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Marathon - Vertical integration or maximum agility - which will be best for mining in 4 years

August 18, 2021

Fred Thiel, CEO of Marathon Holdings, emphasizes the need to optimize returns on mining investments. Delving into the choice between vertical integration and maximum agility, Fred suggests that the current phase demands rapid miner deployment due to unprecedented profitability resulting from China's hash rate drop. He outlines how miners control hash rate, electricity costs, and corporate expenses, while external factors include network hash rate and BTC price. Analyzing costs, he dismisses power generation ownership, advocating instead for buying power. When it comes to infrastructure, he argues for outsourcing over capital-intensive projects like hosting facilities, illustrating that investing in more miners holds superior ROI. Fred's advice for miners during this hash rate constrained period is to prioritize miner investments for optimal gains, emphasizing agility over infrastructure ownership.

1:31 What is the Best Way To Generate a Return as a Miner

2:19 Where Should You Be Focused

2:22 Path To Profitable Mining

5:51 Infrastructure

Transcripts are autogenerated. May contain typos.


[Applause] so i have peter thiel who is the ceo of one of the first publicly traded companies on the nasdaq marathon holdings come on up let me start by saying that i'm not peter thiel peter's actually my oldest brother but he's not that peter thiel so i get this question all the time it happens at every conference sorry it happens at every conference so i'm pretty used to it uh my name is actually fred teal so i'm going to talk to you today about really a business strategy question uh i think everybody here is very focused on


technologies what they can do to earn more bitcoin what they can do to have better production find better hosting and also find um lower cost power the changes in china have affected a lot of businesses and when you look at really the mining business and i'm specifically talking about being a miner one of the key things is how do you maximize the return on your assets and this is kind of a capital markets financial analysis question if you want to maximize the return on the capital you're investing in mining


what should you be doing should you be buying more miners should you be vertically integrating should you be building hosting facilities should you start thinking about generating your own power what is the best way to generate a return as a miner and i happen to be a contrarian i've been in the tech industry for 40 years i've seen lots of cycles but i've also been on the financing side and run private equity firms and vc firms that invest in technology companies and i think we're entering a cycle right


now in the bitcoin environment where it's all about deploying as many miners as you can for a short period of time because we're entering a time of never tested profitability with the drop off in hash rate from china and the delay in that hash rate coming back over the next 12 months this will be the most profitable time to be a minor most probably ever and this time may disappear before we know it so where should you be focused so if you think about the path to profitable mining and this is a slide we


use really as a miner you control some things but you don't control a lot of things you don't control what the network hash rate is you don't control the price of btc you don't control the number of block rewards and transaction fees that you could potentially get in a year and you don't really control the price of miners because there's this thing called scarcity that affects the pricing and unless you combine very large volumes and get really good pricing forward fixed price it can be a bit of a crap shoot what you


do control is your own hash rate which you do control is your cost of electricity and what you do control are your corporate expenses so if you think about the mathematical equation how do you maximize your profits and your return on assets meaning the capital you're investing how do you maximize that return so let's look at the deeper cost of mining power the math in the power industry is that your long-term cost to operate and get a return on capital is about 5 cents a kilowatt hour how do i calculate that well it


costs about 70 to 140 million dollars to build 100 megawatt power generation facility depending on what source of power you're using are you going to use nat gas are you going to use solar you can use wind whatever it might be so and these are by the way just data i've taken from all public sites if with a cost of capital of around 5 and the useful life of that power generation facility of 20 years that works out to about 4.


1 cents a kilowatt hour now if you think about what price you would pay for power going to texas for example getting a deal with aircot or through a third party provider you're going to pay somewhere around three and a half to four cents so it makes no sense as a miner to go into the business of owning power generation assets even if you buy older assets shaver plants gas plants you've got the issue of you're now a reg operating a regulated entity in a utility market most probably and you've got to deal with the fact that you may not be able


to control your price or your costs so not a good place to allocate capital if we look at the next step which is infrastructure as a miner do you build a hosting facility do you invest tens of millions of dollars in containers concrete slabs transformers and switching gear or do you instead let somebody else bear that capital expense and you pay a slightly higher fee and then buy more miners this is no different than in the software world where you pay a perpetual license for software that may be millions of dollars a year a millions of


dollars one-time fee you use that software for five years you're paying 20 annual maintenance on it or you go to a sas provider and pay 99 a user and have an op-ex versus a capex calc why is that important well as a business when you have capital and you invested in something you need to generate a return on that to provide value to your shareholders and your investors and as a public company we're very focused on providing the maximum value to our investors and our shareholders if we were to invest in power based on


the prior slide that would be a poor roi for us we're better off buying power in the market as we look at infrastructure again 100 megawatt facility costs you about 30 million dollars if you're going to go the container out to build out concrete slab switching gear containers and do that and that ends up costing you roughly um when you add in all the costs about 1.


18 cents per kilowatt hour if you're going to do it your capex cost is about 0.68 cents and then your operating cost is about half of a cent on top of that let's see you get to the 1.18 so if you think about you're going to pay for power and you're going to pay for infrastructure from a capex perspective the math just doesn't pencil if you're going to do that yourself what you instead should be looking at is doing it fully outsourced and here's what here's a calculation comparison so vertically integrated you're paying


for power but you're deploying capital for hosting you're going to deploy 30 million dollars for your 100 megawatt facility by owning your own infrastructure you're most probably only going to save about 7 600 a day on your mining operation that's not a whole lot of cost savings especially when you think about the return on your investment you invested 30 million dollars you're going to get about 9.


3 return on that capital not too bad in an environment where yields are low but very bad if you're a bitcoin miner because if you instead take that 30 million dollars and you invested in miners that 30 million dollars means you could buy an additional 6 000 s 19 pros um at an average price of around 5 dollars each which is spot market pricing so not high volume pricing at spot market pricing if you pay five cents a kilowatt hour for hosting and power combined your incremental profit compared to investing that 30 million dollars in a


hosting facility is 97 sorry 90 000 a day that means your roi on the 30 million dollars by investing in minors instead of infrastructure is 109 percent versus 9.3 it's a pretty substantial change in your return on assets and even if you go to the extent of going up to six cents a kilowatt hour it's still pencils you'd be making 61 000 a day more and the return would be 74 so what you want to do is focus your investments on maximizing the amount of minors you can deploy and maximizing your hash rate we're in an artificially


constrained hash rate environment today the global hash rate dropped by nearly 50 percent the hash rate by the end of this year will maybe be around 150 160 extra hash and next year there's a huge amount of capacity coming online so it's all about getting as much online as possible in the short term and even with a price of bitcoin at fifteen thousand dollars and paying six cents a kilowatt hour you would still be better off investing in minors over infrastructure so i urge all of you that are minors that really want to maximize the benefit


of this time this period of time we're in invest in minors don't invest in infrastructure the hosting guys will love you for it but it's a much better play