Bitcoin Back in Action | Office Hours (ft. Harry Sudock)

How we doing? Yeah, pretty good. About yourself?

No bad days. I like that.

I think that people realize that sovereign money is increasingly useful over time. Basically, we've got this incredible technology that results in this incredible asset, and the use case for that asset and the desire to own that asset is making itself more evident. I think that we've got compelling tailwinds as inflation continues to be non-transitory. I think we've got evidence as we look to instability across the world. When you look at a digitally native population entering some of their peak earning years, which is what I think we're starting to see with some of the Millennials, their version of flight to quality is not gold. Their version of flight to quality is something that more accurately is approximated by an asset like Bitcoin.

Yeah, I think that if you look at when GLD was approved for gold, for many, many years there was no way to buy gold exposure directly through what's called a spot product. For those in the audience who are not familiar with some of these financial products, there's this concept of a spot market for an asset versus a futures market or an options market or a derivatives market. The spot market really is just a reflection of owning that underlying asset as directly as possible. The way that the ETF will function is if I go and buy a dollar of the ETF, the ETF goes and buys a dollar of Bitcoin. This is different than the futures product, which is really more of a synthetic idea where if I go buy one dollar of the Bitcoin futures ETF, maybe the ETF buys one dollar of the futures product, or maybe it goes up by a dollar relative to the Bitcoin price. The relationship between the underlying asset and the decision to purchase the ETF wrapper is at more of an arm's length relationship, whereas the spot relationship is most closely linked and most direct. So I think anytime you get innovation in the suite of financial products that are available, you're going to see a potential increase in price because more people have a vehicle to get exposure. Maybe you have an IRA or 401k and you say, 'I'd love to have Bitcoin exposure in here.' Well, I can't get a Coinbase account for my IRA account because they don't support it. Now you say, 'Okay, I've got my IRA, I can go buy the Bitcoin ETF and I can get that kind of price exposure in a type of account that couldn't get that exposure previously.' So I think it's really exciting. I think there's like $40 trillion of retirement accounts in the US right now. So even if they only chose to put a small fraction of that into an ETF product, that's a huge run-up in Bitcoin price. There's not that many Bitcoin. There's only ever going to be 21 million of them, and that doesn't account for the ones that are lost or the ones that will never be sold. So there's very few of these things, and as you increase demand for an inelastic supply side good, you get to see some kind of violent moves to the upside.

I think it's worth thinking historically a little bit. For all of Bitcoin's life from inception till 2021, 2022, we were in a zero or near zero interest rate environment. There was an abundance of capital looking for speculative returns in growth assets, and Bitcoin got lumped in with the rest of them: new tech, hot sector, all the rest of it. So for a long time, Bitcoin got carried by the macro backdrop: money's cheap, abundance of capital, everybody's looking for that return that's going to outperform. Treasuries were paying 2%, now they're paying 6%. So I think of it like a video game. We used to be playing the video game on easy mode, and now we're somewhere between hard mode and all-pro with this very sharp rise in interest rates. Capital drying up, you put that on the backdrop of a couple of different wars going on, commodity prices blow out, and all this good stuff, I say sarcastically. So I'm always very hesitant to say 'this time is different' because what's past is prologue. But what I think really is different about this time is that we've seen Bitcoin recover this year, 80, 90, 100%. The NASDAQ is up maybe 23%, and everything else is down. So we're seeing this macro environment get turned up to hard mode, and we're still seeing Bitcoin, the underlying asset, to be highly performant. That's really cool, and that's really exciting for me as someone who's been toiling away at this for five, six, seven years at this point. So it's really exciting to see this type of price action, especially relative to other markets, especially given the backdrop of a more aggressive Fed and a more unstable world. This is kind of the environment that Bitcoin was built for. It's a hard money. So when you get into a place where government spending isn't going down and deficits are going to expand over time just to service the debt and to continue to pay Social Security, Medicaid, Medicare, and the other entitlement programs, I don't foresee the money printer to slow down at any point if we plan to service the debt and continue down the road of the existing programs that are already signed into law. So I think it's really interesting where Bitcoin is now emerging not just as a growth and a risk asset, but as a flight to quality asset where we see instability, whether it's economic instability or geopolitical instability. This time is a little bit different.

Well, what I love most about Bitcoin, and I love a lot of things, but what I love most is that it puts the burden back on entrepreneurs to produce a better good or service. When you have a harder money, your quality of product has to go up. The reason is that if your dollar is not losing purchasing power every year, all of a sudden the incentive to hold your savings in this better asset is more compelling. So the quality of product, good, or service that needs to convince you to part with your savings needs to be higher quality than it has been in the past. There's this beautiful and incredible opportunity and pressure that's going to get put on entrepreneurs to incentivize them to raise their game so that we as consumers are all going to be the beneficiaries of these higher quality goods, products, and services. That part gets me really excited because right now the incentive to hold dollars is negative. There's a disincentive to hold dollars. So what do we do with our dollars? We spend it as quickly as possible, and maybe that means investing in the S&P 500 or something else. But this is the beautiful change that a harder money can bring to an economy.

My answer is going to be somewhat laser-eyed and maximalist in nature, which is that Bitcoin isn't competing, it already won. There really isn't a way to disrupt Bitcoin's network effect in a meaningful way because none of these other coins are A) fairly distributed, B) sufficiently decentralized in their proof of work consensus mechanism, or C) credibly neutral in their lack of backward disruption. What do I mean by that? When I send a Bitcoin transaction and six blocks are built on top of that transaction, each transaction gets included in a block. Then more blocks are built on top of that, and the cryptography is such that the outputs of block one determine the inputs of block two, and two determines three, and three determines four. So if I go back and change something or try to change something anywhere historically, the whole thing is ruined. That's why settlement transaction finality exists. If I send you one Bitcoin, I can't get it back unless you send it to me. I was in control, now you're in control after I've sent that transaction. None of the other chains, tokens, coins, etc. do that. You've got evidence that their blockchains are relatively editable if there's a sufficient amount of social pressure. Bitcoin doesn't work that way. The other vector is that there's a 21 million supply hard cap. Go ask your favorite Ethereum friend how many Ethereum there are. You can't tell you why because they can't run a node to independently validate the circulating supply, and they don't know what's coming in the future blocks. The burn versus the issuance, all these different monetary policy ideas, those are all F-U in every one of these other systems and ecosystems. To me, that's just a non-starter. If I want to go start a tech company, I'll go raise VC money and go try to build a tech business. But Bitcoin is not a tech business. Bitcoin is money. It adheres to the laws of physics because of proof of work and the difficulty adjustment. The miners that are out there, of which we are one, these are the ideas that keep Bitcoin's conservative profile stuck in time in the right ways. We're not anti-innovation or anti-creativity in any way at all. We're just very thoughtful about the tradeoffs, at least I'm very thoughtful about the tradeoffs that some of these other systems have proposed and have gotten through. But even within the Bitcoin development ecosystem, I just think that people are not as thoughtful about the tradeoffs that their technical ideas introduce to the system. When I look at it, I say, 'Is it going to make the likelihood that my percentage of the 21 million is less certain? Then it's bad tech.'

Totally. This is a human behavioral bug, it's not a feature in some ways. We're enormously biased towards action, which can be good, but it also cuts the other way when you want to tweak and massage a central planning idea into reality. The place for central planning is at the corporate level, not at the monetary level.

I think there's like a 'too big to fail' idea of intellectual yet idiot. He's too smart for his own good in some ways. I think Matt Levine is brilliant. I think he's a great writer. I think he's super sharp and thoughtful and credible on lots of topics. Clearly Bitcoin isn't one of them. The stuff that he put out in this post is like I felt like I woke up in 2015 when I read it. The idea that you're overwhelmingly likely to lose your Bitcoin every time you send it, that's just bunk. You might actually send it to a criminal. Some of it, if you pay $16, some of it might go missing in transit and couldn't end up in the hands of a murderer. This is kind of FUD 101, disinformation misinformation 101, where a person with a big platform makes a non-credible claim. A credible person makes a non-credible claim, credible readership then takes the non-credible claim and runs with it. That feels like it's kind of happening. I think it's worth calling out as well that Bitcoin's not perfect. We don't have the UX, the user experience, in all these apps at the level of quality that we want to be at yet, at least for me as a user. But it's getting better and it's changing. An easy way to manage that is just scan a QR code. If you're worried about typing or copying and pasting, all of these payment options have their QR code enabled. So you scan the QR code, you send the thing, you sign the transaction, and the money goes. The other thing you can do is send a test transaction. You don't have the opportunity to do that with your bank as easily, but you can. If you're using Bitcoin and you're going to go buy a house with it, send a $10 transaction to the address they give you first, confirm that it works, and then repeat the process. These are relatively straightforward risk management strategies when you're moving a large amount of money in a bearer asset. The other piece that is worth calling out and highlighting is if you want to be taking sovereignty of your own wealth, there is a higher bar for personal responsibility associated with that. That's okay. It's okay that it's harder. You're getting a lot of benefit for the additional friction. That's what I continue to return to: yeah, you're right, it doesn't work. You can't recover your password the same way you would with a bank. Why? Because we think that the bank and the banking system introduces other kinds of risk that we're avoiding. In a world of tradeoffs, a typo and a loss of funds is an acceptable tradeoff in order to be able to hold your own wealth in a self-sovereign way. That's okay.

We're a mining company. We're vertically integrated. We're kind of a pure play. We acquire land and access to power at as able a cost as we're able to, and then we build what looks kind of like a bunch of shipping containers in a data center. The company was started in the middle of 2018. I joined as the first employee a couple of months later, and we've been on this growth path for a while. We're in the middle of a public market transaction, so I can't comment specifically on the business. But it's been the joy of a lifetime to work with the team and to work on Bitcoin and all this different stuff. It's just such a pleasure to get to do this professionally because I was obsessed obviously prior to joining Grid and couldn't imagine doing anything else other than working on Bitcoin Park. The role is relatively straightforward. I'm responsible for miner acquisition, for power acquisition, for capital markets, strategic transactions, and brand, whatever that means.

I don't know. Like any complex system like a good market, you don't really know the inputs and the outputs. You can bet on it with your dollars. But what's more in my wheelhouse on the energy question is that puts a lot of pressure on the cost structure that miners face. If you don't have a fixed rate power agreement, all of a sudden what looked like really healthy margin might look like compressed margins. So really where that rears its head is putting pressure on the mining sector. We saw a version of that during the early days of the war in Ukraine when natural gas blew out. It was trading at $2 per MCF and then it traded all the way to $10 or $11. That definitely put pressure on a lot of businesses. You saw some go out of business, you saw some struggle. So the Bitcoin sector is not immune from exposure to energy markets, but I think that's not really reflected in the price of Bitcoin necessarily. It's more so reflected in the margins that miners are able to achieve.

It all comes down to the power management side of the business. You can sign a fixed price power purchase agreement where you're buying the energy at a fixed cost and the hedging burden gets passed back to the supplier. Same deal with if Apple strikes a deal with Foxconn to buy 100 million chips at a certain price, that price is in the contract regardless of the materials costs that Foxconn faces. So some miners can buy these fixed rate products and sign these contracts. The other way is to put the burden back on the miner for the hedging, where the miner can say, 'Hey, I'm exposed. I'm buying X amount of power and Y percentage of that is natural gas exposed, so I need to have Z amount of hedge over a certain period of time duration that protects me in the event that that happens.' But I don't know that the mining community is that sophisticated yet on engaging with that type of price protection and those types of products. We're coming off of a historic low in energy costs the prior 10 years. There's a really compelling backdrop where 2010 to 2020 the price of power was pretty damn low. So the shock of the Ukraine war came pretty violently to a lot of folks' businesses. I think going forward, as the industry continues to grow and professionalize, those hedging programs are going to be table stakes.

Nominally, it's you know, but if you think about even just the public guys, the market cap is maybe $20 billion across all of them combined. It's just not that big yet. So part of this is just we've all got to get bigger and let time and maturity take its course. Bitcoin was invented, the white paper dropped on Halloween of 2008, and then shortly thereafter in 2009 the first functional code base was released and the system started. So while the system was launched in late 2008, early 2009, mining as a viable business is maybe really only a 2015, 2016 phenomenon. The first kind of public companies working on it maybe 2017, 2018, and then the scaled operators kind of came in 2020. So it's not an old industry at all. Even within Bitcoin land, it's only kind of been a relevant independent sector for five, six, seven years. So it's very nascent still at this point. I think where we punch above our weight class is on the energy side. We're a really big differentiated buyer of electricity, and that brings a huge amount of benefit to the communities and the systems that we operate in. Shameless plug: we love our folks at TVA. They support us enormously. I love the TVA.

Careful what you wish for.

At the end of the day, the Bitcoin technology, the Bitcoin Revolution, pick your poison, it's speaking to a segment of the population that's really struggled with the traditional rails. We have been living under a full fiat regime since 1971, when the final peg between the dollar and gold was broken by Nixon. We've been living on a free lunch since then, where deficits don't matter, you can print into oblivion. We've got objectively unhinged ideas like Modern Monetary Theory garnering mainstream success. Bernie Sanders's chief economic advisor was Dr. Stephanie Kelton, who wrote the book on the deficit myth. She's one of the core proponents of Modern Monetary Theory, which is this idea that the government is allowed to print as much money as it wants and there's no negative impact on the economy. Then there's a tiny asterisk and a footnote that just says, 'Well, we'll solve inflation with higher taxes.' That's the whole kitten kaboodle of that idea. If that makes no sense to you, welcome to the club. So we've got this environment where the first 45, 50 years of this sort of full fiat regime, we didn't really see the distortions that clearly in the economy and certainly in our social fabric. I think it's really only in the last 10 or 20 that they've started to rear their head, most notably with the Great Recession in 2007 and 2008, where the banks blew up and the government said we'll fix it. Then we kind of limp along, we raise rates for the first time, the economy crashes, and we immediately drop them back to zero and keep them at zero. Then COVID rolls around and we print another $5 trillion in deficit spending to try to fix that problem. At the end of the day, creating additional demand side solutions doesn't fix a supply side problem. That's really what the fiat regime that we've seen play out has most articulately resulted in. If the economy struggles, no one's willing to look to see that the demand is there and the demand is healthy, but our ability to satisfy the demand with supply side goods, or at least high quality supply side goods, isn't achievable. Some of that is described by the fiat problem and the money printer, but some of that is also overregulation and restrictive policy. It's illegal to sell raw milk. The dairy folks just get kicked in the teeth when they just want to sell their product, which some would argue is a much higher quality product. Why? Because big Ag has basically said we want to choke the life out of this and make money on the pasteurization process. Or ethanol and corn subsidies, or wind, solar, and energy subsidies. All of these distortions to me are downstream from the fiat decision to de-peg and to fully empower the government's purse strings. So why the Bitcoin issue is so important? On the one hand, I don't think we're replacing the dollar. I don't think we're doing these more radical ideas. But I think what Bitcoin is very credibly doing is providing a relief valve where there was none prior. As long as Bitcoin exists, there's an opportunity to own a bearer asset on your own terms that can't be debased. Any political legislation or politicians, or God forbid, anyone that is doing anything positive on this front, be it in DC or at the state level somewhere, I think there's a ton. I think Senator Lummis is an absolute firebrand for our industry. I think Senator Gillibrand is very literate on this issue and has proposed legislation in conjunction with Senator Lummis. I love what Senator Hagerty and Senator Blackburn have done in the state of Tennessee. I think the governor's office here with Governor Lee is an asset. I think what Governor Abbott has done in Texas is obviously productive. I think Governor Youngkin in Virginia gets it and is on the energy side. I think there's a ton of positive vision for this. I think Congressman Ro Khanna, though he and I disagree on many social issues, I think he gets the Bitcoin issue, he gets the crypto issue, and believes in American innovation and is a patriot. These are people from both sides of the aisle who are early adopters to Bitcoin as a legislative tool and as an American economic tool. The more that we're able to open our doors to this, the more I think we're going to see innovation and flourishing here. When I get asked this question of 'What about the politicians?', I get a lot of 'SBF, FTX, Celsius, bad actors.' My answer is awesome. We have great laws in place today to prosecute and convict bad actors who do bad things in financial markets. Of course we don't need a new law. We don't need a new treatment. All we need to do is to have fair rules of the road so that entrepreneurs can go out and work themselves to death to make other people's lives better, like they have been doing for the last 300 years.

I think that whether it's a coffee shop or an auto dealership or a tax collector, Bitcoin is a very useful tool to be able to satisfy an obligation to one of those counterparties in exchange for goods and services. Bitcoin is sound money.

I'd say a few things. One is that I moved to Nashville this year from New York City, the belly of the beast. Thank you, sir. Couldn't be happier to be here. It was a long time coming. We have business in the state and I just love it here. I grew up here and lived on the west coast for probably five years between LA and San Francisco. During COVID, I moved back and I'll probably never leave again. It's easy when you got family and all that stuff. In addition to that, it's just an easy place to live. I'm a refugee. New York City was tough in the last couple of years. It's more expensive and less fun, and that's a tough combination. So one of the big reasons to move here, outside of the Grid business and that side of things, is that I love Bitcoin Park. They were looking for a third partner, somebody had to break the ties, and I jumped on it. It's a no-brainer. I organized the Nashville Energy and Mining Summit last year. We're running that again. We'd love to see you there. I was there last year. But for anybody in the audience, come by. The registration is bitcoinpark.com/mining. It's easy. So that's one option. The other is we're going to be running our November meetup and BitDevs. Tuesday night is BitDevs, which is a technical meetup. You don't have to be technical, but it's more technical content. It's a good first exposure to a new technology ecosystem. Wednesday, like you mentioned, is the open house. It'll be the 8th and the 9th. I'm going to share the Bitcoin Park page. The two URLs: you can just go to bitcoinpark.com and it'll find everything. The other stuff is bitcoinpark.com/mining, the other is bitcoinpark.com/meetup. We try to keep it real simple with the URLs. These are the things we do. Our job is to bring people together in a grassroots way in order to promote Bitcoin education.

Totally fair. I find it, yeah. That's where it's like the, I kind of hate using this term, but it's like the red state technology. It's like the red state Silicon Valley network is built off the back of Bitcoin. As we talked about earlier, it's downstream from all these other issues of freedom. We talked about the school stuff and Murfreesboro's decision to not have Pride and then they got forced to have it. These all things are just kind of downstream and mingle with all the ideas around Bitcoin, which is one of the more interesting things to me about it. What I would say is that Bitcoin is for everyone. I know full-blown lefties who are huge bitcoiners, and they're, you know, I'll mine their transactions just like anybody else's. So I think honestly, I just think it's a time thing. I think that there's a conservative perspective that Bitcoin appeals to faster, but over time, think about the unbanked communities, the folks who just need access to basic financial functionality. That's a bipartisan, nonpartisan issue in my opinion, and Bitcoin solves that. That's why I say everything else is downstream from Bitcoin. If we can solve basic human rights, basic access to sovereignty, liberty, freedom of expression, and freedom of commerce, freedom of assembly, those are fundamental American ideals, and Bitcoin is a technology that delivers on those ideals. They don't ask you for your party registration card when you sign up for a wallet. So I'm motivated by the opportunity to be nonpartisan. I think a lot of people say bipartisan, I say nonpartisan. These are basic human rights and basic American freedoms that we work hard to secure. But it's not a shock that a more conservative values-based community is faster to the puck on this, just because I think they're a little better primed. But over time, I expect it to be foundational household functionality for people far outside of a red environment. I love that you touched on this Silicon Valley network, Bitcoin red state thing. We are going to build Sovereign Valley in Nashville, Tennessee. There you go. I like that. Sovereign Valley. We're going to build Sovereign Valley, which is sovereign freedom, technology, freedom, money, Bitcoin, individual rights and expression, and we're going to build enormous technology companies on the back of those ideals right here in Tennessee.

Absolutely, brother. I appreciate it. Come by anytime. No bad days.