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Crypto Miner Explains How Bitcoin Price Drop Has Squeezed Profits

December 22, 2022

Fred Thiel, the CEO of Marathon Digital Holdings, shed light on their Bitcoin mining operations. The company's revenue and profitability have been impacted by the decline in Bitcoin's price from $68,000 to $16,000. This drop in value reduced gross profit margins, which were once at 80%, to a range of 30% to 40%. To mitigate the environmental impact, Marathon has transitioned its operations to a wind farm in Texas, contributing to the reduction of carbon emissions. Despite these efforts, their financial performance faced challenges, including a substantial drop in revenue, write-offs due to facility transitions, and exposure to financial risks from third-party partnerships.

00:00 Miner's Role

00:40 Earnings Process

01:19 Stock Price Dip

01:53 Carbon Reduction

03:01 Grid Energy Role

04:02 Revenue Drop

05:08 Financial Impact

06:17 Compute North Exposure

Transcripts are autogenerated. May contain typos.


perspective then from a digital Miner we're joined by Fred seal CEO of marathon digital Holdings Fred thanks very much for coming on on the show glad to be here tell us how do you make money so uh we operate data centers that have a very specific Hardware devices that are based on unique Asics that do one thing and that is they calculate an encryption algorithm called Shaw 256 and in doing so we essentially are processing transactions on the Bitcoin blockchain so we assemble transactions into blocks we then run the algorithm to


try and guess a number which is part of the proof of work process that Bitcoin uses for consensus and if we guess the right number then we get that we win that block by winning the block were awarded um today 6.25 Bitcoin for each block that we win plus some transaction fees and uh essentially we then hold that Bitcoin on our balance sheet and that's how we make money and your stock is down in common with a lot of crypto other crypto players why is that though well I think it's a combination of uh generally speaking if you look over the


past two years there was a huge run-up uh in the valuations of companies in this space especially the miners and as a group you know we saw a huge run up in 2021 and then uh beginning this year uh you know as Bitcoin sold off uh you know most of our stock prices came down you have to realize that um you know when Bitcoin was at sixty eight thousand dollars the gross margins for companies like ours were in the 80 plus percent range and down at these levels around 16 000 the margins are in the 30 to 40 percent range so that


clearly impacts growth expectations and that affects stock prices as well as just the general malaise around the crypto industry uh this past year and tell us what what you're doing to reduce the carbon emissions from from your operations sure so uh this year we transitioned out of our Montana facility which was powered by a coal plant we moved 100 of our capacity out of that site and today we operate primarily uh at a wind farm in West Texas which generates wind electricity it's a very large wind farm


with about 280 megawatts of power capacity and one of the challenges with wind farms in West Texas is the transmission lines to the grid have capacity constraints and so they have Excess power so we are cited our data center if you would is located on the grounds of this wind farm we use wind energy whenever we can and if we need to we can draw from the grid excess energy the best thing is by providing this kind of Base load consumption the off take if you would for the wind farm we ensure its profitability and more importantly


whenever the grid needs the energy we can give that energy right back to the grid and sell that wind energy and so for us that has an economic benefit and that we obviously can profit by selling the wind energy that we otherwise would be consuming by selling it to the grid when it needs it the grid benefits from it because we act as a load balancer think of it like a capacitor almost a battery when they need the energy we can just shut down our miners in 10 minutes they can take the energy and then when they don't need it again we can start


our miners up again it's important to note that renewable solar and wind are the last forms of energy typically used by the grid because they are interruptible meaning you can turn them on and off very easily coal nuclear natural gas uh much harder to do so you always run on your nuclear you run on your coal because you can't turn those on and off easily natural gas you use as kind of peaker capacity and then when you need much more capacity you pull on solar and wind and because solar and wind get curtailed or


interrupted uh first of all anything you can do to consume that energy helps keep those wind farms and solar farms in business which means they have an incentive to build more capacity looking oh sorry um to cut you off so it's such an interesting area looking at your finances in the three months your latest three months your Revenue all but collapsed and it was less than 13 million the same period a year earlier it was north of 51 million so why was there such a huge drop in in Revenue well one thing is just look at the


difference in the price of Bitcoin right you have Bitcoin in the 50 000 range uh in this year in the prior year quarter and here you have Bitcoin in the 15 and 16 000 range that's the third you know essentially a 66 drop almost in the price of Bitcoin so that has a huge impact at the same time the difficulty rate was increasing and we were ramping production so when we shut down our Montana facility our production went to zero and then we brought online our West Texas Wind Farm facility and production began ramping again and so there was a


gap in that period where we actually were producing very little Bitcoin big lawsuit a net loss for the three months just over 75 million dollars it's a lot of red ink well part of that you have to realize is the Hardin Montana facility that we exited in July we only brought that online less than 18 months ago and that had an economic life of over five years so we had to essentially write off a hundred percent of our investment in that site um and that large part of that uh you know 70 million dollar loss comes from


those write Downs one last thing people are concerned about contagion in the space now in November uh or sorry October it was reported that you had more than 80 million dollars exposed to an outfit called compute Norse you'd installed thousands of mining machines for them in Texas so did you lose 80 million dollars on that no no so the uh because we work with third party hosting operators that 80 million dollar consisted of a number of different things about 40 million dollars in deposits for sites where we pay a deposit kind of


pre-paying our electrical costs if you would uh like a security deposit just like when you lease an apartment or a home um and of that 40 million dollars of deposits uh over 20 million we've assured are uh where they should be uh and haven't been lost um and if you look at the balance uh beyond that 40 million dollars there was a 30 million dollar loan uh and about 10 million dollars of equity we invested in compute North and the equity is a write-off at this point most likely because of the bankruptcy and we'll see


what the recovery is going to be on the loan and the remaining deposits as the bankruptcy finishes working its way through the courts