Stressed Miners Strategize to Survive Crypto Downturn

dollars and losses. These are companies like Core Scientific and Marathon Digital Holdings, which each reported net losses of more than a hundred million dollars. To discuss what's driving this distress, I'm joined by Bloomberg Reports of David pan they basically tribute coin as a commodity, and by Amanda Fabiano. The energy narrative around bitcoin has always been a thorn in our side. Amanda is the head of mining a Galaxy. Welcome. So, Amanda, I'd love to start with you. You know, tell us

a little bit about your role at Galaxy. What does a head of mining do at a company like Galaxy? Yeah, you know, one day is not the same as the last. I can say that mining is a really interesting space to operate in every single day. UM, and I definitely am not bored at any point. Our mining business has two main focuses. We mind bitcoin, and then we also

create financial services for miners. So we leverage, you know, all of galaxy to connect bitcoin miners to different products that could help them grow and scale their business because it's a capital intensive business, right, and miners consistently need ways to think about treasury management and additional capital and

leveraging what they have right to get more capital. So you know, we're really committed to providing bitcoin miners with a comprehensive suite of financial services that really fit their needs. When you talk about the capital intensive nature of mining, can you say a little bit more about that? So somebody who has perhaps only encountered in theory how bitcoin mining works, what are the specifics of what you're described? Sure? So, UM,

mining requires a location. The location requires construction build out right, finding a location that has low source of power. You're building out either you know, energy infrastructure, a substation, renting

energy infrastructure. All that costs a lot of money. And then on top of it, you're adding these specialized computers to mind bitcoin and the way that you purchase them is really on like a forward basis, right, So you put down a deposit, you're to put down another deposit, and you're paid for the machine before it even arrives, So you're not getting any revenue before you have to

pay for for that asset. So you know, it does require a lot of upfront capital and so mine is constantly looking at how can they leverage what they have um to continue to get capital to build in scale. And when you say leverage what they have, you know, one of the biggest assets is of course or potentially like the bitcoin itself that they are mining. Yep. It's

interesting when you think about what they have. They have physical assets, right, like they have a land, right, they have electricity infrastructure, they have these machines, and then they have bitcoin that they produce. You know, hedging has not been something that miners have been focusing on, but miners can hedge so much. They can hedge that bitcoin, they can hedge their energy, and they can also hedge the hash rate that they're producing as part of their overall

plan um. So you know, there's lots of ways that are not being drawn on yet that miners could potentially work with to make the most of the situation that they're in, especially as capital markets have really started to wind down to this specific space now, things like electricity hedging, you know, power market hedging generally, many companies for many

years have been become extremely sophisticated at this. But you know, David, I remember a conversation that we had that and you know, to the point that demand is making this is like a relatively new skill for bitcoin miners, and in some cases they've been surprised by just how extreme the temperatures have been in some of the places that they're operating, like Texas or like the spikes in electricity. So what are you observing here in terms of how they're developing.

You know, that hedging capability that Amanda has described, I think for bitcoin miners it is still a frontier for them, Like it's kind of like a process into making right now. Still, as Amanda said, a lot of the bitcoin miners they were not hedging. So that's why we're seeing a very terrible earning season in general for all of these crypto

mining companies in the second quarter this year. Um But one of the ways they're looking into is to hatch the power they're going to use for for the mining operations. As we have discussed before, right blockchain. Um, you know they have. They have made some like millions of dollars from the power grid in Texas and earning in power credits. UM. I guess like one of the ways is just like to negotiated a really good deal with a power broker where like with the supplier from the grid and to

kind of like hatch against the fluctuations in energy prices. Imanna, I want to go back, go ahead amount it. Sorry, I was just gonna say, David, I totally agree. I think what Riot has done has been a really unique way to think about power markets, and it feeds into the narrative that we've been saying for so long a

bitcoin mining right. Miners are good for the grid. They provide you know, an optionality to stay on in mind bitcoin when it works for them, and they also can turn off quickly and provide energy back to the grid when the grid needs it most. And they are making money either way, right, so it's economical for them to sell power back to the grid, They're going to do that, right, And if it's economical for them to mind bitcoin, they're

going to do that. So I feel like, you know, the energy narrative around bitcoin has always been a thorn in our side and riots um, what Right has done has provided a real use case for how it could really work well with the grid, like miners in general can really work well with the grid. I want to also ask a question about the counterintuitive nature of miners

started to sell bitcoin when bitcoin prices went down. So it's like you would have expected some sales at sixty five K, fifty five K, forty five k, instead we hit twenty five and everybody's like, now seems like a good time to sell. And you've had a similar issue where as the crisis of riggs declines, they're also selling those in an attempt to you know, generate additional cash flu That does not seem sustainable to me as a

as a strategy. Yeah, it's unfortunate for sure. I think that there's kind of like the perfect combination of all bad things happening for miners right now. Right so, you know, there's not a ton of options available for minors. So they got to a place, it seems like where it's like we have to sell our treasury in order to survive. I think it also boils down to the fundamental strategies

for between different mining companies. Some of the companies they do sell like you know, over the course of you know, from starting their business in as early as nineteen, so they basically tribute coin as a commodity like a gold mining company, you know, like when they when they mind certain amount of bitcoin, they will sell a portion of that to replenish their cash flow on also just to

capture some of the high prices along the way. Yeah, I think that, you know, it's funny when it's a bear market, the people that sell bitcoin look like geniuses, and when it's a bull market, the people that hoold look like genius. It's right, and I think there needs to be a strategy for both of that. Also, David, to your point, like I think, you know, Core is

a great example of that. They also have additional revenue streams, right, They're a large posting provider, so they are consistently getting cash on the door beyond just bitcoin, whereas you know, some of the pure Plaine miners only have you know, the bitcoin coming in as revenue. I would say, you know, the Hoddle strategy. My perception of it is the ones who did that over the last bull bear market were

the ones that really were able to survive. And I think that kind of stuck with some of the miners, right like they were like, okay, let's look at for example, how to eight Right they did they were able to survive the last bull bear market, and they have the largest Hoddle strategy that exists. And so I think that others, you know, newer miners that came up over the last market, it looked to who existed over the last year and

what was their strategy. I think what I'd love to see is that shift so that each miner has their own individual treasury management strategy that is extremely comprehensive that might reduce their margins, but also like might make them consistent. And that's I think what we need in order for this market to mature. Right now, all miners trend with the price of bitcoin up. Next. More from David Pan and Amanda Fabiano on how bitcoin miners are navigating falling

crypto prices and rising energy costs. Manda, David, this is a question for both of you, because I'm interested in how you're each going to calm at it. So one of the bigger stories in you know, crypto more broadly is of course the Ethereum merge, which is expected yet again but for sure this time um to be happening in you know, just not too long from now, and

that's had some interesting effects on bitcoin miners. It has made their rigs cheaper because you know, folks are starting to switch away from needing proof of work machines into you know, the different strategies for the merger for Ether

and Ethereum in the future. But it's also complexified the environmental considerations here where you know, we've talked on this podcast about certain types of investors who really need that like e s G. Stamp of approval, may be interested in switching away some of their investments from bitcoin miners

into other parts of the market. So, Amanda, I'd love to just get your perspective on how, if at all, you are kind of talking through or you know, what kinds of conversations you're having about this as it relates to your projections for six, twelve and eighteen months. Yeah. Look, I think that there's a world that exists where proof of stake and exists, right, and and that's totally fine.

It's fundamentally different than proof of work, right, so where I think comparing them apples to apples is just not realistic. What bitcoin did was create this incredible consensus mechanism that doesn't have a point of failure. Right. It is completely distributed. It's a distributed network. Like you opt in, it's proof of work. You have to do the work right in

order to get you know, the reward. Um. I think when we think about belittling Bitcoin down to its energy usage, I question, you know, what is the motives behind that? And why is that a massive a massive question? Right? Like do we do that with other industries? Do we wonder like how much you know, energy is spent on you know, washer and dryers? Right? Do we think about how much energy is spent on maintaining the current financial

system that is not as inclusive as bitcoin is. If we pale back like bitcoin miners, what they're looking for is cheap energy in order to you know, beyond the low end of the cost curve, and that eventually will shift to you know, clean forms of renew of energy. Um, maybe nuclear right? Um? So I think that you know, mining is an E S G investment, It just is, right, I think that Howard. Part is this people don't want

to do the homework to understand why. Well, I think to your point about do we do that for washer dryers.

I mean, one of the big developments over the past couple of decades was this idea of like energy Star compliance and you know, like how efficient is your fridge or you know, to your point about our folks asking these questions about financial services, I mean, if you look at some of the the activist investors in the positions that they're taking about wanting folks to divest from certain kinds of things, I mean, this is certainly a conversation

that is happening across anything that you could analyze with tickers. Somebody out there has a position that like X y z is insufficiently green in a context of climate change. It does seem like bitcoin gets a lot of this attention because it is one I would say new were

as it relates to all of those other things. People are used to having washing machines, they're a little bit less used to having bitcoin miners in existence in Texas, uh, and to it's a very visible industry as it relates to financial services, right, like crypto had a lot more literal advertising than your sort of your average money market fund UM over the past couple of years, which brings

me to you, David. One of the you know, the opportunities for bitcoin miners is absolutely what Amanda mentioned in terms of diversifying away from relying on like fossil fuels or you know, in kind of a semi diversified way, like they're using like waste energy in the way that they are in Texas with flares that would otherwise just

have you know, gas flaring. What are the real prospects from your seeing from what you're reporting in people's ability to start making that switch to say wind power for instance. I think there are a couple of things that we

have to consider. Firstly, I think, um it is like a relatively hard to find renewable energy sources UM, not only for bitcoin miners but also for any energy intensive businesses UM, just because natural gas is very readily available across the US, and UM it's easier to control, you know, can you can throttle up and throw or throtle down the harder to control the wind, Yeah, harder to control

wind and solar. But I would say like a one incentive from the energy side is that a lot of the renewable energy companies, UM, they have a tough financial situation. Based on some of the conversations that I had with the bitcoin miners, they say, like some renewable energy companies would reach out because like Talent is one of the examples, Like it went bankrupt and then it had a really heavy focused on renewable energy. They had a partnership with

with bitcoin mining companies. UM. I mean generally, I think like some of these renewable energy focused companies, they are incentivized to find more diversified a new revenue streams. One of them will be a bitcoin mining businesses. Amount of just a closing question for you. You know, you've talked about the importance of folks who are interested in this sector to do a little bit more homework, so like to really understand that the fundamentals given the people don't

always do the entire assignments. If you could tell them one thing that they should be doing, what that What would that one thing be? Oh, man, I think I might be too demanding to name one. I have like a list of dirty in my head, Like I think that I would say, like meet with people in the space, understand their intentions and like that miners are great businesses

to invest in, especially right now in a bear market. Um, and you know, there is no bitcoin without bitcoin miners, so it's like it's a great part of the industry

to get to know and learn about. And David, I think if you're bitcoin mining stock investor, you should just really look into what exactly the companies are doing, rather than regard the whole like every single mining stock as like a monolistic asset, Like you should just look into the fundamentals of these companies because like each bitcoin mining company has like a vastly different strategy, even for right on the marathon, they have very very different strategies in

terms of how to develop their mining operations and earning bitcoin. So my one piece of advice is just do some research on the stock that you're investing in, and do not think bitcoin mining stocks as one chunk of monolitht Yeah, on that we all agree. Um well, thank you both so much, David, A pleasure to have you as always, Amanda, thank you so much for joining us. You can find more of David'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. If you ask crypto enthusiasts why they believe in the asset class, there's at least one response that you're going to hear, and it's about privacy and resistance to government censorship. But what's happening to Tornado Cash, which is an application designed to offer both privacy and resistance to government censorship, is proving to be a real stress test for the ecosystem.

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