Bitcoin Miners Are In Distress

shut all such projects. In late spring of China banned all bitcoin mining as part of an ongoing crackdown on crypto in the country. In response, many Chinese miners pack their bags and headed to the state of Texas. Texas offers what I'll describe as a relaxed approach to regulation, a unique par grid, and relatively attractive energy prices, all things that seemed ideal for these miners looking for a new home. And then two happened. The situation in Texas

got slightly more complicated, to say the least. That unique energy grid is prone to power outages, made worse by extreme temperatures. Those extreme temperatures make it even harder to keep expensive mining equipment cool, and crypto minors are already facing financial difficulties brought on by declining bitcoin prices. So the miners actually they are coping with the situation by selling some of the electricity they bought earlier back to

the grid and at a at a premium. That's Bloomberg reports that David Patton, who covers crypto mining, he and Ethan vera CEO and co founder of Lockstair Technology, which is a crypto software and services company, both attended a recent bitcoin mining conference in Miami. They joined me now to share some takeaways from the conference, as well as their perspectives on how miners are trying to survive this complicated crypto winds it. David, Ethan thank you both so

very much for being here. Now. One of the things I would love for us to do is just explain two things to our audiences. And David, I'll start with you. What is bitcoin mining and why are their bitcoin miners in Texas? Sure? Um, so, bitcoin mining is um it's kind of like very industrialized, um, like skilled up industry

right now. Bitcoin miners, Uh, they try to use very energy intensive and very powerful machines and to mind so called quote uncom mine bitcoin, which means like the compute mathematical questions like um too to get a bitcoin in rewards UM. And it's a very interesting UM process because it consumes a lot of energy at the same time you earned this digital assets UM, which is worth like millions millions of dollars, and that means millions of millions

of dollars in revenue for bigcoin mining companies. And one of the things that you've been reporting on is the fact that when China banned bitcoin mining band crypto mining broadly ban various types of crypto transactions, various of these miners left China and moved to other countries as well as the states in the US, like Texas. Why was that?

Why did they move to Texas? First of all, I think a lot of the Chinese miners they were very very scared of, you know, any kind of like regulatory challenges because like when China banned crypto mining, and the miners really didn't know where to go. They were caught off guard. And um Texas actually it has a very liberal crypto regulation. So that's actually one of the major reasons why bitcoin miners were flocking to Texas. The secondly, I think it's because the cheap energy in the state.

I would say the relatively cheap energy because energy prices arising around the world. We have, you know, a conflict in Ukraine, we have intense weather. But Texas, for a whole host of reasons that my colleagues have reported on, still offers fairly attractive rates, especially if you're benefiting from industrial pricing, which is what these miners get. Is that correct?

You also have like a very very interesting energy marketing in Texas also because of the way the energy market was set up and and because they're they're are a variety of demand response so called humanity response programs where bigcoin miners as as large energy consumers in the state had the advantage to nego ship with the state's power operated are cut because they use a lot of energy,

a lot of electricity from the grid. Nearly all industrial scale bitcoin miners in Texas have shut off their machines. That's as the company's brace for a heat wave that is expected to push the state's power grid near its breaking point. The state it has become one of the world's largest crypto mining hubs thanks to its low energy costs and liberal regulations on crypto mining, so they can actually have this um power purchase agreements with with the

suppliers UM and got a favorable rate in the first place. Well, that all sounds great so far, so even I'm going to ask you to talk a little bit about what some of the complications that miners in Texas but really around the world have been encountering in this market environment of falling crypto prices. I'll start with the idea that

they're getting squeezed in two directions right now. They're getting squeezed on lower mining revenue at the same time as higher cost and so on the lower mining revenue side. That that's largely a function of decreasing bitcoin price that we've seen in the past few months here. Bitcoin obviously peaked above sixty six thousand dollars there and now trading it kind of in the mid twenties range for the

past few weeks. And then on in tandem with that is their operating costs, which, as you mentioned earlier, is a function largely of electricity costs, and so as electricity costs rise in this macro environment, that's also causing decreasing economics.

Miners for the most part, and specifically in Texas, didn't lock in long term power purchase agreements known as p p a s. The reason they didn't lock those in is because the Ford pricing curve on electricity looked like it was decreasing over time, and so miners expected their electricity costs to decrease last year. Just to just to ask one questions, So when you say the forward pricing curve, what you mean is like the projection for what energy

prices would be over the next twelve months and on. Yes. Correct. So when miners were setting up shop in Texas last year, they were looking towards UH Energy analysts to determine will power prices be lower in the future than they are today? And because the analysts told them that it would be lower, they decided not to lock in long term rates and kind of play out to see how the market would trade.

UH ended up being that the trade went against them quite significantly there, and electric city prices are higher today than they were last year. David. One of the things that you have mentioned and you know are reporting on is the fact that this exact type of forecasting that Ethan has described is getting harder and harder in the context of like climate change and just uncertainty around whether how are miners responding to this increased uncertainty in every

element of their business. So the miners actually they are coping with the situation by selling some of the electricity they bought earlier back to the grid and at a at a premium. So recently we have seen Ride Blockchain, which one of the largest mining companies in Texas do through a demand response programs and also other purchased power

purchase agreements. UM they were able to earn nine nine and a half million dollars UM in power credits and which is um which is like a very profitable way to make money um, rather than mining a coin at the time. And even I'm gonna throw the stew giving your background in investment banking and what you do at lux Or right now, Well, actually tell us what you do at lux Or right now. Yeah, that's a that's

a good question something asked myself every day. But so so lux there is a focus on bitcoin and cryptocurrency mining, and we run software and services. So um, we have a number of products, including a mining pool that represents

about six percent of the bitcoin network. We run an a sic trading desk, so we buy and sell the specialized hardware used to mind bitcoin UM, and my day to day is the CEO, so keeping the lights on working directly with our our clients to help them grow their business and bring them onto our services UM as well as a number of other functions on the operations

and finance side of the business. And given the work that you do, that gives you a pretty unique vantage point to understand what miners dealing are dealing with, especially as it relates to financing, especially as it relates to say, the costs of some of those machines. What are some of the financialization trends that you're seeing related to what David described about how folks are trying to make money in this environment. Yeah, there's a few really interesting trends here.

First is the ASIC backed financing that started to come on the scene in early but is really proliviated in the past couple of years, and so that's allowed miners to leverage their balance sheet and the purchases they're making on equipment to get extra purchasing power. It comes with a whole new set of challenges as well that we can get into a bit later. Probably but UM, that's one interesting trend that The second would be how miners are playing the energy markets UM as as David mentioned

with the case and Riot blockchain. There UM we noticed that the companies that are straddling the bitcoin mining and energy side UH typically are much more defensible businesses than if you're only in operating on one of those sides. The re and being that during times that bitcoin mining isn't as profitable, which it looks like today, but energy markets are profitable, you can spend more time acting as an energy company, and then when that trend reverses, you

can spend more time mining bitcoin. So UM, I think there's a rapid UH push for companies to become vertically integrated onto the energy side so that they can play into both markets. There. We'll be right back with more from Bloomberg Reports at David Pan and Ethan Vera of Luxor Technology on the current states of crypto mining the wait. We saw what happened with regard to the natural gas

system in Texas. Not only did that break down electricity and that obviously caused blackcots, caused enormous amounts of costs for consumers, it also raised natural gas prices in the entire region, and consumers in Colorado, consumers in Kansas, consumers in Oklahoma and elsewhere, how to pay for that? And they're still paying for that exorbitant rates in large part because of the supply and demand system was out of whack.

There wasn't enough natural gas to go around. That was Richard Glick, the chairman of the Federal Energy Regulatory Commission. He was speaking last January during a House subcommittee hearing on energy infrastructure efficiency. David, you've reported on, you know, some big successes in terms of that, you know, playing playing both sides. I think your story was about Riot blockchain, which you said or nearly ten million dollars in credits

from you know, playing that energy market effectively. How does that work? Like what does it mean to be on the energy side of things? Um? I wish I could give you a perfect answer to that question. But like, you know, like the nature of the energy market, especially in states like Texas, it's um it lacks transparency. I think the way the energy market is set up is like we don't see, we don't have a lot of

visibility into the market. One of the biggest criticisms of crypto mining, and I think it's a kind of a self aware of criticism. I am I no longer here people involved in crypto mining try to argue that there was no environmental cost. What they try to defend is that environmental costs in different ways. But are any of these companies thinking about creating, you know, more climate friendly mining operations and what would that look like in your

from your perspective. So, I think the public companies that are listed in New York Stock Exchange, Canadian Stock Exchange, etcetera have a lot more pressure from shareholders and generally stakeholders to become more environmentally friendly. And so we we have seen a trend in the past year and a half of mining companies moving away from fossil fuel based

energy sources to renewable um. That transition doesn't happen overnight because there are a lot of kind of legacy mining farms set up on power plants fueled by coal and

natural gas. At the same time, there's been organizations set up like the Bitcoin Mining Council, where there's peer pressure from other miners to UH use renewable any eschie friendly UH power sources because it really puts a bad light on the industry on everyone over all, and so if one company uses UH fossil fuels, the rest of the renowable energy companies will put pressure on them. So I

would say that's very prevalent in the public markets. Private not as much, just given they don't have as you know, a lens on them UH like the public house do. Also, overseas companies, I would say are less focused on that than we are in kind of North America, Norway and some of the western world. I gotta thank you. That's very helpful. And then David, just the last question for you.

You attended a mining conference last July, so July, then you attended the mining conference this July, in two what was your biggest takeaway about what if anything had changed in that time. I think my biggest takeaway is just a generous sentiment of of the conferences. You know, last year, people were so excited. You can see hope in people's eyes because that was two months after the China band.

So like people were scraam a link to see to search every corner literally of four machines to mind bit coin. But like this year, it's like a lot of companies offering hosting services, which means like they have the machines, they have the infrastructure, but like they don't want to mind the bitcoin of themselves. And then they were looking for people who can take the risk and you know, like mind be a coin, so please come to my

side and mind the coin. So you see this kind of like a very big shift in terms of risk appetite, risk tolerance, and also like you know, people's outlow com bitcoin prices. It seems like if you are scaling back, if you are kind of like trying to pass the cost to a third party who who is willing to mind the coin in the near future, that means like you have a bearish all look, right, Yeah, And Ethan, is that sort of short term embarrass outlook consistent with

what you're seeing on your end? It is We've been operating Luxury for five years, so we've seen a couple of these cycles. Now, um so, I wouldn't say this bear market is much different than the one we saw in where a lot of the new entrants get a bit rattled about the decreasing mining economics and skiddish. So um, I think there certainly will be a lot of mining companies or prospective mining companies deciding not to build a

business anymore given the economics. But the ones that do have conviction will be able to place a large bet now. And if bull run ends up coming about in the in the near term, then I did they will profit from that. So I think the high conviction miners are the ones that have profited in the past few cycles, at least from from our perspective. Terrific. Well, thank you both so much for joining us on the Crypto podcast. Really appreciate you taking the time. Thank you for having us.

You can find more of David Pan's reporting on the Bloomberg Terminal on Bloomberg dot com or follow him on Twitter. He's at David Pan Underscore one. On the next episode of Bloomberg Crypto. In late July, alexation surface that some North Koreans were plagiarizing online resumes and tricking companies, including crypto companies, into hiring them for jobs. It's all part of a broader effort to raise money for North Korea's government weapons program, and it can also help the authoritarian

nation evade globle sanctions. But how did North Korea get so good at tricking crypto employees and what does this all mean for the security of crypto companies. To better explain, I'll be joined by Bloomberg Report Jeff Stone. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcasts.

Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising producer of Bloomberg Crypto is Vicky Vergelina. Our senior producer is Janet Babin. Our producers are Mohammed Faruk and Sharon Barrio. Associate producer is Zanab Sidiki. Dasta wonder At is our engineer. Original music by Leo Sidrin. I'm Stacy Maria Schml. We'll be back tomorrow