Mining Bitcoin Will Save America with Harry Sudock | Ep. #89

We as a mining industry have never been looking for special treatment or government adoption or anything like that. What we've always been looking for is really just a fair playing field.

I could imagine 20 years from now, why would I not be mining Bitcoin if I'm going to heat my home anyway? Seems to me like the delta there is a fundamental understanding of Bitcoin that I think over 20 years will be resolved. The entire industry learned the lesson of 2017, which is that miners don't decide what happens in Bitcoin. We're ultimately fork followers, not fork creators.

Whether I like it or not, the market is going to seek profit maximization. And if they can accumulate more Bitcoin, they're going to do it. It is truly inevitable.

This idea of like what software has the most nodes equals the most votes equals the development signal, like that doesn't really honor the role that the node plays within the economy of Bitcoin.

Thanks for having me, Michael. Appreciate it. Good to be here.

Yeah, certainly. So I think the cliffnote version is that extremely optimistic, but maybe not for the reason that so much of the Bitcoin community got excited 12 or 14 months ago. We as a mining industry have never been looking for special treatment or government adoption or anything like that. What we've always been looking for is really just a fair playing field by which we can make our businesses exist and thrive. We don't need a handout or a subsidy for the Bitcoin mining industry to do its job, which is to secure the network as well as balance the energy systems all across our country. And so just being on even footing, whether that's with the EIA and some of the data requests that came out late in the Biden term or the SEC and the public company rules and regs and reporting that was asked of us as a sector, just taking the chilling effect off of those regulatory bodies and being able to compete on the merits of our business models. That was really the goal in the change in administration. Are there great things that have happened as well, whether it's the release of Ross or the Genius Act or other state level strategic reserves? That's all great and I think Ross in particular was a signal around what this administration was going to stand for, but at the end of the day, we're a market participant. We're a market participant in how we procure energy. We're a market participant in how we interact with the Bitcoin that we're able to deliver the proof of work to earn. And as long as those market forces are allowed to grow, thrive, and compete, we feel that we're in a supportive economic environment. It was really the chilling effect and the unfair treatment under a previous administration that frustrated us and motivated us as a cohort to be very supportive of one side over the other. And I think we've received that. The difference was night and day and it continues to be a great place to do business and to scale the mining sector here in the US.

Yeah, I'll point to a couple of concrete examples. The first is the roll back of SAB 121 which allows for a banking institution to interact with a customer deposit in the form of Bitcoin. So if you were to rewind the clock to the previous administration and you wanted to have, we're talking about mortgage collateral and Bitcoin being a qualified asset. So, if I wanted to put one bitcoin worth of bitcoin into a bank and then have that deposit count as collateral when I go to have my home mortgage issued, the bank would not only have to hold that deposit amount of Bitcoin for me. Now, self-custody is the preferred method of holding Bitcoin, but let's say I needed to get a mortgage. I wanted to post more collateral. The bank would then have to hold one Bitcoin's worth of cash of their own cash in order to just have a deposit from a customer. And so that type of collateral requirement makes it financially unviable for the bank to ever touch this asset or interact with this industry. That's not a law, that's not a regulation, that's guidance from regulators as to how they would look favorably upon the bank behaving. It's these soft power type of dynamics between regulators and institutions where there's no law that goes through Congress that says that, but there's a group of unelected bureaucrats who make their opinion known and that opinion then has a huge amount of influence over the behavior of a market participant in the form of the bank. That's one example. Another example is really the SEC review process. So before my time at CleanSpark, I had a company called Grid Infrastructure. We took that company public via SPAC and so we signed the merger agreement with our SPAC partner Thanksgiving of 2021. We didn't get listed on the public market until New Year's Eve 2023.

So, it took us 25 months of review of not material financial or accounting items that we ended up being correct on how we were treating them, but the comments that we would receive were things like the Securities and Exchange Commission reserves the right to comment further. And so, that's a way of saying you're fine, but you can't go out yet. And so that put undue burden and pressure on our shareholders. It robbed the market of the opportunity to have interaction with another public company aiming to just build their business and creates the chilling effect that we've seen today. Now if you were to try to go through that process, you do everything right. You pay the attorneys, you pay the accountants, you know what they need in order to shape your reporting and disclosures into the form that the public markets expect and deserve. You're able to accomplish that process in well under half the time. You've seen it through some of these reverse mergers that have happened. You've seen it through some of the SPACs that have happened and as well as the IPO market that's been unblocked as well. And so you're seeing just the deal timelines massively compress which is great for the shareholders in the company. It's great for public company investors and the whole market is much more vibrant when you have more options to choose between. So what the previous administration did was create a chilling effect where less companies were able to get public. We had two dirty words in our deal which one of them was SPAC and the other one was Bitcoin. Neither of those were acceptable structures under that form and we suffered from that. So in short, the regulatory environment is far more inclusive of pro business opportunities and we think that that ultimately best serves shareholders, operators, and the public market investors as a whole because they're able to make choices and vote with their investments the way they deserve to.

I think there's always a risk there. But I also think that Bitcoin has no political party but we do have an enormous number of constituents as an industry. That goes for mining, it goes for energy abundance, it goes for general data centers, it goes for just the holders of SATs who want to have a savings technology available to them on a self-custodial basis. So, I think that what's our best defense against potential administrative push back in a future world is just to get more Bitcoiners educated and holding their Bitcoin and having them represent their viewpoint at the ballot box and more generally. And I think that there's like a toothpaste has left the tube effect with where we stand right now. Part of that is that the current treatment, guidance, etc. is getting integrated into the financial system broadly. Whether that's ETF approval, no matter how you kind of feel about that product, it's out there. It's in a lot of people's hands and people don't want to see that get impeded. Or that's just the existing cohort of regulation has been digested pretty broadly by the marketplace. And so it's just hard to go back. It's easy, and we saw this in some ways with the Biden executive order around AI. The easiest way for government to intervene is to kill something in the cradle before it's had a chance to get out into the world to grow up and become a teenager and become a young adult and become a titan of industry as it grows up. The most fragile moments in any emerging technology are the earliest days. We saw this with Bitcoin on a technical level. We saw this with Bitcoin from a market structure perspective and now I think that we certainly have a teenager if not a young adult in Bitcoin and in the regulatory treatment that we see here in the US. So never stop being vigilant, never stop being critical and concerned with what could happen. But I think that our level of resilience as an open market for this new monetary primitive, I think we're in a pretty strong position to weather the pendulum as it swings politically.

It's a complicated and broad topic. The first is that I think that the role of nodes is not being particularly well discussed and this idea that like a node equals a vote is sort of misspecified. At the end of the day running a node is fundamentally a selfish behavior and that's good. So if I run a node and I receive a UTXO and I validate it against the node that I ran from source from zero, regardless of what software implementation that is, that's the mechanism by which a node exerts its power is because there's a relationship to my economic behavior which is the UTXO and the node is performing an audit function against my economic power. This idea of like what software has the most nodes equals the most votes equals the development signal, like that doesn't really honor the role that the node plays within the economy of Bitcoin. And so that's just something that kind of rubs me, which I think we lost the plot a little bit in 2017, not to date myself, but the UASF movement around SegWit no 2X versus SegWit 2X, that node running an implementation framework was incredibly powerful and was able to demonstrate the will of the Bitcoin community, but it was equally important that when the hard fork happened, people sold their BCH for Bitcoin. And so I think that there's a continuum of soft power that happens over the development cycle and that soft power arc gets concluded with a hard power event which is a fork and when the fork happens people exert hard economic power by selling one and buying the other doing nothing or the opposite selling two for one. So understanding the governance mechanics in Bitcoin at a more deep and fundamental level is important and it feels like the discussion that we're having remains fairly surface level relative to the depth of conflict and conflict resolution that the Bitcoin community has been through when there is truly non-consensus proposal litigation that happens across the community. So I don't have a super strong grounded opinion in one or the other. I don't write code for a living which is probably better for everybody that I don't, but I try to bring a deep and first principled view to what's happening around me to try to understand it. And right now the reason that I think this debate can kind of get to such a high temperature is because there's just a lack of skin in the game, right? Nobody's being told like nobody's put to the test of like sell fork one, buy fork 2 and shows you what you really think. And so it's easy to have a really loud debate when there are ultimately relatively low stakes because, you know, you go to a sports game and you see everybody argue, you get onto a battlefield and the relationship's a little bit different. And that's kind of what this feels like where we are today. I think that the concept that you're going to filter your way into Valhalla is somewhat unreasonable. And from a miner perspective, we're in the business of working for users of Bitcoin. And we're profit-seeking entities where if there's a high fee to be paid for a transaction, we include it. We also participate in a large pool environment because we don't want to be in a non-private or in a private mempool environment. I think Merch on X did a good post about the risk of privatization of mempools and the censorship resistant risk and some of the obfuscation risk that can come from that. So I think that we as miners are some of the longest term thinkers in the space because we'll buy an ASIC and we expect to run that ASIC for 3 to 5 years. And so we need Bitcoin to be an economic force for at least that period of time because that's where we risked our capital. And that means that we're ultimately trying to maximize the area of value under the curve, not the high watermark of value at any point in time. And so we try to be very measured. The entire industry learned the lesson of 2017, which is that miners don't decide what happens in Bitcoin. We're ultimately fork followers, not fork creators. And because of that, I think that the developers and the users of the Bitcoin economy need to kind of hash it out and then ask us to participate at the end. At which time we're highly motivated to kind of ride along because we made those multi-year investments in order to do that. So take it from someone who's been around long but shorter than many that continuing to return to deep first principled thinking about what is the value of censorship resistant provable digital scarcity and what is the censorship resistance is important. It's not just a freedom of speech concept. It's also a freedom of association concept. And so the values around freedom of association means that if you're operating within compliance as the rule set of the network dictates, you should have maximal freedom to associate under that rule set. And I'm not putting JPEGs on the blockchain because I think that's not going to maximize my area under the curve. But I also think that picking winners and losers didn't work in a fiat environment and it's likely to not win in a more open environment either. So ultimately anything that can be solved with an economic force is best solved by an economic force.

I think it's a point in time right now. I use the there's like an old joke about inflation which is the cure to higher prices is higher prices. And so I view it kind of similarly which is like right now if you want to do some sort of non-standard something or whatever the case may be you would go to a private environment and bid it out of band basically. So that'll drive up prices, but the cure to higher prices is just to get higher prices in the mempool when you're able to get that corpus of economic activity to be bid on in the auction format more aggressively. That's the way through. And so I think we've seen a protracted low fee environment here. And that's a gift for personal self-sovereign holders of Bitcoin because you get to do some UTXO consolidation along the way, but ultimately low fees aren't going to last forever if this economic experiment is going to work at scale. And so I think back to like, what's the fundamental trade that miners are all engaged in every minute of every day? There's four legs to it. You're long Bitcoin, you're long transaction fees, you're short difficulty, and you're short energy prices. And the combination of those four legs together equals mining business. And I think that ultimately being long Bitcoin and being long transaction fees are like easy things to say and maybe understand like the first order of, but there's a second, third, and fourth order of what it means to engage in those pieces of the network that emerge when you start to say, okay, well, great. If we're long fees, how do we gain value from fees going up over time? Is it number of transactions? Is it fee per transaction? Is there a lightning read through to that? Is there a side chain read through to that? What does all of that mean when you get into a highly complex emergent economic environment, which Bitcoin ultimately fosters? And then that's where I start to think about what are the universes of financial services that need to exist whether on an open-source software basis or a third party provisioned basis to make a Bitcoin based economy highly functional.

There's a tremendous amount in that question. I want to attack it two ways and coming from my CleanSpark perspective, we certainly have a point of view. The Bitcoin mining business finds itself in somewhat of a super position as it relates to the trends that you're talking about. And I'll explain. The first is that we've spent the last five plus years as a sector gobbling up contracted power in a way that almost no other industry has. And somewhere at the end of 2023, chat GPT got released and everybody realized that there was going to be a power plan equivalent of a bank run on power contracts. And that's hard because it's a physical contract. It's not a digital one. And so there's some world of atoms dynamics, whereas the world of bits might be able to flex up and down more easily. But once you got to put a shovel in the ground, the dynamics change. And so Bitcoin miners found themselves in a really interesting position because they got a lot of this stuff under contract really early. The second is that as electricity demand, especially on a firm basis, goes up, the value of flexible consumption also goes up. And so that's how we run our business today is that the vast majority of our deployed Bitcoin mining compute infrastructure is designed to be able to run on a flexible basis. And what's interesting is that utilities are kind of only in a tough spot maybe 200 hours a year where the peak of their generation matches the peak of their usage on the aggregate customer base. So think the hottest day of the summer, coldest day of the winter kind of dynamic. And so that's the structural dynamic as we see it today is that contracting megawatts is hard. We've got a lot of them. Consuming electricity on a flexible basis is hard. We're really good at it. And so that's a really compelling position certainly for CleanSpark is the way we've thought about our business. We've got over a gigawatt under contract and we know how to consume it in a way that supports the broader system and we realize the economic value of that flexibility. So that's the good about our industry and where we are. The challenge is that we're not making enough energy and we're going to need to make more. We're not just going to need to make more, we're going to have to transmit it all over our country. And so when you, part of what Luke's talked about is some of the commodity and raw supply chain challenges, but there's all the other challenges of great, we go build a new nuclear power plant somewhere. That's incredible. How do we hook that into the system? How do we move those electrons all over the wires to make sure they go where they're supposed to? Our energy grid is one of the crowning engineering achievements on the planet because it's a patchwork. There's no, the grid is not one thing. There are three distinct zones which are east, west, and Texas. And then within each of those zones, there's a huge amount of quilt-like sections. Some of them overlap, some of them touch, some of them have agreements, some of them don't. All of that granular complexity that emerges from it. So, I think that going back to being a first principled advocate, Bitcoin miners own a lot of the contracted availability of electrons disproportionately to maybe you would expect a company of our size or our industry size. Number two is we at CleanSpark have a unique ability to consume it very flexibly. Number three is we need to produce a lot more, move a lot more around and figure out how we're going to serve these changing demand functions for power at a very fundamental basis. The generation of electricity is going to be one of the great challenges of our time.

The short answer is I think that's pretty likely. I think the gross demand for power is going up because of AI. Think about a silly example: you shut off 100,000 gas cars and put on 100,000 electric cars. Same amount of energy, but one puts stress on the network of fuel pumps, the other on the network of outlets. So you're shifting the same energy from A to B, but B puts strain on our electric system. Those are some of the complexities. We talk about power versus electricity. A car runs on power, just a combustion engine. Thinking about where that happens, how it happens. Batteries are still an open technology question, a material science question being solved over time. Renewables remain an opaque, subsidy-obscured type of generation that may work great but introduces complexity and risk around the duck curve in each energy market. When I talk about a complex adaptive emergent system, energy is a great example. There's no central planner, just competing market forces that can't quite reconcile because the future is different than the past. As you go through a technological shift, which AI certainly is, which the advent of electric vehicles certainly is, which the changing dynamics around building interconnect generation are, all of those are technology enabled. The SMR or fourth generation small modular reactor nuclear plant that didn't exist a while ago now does. You're seeing a system with a lot of market forces baked into it try to react to changes in technology, and it's not going to do a perfect job. Anytime you have that dynamic, it means there's a huge opportunity for businesses to come in and solve problems. That's really where we find ourselves. We've been solving the problem historically with our Bitcoin mining business. We're looking and exploring what it'll take to solve some of these problems with a potential AI business. When you see an environment where the dynamics are changing, especially because technology is evolving, that's where your biggest opportunities are going to be.

The insufficient answer is it depends.

Right now we operate in four states: Georgia, Mississippi, Tennessee, and Wyoming. They're all a little different. In Georgia, the municipality in many cases is the utility, so you're contracting with the city for power. In Tennessee, you work with TVA, who does generation and distribution, and they have over 150 local power companies you contract with on a triparty basis. So you're contracting with the local utility and with TVA. That's two layers of utilities landing the power at your facility. Wyoming is different, where you go straight direct to the utility.