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From Genesis to Global Impact, Marathon Digital's Evolution

August 28, 2023

Marathon Digital Holdings stands as the largest publicly traded Bitcoin miner worldwide, operating in Texas, North Dakota, and the United Arab Emirates. Fred Thiel, the company's CEO, discusses the company's journey, starting modestly in 2017 and scaling up significantly, boasting 23 exahash of mining capacity with almost 200,000 miners. The Bitcoin mining industry remains decentralized to avoid concentration risks, with no single miner holding more than 15% of the global hash rate. Thiel also highlights the Bitcoin halving events and the eventual reliance on transaction fees when all Bitcoins are mined. Marathon prioritizes efficiency, strategic value, and risk mitigation, leveraging a vertically integrated technology stack and emphasizing sustainability by using renewable energy for 58% of its operations.

0:00 Introduction

2:30 Bitcoin Mining Industry

3:55 Future of Bitcoin Mining

6:45 Bitcoin Mining Evolution

8:00 Energy Efficiency

8:55 Bitcoin Mining

9:55 Debt

11:00 Capital Structure

12:30 Balance Sheet

15:33 Valuation

21:52 The UAE

23:40 Stock vs Bitcoin

26:11 Sustainability

Subtitles are autogenerated. May contain typos.


[Music] welcome to a new episode of Bitcoin Equity stocks today I'm is I'm with Fred Thiel the CEO of marathon digital Holdings it's uh our biggest uh holding also in our ETF which is a Bitcoin equity ztf and the marathon is about 10 of our portfolio that is the number one of uh the 30 stocks that we hold in Bitcoin equities in general so I'd like to jump into it and ask you to present yourself and present a little bit of background for our European investors that are maybe less familiar with the marathon digital


Holdings and your history and your positioning in the Bitcoin mining space sure so uh my name is Fred Thiel I'm chairman and CEO of marathon digital Holdings um Marathon started in the Bitcoin mining space in about 2017 at a very small scale um and uh grew its capacity modestly um through about 2020 when uh the company raised a considerable amount of money using at the money offerings on the NASDAQ and placed an order for about 70 000 mining rigs which at the time was was probably one of the single largest


orders ever placed with bitmain who's the primary Hardware vendor in the space for miners uh in the industry and then began deploying miners at scale um and uh today we are at 23 extra hash uh of capacity running nearly 200 000 miners and we have uh we are the largest publicly traded Bitcoin miner uh in the world globally uh we have mining operations in Texas North Dakota and we recently started mining in a joint venture together with uh The Sovereign in United Arab Emirates in Abu Dhabi and we continue to explore other


opportunities in areas such as Asia Africa and uh also us and Latin America okay awesome so um just for me to understand um the your the largest publicly listed Bitcoin miner yet uh reading your latest uh announcements uh you said you represent around the three percent of uh the Bitcoin mining uh uh capacity or or hash rate uh in production how come being the biggest but still a very small in percentage compared to the overall overall Bitcoin mining uh industry well it's a highly fragmented industry and so if you think about it this way of


the publicly traded miners all of the publicly traded miners in the us together represent less than 25 percent of the global hash rate you have um a number of uh Bitcoin miners uh at The Sovereign level uh around the world you have many private miners 21 of my knee is still done in China um but uh you know no miners are really bigger than you know some of the biggest miners or maybe two percent something like that um and there are just you know many many many people who mine and one of the beauties of the Bitcoin blockchain is


that it's so decentralized okay so because there were some worries uh that was like uh five or ten years ago about the concentration of uh the Bitcoin Miners and very little hands But as time went by seeing that this consolidation didn't occur what's your vision on the long-term evolution of this um uh distribution of Bitcoin miners so we see more so we see consolidation or uh continuous fragmentation I think over time you'll see some consolidation but the industry is very wary of any one minor having more than


say 15 percent of the global hash rate um because uh if you're at 15 then you acquire another big minor and now you're starting to get close to the magical 51 percent which is the the level at which um people really start to worry about concentration risk so I think what you'll tend to find is miners will will consolidate you'll have a number of players that are at the 10 level uh and then um you may have one player who's at 15 but uh over time mining becomes a business which is really very


institutional or industrial at scale you really need to be able to operate with very low energy prices at very large scale because every four years the fees that miners are paid to operate the Bitcoin blockchain are reduced by 50 so the block subsidies which is essentially what covers our cost to operate which are paid by the Bitcoin blockchain uh every four years those are reduced by 50 percent and next year in the late spring is the next occurrence of that uh and then in 2028 is the next occurrence again after that and so on until the


last Bitcoin has been mined at which point Bitcoin miners to operate the Bitcoin blockchain will be paid solely based on transaction fees and there are times when transaction fees are equal to or greater than the block subsidy um which is great but for the most part transaction fees tend to represent less than 10 percent of the revenues of Bitcoin Miners And so unless the price of Bitcoin continues to move up greatly um you'll tend to find that the smaller scale miners just won't be able to afford to remain in the business


um both because their cost to mind will be too high uh for them to be competitive and they won't have the ability to reinvest in the Next Generation technologies that will make them more energy efficient and more lower cost producers I think you're muted sorry uh you jumped into the Bitcoin housing but that was my next question so um how do you see uh the Bitcoin mining space evolving post uh the Bitcoin holding that is going to occur in March 2024 if I'm not correct really yeah April April 2024.


um so what's what's going to happen is that you're going to have to look at the Energy Efficiency of The Fleets of the miners that are running the average Energy Efficiency meaning how much energy does it take for a miner to generate one Tera hash of compute power is about 33 joules or watts per terahash um if you look at marathons Fleet our Fleet is between 24 and 25 joules per Terra hash which is much more energy efficient than um then uh the general Fleet so typically at a having like this more than likely


that 50 of the fleet that is somewhere higher than 28 29 joules per terahash will just have to shut down because they won't be economically viable at that point okay I see it so um and how do you position yourself on the Energy Efficiency level um I haven't seen any sort of official communication on your part about your average electricity price unless I missed something but how do you compare yourself to other miners so we don't publish a electricity price because many of our deals are electricity and hosting in one price and


so we don't break out electricity per se because in many cases we don't have a direct PPA we're paying an all-in-one price if you would but if you look at the energy prices that we um have been paying historically they're somewhere in the flee three to three and a half cents a kilowatt hour price sometimes up to four depending on seasonality and location which is very competitive okay um I've also seen like a big spike in your uh Bitcoin production um and the reason why uh recently there was a spike there


well part of it is we've increased since the end of last year we've tripled our capacity to mine Bitcoin so we've increased it threefold we've increased the efficiency of it meaning we have higher up time and it's producing better and we've launched our fully vertically integrated technology stack which instead of using a third-party pool for orchestration and instead of using standard firmware in the miners we run a custom version of our own firmware in the miners we have our own proprietary pool we run our own


immersion technology all of these things added together create additional efficiencies in our processes which mean that we can produce a little bit more Bitcoin than the average person okay I see um looking also at your balance sheet and financial structure I saw that you're holding a big amount of debt um where we saw last year in 2022 uh some miners who suffered because of that and some of them went bust how do you uh continue how do you cope with the volatile assets while managing uh your death basically what's the logic


behind it and how do you see it on the long run well Marathon has no current debt the only debt we have is a convertible bond that doesn't come due until 2020 end of 2026 there's a one percent coupon on it which is very affordable um and there's no amortization on it so uh that's not a problem definitely in the short term okay and then on the long term do you think that the the current capital structure is the ideal one or you see it evolving um towards maybe more convertibles or less or how do you see the what is the ideal


capital structure of a Bitcoin miner according to well the ideal structure changes with the environment uh for logical reasons right if bitcoin price is running way ahead and it's very high profitability um then debt can be very easily serviced and people should be able to get debt easily and capital should be easy to get in today's environment capital is very hard to get and debt is very hard to get the debt that we carry at with a one percent uh carrying policy the interest in other words we pay you can't find


debt at that level today uh so uh if anything you know over time that debt will likely be reduced um you know there's no reason in today's environment to carry any debt uh if you can we have the benefit that we have a lot of liquidity in our stock we have a lot of stock available that we can use to pay down debt if we wanted to do that you know I don't necessarily think that paying down debt at par today would make sense but um you know there are opportunities to potentially you know buy back a portion of the debt at a


steep discount who knows okay um also looking at your balance sheet I see a significant amount of Bitcoins held over there um what's the logic behind it because on this strategy miners tend to uh vary some something to add everything or sell everything straight out of Productions others then to give how do you what person of uh your profits do you invest or what percent of your produce Bitcoins do you keep and which ones do you sell so we operate very much like an oil company would which is you know we extract Bitcoin through our process uh


we sell enough Bitcoin to cover our operating expenses so we're not diluting our shareholders or incurring debt to cover our operating expenses and then anything that remains we keep in Bitcoin so um so so because um contrary to oil companies or gold companies or any commodity companies you never see like a significant stock of the commodity on the balance sheet of the company well that that's not really true because oil companies sit on reserves which is simply oil they haven't pumped out of the ground uh so


whether it's out in the ground or whether it's in a tank outside of the ground it has the same value so oil companies do carry reserves in Bitcoin that phenomenon doesn't exist and so you have to carry it as an asset post mining because it's the fee essentially we earn uh for doing what we do some miners have to sell all the Bitcoin they mine because they have no way to um buy new machines they can't raise Equity they you know don't have a liquid stock uh they're not debt worthy and uh you


know luckily we're not in that situation so from our perspective we don't want to dilute our shareholders um for operating expenses but you know by any person's analysis if you look at the value on a per share basis of our Bitcoin which the Bitcoin Holdings in our balance sheet today are you know north of 300 and some odd million dollars on the balance sheet today unencumbered um you know the shareholder Equity that that provides the value to our shareholders is significant and if the price of Bitcoin moves upwards 10 15


percent it's a much better investment for us um to hold that Bitcoin than to have that as fiat currency which is only getting losing value every day by five six percent a year right so and if you look at this year uh you know the price of Bitcoin has gone up by uh you know over a hundred percent almost uh this year so it's been very good for us to hold the Bitcoin okay I got it um what about uh valuation since you talk about it how how should one uh look at valuing a Bitcoin mining company because it's a


it's a beast I would say that doesn't fit in the traditional uh analyst valuation models what uh if one wants to to look at a comparative comparative valuation to listed Bitcoin miners what kind of uh valuation methods do you recommend well it's very complex because you need to understand the age of their plant property and Equipment assets uh which also has to do with the Energy Efficiency of them so for example uh one Miner may have bought mining rigs five years ago they're now fully paid for but


the problem is they have very poor Energy Efficiency because they were purchased five years ago and the technology moves so quickly in this industry that you really have to have the latest and the greatest uh Miners and for example marathon's Fleet is the most advanced Fleet in the world today we have a higher percentage of the fastest and most energy efficient machines than any other Miner does because of how we purchase machines uh over the past two years the other thing you need to look at is obviously balance sheet how much debt do


they carry um you know how profitable are they uh you know how many employees what's the productivity per employee uh Marathon has under 50 employees most of our competitors have hundreds of employees so we're hugely efficient from a headcounter perspective plus we have a lot of diversification in our mining operations most miners operate out of one or two locations typically in the same state in the same location Riot for example um who's also a very large Miner all of their mining happens in an area of Texas


that's within uh sort of a hundred miles of Austin Texas so uh they are at risk for Texas changing a law a rule U.S government changing a taxation law all sorts of risks Marathon mines in Texas we also mine in North Dakota we also mine in the United Arab Emirates and we're going to continue to diversify our locations um that we mine in so that we don't have concentration risk in our business I spent a number of years working in the private Equity industry and for me we really focus at Marathon on generating


shareholder value uh which is for us a combination of strategic value and also risk mitigation and you know we mitigate risk through having multiple partners we work with both on the capital side and on the hosting and energy side and on the equipment side we locate in different locations so we're not subject to any one utility company or utility grids uh foibles uh different states different countries and will continue to diversify geographically on a global basis as well and we also diversify in how we operate our sites some sites we


operate um from the ground up meaning we designed the site we built it we expect it we did a contract with the power provider directly and we operate the site other sites are fully third-party hands-off you need to use different models depending on what's going on in the industry when the price of Bitcoin is growing rapidly uh then third-party hosting is very attractive because it lets you scale very quickly there would be no way that we could have scaled to Triple our size at the end of last year by middle of this year had we only been


building our own sites that would have been very difficult to do so you have to look at the Bitcoin industry as uh something that goes through a four-year cycle there are two great years there are two tough years and you have to be able to do your Acquisitions of machines and things in the tough years when people don't have access to Capital and there's less competition the prices drop in the good years when everything is expanding and everybody has money machines become more expensive sites become harder to find


and it becomes more competitive the global hash rate Pros so you have to really time what you're doing and you have to make sure you're maintaining full optionality and we're very focused on always making sure that our balance sheet is um structured so that uh you know we have the ability to go raise Equity raise debt whatever we need to do at any given time so we can move quickly as opportunities present themselves and having that full optionality we think is a clear differentiator plus just from a


strategic value creation perspective the technology stack that we've built from you can kind of liken it to Apple who has Cloud all the way down to Asics we have a similar concept from our Cloud solution at the pool all the way down to the Asics and the miners where we co-invested with some of the top PCS in Silicon Valley in a company called auradine that makes one of the top miners in the industry today based on our testing and Analysis we have the ability to fully control that technology stack no other Miner has


that and what does that mean well it means that we become an extremely attractive partner to sovereigns which is one of the reasons we were able to do the deal that we did in UAE uh with the Sovereign there because we have a fully integrated solution that we control and it diminishes risk for them because they can get a fully integrated solution and as we continue to look as this industry matures more and more people may be interested in buying our Technologies which then creates another Revenue stream for us and so we believe that our


technology is a strategic asset that adds to our our value to our shareholders okay um you mentioned the the Emirates um that's quite new or out of the box I would say because I haven't seen any listed Bitcoin miner going in this into this location can you tell us a little bit more about this location and how come you're the only one there sure so um you know obviously The Sovereign controls who gets to mind there or not um they had done a number of tests with different parties and those tests had not delivered the results that were


expected we began speaking to them late last year and we set up a pilot where um we were able to run that very successfully the UAE is an environment where it's extremely hot and very humid you know the ambient temperature is north of 40 degrees Centigrade on uh most days uh during the summer and kind of half the year at least and which is an environment that miners typically don't run very well in but we had designed an immersion technology where the miners literally sit in fluid that's dielectric


non-conductive um and our pilot ran for over a hundred days before an engineer had to go on site and touch anything which was a huge success and so we signed a JV agreement with the Sovereign in uh February of last of this year rather so just a few months ago and the first site was already operational by the end of July of this year so we'll have 250 megawatts or roughly 7x a hash uh which is the equivalent of all the capacity we had running as of the end of last year running just in UAE um by the end of this year okay well


um maybe one word about comparing an investment in Marathon digital Holdings versus a direct Bitcoin uh holding your stock and how do you see it because at the end you you are holding some Bitcoin so uh which which one do you advise so uh I mean I obviously advise holding Marathon stock because I'm a large shareholder of the company and I want other share other company other people rather to invest in our stock yeah um that's a biased opinion but like that I understand but so uh yeah well so what you need to do is you need


to look at how does our stock perform compared to bitcoin there's a lot more volatility in our stock uh than there is in Bitcoin so if Bitcoin moves two three percent will move 10 percent so what does that do it provides a huge advantage to people who like to trade the stock and so this is the same reason that Warren Buffett has famously said that he doesn't buy gold but he buys gold miner stocks because they move with greater beta than the underlying commodity why is that well it's because they actually mine the underlying commodity


at a discount to the spot market price right that's something you have to realize that uh and by holding it you get the exposure to bitcoin because of the Bitcoin we have in our balance sheet but you also get the exposure to the margin that we generate by being a minor uh and so I I think it's very easy just go look at how much our stock has performed compared to bitcoin Bitcoin is up 100 this year our stock is up uh you know it's been over 300 percent up this year at one point uh recently I think now we're down at about


270 but you know we've outperformed Bitcoin by two to one but that is beta what about Alpha like I said we outperformed Bitcoin two to one this year so far so there's beta but in raw Alpha we've given our shareholders more Alpha than Bitcoin okay uh perhaps uh one word about uh sustainability what would you say to someone who says uh you're just uh polluting uh uh by mining Bitcoin which is the useless uh digital uh uh Ponzi scheme well I suggest they read reports by people like KPMG uh and others who have


put out reports that show a How mining Bitcoin balances the electricity grid um the other thing is you know 58 of the energy we use to mine Bitcoin is sustainable renewable energy so uh no other industry is as sustainable um as Bitcoin mining you look at the banking industry which uses much more energy just to power ATM networks most of which is carbon based so I think you know it's very easy to sit somebody down and walk through the reasons why a Bitcoin uses predominantly renewable energy sources B Bitcoin helps balance


the grids because and this is one of the key reasons The Sovereign and UAE wanted to see Bitcoin mining there is they have an energy imbalance in the summertime they have to generate four gigawatts of power to run all the cooling and all their water desal and in the winter time they only need one gigawatt but they still need to run the energy for the water D cell so if you have a base load customer like a Bitcoin miner that can shut off their systems in 10 minutes and then bring them back up in 10 minutes it's very easy to balance the grid 95


percent of people have no concept of how an energy grid operates they just think that people generate electricity and it's always going to come out of the plug in the wall what they don't realize is the grid can't hold energy it's not a battery they have to tell the generators to shut off if people aren't using electricity and people don't use a constant amount of electricity during the day the utilization of energy from the grid varies hour by hour every day and it's different every day and so the grid is


and the utility operators are constantly balancing with the energy generators telling them turn down turn up turn down turn up and that's a very difficult process you can't do that with nuclear power plants you can't do it with coal plants you can do it with some natural gas-fired plants with solar and wind plants you know they are intermittent meaning the sun doesn't shine 24 hours and the wind doesn't blow 24 hours a day so they need a customer that can essentially shed load instantly when they need it


and who can when they need it to be consumed again can consume that load and Bitcoin miners fit that perfectly we are much better than batteries for the grid and that's why if you talk to the grid operators in Texas they love us if you were to go talk to the grid operator in UAE they love us because we provide balance to the Grid in a way that nobody else can okay um you talk about load balancing so shouldn't uh this whole Bitcoin mining activity be done by energy producers instead of uh Niche uh Bitcoin miners


because they are the ones who have the most energy well they would also have to be spending all of the capital to do it you know think about it if you're an energy producer and you can invite a Bitcoin miner to spend lots of money to build out all sorts of infrastructure to do what they have to do and you get all the benefits of it without having to invest a penny that's a pretty good deal if you think about it energy producers could deploy a lot of capital to batteries but it's hugely expensive and


it doesn't give them 24-hour coverage it's the same reason with Bitcoin mining it's better to have somebody else take all of the risks both capital and Regulatory perspective uh then the energy companies energy companies think in 20 30-year Cycles they don't think in five-year Cycles and so Bitcoin is you know eventually and I've spoken publicly about this you know eventually energy companies will get into this business but today it's still a little too early awesome okay thanks a lot for your time I'm not


gonna help you uh the month of August that uh uh is it quite light once uh uh I'll be happy to jump on another call uh sure your next quarter so uh did you an appointment for next time perfect look forward to it okay [Music]