Cipher Digital Inc. (CIFR) Earnings Call Transcript & Summary

All right. Welcome. Welcome. Back at PubKey, above the bar in the parlor. We call this the parlor. Cipher party is just raging downstairs. You'd probably pick up a little bit through the mic. But welcome, everybody, up here, Thomas, Drew, as always, and our friends from Cipher. Tyler?

Thomas, thanks for having us.

Thanks for being here. And we have some other team members as well. Do you guys want to introduce yourselves?

Sure. Hello, everybody. This is Samy, Head of Power at Cipher.

Just lean in. We're sharing mics.

Guys, it's Reuben, Head of Treasury and Markets at Cipher.

Awesome. Awesome. Awesome. We have an interesting day ahead.

We do.

Stuff's going on.

It's very exciting. Yes. No, big day. I mean, I think, for Cipher, especially, we were talking about this before we came upstairs. Like, we started Cipher in the shadow of the last halving. So it was summer of 2020, we started working on the business plan. And so everything that -- everything that sort of has shaped what we decided to do and the contracts and how we set everything up was sort of like, man, these halvings can really clear you out so you've got to make sure you've got something that's sustainable through the cycle. So it's a big day. Obviously, a big day for Bitcoin, in general. Excited about that. Big day for Cipher. I think there may be some miners putting a tear in their beer today, but for us, it's definitely a celebration. We're excited to have a party at PubKey, certainly the best Bitcoin tavern in the world. There's no question about that. So we're excited to be here.

God bless.

Yes. And so just super excited to talk a little bit about Cipher, talk about the halving, talk about PubKey, talk about everything.

And then I think we have one Mike Alfred out here with us as well virtually, coming from elsewhere in the United States. How are you doing today, Mike?

Good. Can you guys hear me pretty clearly?

Loud and clear.

Awesome. Yes. Thanks. Great to be here from beautiful Las Vegas. Sorry, I can't be there in person, but I look forward to contributing.

Awesome. Awesome. So let's start with Cipher. What's on tap? There are some big moves happening.

Yes. We got a lot going on. Let me do the required, just a second, at the beginning of our Twitter Spaces. Since we are a public company, I'd normally try to say something along these lines, but keep in mind, obviously, we got to talk about high-level things we can talk about. There are rules for public companies. I can't talk about things like in the first quarter like, hey, what are the numbers looking like? Like, we do have earnings coming up Tuesday, May 7, so any, like, official update you can get from that, you can go look at our public filings. That's where you can get official stuff. And if we make any forward-looking statements or anything like that, expectations about the future, we intend those statements to be covered by any safe harbor securities laws, whatever. So with that out of the way, another thing is, we brought -- today, I brought Samy, our Head of Power, who's really the originator of a lot of the advantages we have at Cipher. And Reuben, who's our Head of Trading, because I don't think the world gets to talk to these guys as much. I like to hide them in a cave, so people can't try to poach them. No, but, like, what's going on at Cipher is sort of -- and maybe it's a good opportunity to kind of introduce Samy and let him talk. We are running our data centers. Everything is going great. We've got great unit economics. It's going to look great tomorrow. Fees will probably spike. Curious to hear Thomas' and Drew's and Mike's thoughts on if we have a big day tomorrow, we are sort of speculating what might happen to fees tomorrow that we might have this crazy special day tomorrow and having, like, the hangover from the party, might go over…

Tonight, 9:30.

Right. Yes.

Those few blocks are going to be pretty hectic, I think. But we'll get into that.

Yes. No, I think so. But I mean what's going on at Cipher, we've got downstairs at the bar, I know there are some footage running of our construction. We're working on our next big site. And maybe it makes sense to talk about it. I think everyone knows us in the space a little bit for -- we do have really good power setup. And I think it's relevant to introduce Samy. Samy is a really unique person in Bitcoin. I think, obviously, sitting here with Drew and Thomas, we're with OGs and the PubKey crowd is a very much hard core original Bitcoin-er crowd. I think Samy has got a really interesting mining background because he's someone that was working in corporate development at a massive energy company like, 10, years ago, and had an aha moment about Bitcoin mining and, like, changed his career. Samy, do you want to talk a little bit about it? Because that's how it -- listen, people ask all the time about Cipher. Like, "How do you get that contract at Odessa? Like, "How are you paying $0.027 for power?" Like -- and I sort of say, "Talk to my guy in Paris."

A lot of work. So I've been in the mining space since 2018. And before that, I spent 6 years in the energy space, mainly looking for technologies to improve the economics of our assets in the U.S. and in Europe. So I've been looking at batteries, electrolyzers, software and technology. And at some point, I discovered Bitcoin mining in 2017. And the idea was to combine Bitcoin mining with a specific -- so an asset that was in Chile and that was suffering from grid congestions. So inability to monetize, release the volumes that were produced. And this idea was a bit too innovative for the power company I was working for, so I decided to join the space in 2018. And then I started to discuss with various energy companies in the U.S. to try to identify some assets that were suffering from limitations, either of the market or sometimes of the grid infrastructure. And that's how we started the story of, for example, the Odessa Data Center. So the economics that we have been able to secure are really the result of, usually, market inefficiencies or infrastructure limitations. And I think with Bitcoin mining, we're able to solve a lot of these challenges. The market has evolved a lot since 2018. So now we are changing a bit our approach and trying to be a bit more sophisticated to secure the same type of unit economics. But clearly, the value proposition that we can offer to the grid and to energy companies is still there.

And Samy, I get the question a lot from the crowd like how does the power market look right now? Like there's a lot of growth plans from a lot of different companies, folks are, like, how do we source a new power contract, the prices are up. Like what's different? So we set up Odessa a couple of years ago. These contracts take years. Power prices were cheaper in general, so that made things easier. That was a specific plan with specific challenges in the area it was located. But like -- so you've sourced power or looked at opportunities all over the world, Middle East, Australia, South America, Canada, U.S. Like, in general, what's changed if you're -- because there's a lot of folks on here that are, like, how do I think about this company versus that company. They're going over, these guys are going to South America. These guys are in the Middle East. These guys are in Texas or, like, what's -- in general, sort of what's different and what's the scene look like right now for starting or finding good Bitcoin mining power contracts?

Yes. So let me tell you what is similar and then I will discuss the differences between now and 2018. So I've been looking at many regulated and unregulated markets. And if you look at the characteristic of Bitcoin mining, usually, you would be looking for areas in which you have imbalances between supply and demand of energy. And also in which you have some mechanisms to monetize your flexibility. You have a couple of markets where you can do that. For example, Scandinavian countries, in Europe, Canada and Alberta and Ontario. In the U.S., you could focus on SPP, ERCOT, PGM. And so we are keeping, I would say, a similar stance, trying to focus on these areas. What has been changing since 2018 is prices have increased a lot. You will see also much less opportunities between specific power plants and general prices that you can get out of the grid. So if I'm taking, for example, Odessa back in 2018, the reason we have been able to lock such a good price at Odessa is the prices that the power plant was able to enjoy in 2018 were actually very low compared to what we would have to pay if you would connect the data center to the grid. So what you need to know is that in a market like ERCOT, power plants are subject to nodal prices and loads are subject to load zone prices. And load zone prices are usually the average of multiple nodes. And so if you look able to find some power assets that are having much lower economics than what they should be receiving if they would be able to be exposed to load zone prices. So that's what we did back in 2018. And to give you some numbers at Odessa, if you would look at the prices that this power plant was able to enjoy, it was close to $16, $17 per megawatt hour for most part of the power plant distribution. And load zone prices were closer to $35. So that's how we have been able to lock a deal with Luminant and get the price at $27, so in between. Meaning that Luminant was receiving a bit more money, and we're able to achieve some savings with respect to grid prices. If you look at the situation today, you would see a very narrow gap between what Odessa is receiving and what you can get by connecting to the grid, meaning that instead of averaging at $16 per megawatt hour, now the Odessa plant will be averaging at $32. And load zone prices at something like $34. So you cannot replicate the same approach because you cannot drive a value proposition for firm like Luminant. Instead, if you look at the market today, it is much more dynamic than what it was in 2018. And if you look at the distribution of the prices and you try to understand what would be the best approach, just looking at historical prices, you will see that 40%, 50% of the time, you will have to be on a real-time basis and shut down your data center. Maybe 30%, 40% of the time, you have to hedge and participate to ensure services. And the rest of the time, it will be slightly more complex strategies. Back in 2018, if you would have bought energy simply participating to ensure services, every day, 90% of the time, it would have proven to be the optimal strategy. So what I mean by that is now you have to be more dynamic, more granular in the way you're approaching the power market, and you have to have the control associated with your own data centers to be able to unlock this economics. So I believe we would be able to repeat the economies we have at Odessa if we are able to develop this software and these technical capabilities.

Actually, just can I ask a quick follow-up question related to this? Something Tyler and I have talked about a decent amount. We're just catching up about mining in general is really a question of available power. Theoretically, in the long term, there's perhaps no limit to the amount of power that we could harness. But certainly, in the short term, there are infrastructure bottlenecks, generation bottlenecks. Given how the market is changing, you said over -- since 2018, since you've been looking at this, how far away do you think we are? And I know it's power market specific, but in general, do you think are we close to sort of tapping out the amount of, call it, $30 per megawatt hour power that is in fact, available? Like, how far away do you think we are from kind of having the market be that saturated and that efficient from a Bitcoin mining standpoint that most low-cost power is, in fact, taken?

I mean, it's an excellent question. If you look at the queue of flexible data centers, you will see that most of the loads have been deployed load zone west. And because of that now, load zone west, which was historically the cheapest load zone in ERCOT is now the most expensive load zone. So we see the impact of additional load in ERCOT. And now we are looking to potentially diversify our presence in ERCOT in all load zones, like load zone north, load zone south, maybe load zone Houston. So if you want to chase cheap power, now you cannot only deploy in the load zone that was seeing an excess of supply. You will have to go to other places and again, implement an approach that is a bit more granular and deploy with other transmission and distribution service providers. With respect to the distribution of power prices, it's very difficult to find nodes or load zones, which you would be able to get prices between $15 and $25 per megawatt hour, which was something that was pretty common in 2018, especially if you would be looking at renewable assets. Now for any, let's say, wind or solar assets in any of the load zones, you would be between $28, $30, $35. So we are seeing an increase by approximately 30%.

And maybe it makes sense, I think it's good context to zoom out for some of the folks. We had a couple of questions loaded coming in, so it's easy to start here before we open it up. But I think, sort of, in case it's not clear, underlying Samy's discussion here, and this is important about the halving and mining, is that I think of mining as always requiring everyone participating in the space to sort of advance their efficiency. And this is across a spectrum. Like, Drew, I'd love to hear what you guys are working on these days, because we're playing in, like, this big scale sites, but there are ways to get more efficient sort of at different sizes, right? So it's not like, oh, you've got to be a big miner or you've got to be a small miner or you got -- there are sort of different pockets. But the thing about the halving is a it sort of requires efficiency everywhere. And I talk about this a lot that on the, like, big public mining companies, historically, the model was find some cheap power with a utility and plug in your rigs and try to run them 100% of the time. And you're really good at repairs, and so you're up times 99.5% as opposed to 98%. So you're, like, "better" at ops because you run 100% of the time, you pay the same price. And the whole thing about what we do that's different is that, going forward, it is hard. There's not as much of that available in general at good prices where that model works as well. And so the way we do it requires a little bit more investment in technology, people, trading, structuring, everything, but it's monetizing the great underappreciated thing from an economic standpoint, I think of Bitcoin mining, which is the curtail-ability of the data center, the ability to instantly shut off, nothing uses that much power that has that characteristic. And anyone that knows anything about power appreciates how valuable that is to the stability of grids and everything else. And so in a place like ERCOT, our model sort of manufactures these cheap power prices because of the way we run the data center, and it's different, and it's a little more involved. And I say that because we've also got Reuben with us. And it's valid -- maybe talk about your background a little bit, Reuben. But maybe you could also question -- Reuben sort of manages our treasury and trades power effectively for us because I think folks that follow Cipher know we're trying to maximize -- we're a public company, we're trying to maximize profits in dollar terms. We love Bitcoin. We hold Bitcoin in the balance sheet. But ultimately, if we can make way more money selling power back, we're going to do that. You can always go buy Bitcoin with it if you want to do and keep the extra dollars, right? So with that sort of required in our model is the ability to be thoughtful about trading power and looking at market conditions. And Reuben, you should give a little bit of your background, but then talk about kind of market conditions and what's changed, maybe what's the kind of landscape for trading power in ERCOT and what we're seeing.

Yes, sure.

Just lean into the mic. Yes.

Close enough?

Yes.

Yes. So hi, guys. I spent pretty much my entire career, almost 15 years trading and running commodity -- large commodity, derivative desks at Wall Street banks. Started my career at Goldman Sachs. Had the fortune and misfortune to…

Joe Rogan says one fist away.

One fist.

Yes. Reuben's also our greatest MMA fighter on staff so the Rogan reference is not lost to him.

You might see some of that later. So yes, but, essentially, I have a 15-year career covering -- running commodities on Wall Street. And as part of that, a large part of my customer base were treasuries of huge energy companies. So I had the -- I was from in an advantaged position to see sort of how well-run commodity treasuries operate. And when I spoke -- start speaking to Cipher, Tyler specifically, and he's explained to me exactly how does the sort of value chain of Bitcoin mining work. The first notion that entered my head was, okay, you guys are just a refiner of energy. In this case, we're refining power into Bitcoin, but we -- the process, we could be refining power into anything. And so immediately, I thought of -- my view of the treasury was we have, essentially, a very, very valuable refining option on both sides of the equation, on the power side and on the Bitcoin side, and this is the optimization that we need to build and manage. And so to your -- Drew, to your question about, like, low power prices. When we look at the power market, 2 years ago, Samy had the opportunity to lock in a very low fixed price. But as Tyler mentioned, we also have the opportunity to manufacture a low power price. And so just if you -- and what I mean by that is when we look at the power markets, we have built a technology stack that's built on our trading algorithms, essentially, that can conveniently avoid high prices that are above our Bitcoin mining marginal revenues. So if you -- for those that aren't that familiar with looking at Bitcoin and power terms, prior to the halving, it's about to change as we speak, the Bitcoin mining revenues and power terms is about $150 per megawatt hour.

With our efficiency...

With our efficiency...

Which is about S19j Pro about, on average. Like, 29 and change joules per terahash for those that follow the stats.

Yes. Thank you, Tyler.

Yes.

So, essentially, if you think about our -- at Odessa, we have a fixed price of $27 that we can turn into $150 revenue stream. But when power prices go above $150, we have the opportunity to trade higher and run the trading strategy around that. So that's Odessa. So our at other data centers, Bear and Chief would be 2 of them, that are running full front of the meter unhedged against real-time power prices, load zone prices, we can avoid the high power prices. And just as a sort of a metric, if you take the 2 extremes of that, imagine you have a miner that's not very well run, that has no ability to avoid higher power prices versus a miner that can just be perfect about avoiding power prices. The badly ran miner will be facing for -- I think last year, we said it was right about $100 per megawatt hour, whereas the well-run miner would be facing a price that's more like $30 per megawatt hour, which is actually quite close to our fixed price at Odessa 2 years later. So what we are very proud of is the tech stack we've built, the way we look at the market. And that's a very repeatable process, sort of almost regardless of power price. Because as the power prices are increasing, the demand response programs that we can take advantage of with our flexibility, the real-time avoidance, we can take advantage with our flexibility and our tech stack also increase in value. And so that becomes a revenue stream for us ,or the way we think about it is reducing our overall power price to manufacture a low price.

And to state the obvious, right, the numbers you just said, if you take our fleet and you were being unsophisticated about your power management, you cut it in half. So you go from $150, $160 down to $75 to $80. If you're paying $100, that's not a good business. If you're paying $30, it is, right?

Yes, exactly. Exactly.

And so, anyway, long kind of intros, but I mean, I think we always get questions about the origination of power, the trading of power, what are we doing. So I brought our big guns. But just shifted -- I mean, Drew, curious, like, how are you guys thinking about efficiency kind of going to halving? Big day today. I mean, how are you guys thinking about it moving forward? Like, 6 hours left.

Yes, about 6 hours. We should probably do something. But I think maybe just one thing I want to kind of remark on before is that, yes, something we thought a lot about the halving. We are smaller than Cipher by a couple of orders of magnitude here.

You'll get there. Hang in there.

Inshallah. I have confidence. But I think -- one thing I think, Tyler, you've done like an amazing job with Cipher, and not to sort of fan boy here, but just -- there are many different operators in the space of varying qualities. And I think the quality of everyone on your team is so high. Like, Samy has been in the industry for a very long time. He's seen a lot and seen this all evolve. Talked to Reuben a few times, and yes, like, incredibly sophisticated power trades. Say nothing of the data center team that you -- guys you have downstairs are all excellent. And yes, I think a lot of times, people will see in the deck that there's, like, a certain cost of power, and they don't quite know exactly how that's achieved. Like, they just assume that maybe that somewhere, maybe you just need to pay someone, but actually it does require hard work and being clever. And then you have the points Reuben talking about specific to ERCOT. Perhaps many people could "manufacture" low power prices in ERCOT, but many, many have not. Many have built hundreds of megawatt data centers down in ERCOT, somehow managed to -- whether it's messing up the hedge or perhaps not hedging at all and not really paying too much attention to how that market works have resulted in many people losing their shirt in that market. So I kind of just want to say that and give you guys some credit there. But it's funny, we're in a -- we play a very different game ourselves. We -- I'm the President of Cathedra Bitcoin. We're a publicly traded mining company as well. So I'm just going to copy paste Tyler's disclaimer and then call it good. But we have about 400 petahash. That's sort of a variety of sites. We're big believers in diversification. You don't want all your eggs in one basket. And whether it's a regulatory issue that comes up or whether it's some change in the local power market, things can be -- can evolve quite quickly. And so we basically have 4 different data centers in the country that we are operating machines on. We just announced a merger with a hosting company as a way of also further sort of diversifying business models and revenue streams. So for our proprietary hash rate, we're big believers in underclocking and basically using firmware to help manufacture efficiency and help improve your margins. This all started back in Q4 2022 as hash prices at $55 per petahash per second per day. And we had too many machines, and it wasn't even worth the hosting deposit to go get those plugged in. And so we plugged them into a data center, underclocked them by 50% and saw 23 joules per terahash come out of an S19j Pro. And so that's some really easy -- that was -- I mean, it required a great deal of work from our team, Isaac and Rete, but it basically ensured that we could survive and was transformative in terms of the cash flow of the business. So it really helped us survive the bear market. And as we look out into the future, we're excited about this deal we just announced, again, moving to a fixed margin business. That's not just pure-play Bitcoin mining, which does require ultra-low cost of power, as you guys have gone -- gone and achieved there. But looking forward, I think it's really a question of being nimble. All of our contracts for power have the ability to underclock and use less power without giving up rights to the full power. So you can basically underclock during a bear market, restore the machines to factory default settings during the bull market. But then I think longer term, and this is something that Tyler, we've talked about a great deal, which is what's this next cycle going to look like. And I think one thing that most people are not ready for, Mike has talked about this, and I talked about this with Tyler, but it's really the infrastructure bottleneck. And that perhaps this cycle might different in that there's not enough energized rack space for miners to really expand network hash rate. Perhaps the machines will be abundant, but they'll just be nowhere to plug them in. And so I think that's something you guys think about a lot as well.

Mike, I saw you posted a snap, like a picture from Morgan Stanley this morning about the value of infrastructure. I don't know if you want to talk about that. Obviously, I know you often have nice things to say about Cipher. We appreciate the support. But obviously, you're on the Board of Iris, and I know that's one of their strengths. And I'm curious if you want to follow up on that post from this morning, thinking about the value of infrastructure in this space.

Sure. Yes. And I'm highly biased. Obviously, I want everyone to know that I currently hold about 4.7 million shares of Cipher and another few hundred thousand warrants and options. So I really believe in what Cipher is doing. I think having industry-leading power cost is a key differentiator. I think the team is a key differentiator. Separately, I serve on the Board of IREN. Ticker is I-R-E-N. I think it's one of the cheapest miners in the ecosystem relative to the value of the infrastructure. I think one of the things that's interesting about IREN is they didn't come at this as, "Hey, we want to be a Bitcoin miner." They came at this more as, "Hey, we want to develop super high-quality infrastructure globally, wherever there's an excess of renewable energy at really low prices, where we can actually soak up energy that other people aren't using, whether that's in British Columbia because the paper and pulp industry has left, or whether that's in Texas and the Panhandle because there's 20 gigawatts of excess wind and solar that can't be transported efficiently to the load centers." And so they came at this from the beginning of, "Hey, we want to build this infrastructure." Bitcoin might be an interesting way to monetize that infrastructure. And they actually started conversations with Dell way back in like 2018 about doing HPC and AI, high-frequency trading and computational biology and some of these other compute sectors beyond Bitcoin. And I think the Morgan Stanley piece highlighted the sort of undervaluation systematically of the secured power and infrastructure that a lot of these miners already have. If you're spinning up a new AI data center today, it's going it's going to cost you a lot of money. It's going to take a long time to get to market. And a lot of the miners, including Cipher and IREN and Riot and others, have large-scale existing infrastructure that I believe currently, based on the shape of the balance sheet, is undervalued. It is separate from even using the infrastructure to monetize for Bitcoin purposes. There's a balance sheet value that I think is just not being appreciated. So I think Morgan Stanley's research is, like, the beginning of that kind of Wall Street awareness, and I think that'll will play out in the coming, call it, 12 or 24 months.

Yes. I mean, I was excited. I actually tracked down that research myself this morning and read it. And at Cipher, we are not doing anything in the HPC space right now. But I think my real takeaway from that piece is that if you look at our team, we basically go all the way from searching the world to find power opportunities to contracting it, to then taking, basically, dirt without fiber or water in the middle of nowhere, to a fully functioning high-end data center. And to brag on -- Samy and Reuben are amazing. We do have a great team downstairs. I think we're up to now, like, a dozen ex-Google data center folks that build and operate our data centers. They're really good. And when you think about that kind of soup-to-nuts capability of being vertically integrated, owning your data centers and basically sourcing the power and taking it from dirt to the end, there are not a lot of groups that do that. I mean, obviously, Mike mentioned IREN. I think they're known for that. The Roberts Brothers are very good at that. But, like, a lot of big names in the space, I won't be diplomatic, but, like, if you look, even some very large well-known Bitcoin miners, they've tended to buy spaces that already exist, right? Like, they bought a site and maybe they expanded it.

How about owning the power?

Well, I was going to say so…

The power assets, the power source.

You may look -- tonight, we do have an RSVP from Fred Thiel who said he would crash our party later. So I would say we may pour one out for the asset-light model at this halving party. We'll see. I do think owning -- obviously, well, I mean, you can speak to that, Thomas, I suppose. It's stronghold all for owning. We have a broader thesis about there's certainly opportunity for upstream integration into power generation. I think we've thought about this. One of the challenges we have, and it's actually -- it rhymes with the HPC question, which is, these are really expensive CapEx projects, and generally, they rely on favorable debt financing. And the challenges, if you're any kind of Bitcoin miner, I think we actually have access to debt offers that very few miners have. We're thought of pretty well. We have good unit economics. We don't have any debt on the balance sheet. And the debt terms that are offered don't work. I mean, they crash the Excel spreadsheet. So the challenge, thus far for, like, buying our own solar farm or something like that has been really what makes that work is a combination of government subsidies and cheap financing. And when they see you have a Bitcoin mining business, they're like, "Well, I'm not sure we want to give you this. We'll give you a Bitcoin mining..."

Sounds risky.

And it's hard to blame them given how debt capital market's been last cycle.

Yes, For sure, for sure. No, as you mentioned, I'm on the Board of Stronghold Digital Mining, and we own 2 power plants, waste coal facilities, one in Western Pennsylvania and one in Eastern Pennsylvania. And it's kind of what I think of when you say vertical integration. It has to go down to the power as well. It's not just the data center. And I think there are very few miners that approach that holistically. There was a lot of talk over the last, like, epoch here that vertical integration is the only way to build, like, a sustainable Bitcoin mining operation that can just take the maximum pain tolerance just to make it through to the next one and see these inventory flushes and be in the right position. But this is Bitcoin. Things always change. It's unpredictable. It's a honey badger.

I think also related to this, something I've been -- I've been on this at Cipher's for a while, talking about how Bitcoin mining is just ruthlessly competitive commodity production. And so in the long run, the most successful miners will have auxiliary revenue streams where they'll have some separate way of generating net profit or net income that isn't just plugging in a machine that anyone, anywhere in the world can plug in as well. And so I think one of the things you guys have, I think, done a good job of in riding this, too, is you could think of your power strategy depending on the site, playing the demand response game. It's basically -- Bitcoin mining is just an energy sync, and really, you're a power trading company. Like you have -- you yourself are using this language, Reuben, where you have a certain bid from Bitcoin mining, $150 a megawatt hour. If the grid is priced higher, you switch off your machines and sell to the grid, assuming you have the rights of this power and assuming you have some sort of DPM. Similarly with Stronghold, that's actually the reason they got into Bitcoin mining in the first place was because it was just is another bid. There's an orthogonal bid on their power. And especially with more renewables coming online, the grid volatility can -- grid volatilities increase a great deal. Sometimes we have negatively priced power for prolonged periods of time. And that's very bad if you're a baseload generation power plant. And so I think this is going to be sort of the next level for Bitcoin mining, these next cycles. What are your auxiliary revenue streams. Is it sort of the power trading side of things. Potentially, does that go into further vertically integrating, owning the power plant yourself, where you basically have fixed input costs. So I guess it depends on the type of power plant, but you basically are locking in your fixed cost for generating the power versus entering into a PPA or something like this, obviously, much more asset-heavy. And then potentially, then it's similar to power trading, but you're power producing. One -- the angle that we've taken is we've gone into sort of the hosting strategy where it's, look, we can really just develop data centers. If you can develop a data center for $170,000 per megawatt and you can charge a hosting margin to some other miner at $25 a megawatt hour, you get paid back in 11 months. And so potentially, that's an interesting way to compound capital. You don't have to buy the ASICs, which are really the most volatile part. But I think this is really what this next cycle is going to look like, what this next phase of mining is going to look like. And it's going to be really interesting watching people really innovate on the business model side of things, not necessarily just 2-phase immersion or things like this. And one last comment on just, Fred Thiel and the asset-light model and the funeral service we'll be having today. And I'm told that Tom has actually hired the Guinean pallbearers… Actually, that leads me to a question that I just thought of because I've heard some people theorize on where this question goes is like what's the holy grail like truly vertically integrated would be. You own the natural gas, you own the generation, and then you own the Bitcoin mine. But actually, I'll throw this to Samy because I'm sure -- my guess is he'll be skeptical. I don't know. I haven't really talked about this. This is kind of a surprise question. But Drew, I know you know this because, like, years ago, when you were sitting at Galaxy and I was calling you from NYDIG, asking you questions about -- or post -- formerly NYDIG, asking you questions about mining and things. There was always someone knocking on the door with a gigawatt of power that was going to dominate the world. I feel like this is the new version of that. I've heard from a couple of people like, you could own the gas and then you own the generation and you're always optimizing, like everything offsets. But Samy, how ridiculous is that? Or is that something that's, like, achievable and realistic?

I mean putting aside the operational complexities...

Speak up by the mic please.

Putting aside the operational complexity of running power plants, at the end of the day, it will be a question of cost of capital. If you look at generalized cost of electricity of almost any of our assets, whether it's a renewable asset or the thermal assets, you will have 60% to 80% of the cost of energy that would be related to your cost of capital. So you will have to have debt financing that would be competitive with respect to large energy companies, which are able to get the financing at 10%, 12%, sometimes 8%. So that's why, for now we have decided to enter into PPAs. You can get access to almost the same power prices with a limited adder, usually $1, $2, $3 per megawatt hour. And you still have the option to monetize this small volume the way you want, whether it is Bitcoin mining or reselling this power to the market. Now with respect to some opportunities related to various gas sites that are not going to -- necessarily, to a gas pipeline, this model is not scaling. If you look at the science in particular, you will see that you can deploy 1, 2, sometimes 3 megawatts per well, which is not the operational model of Cipher and which is also preventing you from participating to the market. If you would do that, you would solely rely on Bitcoin mining revenues. So you don't have this arbitrage that we can implement, for example, at a large gas power plant that would be connected to the grid. So for that reason, we have not decided to go to implement this strategy. Lastly, if -- to end this topic, if you look at the forecast that you will have, by deploying a small gas turbine, 1 megawatt, at the end of the day, it will be close to $30, $35 per megawatt hour, precisely because you don't have any economies of scale in CapEx and OpEx. And so it will be, in most cases, less competitive than just deploying and connecting all that…

In the context of a company like ours. I think, again, mining is a lot of things to a lot of people. And we are -- I think, first and foremost, we're giant Bitcoin fans, and we love the mining industry. It provides a vital piece of the whole infrastructure for the system that -- I mean, listen, certainly, I have and everyone that works at our company, but, like, I really think of, like, a demarcation point in my professional career where I, like, shifted everything from traditional finance to Bitcoin. And I was thinking, actually this halving, I've been working, like, employed in Bitcoin for basically half of Bitcoin's existence. So I was a fan boy, hobbyist, investor before that, but, like, actually working in the space, I'm starting to be particularly long in the tooth, not like Caitlin Long's on our Board, so it's always a good reminder of like who's really OG and things like that. But I do think, to Samy's point, that's in the context of, like, running a very large public company and we look at big scale things. I think what's kind of interesting is, and this was my question earlier to Drew, but in more general. All the halvings make everyone drive efficiency. You can be very efficient and be a home-miner or whatever…

Some people prefer the field.

Exactly.

I mean you have hobbyists that just want to have a stake in the ecosystem. You have nation states or other -- or people in nations that just want access to a global financial network. You have people that are mining for, like, no KYC Bitcoin. At what point does that start to be -- I mean the cumulative effect of that, you're ultimately competing against them. When does Cipher mine for Bitcoin instead of mining for USD?

Yes. I mean, candidly, I think of Cipher as a USD exercise in the sense that, again, we're -- to be clear for those -- because it's not abundantly obvious, I literally have responsibilities, like, legal responsibilities, to seek to maximize the dollars I get for shareholders.

Of course. My question is when there are people out there mining for Bitcoin, if you assume that, that cohort continues to increase, does that create real competitive pressure against companies with real fiduciary responsibilities to their shareholders, both from a regulatory perspective and also to maximize shareholder value?

I think it's one of these things. It's actually a really, really good balance. Like we can't -- the Bitcoin network is healthier with a blend of different participants in mining. And that's good for us. Like, we want a healthy Bitcoin mining environment. There is a large portion of the network that does that. So like, we're not trying to wipe out small-scale miners. Like, it's an important part of the overall success of Bitcoin. I would like to wipe out CleanSpark, Riot. Not, personally. They're nice guys. Don't get me wrong. It's nothing personal. But, like, we think of it and like -- for people in our shoes, how do we build the biggest, baddest large-scale mining company, but that will never -- whoever that is, that will never be an overwhelm-the-network, in my mind. Not a healthy version of the network.

Well, so you think about -- think about it from Bitcoin's perspective. What percent of network cash rate are in North America and PubCo mined? It was, like -- I haven't looked at the numbers in a while. Like, maybe 30%?

Yes. I think it depends also on the PubCo.

So like 20%, 20% to 30%. That's not that meaningful. I mean, like, it's quite meaningful, but like, we're not talking about really controlling...

Apologies for the sounds of New York City.

Hey, authentic, authentic PubKey action.

Excuse the background habitat.

NYC ASMR. But, like, to this exact point, like, we are not the majority of the network. And I think that a lot of times, people in the PubCo sort of mining ecosystem, they think that, like, we are all Bitcoin mining. It's like, no, no, no. There are kingdoms in Southeast Asia and places that are mining Bitcoin. They're -- Ethiopia now is seeing a massive influx of mining as is -- actually, the ambulance are mining Bitcoin which is why they're so loud. But this is, I think -- like we are not the Bitcoin network. We are a meaningful, a sizable part of the Bitcoin network, but we are not the Bitcoin network. And also, to your point, thinking about it from the perspective of the Bitcoin network, the diversity is very good. The diversity is not going away. Power is a local phenomenon, right? Power prices are always localized. And so if a bunch of miners all go plug in the same place, power might be more expensive and maybe there's an arbitrage opportunity elsewhere. So hash rate moves elsewhere. And we're kind of always seeking the power arbitrage. And from the Bitcoin miners' perspective, really, they don't care about PubCos. They don't really care about sort of our -- Bitcoin doesn't care about our net income. But it's great that all these for-profit entities have been able to raise so much capital to build this infrastructure to strengthen the Bitcoin network and to kind of ensure that so many ASICs are plugged in, network hash rates continuing to rise. And I actually don't really think the -- call it the Bitcoin -- are we thinking about things from a Bitcoin perspective or as like fiduciaries? I don't think there's really a great conflict between that, because, like, our fiduciary duty is to make the most money for our shareholders. And if there's this emerging global monetary asset, like, this is why we both hold Bitcoin on our balance sheet because we're bullish on Bitcoin, we think one of the best things we can do for our company is to hold Bitcoin.

Well, I think it's -- like I mentioned, in the same way that it's good for us to have small miners on the network, it's good for small miners to have us, right? We're protecting a $1.25 trillion of value that we all think is going to be a lot more. I should be cognizant of the time. Mike, you're out there. We've been dominating here. I don't -- and we have questions from the audience…

Yes. Absolutely. We're coming up on an hour here. We should definitely talk about what's going to happen in a couple of hours.

Yes. I mean, let's talk halving. Yes. Mike, what do you -- let's start with Mike or we can pull a question up or whatever.

Yes. I mean, can I just jump in real quick on the last point. I think the capacity constraints, part of this are not talked about enough. It's a lot harder than you think, even if you theoretically have, like, $500 billion of capital right now. It's a lot harder to secure enough power to do, for example, what Cipher is doing and to do it profitably. What I see a lot of people doing is just trying to go really, really fast, and get big as quickly as possible. And post halving, I think that's going to be problematic. In terms of the market dynamics right now, people have been intensely focused on the halving. Investors are looking at it. Every time there's been a rally in the stocks and the sector, people are willing to sell them pretty quickly because they're worried about what's going to happen. And I think the best thing that can happen for the industry right now is for the halving to just be over so that the market can focus on positive surprises, like companies that have better unit economics post halving than we expect, global hash rate not going up as much as people expect. The fee market being more robust, for example, than people expect it to be right now. Those are all positive catalysts in a world in which, for the last 12 months, from my perspective, the entire market has been maniacally focused on this halving event, which, again, is going to come and go with a whisper, in my opinion.

Feels like it. So Mike, here's the question. Tomorrow, what do you think the fee -- we're talking about what the actual fees will spike to sort of tonight, tomorrow. What's the overrun there?

Block 840,000 cumulative reward, so the subsidy plus fees.

I haven't looked at the exact numbers. I'm not going to make any sort of prediction on what's going happen in the very short term because I don't think that matters. I think the key point though is over 12 or 18 months going forward, almost certainly, the fee market is going to be far more robust than it was over the last 24 months, in my opinion. And that is not priced correctly in stocks like Cipher and IREN and CleanSpark and on down the list. And that's what I'm betting on. Personally, I have no idea what's going to happen in the next 12 hours.

I think it'll be above 13 Bitcoin in that block.

It's auspicious number.

Up by 13, higher.

You think higher?

Yes.

You'll take the over?

Yes.

That's a lot of Bitcoin. I mean, look, the reward is only going to be 3.125, right? So that's a lot of tips, a lot of tips to miners. Do you think we're going to have a reorg?

No.

No?

What do you think? Do you think you'd be selling...

I think it's totally possible. I think that I was on RHR just before this with Matt, with Odell and Marty and Ben. And there are concerns around consolidation amongst the mining pools, right, AntPool, Foundry getting quite large. And the moment the halving occurs, rooms go live, right? So that's a massive expansion in the functionality of what we can do with inscriptions. So there's going to be a ton of competition to be in that block, not just for rare sets or anything like that, to really sort of establish and kick off this new era of whatever we're going to see out of the ordinal and inscription space. Whether you care about that or not, believe in that or not, it is real, and it is going to take up block space, and block space is going to become much, much, much more valuable in the next epoch. But what remains to be seen is how this is going to play out from a mining pool perspective. Block construction is becoming much more valuable. You have Slipstream from Mara. You have a hefty share for just a handful of pools here. And I think that there's going to be a lot of competition. We're going to see MEV on Bitcoin is going to be a thing. I don't know if it's going to be a thing forever, but I think we're going to aggressively kick the tires on this over the next couple of months.

We're certainly keeping our eye on it. I mean, I think at this point, I'm a little bit non -- I -- but, personally...

You've got to watch your mining pools. You've got to audit those mining pools.

Yes. Personally, I'm excited about the idea of monetizing block space. I'm not a big buyer of the current wave of the sort of sustainability of the current ebbs and flows of how it's potentially being monetized now. Don't hate me if you're a big...

So Tyler Page does not have a BRC-20 bag.

I'm not a big BRC-20 guy. But listen...

But you love the fees.

Right, exactly. Like, running a company in this space, I analogize it to like...

Cipher [ labs ].

I go surfing every morning, and we ride the waves that come in. And sometimes the waves are big, sometimes the waves are small, but I can't control what the waves are going to look like. We go out and we try to catch one and enjoy the ride.

But wouldn't it makes sense for a mining company to start to fund some of these projects, right? And I think that, that's kind of what Marathon has been doing. Because that spurs demand. Mining companies ultimately need transaction fee revenue to continue to make up for the halvings as we go forward.

Yes. I mean, I think there's a question of do these mining companies funding this stuff, trying to develop this ecosystem for [ Shitcoins ] on Bitcoin. I think it's like...

Or merch and adoption. It doesn't really matter. The usage of Bitcoin...

For sure.

Increasing is good for miners.

I think it's one of the other things that Samy alluded to earlier, which is kind of just operational complexity where, like running a mining business itself is, like, pretty hard. And as an organization, one of the most important things to do is just to kind of stay focused. And I think this is actually -- this is something I don't agree with. I'm not going to make comments about different mining companies. But one thing -- I've heard some money companies say, CleanSpark is one where it's just like, we're just focused on mining Bitcoin. And I think there's a question of how much is that sustainable if you don't fully -- if you weren't fully vertically integrated or if you weren't -- don't have some auxiliary revenue stream. Like that is -- potentially, you might be choosing to put all of your energy in sort of the wrong place, depending on what you're doing, but that focus is really important for actually executing. It's something -- Cipher has been able to execute. Many mining companies have not been able to execute. And it's just like a really, really sort of hard industry in general. So I think yes, Marathon is clearly already doing this with things like Slipstream and with some of this new -- the new solutions that they're coming out with. But that -- it always does come at the cost of focus and sort of operational complexity. So I don't think -- I think most miners will not do this. I think that's fine. I think there are plenty of people who are going to be doing this and are trying to improve adoption and trying to build [ Shitcoins ] on Bitcoin. But I don't know, my two cents.

I mean, I'm a big fan of the show The Wire, and I look at it as like, look, they might be right, but like, some of the things Marathon's doing, they want to expand and get into new businesses, they're more Stringer Bell. I think I'm more Avon Barksdale. I want my corners. I think if you look at our unit economics. I think -- yes, you got to find something to do or a story to tell if you're going to be losing money mining Bitcoin in a day, so we'll see. I think for what it's worth, I taped a podcast earlier this week with 5 big -- it was Fred actually, me, Naz from TeraWulf, Haris from Bitdeer and Zach from CleanSpark. For what it's worth, there was a question, I think this podcast is being released today. But there was a question about pools. And basically, everyone there said they thought the pool, every miner would run their own pool in the future. I'm not sure I necessarily hear that, but, like, my point was more like, as far as things evolve, the pool, we can see what happens if miners -- MEV becomes a big thing. We can always pivot. We can go do -- it's not hard to change pools. It changes things. There's a lot of dynamics that are going to be shifting.

Yes. And I mean another aspect of it, too, is if mining wasn't a [ shady ] enough of a business, people need tools also. A zero-margin business is a [ high phenomenon ]. But I think, yes, it will be interesting to observe mining pools and I'm hearing about a lot of smart people on mining pools talking about shifting back to [ DPL ] and that's just because of the transaction fee volatility. If there's 1 massive -- 1 block of like 10 Bitcoin for transaction fees, if you don't get it and you need to pay that expected value to your customers, that potentially is quite damaging. I guess, can I ask Mike Alfred a question as well? So, Mike, I'm always curious to hear your thoughts. I think you're right. Everyone loves to talk about halving, then the halving happens, and then life goes on. What do you think is something people aren't paying enough attention to in the back half of the year, just related to the Bitcoin mining industry here?

Look, I don't think there's any one thing. I'm focused on the investment returns. I'm focused on what the expectations are in the market relative to where we are now. And I think there's a bunch of areas where the market's just going to end up being wrong. One of those areas is the price of Bitcoin. I think the market is pricing in like a $60,000 or $70,000 Bitcoin price indefinitely. Almost all the models I see from Wall Street banks and analysts have that type of pricing $50,000, $55,000, $60,000. If that ends up being wrong by some order of magnitude, let's say, we see $100,000 this year, we see $150,000 next year, everyone's going to be wrong about the value of mining. I think the market's also going to be wrong about how much hash rate is actually economic post halving. I think there are a lot of old machines run by people who are just going to leave them plugged in for the next few hours and then they're going to run. And I think there are far fewer players that have the scale and the economics to really grow into this halving. And so I think that paradoxically, a lot of the public miners are in a really good position relative to private miners who have not had access to ATM capital over the last year and haven't been banging on those things to pull down capital. These miners, top 5 or 7 miners in public markets right now have so much cash in Bitcoin relative to previous epochs. They have no debt on their balance sheets in a lot of cases. They're in really good position. I'm -- I was looking at some numbers earlier today. Like, some of them are going to have 15 to 20 to low 20s joules per terahash looking out a year from now. Efficiency of -- none of the other like private miners have been able to raise enough capital to do that. So I just think -- look, I think the market is too negative. I think sentiment is too negative, I think...

Or nation state.

Yes, nation state. But a few -- last few quarters have been a really good time, in my opinion. Like Q3, Q4 of last year and then again for the last quarter, right, like the WGMI ETF is still down 20%. After today, maybe it's 15%, whatever, right? But it's still down year-to-date. I think there's a long way to go just to catch up to where the stock should be. And I think if the dollar falls later this year and rates finally come down a little bit, like, I just think we're primed for a huge move in the equity values. And I can say that because I'm not the CEO of a publicly traded miner.

I mean, look, I can say, with apologies to some of the equity research analysts that may be downstairs in PubKey right now but we do love the AllianceBernstein call from Gotham, where he has the guts to call a big move up in Bitcoin and that's the whole premise. And actually, listen, the reason why I like that is here's the point. We talk about this a lot. If you're not bullish on Bitcoin, you're probably not buying our stock. Like I'd love to have you buy our stock. I can tell you a great story about how wonderful we are at trading energy, and we are. But like, you wouldn't buy a Bitcoin miner if you're not bullish on Bitcoin. So there's a little bit of that. I do agree very much with what Mike says that -- because it's this weird juxtaposition of like traditional Wall Street research analysis where, well, we don't want to make any call on the commodity price. We're just looking at these companies. We'll just hold the price flat for the next year and say what the price is going to do. And it's like, let me guess, it's not going to look that good. It's a big -- people want the upside. I tell people that this is still very much a growth-dominated market. There's, like, value-oriented elements, particularly with the catalyst of the halving, but, like, this is a growth story. It's the adoption of the Bitcoin network and what it can mean for the economics of these companies is, like, why you buy them. So I might as well tell the story to the people that believe that. If you're not going to think the price of Bitcoin is going up, then I'm probably wasting my time if I'm talking to you.

And even the Bitcoin -- even the folks in Bitcoin, just real quick, I want to call out something that I've seen. People that believe in Bitcoin, love Bitcoin, believe it's a long-term opportunity as an asset, they're bearish on the Bitcoin mining business. And I think that's actually wrong, incorrect thinking, because I don't think you can scale Bitcoin to $50 trillion, let's say, of future value without there being some incentive that actually makes economic sense for people to continue to grow the network from an infrastructure standpoint. It, like, literally doesn't make sense how you could say mining is a shady business and you also are long-term bullish. And the way they tend to talk about it is they say, look, Cipher's worth x amount of Bitcoin or Riot's worth x amount of Bitcoin, how are they possibly given how hard of the business it is going to generate that much Bitcoin. And what they leave out, of course, is the value of the assets that are used to generate those revenues and potential profits in the future, right? So they're basically marking the value of the real-world infrastructure, the secured power, et cetera, to 0, and saying, how do I know you can generate any Bitcoin in a network that has a difficulty adjustment that just gets harder and harder and harder. It's like a treadmill that ratchets up on you over time. And it's like, well, part of that is true, but it also still needs to be possible for a good miner to generate economic profits across multiple cycles. Otherwise, there would be no incentive to stay in business. So I just would make the argument that, over the long run, the best miners have to be good businesses. Otherwise, the Bitcoin algorithm is fundamentally flawed and would fail. I don't think that's the case. But I chuckle a little bit when I see people who claim to love Bitcoin, claiming that Bitcoin mining could never be a good business for anyone.

Yes. I think it's a great point. And I think we can be sober about the fact that Bitcoin mining is ruthlessly competitive, where anyone anywhere in the world can plug in a machine. But -- and -- I think if we think about Bitcoin at sort of steady state, where maybe every power plant has, like, Bitcoin miners plugged in, maybe ready to go, you can certainly see the market dynamic changing and maybe becomes more or less competitive. But I think, Mike, you're totally right, we're all -- at least I'm in this business because I was a Bitcoiner first and was really bullish on Bitcoin. If you're bullish on Bitcoin, one of the first questions you ask is, like, okay, how can I go make some of this? How can I go be a miner? And then certainly, I think the reason why you build this infrastructure is because we have the belief that Bitcoin, we're not sure when, we're not sure when it's going to be, but will appreciate by orders of magnitude. And that's kind of why you're in the business, right, because you see this asymmetric upside and this opportunity and sort of this call option on, really, a once in a lifetime, perhaps a wealth transfer. And so you want to have ASICs plugged in, you want to have exposure to it, for sure. I mean, I think also, Tyler, to your point, about some of the retail shareholders maybe who are, like, not bullish on Bitcoin, not catering to them, what's the old Satoshi line? If you don't get it, I don't have the time to explain it to you. And it's like it's hard enough communicating your Bitcoin mining business to people who know about Bitcoin mining, let alone someone who doesn't understand Bitcoin at all.

I mean, agreed. I mean, look, on that, I think, look, Thomas, Drew, Mike, thank you so much for your time. For everyone that tuned in, I know we've had grandiose ambitions. I feel like we could fill an 8-hour space, and we'll -- I promise I will bring back Samy and Reuben and we will do a lot more audience participation in the future. For what it's worth, for anyone in Bitcoin mining that runs a public company.

Look, we can definitely do a Cipher mining monthly. So Drew and I run, like, the meet ups on Thursday, Bitcoin programming. We could absolutely do one just dedicated to any of the topics that we talked about.

We would love that.

With a live studio audience.

That would be awesome.

That's rowdy.

Look, everyone come to PubKey. It's the greatest. If you love Bitcoin and you love hoisting an adult beverage, it's a fantastic place to do that. And look, thanks to everyone. Thanks for your time. We'll come out and answer questions from the audience in the future and the future spaces as well. And look, today is a great day for Bitcoin and a great day for Bitcoin mining, and a great day for Cipher and PubKey. So thanks for having us. And thanks, Mike, for joining.

Thank you, guys.

Thanks, everyone. Cheers.

Thank you.

Thank you.