground. [00:51:45] And if you have inefficient miners or older cheap miners, it becomes really easy to monetize that  when your base energy cost is essentially zero, because you have no other ability to sell it.

So with the intermittent power sources, it doesn’t make sense to deploy brand new, very expensive equipment, but it will become a ground for all this older equipment to have a second life and provide better returns for that utility.

You know, it’s going to be where the S9’s go. And in the future, it’s going to be five years, six years down the road, it’s going to be full of S19j’s cause what you want with an intermittent power resource is you want to be able to monetize the power for the lowest amount of cost, which means you want the lowest CAPEX.

And you want to minimize your opportunity costs from being down. If you have the newest equipment that’s producing the highest cash flows, it becomes very expensive to be offline, but if you’ve got very cheap, old equipment with not very high cash flows, the cost of being [00:52:45] offline is not so great. And the cost to monetize that otherwise would be wasted resources very low.

And so you’re going to see all the older equipment recycled out, I think into these kind of scenarios. And it will be primarily financed by subsidies. The only way that solar gets down to that cost is through subsidies and the same thing with wind. You know, they have significant challenges there with those investment vehicles, because even though they’re classified as sustainable resources you need to replace the solar and the windmills after 20 years. They’re not permamently running. It’s not as if we put up a windmill and it just runs indefinitely for the rest of time.

Saifedean Ammous: Yeah, and putting it up and replacing it is no joke. It’s not like disposing of an engine. The windmills are enormous. And the solar panels take up a lot of space.

Ben Gagnon: Absolutely. The windmills are already being replaced after 10 years instead of the 20 years that they’re supposed to be done on because [00:53:45] you know, people like Warren Buffet say, well I can get  cheap financing and I can get subsidies to upgrade these windmills.

And, you know, even though it’s not at its useful time span, I’m going to do it now because the subsidies make it cost-effective to do so. Which means that we have windmill blades piling up all over the world because there’s nothing that you can do with these things. They’re all fiberglass.

They can’t be recycled. They can’t be transported easily. They can’t really be broken down into new materials so effectively, at least with current technologies.

Saifedean Ammous: Yeah, and of course we should add that everything along the lifecycle of this windmill turbine is done with hydrocarbons. You can’t manufacture wind turbines on wind energy.

You need to make gigantic fires and have probably coal plants or gas or, and the turbines themselves are made from petroleum byproducts and then transporting them of course, cannot be done [00:54:45] on anything but machines that run on hydrocarbons and then disposing them of course also requires the same.

So the whole thing is an elaborate exercise. What I like to call hydrocarbon washing. Where we spend a lot of  hydrocarbons in order to build this extremely complicated contraption that hooks up to our machines and then lets us for a few minutes every day or a few hours every day, pretend like hydrocarbons didn’t go into doing what we’re doing right now.

But in reality of course it’s not just the windmills, it’s also the entire grid and all the cables and wires that go into making it. None of that would be possible without hydrocarbons. We can’t make that out of twigs and we can’t dig metals at scale at this cost in order to be able to produce it without hydrocarbon.

We’re big hydrocarbon enthusiasts here at this seminar.

Ben Gagnon: Absolutely. I mean, there’s really only two truly sustainable resources, as far as I’m concerned for [00:55:45] power, it’s hydro-power and geothermal. You know, those are the only two assets that you can really produce that just continuously generate power for decades and decades, if not a hundred plus years.

Everything else is literally a fraction of the lifespan.

Saifedean Ammous: Yeah, absolutely. All right, so next thing we wanted to talk about is the China ban. What is your impression of what has been going on in terms of there? What is your insight from the mining industry on what the effects of the China ban are?

Ben Gagnon: Well, it’s pretty clear that the China ban is not anything to do with the environment or emissions but everything to do with capital controls and financial controls over their population.  Looking at what that means for other miners, it’s a huge boon for us because the peak network hash rate, which was estimated at 198 exahash on, I believe April 15th of this year. Currently it’s around 89, 90 exahash, and that’s more than a 50% [00:56:45] drop in peak hash rate. And that just means that everybody who else is installed and operating, their market share has effectively doubled.

Which means we’re making twice as much Bitcoin for the same amount of cost. It’s a huge, huge boon for all of us and running the math is quite startling. We dropped from 198 to 89, it’s 109 exahash. You can reverse the math out using the watt per terahash efficiency of the miners.

If you were talking about new gen miners, which were not, it would be something like 1.2 million machines with a 41 terahash average. On the high end, you would be 100 watt per terahash, which is like an old S9. And that would be 7.8 million machines. Realistically, the number’s probably somewhere between 60 and 80.

So we’re somewhere between 6,5 to 8.7 gigawatts worth of power taken offline in China. 2.2 and 4.3 million machines. This is a huge amount of [00:57:45] infrastructure that just came offline and China’s by far the world’s number one electricity producer and consumer. The US second I believe Canada third, but  we don’t have this kind of infrastructure anywhere else in the world and no other country operates at Chinese speed.

So for these miners to find a new location and a new home is going to take years and at the same time, we’re still producing roughly a hundred thousand new miners every single month based on production schedules and payments to the boundaries that have been done for the last 6, 7, 8 months, laying the groundwork for this going forward.

So it’s a huge amount of infrastructure that cannot be deployed. Obviously there’s going to be a big rush to develop new electrical resources, new substations, and that sort of thing now. And transfer all of this over to western countries, but what takes eight to 12 weeks, and China’s going to take eight to 12 months in the US and that’s just a [00:58:45] reality of how fast things move in China versus how fast things move in the US. So for everybody who’s sitting here operational with machines now this is higher profitability now, and for a long time looking forward.

Saifedean Ammous: Yeah. Do you have some guess as to when the hash rate will recover? You know, we were on the verge of 200, we’re probably around 93 today. Looking at the daily estimates over the last week or so we’ve kind of bottomed and we’ve been flat around the range of 80 to 100 million terahash per second.

In this case, do you think we’ve bottomed and how long do you think it might take until we can hit 200?

Ben Gagnon: It’s anybody’s guess how much rack infrastructure is actually available and ready right now, but I’d say it’s incredibly small. The prices of hosting have been creeping up rather rapidly with the China situation.

The demand for [00:59:45] hosting is significantly increased. Realistically I’m thinking this is probably going to be 12 to 18 months before we’re at our previous all time high again. And this will largely function as a result of completely new infrastructure developments. Some electrical or some minor upgrades, converting from older hardware to newer hardware, increasing the hash rate with the same amount of power.

But this is gonna take a while for the market to adjust. As of right now, you’ve got a lot of miners who have already put their miners in containers and on boats, shipped off to the US but they don’t have a place to plug them in. They might sit in storage for months at a time while they work on these deals.

And the Chinese have come to the US and Canada before in the last bull run of 2017 and they quickly left because they realized they couldn’t just drive up to a power plant on a bus have a couple of drinks, shake a couple of hands and have a deal signed. It’s something that they learned the hard way, [01:00:45] and they’re going to need to find trusted counterparts to work with them and navigate the bureaucracy and the rules here and help develop this infrastructure, it’s a completely different way of doing business than in China.

And it’s not something that they’re used to. But the reality is that the economics are there to justify them paying more than they’ve ever been used to paying. And they’re in a bit of a rock and a hard place between paying for this equipment or having already paid for this equipment and not being able to monetize it.

So there’ll start to get creative. I think what we’ll see over the next two years is maybe a lot of temporary installations that take advantage of things that they can develop quickly, even if the other higher costs of electricity per kilowatt hour. Probably a lot of containerized deployments that can get everything monetized faster and as they develop cheaper resources, it can move the infrastructure easier with less costs.

Saifedean Ammous: Yeah. All right, well Peter has a question for you. Peter, you want to go ahead?

[01:01:45] Peter Young: Yeah, sure. Thank you, Ben. That was absolutely fascinating. My question relates to the China ban and the possibility of something similar with mining happening in Canada. In your answers, you are quite explicit that Bitcoin competes against the legacy financial system.

You’re also quite confident it seemed that what’s happened in China will not be happening in the markets in which you operate. So I just wanted to get a sense of why it is that you think that places like Canada are more prone to protect investments in mining, especially given that from what we can see internationally, it seems like Canada has taken quite a few reasonably heavy handed policies, particularly during the COVID era to clamp down on things it doesn’t like.

Why is it that you think that Canada’s a stable environment for mining going forward?

[01:02:45] Ben Gagnon: Well, and I think this is true for both Canada and the US but it goes back to what I was saying earlier about how we’ve developed all this infrastructure here in Quebec to facilitate old industry. And this industry has largely moved on to third world countries or become extremely more energy efficient, but those resources are still there.

Nobody’s investing in these areas. If you look in the US, places like former Alcoa plants, New York,  here’s a huge amount of power up there on the border with Canada and upstate New York, at a former Alcoa plant, that’s been shut down and moved overseas.

That entire town has been gutted economically. Nobody has reinvested in that town since how Alcoa left. You go on Zillow right now and you can find houses there for $10,000, $20,000. I mean this is obviously a town that nobody else has been interested in other than Bitcoin miners. When you look at what governments are interested in, I think it’s primarily jobs and tax revenue. [01:03:45] We are as an industry, investing in areas and taking advantage of monetizing resources that nobody else is interested in.

In which case we’re an economic boon to all these different populations. And so I think you’re going to have, a struggle between local governments and federal governments.  Obviously the local governments are going to receive the most benefit from having their local populations employed and their local assets generating productive returns and being reinvested in those communities.

All the federal governments are going to be the ones that feel potentially more threatened as to what Bitcoin does to build our own currencies. At the same time, if you’re looking for basically a sponge to absorb all that liquidity, it goes back to what I was saying earlier that we are the sponge that absorbs all this excess liquidity that they’re pumping into the market.

You can’t find other industries that can just absorb all the inflation and all the money printing that they’re going to do. So in which case we kind of [01:04:45] are that buyer of last resort of their liquidity. In which case they can extend this behaviour significantly longer than they would be otherwise.

And I think Venezuela provides an interesting example on that. I don’t know if that regime would still be there if there weren’t Bitcoin miners operating that country, generating positive yields and  productive assets that the population could actually be trading in, going over across the border, buying goods, buying food, buying products, and then bringing back into the country.

It simply doesn’t make sense if you’re in Venezuela to be working for boulevards. But it does make a lot of sense to be working for Bitcoin. And if you are earning in Bitcoin, I think that provides a much higher quality of life and it reduces the pressure on the government in order to provide all those services and the needs for their populations.

So in that way, it kind of enables them to keep doing what they’re doing for longer.

[01:05:45] Peter Young: Can you apply that same logic to China as well? That if they’re interested in jobs and tax revenue, then they want to have this industries near to them rather than in other countries.

Ben Gagnon: Well, I think that’s primarily what drove all the investment in China in the first place. The kind of follow like a field of dreams approach when it comes to developing infrastructure. And they developed infrastructure and locations where there was really no demand for that infrastructure because they have a system of government that encouraged developing these different assets in different provinces. If you look at how many people are in the politburo, which is the top ruling class of the communist party, has about 250 people.

And over half of them have degrees in hydroelectric engineering. Where are they going to allocate  their tax revenues? They allocate them into hydroelectric dams because it’s what they know that they’re going to be able to get passed and supported, but they start developing [01:06:45] these resources in places like Sichuan, where there is no industry and there’s no demand, right?

All the demand is on the east coast where all the manufacturing takes place. And in order to bring that electricity from Sichuan over there requires ultra high voltage transmission lines. I mean, technology that literally the Chinese had to invent so that they could economically move that electricity from the location where they developed the resource to the location that actually demands it.

Whereas Bitcoin came in there and provided a boon.  These people could work into the local areas. They could generate tax revenues in their local areas. They could reinvest in the economic development of those local areas in ways that nobody else is gonna do.

It’s not as if companies wanted to make cars in Sichuan. But everybody wanted to make Bitcoin. We’ll see what happens with China over the long-term. A lot of Chinese are wondering and hoping that they reverse their policy and restore this industry back. It’s way too early to tell what’s going to [01:07:45] happen there.

And China can move in a very, very fast way. With this last ban, it happened over the course of about four days. And if they wanted to reverse that they could easily do that in four days. Couple of weeks for them to build back up the infrastructure, but they could certainly do it faster in China than we could build so in the west.

 And they might realize that this is a boon for them, but I think  their goals are more on control. As opposed to job creation and GDP, China has a lot of ways that they can pump up those numbers. They have their own number go up technology when it comes to GDP.

And I think they’ll utilize that first.

Saifedean Ammous: Yeah, I think perhaps the key thing is that in China, the reason that they did clamp down was because of capital controls and that’s a serious issue in China. People who go do business in China are usually getting propositioned to smuggle capital because it’s a huge issue.

So you can see why Bitcoin would be [01:08:45] quite sensitive and become a problem. Once it grows beyond a certain point you can see how it can undermine the financial control that the political party there enjoy, the CCP. It’s not clear that that is this generation in most other countries, at least not yet.

You know, we’re not at the point where you have capital controls. We’re not at the point where they’re confiscating people’s bank accounts. Well, some would argue we’re getting there, but I think it’s still a long way to go before, well who knows how long. In fact, these things can move very quickly as we saw last year with the coronavirus.

If there is going to be something like that happening in the west, it’s going to come when these countries start to move against the freedom of capital basically, freedom of movement of capital.

Ben Gagnon: Yeah. And we have historical evidence of Bitcoin restrictions being a form of capital control.

If you look back in 2017, China implemented a policy where they [01:09:45] restricted withdrawing Bitcoin from Bitcoin exchanges. They still allowed you to transfer your RMB to the exchange and buy Bitcoin. But you’d have to sell the Bitcoin on the exchange and withdraw your RMB. You weren’t allowed to withdraw the Bitcoin anymore.

Before that, you were freely allowed to move your RMB there, buy Bitcoin, send the Bitcoin abroad and sell it for whatever currency you wanted to do. Now, obviously they’re not a big fan of that situation because of their strict capital controls of about 50,000 USD leaving the country per year per person.

What they did when they implemented that policy though, was they didn’t implement it for all cryptos. They just implemented it for the number one, Bitcoin. And immediately you start seeing Ethereum’s price rally from $10 to $430. Now the rest of the west is saying, well this is because Ethereum works and ICO’s are the future.

But the reality is this is really just a capital control mechanism implemented in China and the Chinese still wanted to perform the same function. And so they bought the number [01:10:45] two and it drove the value of Ethereum up from $10 to about $430. And most of the west doesn’t understand that because they don’t understand China and they don’t speak Chinese and they’re not following Chinese news, but to those of us who were operating in China at the time, this was a pretty clear situation.

Saifedean Ammous: Ah, interesting. I did not know that. One more question. We’re running a little bit into our scheduled time, but I wanted to get your thoughts on Bitcoin mining equipment and the centralization of its production. First of all, do you think the manufacturing has been decentralizing over the past few years as most people think, and how do you see it playing out in the future?

 Do you see forces for centralization of the production of miners, or do you think over time we’re going to witness more decentralization?

Ben Gagnon: I think we have two different incentives happening at the same time, kind of competing against each other.

[01:11:45] I do think that there’s going to be greater centralization in terms that there’s going to be larger and larger scale miners. At the same time, because of that economy, you have scale, or economy of scale shaped like a U, I think we’re going to increasingly incentivize smaller mom and pop people for running one or two miners.

Saifedean Ammous:  I’m sorry, I should have specified. I meant the production of the mining equipment, not the mining itself.

Ben Gagnon: Well, the production of the mining hardware?

Saifedean Ammous: Yes.

Ben Gagnon: I think that’s been increasingly decentralized over time. When we first started, it was really just Canon producing equipment and every single time there’s a bull run, there’s a bunch of new miners who are trying to come into the space and they say, look we can produce a better or similar quality of chip for a lower price. And we’re going to take a lower price on our hardware because we don’t have the operational and the reputational history that the bigger players have.

It’s something that we see now as Bitcoin was going up to [01:12:45] 60k, a ton of new entrance were getting into the market and saying this is a great time for us to produce our chips and produce our new hardware and sell them to customers. So I think we’ll continue to see more and more players.

I doubt that there’ll just be one or two mining manufacturers in the future. The hardware is a commodity, right? Anybody can produce that with the right skillset and the right connections to the foundries. I think that you’re going to have more and more companies do that. And I also think you’re going to have more traditional computing companies start getting into the space.

You know, companies like Intel, aMD, Nvidia, they’re going to start to realize that this is a really good business for them to enter into. It’s a great use of their existing resources, technologies, stack and experience. Why do you want to develop a chip that you have to market and sell to consumers when you can develop a chip that just has a predictable cashflow attached to it.

And if it does have a predictable cashflow [01:13:45] attached to it then there’s a very easy way to price that chip. Everything else that they do now  is a marketing game. You know, for Intel CPU or for GPU’s, it’s all marketing. I think you’re going to see a huge demand for that.

Saifedean Ammous: Yeah it is honestly curious for me that they haven’t moved quicker into it.

And it’s curious that the majority of mining manufacturers are in China. Now, what do you think is when you say decentralized, do you think that will also change over time, that we’re going to start getting more non-Chinese manufacturers or is there some reason that continues to make sure that they have an advantage?

Ben Gagnon: I think they’re going to see North American manufacturers emerge in the next 12 to 18 months.

Saifedean Ammous: Yeah, I guess so. A lot of people think of this as, they think that the bigger the companies that get into Bitcoin, then the more insecurity or the more attack angles this creates. I tend to have the opposite view.

I think [01:14:45] the more institutionalized and the larger that Bitcoin becomes, first of all there’s the political aspect of, you have more people with serious money who are invested in Bitcoin. And so more politically influential people are able to sway political decision-making in favor of Bitcoin.

But also I think in general, this is the result of my understanding of capitalism, you want to trust yourself and in fact, you do this most people don’t like to think of it that way, but you’re constantly trusting yourself and your life and your work and your wealth to things that are produced through the magic of reliable, long supply chains. The division of labor and the people who are specialized in doing what they do, this is what makes anything work.

And we use a lot of complicated machinery every day, and the way that that complicated machinery can be done reliably, the way that it can be produced reliably is when you have large companies and large supply chains.

You have a [01:15:45] producer who just makes one tiny little part of your laptop in one country. And then it gets shipped into another country where it, they add other stuff, and then it gets assembled somewhere else. So many different parts come together from many different places in order to make your computer or your car happen. And when you have that degree of specialization, each participant is producing each thing that they’re doing many times, and with such a degree of repetition.

They accumulate the capital for it. They increase their productivity and they’re able to do it very, very reliably. And for me, this is the safest thing. This is why technology is safe because you have these long supply chains where everybody is extremely specialized in what they do.

And I think introducing this into Bitcoin mining and having more and larger and more professional companies and more diverse supply chains is I think going to be a net win in the long run.

Ben Gagnon: Yeah. I think we have [01:16:45] a geopolitical issue with supply chains that people don’t fully comprehend. You know, I have a feeling that we’re living in Atlas Shrugged where the infrastructure is continuously breaking down and things that you expect to be functioning normally just stop functioning normally.

It seems like every day I’m reading about a plane falling out of the sky which is just something that you went to have heard before or infrastructure exploding or collapsing. This is something that I think is going to happen more and more, and as infrastructure falls apart, so will supply chains.

I think people are going to need to think seriously about their supply chains and how this works. Fortunately with Bitcoin, at least our miners are very, very simple products. Besides the chips themselves, we don’t use anything that’s a rare resource or a difficult to produce component.

We’ve got PCBs, which can be manufactured anywhere. We’ve got things like capacitors, which can be manufactured anywhere and for almost zero cost, computer fans, [01:17:45] aluminum shells. I mean the vast majority of the technology and components in the miner are produced all over the world already and are incredibly simplified.

It’s only the chip production, which is entirely concentrated in a few places. And I think even TSMC understands this. TSMC is the number one producer of chips in the world. But if you look at where they are investing in their new production capacity, they’re not investing down in Taiwan.

And I think it’s a geopolitical move against China coming in eventually and taking over Taiwan, or at least the threat of that happening. Instead, they’re going to invest in the US where they can keep that technology safe, which will provide a net benefit for miners in the US and Canada. Otherwise, that potential supply chain for all Bitcoin mining equipment is threatened, if there is a breakdown in international relations,

Saifedean Ammous: Yeah. That’s a good [01:18:45] point. But again, as the industry continues to grow, I would expect we’re going to see just more diversification and more big players enter the market and each one of them will become less and less significant.

My estimate is that I don’t think we’re ever going to get to a point where we’re going to have somebody as powerful as Bitmain was in 2017. Because at that point, they produced something like 90% of the hash rate. And they chose to use that in the best way to illustrate the lesson that miners can’t control Bitcoin.

And it was an extremely expensive mistake for them. They were on the verge of IPO-ing and then the IPO was canceled and they missed out possibly on 100 fold growth. If you think about the potential that they had, instead of mining b-cash, instead of spending so much time trying to defend that doomed fork, if they had focused on just making more miners and stacking more SATs they’d [01:19:45] have probably done a lot better for themselves.

To end on a positive note, we’re highly unlikely to be in a situation where somebody is going to be more powerful than what than Bitmain at that point. And even if we do, we saw the  worst that Bitmain could do is ruin their own profitability and the CEO got fired and it ended badly for them. The block size war is an excellent source of lessons about the power dynamics of Bitcoin.

Ben Gagnon: Absolutely. I think that was probably the biggest test of anti-fragility to date. I do think that China’s ban of Bitcoin mining is an even greater example of Bitcoin’s anti-fragility. Here’s what happens when a country comes in and completely shuts down an industry overnight, and nothing happens to the network in terms of production transactions.

Everybody’s still going through, everything still processing exactly as intended. It would be incredibly difficult for other [01:20:45] countries around the world to produce the same sort of legislation and regulation, and also do so concurrently in a way that actually threatens the network.

So Bitcoin being shut down in China, I think is a general boon. Those miners are going to be pushed to all sorts of different  jurisdictions and locations that they’ve never thought of before and never even considered before. So in that way we’re getting a huge diversification geopolitically of the mining infrastructure all over the world.

And I think that’s, that’s good for the security of the network. I think that’s also good economically for all these different regions. The last thing I think you want to be as a country that has zero Bitcoin mining happening in your country, if you don’t have that, it’s going to be very, very hard to generate returns in the longterm I think.

You’re going to need to have a consistent cash flow of Bitcoins in your country. Otherwise you’re always going to have to be printing more cash to get more Bitcoin. 

Saifedean Ammous: You know, I think you’re probably correct on this perhaps [01:21:45] in this kind of transition period, but I think in the long run, maybe I’m going to disagree with you on this.

My example that I like to give is Switzerland was the place that had the most gold per capita. It had the best banks in the world that everybody in the world used to send their money to Switzerland because their banking system was backed by gold. And so they had tons and tons of tons of gold, and yet they had zero gold mining.

There was nobody mining gold in Switzerland. On the other hand very poor countries in Africa were mining a lot of gold, but it was all leaving their shores and going into Switzerland. I guess, in the long run, I’m not so sure that there’s going to be that much political and economic importance and significance for Bitcoin mining.

Although I can see why it would be the case perhaps now, because Bitcoin mining allows you to acquire , if you do it properly, if you can run it profitably, you can max [01:22:45] out and increase the amount of Bitcoin that you can accumulate. And then particularly for a country that does this to use its spare capacity and spare energy, it can be massively profitable.

You could probably cancel your national debt perhaps, by doing something like this but maybe in the long run Bitcoin mining ends up being just another utility, it becomes like plumbing. Nobody cares. Plumbing is really important, but the people who make pipes for plumbing, that doesn’t give them any kind of extra strategic leverage over humanity because they make our pipes, they make our pipes because they currently happen to make them at the lowest price for us.

But if they start messing around, we can easily get new pipes from somebody else.

Ben Gagnon: Yeah. I think you’re definitely right in terms of gold and the centralization there, and I think with the securitization of Bitcoin miners and the securitization of Bitcoin, you will see a huge centralization there in [01:23:45] the financial markets. The difference with gold is really just the barriers to entry where there is the low end of things where you can go gold panning in a river with, you know, anybody can do that for a low cost, but you know, pretty much all of those gold resources are developed and gone.

If you want to start mining gold and you know, actually mining gold, you have to do a huge big open mine. It requires huge amounts of CAPEX, resources, permits, government support, all these different things. To get started mining as a Bitcoin miner, you need a couple of hundred bucks, a little bit of internet a little bit of power and an internet connection, which really levels the playing field.

You don’t actually have to find the gold resources and develop them economically.

Oftentimes you’re taking advantage of improperly priced electricity. Or maybe just using as a hedge against, you know, your inflation as they’re doing it in Venezuela. It is a slightly different thing.

Definitely there is going to be centralization, I think, in [01:24:45] the financial markets, just because of that’s where the capital goes first. And that’s the big thing driving Bitcoin is just the issuance of new capital. I think as the capital markets understand that and as investors understand that there’s going to be huge pressure to put more and more Bitcoin on your balance sheet and ideally more and more hash rate on your balance sheet because it’s a lower cost way of accumulating Bitcoin over time.

So in that way, I think we’ll see huge amounts of centralization for sure.

Saifedean Ammous: Yeah. All right, well thank you very much, Ben. This was very fascinating and informative. Appreciate you coming on.

Ben Gagnon: Yeah, a pleasure!

Saifedean Ammous: All right, have a good day, take care!