Building an Institutional Grade BTC Miner

Thanks for having me. Thanks for moderating.

It's a great question and it's a very accurate depiction of where we are right now. It is very similar to what happened in 2017 and then 2018 when we hit the bear market and the crypto winter, 18 to 24 months up until the halving event, but that's also occurred almost pre-every halving event since 2009. There were crypto winters all smattered along the way. In 2018, Core Scientific was birthed in early 2017 and our first facility was constructed in early 2018 pre the crypto winter. That time was very interesting in terms of the first scaled miners having the weather, decreased price event, and an increased hash rate. You saw a contraction in the marketplace. The miners that were well funded and had strong balance sheets survived, and the people that built infrastructure that was able to withstand the tumultuous period survived as well. You saw a shakeout of probably 80 to 90 percent of the participants at that time. Now here we are again. We had the spike after the halving in 2020, and now we're seeing hash rate at an all-time high, somewhere around 240 exahash the other day when I looked at it. We have a very high level of hash rate, and we have a price. It's hard to say that it's a sell-off or a depressed price because two years ago Bitcoin was trading between three and six thousand dollars. So we're still 5x higher than we were in 2019 and 2020. When you look at the price and decide your capital allocation schedules, you have to take into account that the price has the history of shooting way up and falling down, but not as far down as it was previous to the halving event or the hash rate rising or the new equipment coming online, which also coincided with this year's halving. We had a equipment refresh, we had a halving event, and then we had the hash rate increase. Lots of people entered the space and some of them will survive, but most of them will not, pretty much akin to any startup business. You're going to have lots of people enter a space with a rapid price increase, and the people that are able to do that in a measured way will withstand the turmoil.

Absolutely. That's a really good question. I started mining about a decade ago in 2012, 2013. I was introduced to the Bitcoin network early on. I dismissed it as most people do. If you looked up what the Bitcoin network was in 2011, you saw that people used it to buy drugs on the internet, and it looked like digital video game money. I stayed away because my background is as an accountant and I'm a lawyer, so I have privilege licenses. When I read that, I said this is probably a technology I should stay away from. What piqued my interest was the immutability of the ledger. At the base, Bitcoin and Bitcoin mining is an accounting revolution. It's an innovation in accounting. We have an accounting innovation in 700 years. The base root foundation of Bitcoin is a new accounting technology that allows you to immutably store transactions in a rescissionless environment. When I realized the innovation was real and meaningful, I decided to participate in the network. Unfortunately, it's called mining, but what you really are is an accountant. You're time-stamping transactions between two parties. That time stamping, or accounting transaction functionality, is the base engine for proof-of-work which runs the Bitcoin network. In 2012 or 2013, I started mining. What happened back then were very poor options to send your equipment globally and in the US, so we would buy equipment and send it to data centers across the US. We were in Washington state, sent some to Georgia, sent materials to New York, and other locations. The problem we saw from 2012 up until 2016 was everybody we sent our equipment to failed. They had massive problems on the infrastructure side, the software side, uptime, and efficiency. So by 2016, we realized if we wanted to do this at any scale, we would have to build our own enterprise-grade facilities to host this equipment. It's a data center business. People get confused about what a Bitcoin miner is. It's simply a computer server that lives inside a data center. Any building that runs computer servers is technically a data center. So we decided we needed to build an enterprise-grade infrastructure facility. We picked North Carolina. There is a region in North Carolina and other Appalachian states that have lots of excess hydroelectric power. That hydroelectric power was built by the US government as critical infrastructure in the 40s for the Manhattan Project. They built massive amounts of stranded renewable energies in the Appalachian mountains, which after the project became stranded renewable energies. We located the first enterprise-grade facility in Marble, North Carolina in Western North Carolina. That facility was actually the home of American Thread, a manufacturing facility that provided thread to Levi Strauss but went out of business during NAFTA. There was lots of energy up there with big utility companies providing power, and you saw American manufacturing jobs go into the Appalachian mountains. In the 2000s, NAFTA basically shuttered all these manufacturing facilities, so you saw these communities that had been growing for 20-30 years decimated. Later, Obama enacted the Opportunity Zone laws to help bring back these areas decimated by NAFTA. Anyway, we were in the Appalachian mountains and that was the first enterprise-grade facility in America. It was about 230,000 square feet on 70 acres up in those mountains. We built it with enough funds and a good balance sheet to withstand what ultimately became the next crypto winter about 18 months later.

As I said, from 2012 to 2015, technically we were asset-light. We would buy the equipment and send it to a third party to host it. The problem was, if you're not in control of your own destiny, it's a disaster. We would purchase the equipment, it would come in, and wherever we were sending it, they wouldn't turn it on in time, or the equipment would be turned off when it should be on. The efficiencies were low, and a host of other problems. We realized in order to control the economics of our business model, we had to control the infrastructure. Today, you hear a lot of people talk about how they're asset-light, they bought ten thousand or twenty thousand miners and they're worth a billion dollars. Two things are wrong with that: one, the miners are very expensive, so they're not actually asset-light; and two, you can't control turning them on and running them properly. You have these two business models. One of them is going to withstand the test of time, and the other will be interesting to see how it plays out this cycle. The last cycle, people with the asset-light model didn't survive very well.

The site development, which we categorize that way before you physically start building or capital allocating towards a specific region, is an art. It's surprising to me that the groundwork you need to do is the first step: go to that region and talk to the representatives, the elected officials, the community, the development team. There is an array of people in every single city you're going to ultimately have to birth your company in. You have to find out if they want you there. If they don't want you there, don't build there. Don't start a project there, because ultimately the elected officials were elected by the people who live there. If the people have elected these officials for several terms, you're not going to change the entire makeup of those communities. There are plenty of options in America, really friendly jurisdictions that want this technology within its borders, understand it, and understand the innovation. They understand that the energy footprint is not what you hear in mainstream media, so they're willing to accept you into their communities. Then there are communities that just don't care, don't want to learn it, and the elected officials and citizens don't want you there. New York is one of those towns. New York is historically very unfriendly to Bitcoin mining and other industries it doesn't want within its borders. To try to hammer a business into a community, especially one that is not afraid of a fight, is a silly proposition for a company that has to allocate capital. There are plenty of places all over you can go to. The genesis of this was in Washington state, which has lots of hydroelectric power and stranded renewable energy. Certain regions have excess energy and haven't built out transmission lines to get that excess energy to areas that need it. Early on, Bitcoin mining moved to Washington state, and I was a customer of one of those co-location facilities. What happened was the people in Washington state decided they didn't want Bitcoin mining within their borders. They didn't like it, they didn't understand it, but they don't like it. So the people spending capital in Washington state left and went to other regions that welcomed them. The same thing happened in New York. The people in New York, just like Washington state, didn't want this technology within its borders. Now we see headlines that New York is banning proof-of-work mining, none of which is true. New York imposed a two-year moratorium on a certain subset of information. Moratoriums are not unique to New York or this industry. There are moratoriums all over the US on all types of issues: building apartment complexes, developing near the coast, building billboards, putting in cell towers. Moratoriums are a tool for regulators to slow down and conduct more studies. I don't think anybody should have been surprised. We knew what was going to happen in Washington and New York. I talked to some of the legislators there and had calls with their staff to understand their interest. They were not interested in understanding the true environmental impact at all, so I knew this was the ultimate decision they would make. The writing has been on the wall for the last four or five years that New York is an inhospitable environment to technology like we have here.

It was amazing. We tried to get Nick involved in the beginning, and he said he would think about it and got more involved as time went on, which we appreciate. The purpose of the Bitcoin Mining Council solely is to educate the public and the regulators on the true energy footprint of this industry. The problem is the industry is very complicated. When you think about it for the first time, it sounds simplistic, but when you actually research it, it's a massively complicated industry. The infrastructure is complicated, the equipment is complicated, the effects on economics, transactions, and accounting is also complicated. How that affects the rest of the world is even more complicated. Explaining that to people in a cohesive manner is very difficult. What you had was the whole world united for the most part against Bitcoin and the Bitcoin network, putting out information that was provably false. Then you had 20 or 30 people in the industry who would respond individually to the comments. So you had a group effort against the network and one-off pieces against whatever it was, an unorganized response to an organized disinformation campaign. The goal of the Bitcoin Mining Council, when Michael Saylor and I and several others got together, was to spread the message of truth: what actually are the facts, how much energy is used globally, what is the carbon footprint, is this something that will destroy the planet as the World Economic Forum said in 2017? In a famous article that is shared all over the internet, the World Economic Forum comically said that by 2020, just two years ago, the Bitcoin network would consume all the world's energy. Obviously, that's not true; we still have lights on. When you drill down on how wrong they were, they were over 99% wrong. We know how much energy is generated globally, and we know how much the Bitcoin mining network uses. It's 16 basis points of the world's energy, so 16 one-hundredths of one percent today. Two years after the Armageddon prediction by the World Economic Forum, the Bitcoin Mining Council was created to lend a voice to these factual and educational points that were not getting distributed properly. Mike Saylor had the best quote when describing the Bitcoin Mining Council, because we did take a lot of heat for creating it. He said that the network and the people involved are decentralized. We believe in decentralization, but he said we could be decentralized without being disorganized, which is what we were. We put a report together every quarter. We're a little over a year in, and those reports are full of information that anyone can download. You can talk to any of your representatives, and they show how inconsequential the amount of energy this network uses is, both globally and in the US. We encourage anyone to go look at the Bitcoin Mining Council website and take any of that information.

Thanks for having me.