Daniel Roberts (Iris Energy) on Sustainable Bitcoin Mining (EP.278)

Thanks, Nick. Pleasure to join.

Yeah, so I think the journey with Bitcoin probably dates back to late 2013. I was one of those people that bought in as the price was rocketing towards $1,000 and you know it came off and halved in the year or two later and I sold it all and thought this is nonsense and kind of disappeared for a little while. I then went into the Ethereum ICO and did well out of that, but it was around 2017 that it really hit Will and I around what Bitcoin was. You know, the monetary asset that it is and I guess the benefit today is the quality of literature is fantastic relative to what has been the case over the last, you know, 10, 13 years. And at that point we kind of just reached this point where we said, you know what, Bitcoin's here to stay. With its increasing scarcity characteristics every four years to the ultimate cap of 21 million, how does this not create a positive flywheel around the store of value, the network effect, the longer it survives, the lower the perceived risk, etc., etc. And as you know, no supply response, unlike other commodities. So, I think that was the Bitcoin lens. And from that drops out I guess the view on mining, which we can come to, but a little bit about Will and I and our more professional backgrounds. So, PricewaterhouseCoopers, Macquarie, developing infrastructure, renewable energy projects across Europe and Australia, and then was involved in setting up an infrastructure funds management business in Sydney about a decade ago. Right place, right time. We grew to around 8 billion in assets under management. So this was on behalf of pension funds, insurance funds, so ports, airports, wind farms, solar farms, etc. I stepped back from my executive role there about three and a half years ago and at that point joined up with Will to form Iris. And Will's background was also in banking and commodity finance. And I think the opportunity we saw in Bitcoin was linked to that view of Bitcoin hanging around and likely escalating in value and the need to direct all this real world energy and data center infrastructure towards securing it.

I think early on the literature that resonated with me was a combination of messages from Saifedean's book, The Bitcoin Standard, obviously, very well known now. Nick Szabo, a lot of his writings resonated. The Sovereign Individual, extremely prophetic as we know. And then I think it just kicks off a bit of a cascade down the rabbit hole of just learning a little bit more around what money is. And we've grown up in a world where US dollars, Australian dollars for us, we just accept as money. And when you start challenging some of those assumptions, it leads you down a path which is fascinating, as we know.

Yeah. So, I think maybe in terms of stepping back a second and why sustainability is really important, and I think this is one thing that's really starting to hit the industry head on, which is this dislocation between the real world and the digital world. And as a miner, your revenue line is fundamentally the price of Bitcoin, right? Every 10 minutes, there's the amount of Bitcoin available to the miners. But the only way to get a piece of that digital pie is to build out this real world energy infrastructure, get access to capital, access to chips, etc. And what we've hit over the last 12 months or so is this inflection point where the real world is really struggling and can no longer keep pace with the digital world. Back when Bitcoin was small, it could. When there's say 50 megawatts of power capacity securing the network, Bitcoin goes on one of its five 10x runs. The world can find a few hundred megawatts worth of power, chips, capital, plug those computers in, the hash rate can catch up to the price. But we saw firsthand even in 2017, you know, the price peaked in December. It wasn't until the following August, so nine months later, that the hash rate caught up to the price, and that was after the price fell 70%. You then fast forward to today or go to late last year, right? There's 8 gigawatt, give or take, securing the Bitcoin network. Bitcoin goes on another 5x run from, you know, 10 grand to 50 grand. All of a sudden, we're in this completely different paradigm. To try and bring online enough mining capacity to normalize those historic returns on capital, you now need 30 gigawatt of power. The entire global data center industry is something like 23. You need $70 billion of capital. And yes, institutions are here, institutions are coming, etc. But it's still early. I think the listed market might have raised three or four billion in the last 12, 18 months. And then finally, even if you get that power, you get the capital, you're still waiting how, four, five, six years of full manufacturing production of these specialized chips out of Asia in the middle of a semiconductor shortage where people literally can't build cars. So what this has created is this enormous dislocation between the real world's ability to build out energy and data center infrastructure to keep pace with this digital exponential asset. And off the back of that you can start seeing those numbers start driving, well, hang on, there's going to be a lot of power potentially consumed to support this network by virtue of those economic incentives. And then the sustainability argument starts popping up around, well, how do you sustainably procure that power? And I think for us very early on, we've sought to build out, and you would have seen from our decks and the management team, we've got about 45 people across North America and Australia, all traditional energy infrastructure, data centers, renewables. And for us building out an institutional quality platform at its heart has been about managing risk and sustainability of operations is the key to that. And we never want to be accused of pushing up power prices to moms and dads. Never want to be accused of taking power away from other industries. So for us, coming back to your question directly, our energy strategy from day one has been really clear. Not only will we target renewable energy, we will only enter a market where we're solving a problem, actually doing a social good. And yes, we know we've got to tick the ESG boxes for institutions, but this is fundamentally so much deeper. It's around winning the hearts and minds of the local communities and areas in which you operate. So we can go into a little bit more of how we do that specifically in markets like British Columbia and Texas, but it's really those parameters, not just renewables, but also making sure that we're integrating into energy markets and delivering positive externalities with our business.

Yeah, it's a good question and obviously took a lot of time flying around the world early on and desktop research, etc. We only wanted to focus on institutionally bankable jurisdictions. So markets like North America, some markets in Asia, Europe, etc. And very quickly settled on North America as a good place to do business for a few reasons. Fundamentally we're looking for low-cost excess renewables. So where are markets that had an overbuild of renewables? Where was the climate manageable for our operations such that, you know, the need to power cooling etc. wasn't prohibitive to the economics? And we stumbled across an opportunity in British Columbia and at that point merged or acquired another business called Podtech that was founded by two Brians there. And it's probably worth mentioning them briefly. Brian Fehr, Canadian industrialist, built a large construction business, has the Order of British Columbia for his work in regional communities. And Brian Fry co-founded a company called Rackforce in the early 2000s which actually grew to be one of Canada's largest cloud computing data center platforms before he sold out about 5 years ago as well. So two very high quality individuals that joined up with Iris. And the opportunity in British Columbia from a power market perspective was and is they have a massive overbuild of hydro. They're still commissioning large-scale hydro in the north of the province, Site C, in the face of decline in manufacturing and industrial load. So over the last decade the pulp and paper industry has been decimated there. And what this does in a regulated market where you've got an oversupply of power, somewhat counterintuitively, power prices have upwards pressure. It's not like a free market, like a deregulated market like Texas, which we'll come to. Basically under the regulated model someone needs to pay the utility such that that utility can earn a return on all the investment it's made in infrastructure and generation. So if you've got a lower number of users then the cost of that generation infrastructure needs to be spread across them. So we're coming into these local communities often leveraging sunk capex in electrical infrastructure etc., partnering with local towns and communities that have seen, you know, the decimation of economic industry in those towns and providing BC Hydro, the local utility, with an alternative revenue line such that they don't need to go and charge moms and dads and other industries that money to recover their capex instead. So, it's a really good service that we're providing there. And there's a substantial amount of sites and opportunities. We've got three under construction or operation and a number of other sites that we're actively working on as well.

That's exactly right. And it's a bit of a perfect storm, right? Because they've been hit on both the supply side and the demand side. So on the supply side, they've got new generation coming online from facilities that are now becoming operational after the investment decision was made many, many years ago, combined with the decimation of demand from the closure of the local pulp and paper industry creating this oversupply of power.

Look, I haven't got the exact numbers, but our understanding, at least anecdotally, is well over a gigawatt of excess power in the province. And it's one of those things we need to be very careful of as well. Like we need to leave room for other energy intensive industry. Electric vehicles are coming. Hydrogen, green hydrogen, certainly a large push in many countries around the world. So, it's not like we want to go in and steal every available megawatt hour of excess power to the detriment of future industry, but there's certainly a role that we feel that we're playing that's valuable today and will continue to do so.

We certainly have that optionality and that goes to the heart of I guess our business model which is building out a real asset platform. So, we don't do short-term contracts. We don't do hosting arrangements. We don't give our computers to other people to manage on our behalf. And I can get into why that's the case. So, we own our land. We own our infrastructure. We own the substations, the power contracts, our own proprietary data centers that seem to be driving some considerable operational efficiency versus, you know, the shipping containers and other warehouse models that you see out there. And I guess that ownership of all the real assets certainly gives you that optionality to push into other industries. And remember, like the team's built out gigawatts of renewable energy, data centers and other infrastructure assets. So the pivot from a management perspective wouldn't be difficult, but today it's very clear. And in fact we signed an MOU with Dell Computing almost two years ago to start bringing out some of their customers and hardware to our first site in Canal Flats because high performance computing, it's real, artificial intelligence, data analytics, machine learning, oil and gas reservoir analysis, all these applications that don't need the bells and whistles of capital city data centers, but ultimately the opportunity cost of time, capital, resources meant that Bitcoin mining was the focus. I think in terms of the geographic flexibility, your analogy to aluminum smelting is a really good one and Bitcoin has been described over time as modern-day aluminum smelting. I think the key difference is even with hydrogen is when you're monetizing it into a real world asset, you've got a lot of logistics considerations. So hydrogen, you either need to truck the hydrogen from the site or you need to be close to a pipeline and then co-mingle it with natural gas and deal with that. And look, it's all possible, right? But it's additional considerations. Aluminum smelting, obviously significantly more challenges around logistics. But that was, you know, an industry that anecdotally was born from leveraging excess power in different markets. But when you're monetizing the power into this digital asset that can be broadcast off, you know, a 4G signal, it gives you incredibly more significant geographic flexibility because of that. And then on the power consumption side, you've also got enhanced flexibility versus some of these other use cases because ultimately while these computers are on, they're generating Bitcoin. While they're off, they're not. There's no customer contracts, no uptime guarantees, no consequential loss. You know, when the power market changes, you know, particularly in these intermittent renewables markets where you see those power prices peak, you can remotely throttle down the frequency of these chips, dynamically reduce your energy consumption, and then a few hours later just ramp it back up. And we haven't come across any other end loads that have that same flexibility. And that seems to be a lot of the value proposition that markets, governments, and utilities are seeing in Bitcoin miners. In fact, Australia, down under locally, late last year actually proposed a tax subsidy. It hasn't been passed yet to my knowledge, but a tax subsidy for Bitcoin miners that use renewable energy recognizing the benefits that it can give to these networks.

So, we've got a number of projects under development in Texas, and one down in Australia. And in Texas, you know, the market there, particularly West Texas up into the panhandle, I know you've written a lot about it as well, but an enormous amount of constrained renewables generation, the opportunity to provide those demand response and ancillary market services. But essentially from day one we've been looking to build out this global platform, like any good portfolio, spread your risk across projects, grid connections, jurisdictions, etc. Like one of the greatest opportunities is to monetize into this digital exponential asset where there's, you know, the real world constraints around bringing online that additional mining capacity, but that brings with it, you know, social licenses to operate, social risk, political risk, etc. And we've just sought to manage those risks from day one. And geographic diversification is a really big part of that.

Look, we haven't gone into kind of the policy and the political level. We've chosen more to deal with it at a local energy market level. So dealing with the energy retailers, the utilities, the network owners of the infrastructure, so the transmission and distribution lines, and really explain to them commercially what the opportunity is for us to help them. And I think by bringing them on board and delivering those positive externalities and integrating into those energy markets, you know, if and when it does become a political issue, and you know, to date we haven't seen it in the markets that we've operated, perhaps because we've chosen those markets sensibly, then, you know, if that question is ever raised, then I would like to think that we've got a number of stakeholders that are going to be very favorable and positive towards Bitcoin miners in that jurisdiction by virtue of what we're doing.

Yeah, and look, Texas isn't an isolated example. There's a number of other examples of markets around the world where you've seen, you know, the buildout of intermittent wind and solar largely driven through government incentives and subsidies, and sometimes particularly in these western markets combined with the decline in manufacturing demand and industry creating again this perfect storm. And then you overlay the buildout of residential rooftop PV reducing net retail demand. There's a need in many of these markets to bring back energy intensive industry and also solve the system flexibility issues. The time of day productions, the lower resilience in the network. And yes,

People are installing large lithium-ion batteries, you know, building out gas-fired peaking power stations, but Bitcoin mining can solve those issues on the demand side. And this isn't the narrative around collocating next to a wind farm and a solar farm and just taking power from that asset. You know, firstly, locating behind the meter is risky. If you're putting your destiny in other people's hands, all of a sudden you're taking, as an investor, you're taking in a team, you're taking risk on Bitcoin mining, and then you're taking risk on a wind farm and their downtime, their maintenance, their access to the grid, contractual disputes, etc. So we've always preferred to have direct access to the grid and avoid those risks.

But from an energy perspective, it's all about being grid connected and it's understanding that these deregulated markets like Texas and Australia are a melting pot of different generation sources — wind, solar, some legacy fossil fuels — and different demand sources. And with the intermittent nature of wind and solar, it creates more variability in the power market where it's only a very small number of time intervals each year where the power market is not in equilibrium and supply is well below demand. In Texas, the big freeze is well publicized early this year. That's an example. So this is not a narrative of just taking wind from a specific solar farm. It's about being connected into that grid and say that 1%, that 2% a year when the power market can't cope.

Instead of building a battery, instead of building a large-scale gas-fired power station, just have some Bitcoin mining in your demand mix that can throttle their chips down, give that power back to the market, back to moms and dads, back to other industry, and then a couple hours later when the market normalizes, just turn them back up again.