Matt D’Souza Bitcoin halving

Bitcoin Halving: Bullish for Competitive Miners | Matt D’Souza on the Stephan Livera Podcast

Check out The Stephan Livera Podcast Episode Page & Show Notes.

Key Takeaways

  • Anyone can have a high conviction in Bitcoin and change their mind later, but not miners, they commit by investing capital
    • “You have Billions of dollars’ worth of infrastructure, electricity spending, facility spending, to secure the Bitcoin network, that is a network effect, that is power” – Matt D’Souza
  • Interesting mines are being sprung up by VC funds that raise a ton of capital. They pay for electricity in cash and hold the bitcoins, thus; removing supply off the network which is excellent for the price of Bitcoin
  • Newer generation miners like the S17+ reduce the impact of electricity cost and keep more miners in the game
    • At $.055 /kWh, breaking even with S9s requires a bitcoin price of $7,062 vs just $2,700 with S17+
  • Inefficient miners capitulate in a bear market and greed is punished in a bull market
    • Bull or Bear, mining is all about survivability, a miner must never engage in speculation
  • After the halving, inefficient miners will shutoff, difficulty will adjust, and efficient miners get even better margins
  • Many factors come into choosing the location of a mining farm – A few:
    • Cheap power, land, and good climate
    • Avoid: Political instability, areas prone to power & internet outages
    • Aim to get at least 3-5 year contracts locked in with utilities
  • Combine multiple revenue streams to outperform the price of bitcoin (e.g. self-mining, selling rigs, hosting other miners)
  • Most of the profits are made in 1-2 months segments of the year; be positioned to take advantage of them

Intro

Miners are the most Bullish on Bitcoin

  • Anyone can have a high conviction in Bitcoin and change their mind later, but not miners – here is why:
    • Miners invest in mining rigs, warehouses and mining facilities with 5-year life-cycles
    • Break-even on initial investment may take 18 months
    • Moreover, Application-Specific Integrated Circuits (ASICs) are specialized hardware for mining bitcoins, and they can’t be easily resold or re-purposed
  • There is a lot of focus on money flowing to ICOs and Web 3.0 applications. However, the amount of spending in the Bitcoin network dwarfs everything else in blockchain.
    • “You have Billions of dollars’ worth of infrastructure, electricity spending, facility spending, to secure the Bitcoin network, that is a network effect, that is power” – Matt D’Souza

Counter-balancing the Sell-pressure

  • Miners get their bitcoins every day and have to sell to cover electricity expenses, that creates constant sell pressure on the bitcoin network
  • Bitcoin’s long term price is affected by net cash-in vs net cash-out – let’s look at the numbers:
    • 54,000 new bitcoins (approx. ~$500M) are being issued every month – this is the sell potential (pre-halving)
    • Miners sell 40-50% to cover electricity costs, and more for capital spending (new rigs, infrastructure, etc.)
    • The question becomes, are funds and individuals raising half a billion dollars per month to buy bitcoins? “No chance”
  • Interesting mines are being sprung up by VC funds raise a ton of capital, have excellent balance sheets and accumulate the bitcoins, they don’t sell
    • They pay for electricity in cash and hold the bitcoins; thus, removing supply off the network which is excellent for the price of Bitcoin

Mining Rigs and Break-even Costs

  • Blockware solutions focuses on 2 units
    • Ant miner S9, which run at a 13.5TH/s hash rate and consumes 1400 watts of power
    • Ant miner S17+, running at 73TH/s and requiring just 3000 watts
    • 6 times the hash rate for 2.1 times electricity consumption – “that is radical efficiency”
  • To put this into context, getting to 1 PH/s would require 70 of the S9 miners compared to just 14 of the S17+ miners – let’s do the math on the power consumption;
    • S9: 70 x 1400w = 98kW
    • S17+: 14 x 3000w = 42kW  
  • Newer generation miners like the S17+ reduce the impact of electricity cost and keeps more miners in the game
    • In their report, they show how running S9 at $.037 / kWh has a higher break-even price than running S17 at $.057
    • At $.055 /kWh, breaking even with S9s requires a bitcoin price of $7,062 vs just $2,700 with S17+

Mining is an Efficient Market

  • Bitcoin mining network has miners all over the world with varying electricity rates (US, Canada, to China, Russia, Iran, Kazakhstan, Venezuela, etc…)
  • Markets are efficient, when you pour water at the top of the mountain, gravity pulls it down to the lowest point. This is what’s happening in the mining space
    • Miners paying $ .05 / kWh or more sell their older generation miners, which are bought by miners that pay $.03 /kWh or lower
    • Older generation miners are being shipping to locations where power is subsidized, or that rely on renewable energy, or have negotiated deals with utility companies
  • Some miners save on infrastructure investments, but pay higher bills, it balances out between the miners
    • That being said, home miners investing in electrical infrastructure and paying above $.05 / kWh will get wiped out

Inefficient Miners Capitulate in a Bear Market

  • A miner who over spends on old gen miners and runs expensive electricity will get wiped out., There are no bail-outs in the Bitcoin economy
  • Least efficient miners shutting off is a healthy cleanse – here is why:
    • Bitcoin’s price go down, inefficient miners capitulate, causing more sell pressure
    • Mining difficulty becomes easier and profits increase for the remaining miners
    • The strong hands, the efficient miners are left ; they are healthy players for the bitcoin economy
  • “They [efficient miners] are going to be holding that bitcoin, and now you are taking bitcoin supply off the market and reducing sell pressure, and that’s what positions us to move up to the next leg in the price of bitcoin” – Matt D’Souza

Greed is Punished in a Bull Market

  • Human psychology means fear and greed drive markets: most people buy high and sell low
  • Everyone buys mining rigs during a bull-run, which pushes mining difficulty up and decreases profit margins
    • Once bitcoin price corrects, miners that chased price get punished, and profit margins are restored for efficient miners
  • Difficulty adjustment is an ingenious self-correcting mechanism that maintains the margins for efficient miners
  • Bull or Bear, mining is all about survivability

How the Halving Impacts Miners

  • “We encourage the halving, we don’t fear it, we welcome it, because we understand what it is going to do, and what it is going to do for our margins” – Matt D’Souza
  • The halving of block subsidy will unpeel the onion layers – here is how:
    • If bitcoin remains around $10K after halving, S9 and older generations mining at $.03-$.07 / kWh will blow-out
    • Mid-tier miners like Innosilicon T2T-30T mining at $.05 / kWh will blow out
    • If bitcoin drops below $7K, miners using S17 at $.07 / kWh will have to shut off
    • Difficulty adjusts and efficient miners get even better margins after the halving than before
    • Keep in mind, miners with negotiated deals and contracts can’t just shut-off, total wipe-out will take 2-4 months
  • Under any circumstances, the worst thing a miner can do is engage in speculation – A clear example:
    • Many miners stopped selling in June 2019 in anticipation of higher prices, they suffered huge losses when bitcoin price dropped
    • Combined with Bitmex’s margin liquidations and US equity markets, bitcoin’s price was pushed down to $3,000

What Makes a Good Mining Business?

  • Many factors come into choosing the location of a mining farm – A few:
    • Cheap power, land, and good climate
    • Avoid: Political instability, areas prone to power & internet outages
    • Aim to get at least 3-5 year contracts locked in with utilities
  • Mining is lucrative when managed well, combine multiple revenue streams to outperform the price of bitcoin – examples:
    • Self-mining, selling rigs, hosting other miners
  • Survivability is key, most of the profits are made in 1-2 months segments of the year, be positioned to take advantage of them
    • “Success is when preparation meets opportunity”

What Happens When Block Subsidy Drops to Zero?

  • Global negative interest rates means you can’t hold cash anywhere – How do you save money?
    • Buying gold involves paying for insurance, storage, etc…
    • Bitcoin is digital gold, holders will be incentivized to pay miners to secure the network
  • Saving in comparable assets will be more expensive
    • Additionally, being able to travel without the risk of bitcoin confiscation will be attractive to high net worth individuals
  • With lightning network taking over as payment network, there may not be even much transaction fees

The Perfect Storm is Brewing for Bitcoin’s Price

  • A positive feedback loop:
    • Bitcoin’s supply halves resulting in less sell pressure
    • Improved sentiment on the buyer side because of the halving
    • Prices are pushed up
  • Add leverage in the form of debt financing and collateralization of Bitcoin – here is how:
    • Miners borrowing cash to pay their bills, and holding on to their bitcoin, removing supply off the network
  • Positioning all of these factors together is how you move up to the next leg in bitcoin’s price
CryptoStephan Livera Podcast : , , , ,
Notes By Mostafa Khaled

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