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

Awesome. Well, good morning, everybody, and thank you for joining us here today for a discussion on crypto mining. We have 3 of the top crypto mining companies in the world here with us today, Bitdeer, Cipher and CleanSpark. So thank you all for joining us. Let's start. And why don't we take a moment for each of you to just introduce yourselves and tell us a little bit about your respective companies. Gary.

Gary Vecchiarelli, Chief Financial Officer for CleanSpark. We currently have over 42 exahash of processing power, producing about 22.5 bitcoin a day. We're solely focused on Bitcoin mining primarily in the U.S., and we have over 12,000 Bitcoin on our balance sheet currently.

I'm Tyler Page, I'm the CEO and Founder of Cipher Mining. We too are a Bitcoin miner. We also are in the burgeoning HPC space for data centers. I'd say in -- across both of those businesses, we're probably best known in the industry for our expertise at originating greenfield sites and favorable power contracts. We're known as having the lowest cost of power in the mining industry at $0.027 per kilowatt hour. We do that basically through active management of curtailment and then trading and hedging in the Texas market.

Great. Jeff LaBerge, Head of Capital Markets and Strategy at Bitdeer. Bitdeer is a Bitcoin miner, but we're also a technology company. So -- we have about 2.7 gigawatts of power in our portfolio, just over a gigawatt of that is currently used for mining Bitcoin, but we are also entering into the Bitcoin mining manufacturing space. So we manufacture ASICs, initiative for both our self-mining use as well as sales to third parties. We are also exploring the HPC and AI opportunity. And given our size of our power portfolio, we believe we've got a number of sites that are suitable for that. So we are very interested.

Awesome. Well, thank you. Let's start off with kind of your bigger picture thoughts on Bitcoin and what you're seeing in the market. What are your thoughts on the crypto market backdrop? What headwinds or tailwinds should we be watching for? Gary, let's start with you.

Well, we're very focused on Bitcoin, obviously. And I think that what's really the biggest tailwind is the change in administration. So having the Trump administration is obviously very crypto and Bitcoin friendly has been very helpful. The SEC is also a lot more friendly these days. So I think that on the regulatory front, that's going to be helpful. But what we're really seeing is some real tailwinds with demand that's starting to come into the marketplace. There's a lot of talk about the strategic reserves. There's nation states that are getting in the game to buy Bitcoin. And now the coin treasury companies are becoming the new fab. So really, what we're seeing is this buildup of demand Bitcoin. We saw a little bit of spike in Bitcoin price this weekend, almost came to an all-time high. So ultimately, a combination of regulatory, political tailwinds and so demand -- just general demand for Bitcoin, I think, is something that we're looking forward to get some depreciation of Bitcoin at least over the next 12 to 24 months.

Tyler, Jeff, anything you'd add? .

Yes. I would just add that I think we are in the transitional period, probably now for Bitcoin. I've now been working in the space for 8 years. And what I'd say is the question around Bitcoin valuation has always been one to me, that is about network adoption of a new kind of network. And so the fundamental question investors need to ask themselves and the reason I moved my career into the space because I thought the answer was obvious was does this network with now maybe 200 million users grow like the Internet or like cellular networks and have billions of users. And I think it's very logical that, that will happen. And so folks -- the market -- it's a very volatile market. It trades 24/7, 365. It gets a lot of eyeballs day-to-day. It was exciting. Sure my panelists were like me, up at 3:00 in the morning, seeing what was going on in Asia. After I went to bed, and it was 107,000 last night. I was a little bit disappointed. Was hoping for the other direction. But on a longer time frame, all these things Gary mentioned to me are just sign posts on the way to broader adoption of the network. And so over a longer-term time frame, we're just extraordinarily bullish and think it's inevitable. Day-to-day, these things sort of swing up and down. But long term, it's really only moved in one direction with some brief setbacks here and there over the last 8 years. So we expect that to continue.

Great. Well, I have to ask the question. What are your Bitcoin price expectations? I was with Michael Saylor a couple of weeks ago, and he said with the banking adoption in the sector, Bitcoin is going to $5 million. So curious what you guys think over the next year, 3 years, 5 years, Jeff, let's start with you.

Yes. I mean, look, I think like Tyler said, the direction has been kind of up and to the right long term. It's been obviously very, very volatile in the meantime. But I think to the point they just made about adoption, I think that is really the -- what is going to take it to the next level. I mean people talk about Bitcoin as digital gold, but digital gold or gold has been acted more like a safe haven asset then, whereas Bitcoin has really traded much more highly correlated with tech stocks and other risk on assets. So historically, we've seen when you had broad market or global uncertainty, sell-ups in the market -- in the broader markets, Bitcoin sold off alongside of that. Now April was, I think, the first kind of divergence from that, where we actually saw a lot of global uncertainty, a lot of macro factors coming in, equity markets were down. I think gold was up with 5%, but Bitcoin was up 15% or 14%. So small sample size, but I think that, I think, is what is going to be needed to sort of take it to those $150,000, $200,000 level is kind of have that broader use case, broader adoption and kind of a change of view on the asset as a whole.

Tyler or Gary, care to venture a view.

I love my spread sheet. I don't know if I'd be sitting here but I went in front of my Board of Directors and said, "Hey, Bitcoin be at $5 million. So let's plan of business on that." It's really hard to plan a business around that type of optimism personally. I believe that very well might see that in our lifetime. But look, this is a hard business to forecast over the next 12 months, let alone the next 36 or 60 months. We operate our business from a very conservative view. So our internal models have it going slightly higher where it's at now. And everything from there is just upside. I think that's the proper way to run a business is just some cautious optimism. And if it gets to $200,000, $250,000 in a short time frame, that's great. We're well positioned to take advantage of that.

Is the only thing I'd add is sort of pulling on that same thread I had before. To me, trying to figure out the price is always this question of -- when do we flip from this network adoption story, so it looks more like a tech stock, because it is like in an early stage, I would still call it early stage, given just the magnitude of the total addressable market of every human and company and government on earth theoretically. I still kind of early, but at some point, that network adoption story will flip, and it will be more like digital gold and be more of sort of an inflationary story. And I think that's what's so hard to -- you could put any number out there, I think Saylor is a little too ambitious for my taste. But I think if you put a long enough time frame on it, you could have any number. It's just that we will probably grow very fast in spurts at times as long as the network adoption story overwhelms the kind of store of value inflation story. But probably, when I'm on my death bed, it will be -- hopefully, which is the longer-term in the future, assuming it is. It will be trading more like a haven asset Gold, Yen, Swiss franc, something like that. When that happens, it's hard to say. So it's probably races. I think it will make all-time highs really soon. And then it might gap up to like a $200,000 number, but does it sort of flatten out and trade more like a goal there? Or does it go to 1 million before -- that's really, really hard to say.

Yes. Makes sense. Well, I wanted to ask about the strategy of modeling versus selling mine Bitcoin to fund operations. Gary, on your side, I know you've had different policies over the course of the company and recently kind of were shifting to selling a portion of coins mine. Can you talk about the drivers of that decision and how you think about that? .

Yes, you bet. So at the end of the day, we are not ideological about Bitcoin as an asset, right? We see this as a capital asset on our balance sheet. And just a little context we were really holding 100% of our monthly production starting in November '23. And here in April, we started really selling a percentage of our production to cover OpEx. We went on record a couple of years ago saying that the 100% [indiscernible] strategy is not sustainable, we still believe that. But we really halted during a point in time when we felt that there was going to be major appreciation of the Bitcoin itself. We just see this as prudent capital management, right? Bitcoin is our functional currency. We manage to profitability. And so to us, if we could pay the power bills and operating expenses with Bitcoin, service any debt that we might have and increase our whole balance, we just see that really as the right combination for our business.

Great. Separately, on the -- I know you talked about it a little bit, Tyler and Jeff at the beginning, but the kind of HPC or AI data center component. How do you view this market opportunity in relation to Bitcoin mining? And what is your strategy around it? Tyler, let's start with you.

Sure. So I would say the space has evolved over time. I think starting really with the ascendancy of the large language models now roughly 2 years ago, there has just been an explosion in desire for these large interconnects available sooner. Historically, on the HPC side, a really big data center was 30 megawatts in the Dulles corridor or something like that. Suddenly, the need for training to have hundreds of megawatts has forced that industry to look to nontraditional places like West Texas, where we happen to have a lot of large interconnects. Our company has a total operating and pipeline of about 2.8 gigawatts of power. So what has happened is there's been a huge push in interest in these large interconnects available sooner because everyone is racing to have the winning model. And so we happen to have angled the company really starting a year ago, leveraging our expertise at developing greenfield sites to aggressively position ourselves for these large interconnects available in the next 3 years. As a result, a lot of that interest in that market has come to us. We have been very busy speaking to hyperscalers, the type of tenants that can take down 300 megawatts at a single site. On the back of this, we've had some announcements. We took a $50 million investment from SoftBank right around the time of Stargate. They had an exclusivity on one of our sites for a stretch. We recently announced a financial partnership framework with Fortress Investment Group, where they are our financial partner at our Barber Lake site and are backstopping the entire cost of the build of the data center. So that when we are speaking to hyperscaler tenants, they can feel comfortable that the deep pockets are -- can stand that up. Because I think a lot of one of the things that's difficult for a company that has been traditionally in Bitcoin mining is that's a little bit exotic if you're going to be the partner of a $1 trillion market cap company that is building a $3.5 billion data center. So I think we're working through the necessary sort of partnerships, but we're sitting on what we think are the really rare valuable pieces there. Everyone in that space says that the bottleneck is the power. So that's how we're thinking about it. And look, Bitcoin mining is a great business as well. They have different characteristics. And so over time, I see us having a balance of the 2 businesses.

Jeff, do you have any different.

Yes. I mean, look, I agree with everything Tyler just said. I mean I think we're all kind of looking at this opportunity differently, some not at all. Some are looking to make a full transition to it, and some are kind of right in the middle. So the way we're looking at it is that, look, we have a significant power portfolio right now, 2.7 gigawatts to monetize at all for Bitcoin mining, it always sounds like the most prudent thing to do. So looking to diversify some of that revenue into these other areas, which will ultimately attract a much higher multiple given the stability of the revenue, diversify the base, but to us, how we're really looking at it as a way to ultimately reduce our cost of capital for what we consider our core business, which is going to be the ASIC manufacturing. So we are, like I said, having the right expertise on your team to be able to execute on a data center like this much different than Bitcoin mining. I think a lot of people are finding that out now. So we made the decision to work with a strategic partner both the development and a financial partner, because hyperscalers are looking for people they work with before, people they know that can execute on a project of the scale. And so it's not just about having the megawatts. It's about surrounding that with the right team and the right capital providers.

Interesting. And you mentioned your own Bitcoin mining machine. Can you talk to us about the seal miner and your rationale for the project? And what advantages do you think it brings.

Yes. So I mean the rationale is this is -- this type of technology development is really in our company's DNA. I mean if you look, our -- most people know our founders, Jihan Wu, who was also the founder of Bitmain, our Chief Strategy Officer, is a guy by the name Harris Bassett. He also has a very deep semiconductor and background. He actually developed the -- what's the current IC design that's basically been used in every Bitcoin mining rig since 2014. So it's been some kind of derivative that his team put together. So it's really part of our team's background. And like I said, we think it gives us a different moat around our business than just the pure-play Bitcoin mining, but it also gives us a lot of strategic advantages. So just on the self-mining side, we can produce ASICs for our own self-mining fleet at a meaningful discount to the rest of the market. We can also sell them to third parties as well. So it creates a lot of flexibility, a lot of optionality for us. And as far as what they do differently than others, right now, you could argue maybe not that much because, again, everything we're -- that's been done over the last 10 years has really been built on that call that 2014 architecture. There's been some upgrades to that. But most of those advances have come really at the foundry or the fab level. TSMC and others have gotten better at their processes, so every time they come out with a new wafer or thinner wafer, you see a big jump in efficiency and you kind of see a little incremental jumps from there. But -- so we are working on a new IC design that we think will sort of revolutionize that and we're hoping to take that out later this year.

Great. For Gary and Tyler, how do you see the market for ASIC mining hardware evolving? Bitmain seems to have a pretty dominant market share that's maintained itself over time. Does this bring concentration risk in terms of suppliers? How do you think about tariff risk? What what does this market look like going forward to you? Gary? .

Yes. So there's a number of players now that are coming to market, right? Looking forward to seeing the [indiscernible] machine come out here shortly. But we're primarily Bitmain right now. Bitmain it's kind of like the old adage, right? Like no one ever got fired for buying IBM. Bitmain just been very solid machines, and they've been very successful and have the majority of market share. But we obviously welcome competition in the marketplace. There's one minor that's apparently going to be manufactured onshore. We'll evaluate all of the miners. We think that the days of $90 a terahash aren't, at least I don't foresee that happening. Sorry, Jeff, anytime soon. But that's a great thing about competition, right? We think that's going to keep the cost of CapEx a little lower. In terms of tariff risk, I mean, it's a whipsaw, right? You got to be able to plan for it. We don't buy any of our miners from China contractually need to make sure that they are -- they're mainly manufactured in Malaysia. So it is appealing to have miners manufactured in other areas, but you never know what's going to go on with this administration, where they're going to -- where the tariffs are going to land. But ultimately, you got to have access to capital and a 10% tariff, if you're really worried about that, you've got a problem with the business model and the capitalization of our company. So I think that that's one of the things that I feel really comfortable and I can sleep well at night -- is the fact that we're well capitalized. We have access to decent cost of capital. So if there is that tariff risk, we can address it head-on or we can delay purchases which ultimately, it's a level playing field, right? Because it's going to apply to everyone. And if the tariffs are so significant that it reduces the purchases, that just is going to keep a lid on global hash rate, so.

Absolutely, I think we've always taken the approach that certainly, Bitmain has the most market share and you have to have a relationship with them. They make good machines. There's a reason why they have that market share, and we're a happy client of theirs. We have always tried to diversify and look forward to also testing and perhaps buying some seal miners in the future. Our fleet, traditionally, we've worked with MicroBT and Canon as well. I think we've always viewed there being just a lot of risk with those companies because they're privately held, they were Chinese or are Chinese in origin. So you couldn't always get the best picture of their financials. And so earlier in the business several years ago, one of the risks was sort of like you send this giant bag of money across the world, and I hope that machines show up in 6 months and definitely caused me and our CFO, quite a few sleepless nights early in those expensive dollars per terahash days. So I think we've always tried to stay sort of diversified among the manufacturers just because to sort of protect against any particular company risk, though they've all done pretty well. We always want to find other manufacturers. I think what's also unique for us. We -- our sites are in Texas. It's a hot place. It's a harsh environment sometimes. Some machines that often have like the best specs for perfect environments are also the most finicky and harder environment. So it's not as easy as just kind of like give me the one with the best horsepower because maybe it's only the best horsepower in perfect conditions. And you can tweak the conditions, but that also costs more CapEx as sort of a constant ROI evaluation battle to figure out where you want to strike the balance on those factors. And so that will always be going into our analysis. I think to that end, look, tariffs are challenging in the sense that -- and it's not unique to our industry, but the uncertainty that they cause. It's not so much the numbers or the fact that you can't plan for a 10% tariff. It's -- there is a tweet and you have a 34% tariff. I think that's the challenge, because we have always been really focused on being pretty strict in planning on like what's the payback look like, what's our ROI on this investment when we make a choice of machine and timing and so forth. And certainly, when it's sort of like you wake up the next day and again, the cost spikes on your largest cost CapEx item by 34%, it's not going to cause like financial distress so much as wow, that really changes how I feel about the ROI and maybe we would have thought timing differently or whatever. So I'd say right now, the landscape was sort of 10% across the board tariffs outside of China, is find very easy to plan around. I would say -- and it seems like the administration is on this path, it seems like they have gotten kind of the broader message from industry that clearer sort of projections about where things are going to go and maybe more measured steps make it easier. When you plant projects, look, we're an interesting crucible for industry in general, we make these decisions and like we have a data center coming online in a month, Black Pearl this month. And that's been an 18-month, 16-month building project. And part of that is planning on when you make these big payments that go across the world to Asia. In the interim, when you get uncertainty on what the input costs are that's a challenging environment to operate. So hopefully, we continue towards that kind of like, here's the level, here's where it's going to operate. It seems like it's on a good path.

And from a technology perspective, you mentioned the conditions, how important are some of the technologies we talk about in this industry like liquid cooling versus air cooling? .

So from our perspective, again, we tend to go back to the numbers and think of it as like a series of levers. And if you pull this one down, the other three move in different levels. So there's not kind of one correct answer across the board, which is why I think every company has a bit of a different approach. We have tended to focus on air cooling historically. And what that has meant is that we, in general, are trying to plan for a lower CapEx there. There may be implications on what we pay for OpEx because it's a harder operating environment for the machine and maybe the specs on the performance of the machine are a little bit worse. But when you think about Cipher's positioning, again, we have the lowest cost of power, which drives like 90% of our OpEx. So the way we've thought about moving the levers is we can deal with a little bit higher cost of ongoing OpEx in terms of how the machine performs or repairs that need to be done because it matches up with our low power cost. So let's save the money on CapEx on the front end to think about ROI in the total project. When we think about it and we've looked at -- and we probably will be doing projects in liquid cooling, again, is a broad generalization, the way you think about the sort of return on investment is, if I move more of this bucket to the CapEx bucket upfront to fund it, do I earn it back in the performance over time with better performance in OpEx. So I don't know that there's one right answer. For us, it's really about sort of maximizing that ROI.

Jeff or Gary, do you have a similar different view?

Yes. I mean obviously, we have a view from kind of both angles, obviously, as a seller and a user. But I mean, look, I think new cooling solutions are definitely going to play a big role, hydrocooling, immersion cooling. But like Tyler said, I mean it's -- this is a quick turnaround conversion cycle as well, too, because you're refreshing your fleet, you don't know where technology is going, 2 years from now, there could be another jump from there. So making a big CapEx investment on the front end for immersion or hydrocooling and knowing that you're going to have to refresh that fleet maybe in 2 years, maybe it's 3 years, maybe you can get 4 years out of it. But where does that efficiency kind of curve land during that time. So you need to stay competitive. And I think we are kind of entering a much more power-constrained market than we had in previous years, where if you want to grow, sites were available. I'd argue they're still available, but maybe more difficult to find at scale and like the more expensive. So there's -- like I said, it's a balancing act, getting more from what you have versus growing and kind of balancing the CapEx and the OpEx and looking at a total ROI.

Great. I'll just add that really, over 80% of our new rollouts are going to be Immersion. We've had a 20-megawatt site operating in the greater Atlanta area now for probably ongoing almost 3 years. So we become very in tune with running an Immersion facility. The cost of the CapEx has also come down to almost the same amount per megawatt building an air cooled facility. So it's really going to come down to as Tyler said, the ROI, right? Do we completely scrap a site and put Immersion that ROI is not going to look as good as if we have just raw dirt there and build from the ground up, particularly with some of the innovations that's going on in Immersion now where they actually have mobile units -- so we can have those manufactured off-site. We just need to run a copper wire, maybe throw down a concrete slab. And so the time the energization and construction time really gets compressed, which we really like. Also, the great thing about Immersion is that these immersion projects that we have like we have some running in State of Wyoming right now. You pretty much pop it in a pad fill it with Immersion liquid, dump the machines, lock it up, put a fence around it, maybe you have a security guard and then you can control it from another data center or our NOC at our headquarters. So it's very labor-light there -- it's such a stable environment that you really don't need to take machines out of the liquid. But again, it's -- we really see that this is really the evolution of cooling, because the chips can only get so thin and so much spacing between the chips, as you know, which means that the fans and air cooling can only do so much to actually dissipate that heat. So Immersion is where we think is the industry is going, and we're leaning heavily into that.

Great. Tyler, you mentioned Texas. In terms of kind of geographic footprint, it does seem like many mining roads lead to Texas. What makes the state so well suited to Bitcoin mining. .

Yes. I think 1 of the things that investors maybe don't have a full appreciation for when you're evaluating Bitcoin mining is the value of this power usage in that -- it is really the only large-scale user of power as an industry that is so instantly curtailable. And first, I think most investors don't pay much attention to the value in that. But a large part of what Cipher is and I would argue, distinguishes us from our competitors is realizing the value of that curtailability. So again, I'm sure most of this room probably knows this, but power grids need to be stable, you need to manage and supply and demand, and that becomes a complex thing. To overgeneralize and oversimplify this in Texas, it's its own power grid, and it manages supply and demand through price signal. So you can have prices be virtually free or even negative to balance the grid for large parts of the time and then see power prices spike 1,000 ex in 5 minutes. If maybe it's a day when there's no wind and the sun is going down and it's summer and everyone is running their air conditioner and so there's tons of demand. And so that price signal is how they get more supply incentivized to come on and demand to come off. And so for us, it's the distribution of those prices that if you look at the average price in Texas, it's still competitive, but there are other states that are cheaper if you're just going to pull power 100% of the time. The way we operate our entire fleet is we never run our fleet 100% of the time. We monetize this curtailment. So the distribution of prices in Texas are such that 5% of the time, the prices are really high and maybe not economical for Bitcoin mining, the other 95% of the time, they might be near 0. And so if you just chop off kind of 5% of uptime, you can drastically reduce that price. And then that enables sort of knock on things that you can hedge the power, you can sell the power back to the grid. You can trade congestion to move power around the grid which all is kind of in our DNA. We have a lot of Wall Street Cipher and hedging and managing that power is like a huge part of what we do, and Texas is a unique market for that.

Gary, I know you have a different view in terms of your geographies. .

Yes. So we operate in 4 states, Georgia, Mississippi, Tennessee and Wyoming. And everything Tyler said about it being a curtailable load is right, and it's one of the distinct advantages of the coin mining because in the grid as the power we can shut down in a matter of 1 or 2 minutes. But our approach is we really like to focus on rural America and partnering with these rural communities. We bring a lot of cash for these committees through taxes, sales taxes on the power bills as well as the margin. We're talking like populations of 10,000 to 15,000 or less in a number of communities we operate in. But what's important is that in our demand response programs that we have and our agreements, at least most of the agreements, maybe 100 to 120 hours a year, we might have to turn down because they need that power for their local citizens, right? And those are times that we wouldn't run anyways, right, because power prices might go up 5, 10x at $0.50 a kilowatt hour, 1 kilo an hour, we're not going to be profitable anyways. So we turned down. That allows the grid and local municipality really to keep the prices as low as possible. Because we are run through that -- they have to now import power, which means that they're probably paying higher prices anyways at the peak amounts, and it's really citizens that end up getting burned at the end of the day. Plus if we were allowed the municipalities to keep most of that margin rather than importing that from elsewhere. That could account for 20% to 30% of our cash flow or profitability for the year. So it's significant dollars in touch, we see it as a partnership, right? We can go in, we can get power at the cheapest rate as possible and then be completely curtailable and flexible to allow in their share of profits.

Great. Well, I know we're just about out of time. But Jeff, I want to ask one question on geography for you, which is -- how do you think about international geographies because I know you have operations outside of the U.S. .

Yes. Look, I think we see a lot of value in it. I mean obviously, we're in Texas. We're in Tennessee. We're in a lot of the U.S. markets right now, but we are probably the most globally diversified miner. We've got 300 megawatts just about in Norway, and then we have another 600 coming on in Bhutan. We did just put our foot into Africa, acquired a 50-megawatt site in Ethiopia. So I think we see a lot of advantages in having geographic diversification. I mean, one, just kind of played out more recently here is when we had the tariff situation, we were getting ready to ship a lot of miners to Texas. And the tariffs popped up, and we would basically essentially reroute those to Bhutan and Norway and really just kind of reslot those in there. So I think it gives us a lot of flexibility beyond just the energy price and the energy, but looking at stable political regimes is important to us. And I think there's going to be a lot more international mining in the future.

Great. Well we are out of time, but thank you to all 3 of you for joining us here. It's a very interesting discussion. Thank you.

Thank you.