The Third Bitcoin Halving Just Happened: What Now? - Ep.172

Transcript

hi everyone a few notes for me before we begin first happy Bitcoin having everyone what a momentous occasion and accomplishment for the Bitcoin network I was so excited to be a part of it and to watch it all happen we will see what happens in this next chapter of the first cryptocurrency second I'm doing another survey to find out what you want from the podcasts and how I can make them better last year we heard you loud and clear on the news front and so have begun including a weekly news recap at the end of every unconfirmed this year what would you like to see from Unchained please take a moment to fill out the survey to let us know what you'd like

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to the global financial infrastructure whether you're looking to power a payment application or issue digital assets like stable coins or digital dollars stellar is easy to learn and fast to implement start your journey today at Unchained stellar org today's topic is the Bitcoin having here to discuss our Amanda Fabiano director of Bitcoin mining at the fidelity Center for Applied Technology and Christopher Ben Dixon head of research at coin shares look I'm Amanda and Christopher hey Laura thank you for having me on the pod I'm really excited to be here with Chris who is you know one of the first researchers to publish reports on the state of the mining ecosystem so we're really happy to see some research back up some of what we've been thinking

internally about the Bitcoin mining network from him yeah thank you for having me it's a it's an honor and a pleasure so this is a momentous occasion in bitcoins eleven-and-a-half year life so far the third having it's an event in which the rate at which new bitcoins being minted is cut in half when the Bitcoin network started up in January 2009 it was minting 50 new bitcoins per block then in November 2012 that was dropped to 25 bitcoins in July 2016 it dropped to 12.5 bitcoins and when this podcast comes out just a few hours before that will have dropped to 6.25 new bitcoins every 10 minutes so all of

this happening and the new bitcoins movement it this will happen in perpetuity every two hundred and ten thousand blocks until asymptotic ly Bitcoin approaches a supply of 21 million bitcoins so Amanda and Christopher to you what would you say is the significance of this third having why should people care about it of course I can start so you know I think the important thing to note about Bitcoin happening is it doesn't change regardless of economic circumstances right so we don't print more Bitcoin we all know the rules and you know the halving is expected and it's fair and it's what makes Bitcoin scarcity real we think about the past two data points on the happening there's

only two data points right we don't have a ton of information on you know what could potentially happen after the happening and you know as it's the same go as past performance is not and is not an indication of future results rate and I think that really applies here too so I'm curious to see you know what will happen at the half-inning and Chris that we can probably dive into this a little bit more but I don't want to go too far without your input yeah no I also think this is it's quite a momentous occasion and the timing couldn't be more awesome in my opinion I mean you have you have this event that happens every four years programmatically automatically it's done without emotion by a bunch of computers

that aren't influenced by world events or charismatic politicians or anything like that it it just happens according to plan and it just shows the credibility of the Bitcoin monetary policy especially in contrast to everything else that's going on right now and so like for miners it's relatively simple to what happens the wrong the revenue of gets cut in half right and what that means is that the price has to stay above the level it cost that miner to mine a Bitcoin in order for them to stay profitable so because many miners are still thought to be operating older machines we could potentially see it drop after the happening around 20 to 40 percent yeah well that's what I was wondering in the

first couple months coming out of the having what metrics will you guys be watching we'll be watching the hash rate first and foremost it's it's really the only way to to gauge what's going on in and it's not even in real time it's it's pseudo real-time so I'll be watching the hash rate pretty closely seeing you know the the magnitude with which it drops if it does is price dependent of course and from the past now we can't know exactly what the price is today so and when you say you know the hash rate is really important like why is that that basically signifies kind of the security of the network the amount of resources

being put in by the different miners and the computers to keep the network running so why is that so important to watch what happens to that metric so one really interesting thing to consider is the different level levers right that you can pull when you're thinking about the hash rate and how it could affect hash rate so there's like three different areas that into so like Chris said if the price continues to rise when the happening happens miners could remain on because again that the whole basis of Bitcoin mining is the price just has to stay above a miners level to bet it cost them to mine a Bitcoin right so that they can stay profitable but there's you know two other things that I think are pretty interesting to think about

so publication and power contracts right so if the happening is in the middle of the month which it is I just wonder if we'll see an instant drop in hash rate and we could argue that you could but you could argue that you maybe that won't happen and I think it all relates to how miners are builds right so I've seen a lot of different contracts for miners and is it you know monthly it do they have long-term contracts is it annually are they even able to shut off so I think that's like a really interesting fact to think about when people turn off their machines another data point Oh Chris did you want to jump in no I was just going to contrast that a tiny bit to what we just saw about a month and a half ago at March twelfth which which was an unknown event of

beforehand which should change Thursday yeah so you know there we we had an effective happening in not in every single possible way but in a lot of ways in that my revenue was pretty much cut in half overnight but that event was unknown whereas this one is well known and can be planned for well in advance so all things other than that being equal it should be less likely that we see disruption on that level at least so rapidly yeah and Chris that whole point is really interesting too so it was a 16 percent drop right and hash rate which

coincided with the price of Bitcoin also dropping and then two weeks later we saw the hash rate bounce right back up and the interesting thing that I think here is the delay of shipment due to coronavirus of new machines so one hypothesis could be that miners were waiting to refresh their machines before the happening happen because that's something that they can predict and so maybe they were just waiting for their new machines to come and because of the delays of kovat machines weren't really being shipped before March but like between March and April middle of March and April then we regaining I'm shipment so you know the miners the dip on Black Thursday could have been you know miners weren't profitable with the old gen machines so

then you know when they got their new gen machines a couple weeks later we saw our hash rate bounce back up I also heard anecdotally from a couple of lending sources that the March 12 draw up kind of accelerated the reinvestment cycle in Dadar bunch of miners kind of had a fire lit under them a little bit and sped up that process that they possibly would have waited some more weeks with in the absence of the March 12th drop so it sounds like what you guys are saying is just there are so many different factors here that could affect what happens to the Bitcoin price in the wake of the happening and

some of it is that because of the way miners can be billed that there might be delays in terms of the impact that we see you know depending on the kinds of contracts that they have they may not be able to really change much what about their it much about what they're doing and yet on the other hand because of issues with like the supply chain or whatever it might be with the coronavirus or you know on the other hand the massive drop in price we saw on March 12th even if obviously it did recover somewhat that that's now kind of hastening people getting new equipment which would help more of them to be profitable even after the halving so it sounds like there's kind of like a

lot of different mixed signals going on and we'll sort of have to see how they all play out and impact each other after the having is that a fair summary yeah I mean this is a very complex industry and it's also quite opaque so the estimates that we can give are very often based on assumptions that we can't fully prove we can make reasonable assumptions and and we can look at things like the hash rate and we can we can we can observe the way it behaved after March 12 to get an idea of you know who was swimming naked at the the bottom priceless that we saw but at the end of the day that having is not coming

as a surprise but the March 12th event did so it might not be a fully fair comparison either yeah and I would just add that that goes back to like a big key theme just overall that I've been seeing in mining that before from you know 2009 to 2019 a miner was able to have this competitive edge by refreshing their hardware right to the latest machine and now it's really your electrical cost being the lowest is what will keep you above so you know the closer you get to the production of energy the lower your operational cost will be and so you'll continue to be more profitable even during some of those fair markets like we saw or that one day of a bear market right that we

saw in March or just future bear markets in general yeah so all of this is I think it's gonna keep all of us even more in the edge of our seats to watch what happens but I also was curious so kind of what we've been discussing is maybe the more immediate impact on Bitcoin but what do you think will be the longer-term impact that the having has on the price maybe say like a year or so out again you know this is speculation but our Chairman Danny masters had a really interesting take on this he compared it to the mechanics that he observed around 2016 which was that we have a market

that is fairly in balance right now you know the price has been ranging not going other than the the rapid drop and recovery that we had recently which you could claim was an exogenous event but India you know if you disregard that we've had a market that's fairly well balanced which you know all things else considered should mean that inflows or matching new production less so if inflows continue at the levels that they are right now where the market is pretty much in balance but supply is cut in half normal supply demand should indicate that there would be an upward pressure on the price which is what we saw in in

2016 you know it laid the foundations for for a long term bull market you know and on top of that we we have some pretty interesting macroeconomic tailwind happening right now so it's hard to give specific predictions but I personally I think this will be positive I'm not expecting some incredibly rapid jump in prices or anything I think this is a mechanic that takes a while to sort of manifest and I think it's like a long-term chugging more than more than a rapid jump service but you know when you talk about the long term macroeconomic factors are you just talking about

things like quantitative easing that increases the money supply or are you also talking about you know I don't know like some people are saying now that bitcoin is being perceived as a as digital gold which makes it seem less like a risky investment than people used to perceive it in the past well it's both and you know we've observed more interest from people who are now getting increasingly worried about the fiat financial system they're getting worried about inflation every day that Bitcoin keeps existing and doesn't disappear magically is another day added to the certainty that people feel that bitcoin

will remain here you know a year from now two years from now so III think it's actually a combination of both yeah yeah and I would just say if we think about just if we zoom out from the price of Bitcoin and the future price of that there's a lot of people building right on top of Bitcoin and investing in companies in Bitcoin so we could argue that it's not going anywhere anytime soon dan Moorhead of Pantera capital was recently on unconfirmed he mentioned that Pantera projects that Bitcoin could reach a hundred and fifteen thousand dollars next year due to the projections of something called the stock to flow model what do you think of that projection and Christopher

I think you're also familiar with this model if you want to just explain a little bit about what that is yeah it's you know I'm not a statistician so I want to tread carefully here but I am familiar with the model it's a supply based model and it looks at the relationship between the Bitcoin price and essentially the supply bands and the model is predictive in that you can you can at least the first version you can extrapolate I saw that Plan B has made a second version which is the s 2 FX model where you actually intraplate interpolate sorry so I mean I'm I on a personal level I really love this model

because you know it tickles my tickles my inner desires I am skeptical to supply by itself being the singular driving factor behind price I know that there's also been that there were some initial outside peer review of the model that seemingly confirmed the cointegration I've seen that since that one of the authors of those confirmations have not had like second thoughts but but had new realizations that that the results might not hold I

really think that the supply constrictions are drivers of positive impact in the price market but I don't think you could say that that by itself is fully predictive so I I'm intrigued about this model and I like it on a personal level but I'm still a little bit skeptical because it leaves a lot of questions unanswered for me and but I mean according to that model it's kind of funny because with that model I did see two versions of price product projections one was the 115,000 another one was like more than 500k from the lake floor 2021 you know so I mean I think you're right that it's not you

know it's some kind of sentenced own thing and that there is sort of a band in terms of the projections but what do you think of that number well it's really hard to say the the model has the price go to infinity over time and at a certain point you know the the Bitcoin issuance ratio is going to go negative as we reach zero issuance and a nonzero permanent loss of coins and so I mean it's hard to say how far ahead you can you can really look to these results as being predictive we know that it's gonna break at some point it has to right but for next year what would you say I

really hope it's right do you have anything to say about that projection 115,000 no I I feel like I care more about like long-term Bitcoin so like the price and you know a year from now doesn't really excite me to think about yeah there's a lot of different ways that we can think about the direction that Bitcoin price can go but I mean I I'm just here with my popcorns yeah yeah me too so one other thing is I mean we started to talk about this a little bit but you know in terms of the mining industry you know what we discussed was

maybe more short-term impacts but I was wondering also where you thought especially now with the coronavirus we will see the mining industry maybe like a year from now so um you know I think I'm just going to shift your question a little bit to kind of what concerns me about mining now right um which i think is essentially the would i focus on so you know we could look at the happy side of people building a lot more decentralized locations from my both in the US and you know other locations around the world but you know there's kind of like two things right now that I don't lose sleep over but they worried me so one of them being the centralization of hardware right so like

we talked about a little bit people kovat affected mining production of hardware and shipment right but when we think about Bitcoin mining overall the supply chain only has a handful of major mining manufacturers right and all of them operating out of China so if something was to happen to that region that produces the machines miners in the West might not have access right and it's some other large events like a pandemic or something else shuts down this access miners outside of China would never be able to compete without access to like the new gen machines so you know that's a huge centralization risk for mining so one of the things I'd love to see happen over the next few years is more distribution of production

of machines despite you know the house reality that mining centralization will be a really hard thing to overcome is there anything that you can do at fidelity to incentivize you know that kind of production somewhere else and so you know we started out small with what we're doing you know I can give a little bit of background of what we've done so you know we've been mining bitcoins since 2013 and that started in one of our offices as a very small experiment you know the cost of electricity it was certainly not a factor in this portion of our journey and you know we just aim to understand how this holding worked like how this whole protocol worked and you know we set it up there let it run

for a couple years and we refresh the machines in 2015 and then time passed and we began to see about a decent amount of failure rate on the machines themselves right so we also realized that the mining industry evolved quite a bit and so we ordered machines from all the major manufacturers looked into better operational setup both within the walls of fidelity and also at like external hosting facilities and so you know I think that we kind of follow the scan try scale methodology right where we like scan that you go system which is what we've done we try things out which is what we've been doing and then hopefully and we can scale I you know I don't know what the future will be for mining at fidelity you know in 10-15 years but I hope that

we're able to help just generally secure bitcoins Network and you know secure this like future worlds where you know Bitcoin could be the open network and open permissionless network that financial services sits on top of so um one other thing before we because I actually do you want to ask you more about fidelity's role in all this but a bit later but I wanted to ask a little bit more about like the hash rate and mining and stuff there was something that I guess miners or large-scale miners have which is called offtake agreements with utilities and I feel like maybe you did mention this but

could you just describe a little bit more in depth what those are and how those could influence the behavior of miners after the having it's basically an agreement where this is common in a lot of power demanding industry that you you agree with the utility that you're going to take off a certain amount of electricity from them per month no matter what so what that means is that even if you as as a miner sit on a bunch of unprofitable equipment your contract with your utility doesn't allow you to not take that power off them so you're kind of forced to mine at a loss so I think I think situations like that are

probably more relevant in episodes where the the profitability is unexpected like March 12th whereas going into the having I think there is at least a higher chance that miners would try to protect themselves by you know doing specific contracts around that time or or trying to come to an agreement since it is well known beforehand that this would happen so but at the same time you also do think that miners plan for the the profit Billy loss so again the this is this is a mechanic that's very hard for us to sit and watch from the outside

individual miners are the ones that know which agreements they have with their local utility but yes it is the case that sometimes miners don't have a choice they have to keep mining that they have to take that electricity off Vance of the utility and that also works in the opposite direction too right so sometimes if there's a load like too much of the load they will turn off specific areas are specific like access to power and so we've seen that happen before in certain locations where like say if you know energy becomes increasingly a demand then you know in every power contract it will say like we might have the ability to turn off up to

X amount of days so it goes both ways with power contracts and one other thing I wanted to ask about is you know Christopher you I think have done quite a bit of calculation on various things and I know you publish this pretty extensive report in December where you looked at you know kind of all the different types of miners and you said quote the current market average all in marginal cost of creation at four cents per kilowatt-hour 15 percent non electricity op X and 30 months appreciation schedules is approximately six thousand three hundred dollars and I wondered is that still your basic estimate and so like around the time of

recording bitcoins like roughly nine thousand is it fair to assume that some percentage of the coin miners will drop out and if so do you have a sense of like what percentage that might be so that estimate is a little higher right now so right now that estimate is around seven and a half but it's not that all in ROI estimate that's actually important for when miners shut off their machines it's the it's the cash cost estimate and so the the cashflow estimate right now for four cents with fifteen percent additional topics is around 5,000 but there's a very important thing to remember here is that these figures are market average but

there's a big split in the market between the previous and the new generation hardware so the best thing would probably be to estimate these bands separately because the new generation Hardware probably had a much lower no they definitely have a much lower cost than that and the older generation hardware might have a higher one so and and individual miners could have both generations of hardware in in their operation as well so I think it's likely that at the price that it is at the time of recording we see some drop-off of gear that is just made

obsolete but this gear could come back again later if either the price increases or if they get sold off to miners that have access to cheaper electricity but around you know the 9500 and we could I I made an estimate for this the other day let me see if I can find it for you so 9,500 is a newer miner no 9500 being the good price yeah oh yeah so let me see here I made an internal estimate for this I have to caveat that these are these are a little rough but I think in between nine and ten thousand Bitcoin price my estimate would be that we could see a hash rate

drop of around ten to twenty percent um okay one really interesting research report that came out a couple I think it was a couple weeks ago as Queen metrics they researched into the nonce distribution and so they're estimating that about 23% of hash rate online is coming from old gen s9 hardware so if we think about you know if old gen equipment becomes unprofitable to run unless the price of Bitcoin is where it is today or you have really low electricity it seems like that band of 20 to 40 percent of hash rate drop or and 10% like Chris's is quoting with the price where it is doesn't seem that far

off yeah so actually that isn't a huge drop I mean hash trade is kind of III so I didn't research this right for this show but I seem to have looked at this somewhat recently I think it's like near all-time highs it can either of you correct me on that it is definitely near all-time highs okay so so it doesn't sound like the security of the network would suddenly drop a significant amount from where it was you know like a year ago or whatever right and and the other thing to keep in mind there is that you know how much security is enough but we don't really know so you know a 10% drop it's it's

significant yes but you know we don't know if if you know eighty percent lower than this was quote-unquote enough or you know if we need more it's it really comes down to individual transaction sizes and how many confirmations trans actors want to accept before being comfortable with having fully received about your money so okay well speaking of whether or not the hash rate is quote unquote enough or too much maybe is some more important direction to go as I'm sure you both know there's been a lot of concern about the environmental impact of Bitcoin and I was curious to know how

you expected the having to effect to effect that the environmental impact I don't know that it will have much I mean of course a 15% reduction in hash rate is it's a 15% reduction in you know I guess the current environmental impact of whatever that is but you know it's it's mainly price that that is the the driver of that if the price doubled then the hi shirt would go up if you know past where it was before so the energy consumption question right is something that we often hear and so you know when you think about is Bitcoin

ruining the worlds with its energy consumption we think it's not clearly fidelity wouldn't be doing this whole thing with with mining if they believed that it was ruining the world so you know the energy consumption question is interesting but I think you have to zoom out a little bit so when we think about the mining Network energy spend rate the first reaction I've heard I've had was to try to compare it to something some other type of energy spend that already exists today right but the reality is it's really difficult to find a comparison because there's no benchmark so Bitcoin gets in trouble for the transparency right because you can check the network at any time to see the Bitcoin energy stones but it's really

difficult to determine for example how much energy is expended for any type of other transaction including financial transactions and just you know how much energy is expended to secure the entire financial industry as a whole right so Bitcoin is truthful to a fault and people see this energy spend and think it's really really bad but the thing to remember is this energy spend is being used to secure the entire Bitcoin network yeah I agree with you it's one of those things where Bitcoin can be criticized because the energy or environment or maybe not environmental impact but the energy yeah the energy expense is known whereas with other financial systems I mean does

visa let us know what what the energy costs are for you know running the visa Network Christopher did you want to add anything well and you know that comparison isn't quite fair either because you know visa is a payments network and Bitcoin is a monetary system and so you know if you want to compare visa to anything you'd have to compare it to something like lightning because you know you can bake an incredible amount of economic weight into a single Bitcoin transaction so I mean the we've been using the Bitcoin payments network as if it was like a straight-up payments but in my opinion it's more akin to a settlement network and it gets more efficient with increasing settlement

value so you know you can you can transfer as much money as you want in a single Bitcoin transaction and it doesn't have any impact on how much energy the network uses alright so we're gonna talk a little bit more about where Bitcoin goes from here but first a quick word from the sponsors who make this show possible the stellar network connects people to global currencies and assets stellar lets you make mirror instant payments in any currency with anyone anywhere it's an open watching Network that access payment rails for applications and institutions around the world and designs so that existing financial systems can work together on a single platform transactions powered by stellar are low cost transparent and fast saving

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why was that one of the first things that fidelity tried to do with cryptocurrency mining that's like a pretty unusual step for a financial institution yeah so that's a really great question and it is interesting project that we worked on pretty early on so you know fidelity right now cares about Bitcoin mining for a few reasons and it's important to stress that our operation has always been researched first but learning about how this underlying Bitcoin mining network works we think is essential when you're trying to do things like building businesses on top of it right or investing in Bitcoin companies and so mining is critical to this ecosystem so you know it's critical that we understand mining and being plugged in is important we don't just

mean like physically plugging in the machines but more you know understanding this opaque space that secures the network so that's what we aim to do with that experiment we have a group in FCAT called the blockchain incubator and we do a lot of different experiments with Bitcoin and this was one of many and we said what does fidelity do with the Bitcoin at mines so we don't disclose any of that information I'm sorry it's you know all proprietary information so we can't talk about that sadly but you know it it does allow us to I think the thing that matters most is it allows us to understand how this all works right versus like the profit that we make off of it mm-hmm being very

secretive it's like maybe you guys are hanging out with Satoshi Nakamoto one could dream and I also wanted ass and this is gonna take us down a slightly you know a slight tangent but I was also curious fidelity has also mined ether when did you guys start doing that and do you still do that and if so what would you say is different about mining ether versus Bitcoin yeah so we we explore all different types of projects and products right and when we were mining Bitcoin we said hey we have some servers that could also mine ether so we explored that for a little bit um we have about 45 different pocs that we've put on a shelf and said like maybe this

is something that we'll explore later but it just doesn't make sense for us right now so we could move back into the ether you know mining but right now what I focus on is is mining Bitcoin for fidelity and was that just because of the kind of specific characteristics of Vic wine and due to its monetary policy or did it have something to do with the actual mining of the cryptocurrency itself you know I think it's a little broader than that why for every project that we bring in the door which is our a lot we have a lot of ideas we kind of almost have to get rid of one project right so because something doesn't make sense for us to work on right now doesn't mean that it you know it doesn't make sense for everyone or it doesn't

make sense for us to retake that up in the future so basically we just had to shift what we wanted to do excuse me and you know we just that was something that we didn't pursue at the time but it could potentially come back you never know and can you also fill out what the other initiatives are that fidelity is working on and obviously I know you guys have fidelity total assets which does custody you also have trading for institutional investors can you just sort of fill out everything going on yeah sure so you know it's like we're a large company there's often some confusion on the different names right initiatives within the fidelity walls so there's like three main areas so this fidelity Center for Applied Technology

the group that I work on there's fidelity digital assets and then Avon ventures so we covered you know what fidelity what FCAT does but for all any digital assets we also covered that a little bit you know the interesting story here is the research group in F cat you know we build and test these different ideas and when we started mining I mentioned this too we had this like how do we custody this asset question right and so that led to us exploring how you know how custody works and that service right blossomed into what is known as fidelity digital assets and fidelity digital assets is our commercialized business unit building projects for institutions who want

exposure to Bitcoin and then I also mention Avon ventures and so we have an affiliated venture fund and that focuses on the crypto landscape and investing in early-stage crypto companies all right yeah and now let's turn to Christopher can you give us a background on what coin shares does and why it regularly publishes these extensive Bitcoin mining reports sure so conscious is a digital asset manager and we are businesses to offer customers a wide range of investment products are all related to the digital asset industry so we have a suite of eight passive exchange-traded trackers for Bitcoin either XRP and litecoin that trade on NASDAQ in

Stockholm and Nordic growth market and versus turd cart we also have some passive products you know one of them being Melton's VC fund and we recently launched a physically backed gold token so the the reason we're into Bitcoin mining is as a part of our research effort you know we we believe that education is a huge open gap that needs to be further filled in this space and we believe that if there's our fully informed they will come to the right decisions on their own without having to be influenced by you know others so this is just part of our

comprehensive effort to track everything that that concerns the the Bitcoin space and you know the the supply side of the equation there is extremely important so that's basically why were in there and so at this point in bitcoins history as we've been talking about we're at this inflection point of the third having and I imagine you know you could look at each period of bitcoins history in between the having's and kind of put a narrative on how Bitcoin developed during that period and so I wondered you know it for this phase what do you two feel needs to happen in Bitcoin to kind of further promote its adoption of a few different things and some things that

are already happening for example the the rise of proper institutional level custody like Amanda and we're doing at fidelity is a huge thing I think one of the other things that that needs to happen is the proliferation of financial products for miners miners are currently unable to fully hedge their production the way that normal commodities producers can which again sort of hinders the flow of capital into this whole space so I mean those are some of the things that that I hope can happen if I think that if we if we do get proper hedging products for miners there

we can we can dampen the volatility of the market a little bit by getting some more certainty on on part of miners as to what their incomes are going to be over time which which will allow for a professionalization of that sector and yeah Chris there's a lot of momentum in that space right now right with several companies designing those financial products to help miners reduce their risk so you know like Chris was saying with the network cash rate how it fluctuates right like we've been talking all day miners have exposure to these swings of difficulty adjustments resulting in a lower than expected Bitcoin return from you know their mining operation so things like hash rate derivatives with a difficulty swap

can be used to hedge against this risk yeah it's you know for potential listeners who are not quite familiar with with why that's important I mean if said you're a normal commodities producer like an oil producer you have you have a really good idea of how many barrels you're gonna pump out of the ground over a certain time if you're a Bitcoin miner and you know as an oil producer you can you can hedge by selling that production forward using deliverable futures contracts if you're a Bitcoin miner you don't have that luxury right now because you don't actually know how many coins you're gonna produce so and that is because of the difficulty you know how much hash

rate you're gonna produce over a certain time but without having some way to hedge your exposure to the difficulty you don't actually know how many coins that hash rate is gonna produce and that's a problem and there's a lot of things that you don't know in Bitcoin mining and two of the biggest one being the price of Bitcoin and the rate of hash rate so it's fun these things these future products like hash rate derivatives would be super helpful for miners how does that work like if I'm a miner we just walked me through the steps of how it is that a hash rate derivative helps me you know hedge my risk when it comes to mining yeah so if a minor a minor would be like long

difficulty in the contract so the miner receives a payout in Bitcoin if the difficulty increases more than expected so it would make up for the lower than expected Bitcoin revenue from the mining operation oh I see so every mining operation sets up with a certain set of assumptions for where the price and difficulty will be in the future but having access to these types of derivatives would allow them to protect themselves if you know the the difficulty increases by by more than what they thought it would and what is the cost of purchasing something like that is it nominal so um right now it's in it has a long way to go this is like I think very

beginning stages of you know this type of product being delivered so our team has been exploring some of these contracts and just their structures overall and we've even conducted some paper trades which has been an interesting learning experience for us but ultimately I think there's just a long way to go to figure out exactly how these would work yeah pricing is a big open question there and so most of the most of the current products that are out there are have been OTC and and bilateral for the most part and they rarely extend past one single difficulty period and for these products to be fully functional in terms of what the miners need they would

have to have a much longer range than that so pricing is a big big open question here and I don't think anyone has to answer yet another really interesting product that is coming out that we sees fun like structures so this is allowing exposure to Bitcoin mining without some of the operational headaches so if you can mine a Bitcoin for a lower cost and you can buy it on the open market and you take on this like long Bitcoin mentality funds are an alternative way to diversify your exposure to Bitcoin because with the right operational setup you can mine a quick clean at a discount rate yeah so how does that work it's it's similar to

like traditional funds so say if an investor invests money into you know this type of operation they give money to the operation and then they would just get out Bitcoin or US dollar in the end depending on how its set up so you know we've seen some companies exploring this type of structure which should be really interesting some of our research has also backed up that there's institutional demand for this for just generally and not funds but just generally structuring products around Bitcoin mining so in 2019 and again and in 2020 we a survey for institutional customers and we asked them if they would be interested in the product focusing on crypto mining in both years we saw her

about a 20% group of people that said yes they would be so you know this gives us hope that there is a demand for an institutional grade mining product however I think there's still quite a bit of work that needs to be done on the mining side if we want an inflow of institutional investors I for one cannot wait to have Western capital markets unleashed on the mining space that is going to be awesome and when you say that like what are you like what would that look like to you what would what would be exciting to you I mean just having the ability to create products that look and feel like current investment products that proliferate in the Western capital market space I just

think that would lower the cost of capital for Western miners which you know could hopefully at least act as a bit of a balance against the advantages that Chinese miners currently have by proximity and lower setup costs and so forth and I just think that would be you know one way to level out the playing field at least a little bit now what it would exactly look like it's hard to say but if we do get these types of difficulty on hash rate derivatives in place you could you could start to imagine structure so I commando talking about like funds or even fixed income products we and so just so I'm clear like essentially what you're saying is

the kind of the more robust hash rate derivatives that we have that could even foster more mining outside of China is that where you were going with that well at least I think if you if you have these types of products in place you can start building financial products that you could sell in western capital markets which tend to be you know more efficient and are much larger and I think that could help and I also don't think that the investors that would be buying these products would want to have the operations outside of there either home jurisdictions or similar jurisdictions to their own where where

they can feel confident and in you know rule of law and yeah no I would just add here that like look mine is this really weird opaque industry right even some of the experiences that we've had have been really interesting from an institutional perspective so you know one of the manufacturers that we ordered machines from 50% of our hardware arrived broken and when we reached out to them we said hey how do we fix this and they told us use duct tape quite a bit of work that needs to be done on the mining side but from you know from an institutional investor perspective if we can figure

out all those operational complexities for them and you know offer them a product where they can you know have access to Bitcoin at a lower rate that they can buy it on the market and they don't have to deal with some of those like weird complexities of you know how you structure all of this and in a warehouse you know I think that that then it becomes more real and when there's products are structured in ways that they already know I think that it will be more appealing to them ok so that this is a little bit different from the you know kind of like have your own keys ethos like this is saying build up infrastructure essentially in such a way where people that's abstracted away for people and they don't have to deal with

that kind of thing yeah it could happen right it's also about choice I mean not everyone wants to custody their own gold or custody their own Bitcoin you know Bitcoin gives you the option ality to be self sovereign but you don't have to do you know sometimes it could be more efficient for you to not be it depends on how you want to interact with it so what makes Bitcoin fantastic as a monetary system is is that it at least gives everyone the optionality to be self sovereign and and and interact with it the way that you want I'm just pointing out that it would be fantastic if we on top of that additionally got that types of financial products that have that are already quite excellent in

their ways yeah yeah more choice obviously is better but so at some point one of you mentioned something about yeah though I think it was Christopher you said something about the Western financial markets being unleashed on Bitcoin but one other thing that we had heard about in recent years was that there was gonna be this wall of institutional money that was gonna enter Bitcoin and I think people were saying that like you know three years ago and it hasn't exactly materialized so I kind of wondered especially Amanda since you are more on the institutional side how you would say institutions have been

thinking about Bitcoin over this period and whether you think that that has changed over the last few years yes I was recently listening to a podcast with our head of sales in marketing and Aptos and Christine Sandler is the head of sales and marketing for F dust and she said that she has had a ridiculous amount of inflow over the past like three to four months so I think that you know there is inflow coming in which is really interesting I don't work on the AFT outside so I can't speak to you know the inflow of that specifically but you know I think the things like that survey that we had is really interesting that 20% of people are just interested in mining and FJs will be they'll be publishing some more of those stats and

data points coming out soon so I think you know that's something to look out for to see what our research is showing from institutions like what they're looking for I think it's also important to note that institutions need products that have certain structures they can't necessarily go ahead and buy whatever they want a lot of them have very tight mandates so I think it's very important to that we we get more financial products around Bitcoin that are fit for purpose and that actually suit the demands of institutional investors and that is something that we were working on actively at coin shares too so sort of broadening of the availability of

financial products I think it is going to help this as well so that institutions can go and buy products that look and feel exactly the same as the ones that they're used to handling and that doesn't require them to for example self custody or do anything like that and Christopher I'm sure Coyne shares also deals with institutions when you know you deal with them what do you see in terms of their interest with Bitcoin like you know why are they interested in it or what do they plan to do to do with it I mean it's a lot of different reasons but worrying about the health of the current Fiat monetary system is a common

thread thinking about it as an inflation hedge that you know over the past years Bitcoin has been very uncorrelated to the remaining financial markets which is also an attractive trait now we've seen that fall off a little bit lately but having uncorrelated assets is a rarity these days and and and it's something that many of them are looking for but again it just really depends on the institution and it depends on their individual funds and and what they want to achieve with their portfolio and do

you guys see other institutions also taking an interest in mining Bitcoin the way fidelity is um I would say that that's not something that I've seen a ton of at the very least I think fidelity are very much the pioneers there so kudos to them for that but I think other institutions should take note but you know not everyone can be as awesome as fidelity we've seen some other institutions looking into mining and like they're essentially just coming to you kind of for advice asking you how you did it or like is this something where they would you know partner up with you in some way or hire you for

for their mining we haven't provided the advisory services to anyone I think you know through our exploration of just being super nerds about Bitcoin mining we have come across some groups that have been doing it for a while some being you know these traditional what we would expect from a miner and some more of the institutional grade so it's you know miners come in all shapes and sizes right and anyone can mine Bitcoin which is the beauty of it so I you know I think that we will see a more influx of institutional and activity within mining you know over the next however long but you know there are some people out there doing it maybe just not as public as we are and earlier when you talked about

how Christine had said that there was an uptick and institutional interest in the last few months did she say that whether that was you know due to the coronavirus and the economic fallout from that or is was that just kind of already happening so on the podcast with um Zak she didn't say that but you know one could imagine that that was that was the case right with the current climate as it is today it makes sense to think about different different strategies for your portfolio and Christopher is coin shares noticing that that's having an impact on interest in what you guys are doing um I think interest in in bitcoin is just accumulating in general it's always hard

to pinpoint single things in particular that are raising interest I think there's pretty much the totality of everything that's happening in the world right now is increasing interest and what I mentioned earlier to the you know the way people interact with Bitcoin I think has a lot to do with when they first heard about it and how long it's been since then and the fact that a lot of them when they first interacted with a thought that it would be gone within a few months because that's everything that were ever told and the longer they observe that no that's actually not happening the the more motivated they are to actually look at things deeper and

deeper and that's what I think is happening right now like a lot of these companies are dedicating more and more mental capacity towards trying to understand Bitcoin and in trying to to get a better grip on how it works and and the things that it can do so yeah it's it's hard to pick out specific reasons but do you see obviously there is this like increased interest and we even have these kind of macroeconomic effects that probably are fueling that but I wonder if you know when you sort of look at what where the industry is broadly what do you feel like are the current obstacles in

getting more institutions on board or they don't even have to be obstacles but just like you know what are the challenges that institutions have in trying to get into the space a product fit is is a big one they can't necessarily go and yeah I mean I manned up if you want to I think you know products it makes total sense and just like generally if we think back to like when we started thinking about the claim it's kind of difficult to figure it all out right a lot of I think what Chris and I both do is focus on research right and like sharing back that research with people to help them make decisions and just help you better suited for if they wanted to jump in so I think that that's

really helpful yeah we say that a lot too we got a lot of questions for about research and Quentin you know questions of where people can find more and I mean you know another another obstacle is still the volatility volatility makes people uncomfortable there's just no way around it well nowadays maybe it seems tame compared to what's happening in you know for instance oil absolutely I mean I don't know about you guys but I found it hilarious that oil went to zero before Bitcoin well so just kind of gathering together all the different

thoughts or threads that we've been covering here it sort of feels like in this sense this sort of next epoch of Bitcoin is maybe greater Institute's institutionalization or financialization if you know where we are as like there's sort of needs to be more products and we do have this demand that's you know knocking at the door but there aren't really you know products suitable for for those institutions this would you say that there's that's kind of like a fair assessment of what might happen between now and the next Bitcoin having I think so I think that we're gonna we're gonna get better financial

products around Bitcoin between now and the next having and in terms of volatility I mean you know this is a bit of a self-fulfilling prophecy right like the smaller the market the more volatility you have when you have large movements a lot of the larger institutions are not going to get out of bed in the morning unless we're talking about you know dozens of millions of dollars in clip size so in order for them to be able to even get their toes wet they need certain liquidity sizes in these products so we you know we have to build it kind of step by step and I you know I I don't expect like a sudden flow you know like a tsunami hitting this

market I think it's gonna take time but I do think that this will happen over this time for years in Bitcoin is like a lifetime rate the cleaners are like dog ears I think that it's reasonable to that one scenario could be that they were by you know in four years from now if the three of us have a conversation again that will see more institutional investors that's definitely one possible scenario all right well it's funny what you said about how four years in Bitcoin is really it's like 20 years because actually when I was researching this show I got to thinking and I was like oh I I think actually right around the

Bitcoin having is when it's my five-year anniversary of covering Bitcoin regular and you know you can't put it on like an exact date but when I looked on my calendar its roughly around yeah the the middle of May and so for me it is a significant anniversary and you're right it does feel like you've been 40 years in this industry one question for you guys is it the halving or the happening I think it's the halving but what happened is that back in 2017 when everybody was talking about the flip inning I think people at that point thought it would be funny to call to

having the happening so I think that's why this time around people some people are also calling it the happening because it's like that combo of flipping and and having but but last time to really like the heaviness I was having a conversation with someone in January who has been a Bitcoin for a while and I kept using happening and he said you know I feel like as bitcoiners we make up these terms so I kind of also like the happening that's what I've been going with this is our universe we make up the words that's right seriously we make up anything we want to make up so that's what's so fun about working this Way's like we can just be creative and we all have really different backgrounds it's not like anybody's an expert in

this stuff because we're all new in it so agreed and I would say I often say that you know to a large extent like everyone in this video we don't drop this technology that no one that's currently in this space made and you know we're making it up as we go like we're figuring this out and we we have large senses of curiosity and and there's like a fearlessness about it - everyone's just diving in the deep end like headfirst and you know see what comes out of it it's amazingly motivating and an interesting yeah and for me it's fun to watch I tell my friends that for the last few years I've

had a front row seat to the most suspenseful movie that you could ever imagine and that it's going to last decades and I yeah I just I feel so lucky to be sitting here and thinking less covering it absolutely the single funnest industry on the planet all right well thank you both so much for coming on the show it's been great having you on unchanged thanks for having us Laura yeah thank you so much thanks for tuning in to learn more about Amanda Christopher and the Bitcoin having be sure to check out the links in the show notes of your podcast player whatever your favorite crypto meme is Lambos unicorns or the Guy Fawkes mask it's

probably on the Unchained rabbit hole t-shirt check it out at shop Unchained podcast calm and also be sure to check out our hats mugs and stickers to unchain is produced by me Laura Shin with help from factual recording Anthony you at Daniel knows Josh Durham and the team at CLK transcription thanks for listening [Music] you [Music]