To HODL, or Not to HODL – Is That Really the Question? | Marathon Digital CEO, Fred Thiel WDMS 2022
In a talk by Fred Thiel, CEO of Marathon Digital, the question of holding or selling Bitcoin in different market conditions is discussed. Thiel discusses the company's partnership with Bitmain and emphasizes the collaborative nature of the industry. He underscores the significance of prudent financial management in the volatile Bitcoin market. Thiel introduces the concept of weighted average cost of capital, which aids in determining whether to hold or sell Bitcoin based on the interplay of anticipated returns and costs. He advocates for strategic decision-making grounded in market realities rather than pure speculation. Thiel also briefly touches upon options like hedging and lending for generating yield.
Transcripts are autogenerated. May contain typos.
you good morning everybody um it's always tough to come after a speaker like mike because he's so eloquent about covering kind of the key important parts uh of the material um i do want to definitely echo as mike said thank you to bitmain um mr do and mr joe thank you irene everybody we really appreciate the partnership we value very much the partnership and we value what you do for the industry so thank you we think the other services your group with ant pool and alpha delivering are very compelling for the industry you
know what's unique about this industry is we're all actually in this together it's not like we're competing against each other for a particular customer or that we each sell different solutions we really just compete on capital and we're all trying to do the same thing which is mine bitcoin so we can further secure the network so it's great to have a company like bitmain who really is investing in the industry in the ecosystem so thank you i'm going to talk about a topic that mike sort touched on
which is really you know to hold or not to hold or to huddle or not to huddle you know is that really the question and in times like this where we are today in the market it's really important to focus on smart financial management of your business you know when bitcoin is doing nothing but going up it's really easy to just keep investing and when capital is available you know it's just a flywheel you keep going but happens as we can see right now from where we are in the marketplace and so it's
really important to adopt a more pragmatic financial perspective and maybe it's people with kind of more gray hair who've been through cycles who have learned these lessons the hard way who may seem more conservative in their approach but that conservative approach sometimes pays off in the long run so what i'm going to talk about today is kind of a way that we view whether we should hold or sell bitcoin and when it can make sense to sell bitcoin to finance your growth because i do agree with mike there is no better
time to build than in a down market when we placed our initial large orders with bitmain it was in late 2020 and machine prices rigged prices were really low and what we're seeing now is another opportunity where not only have prices come down but also hosting capacity is more readily available granted energy prices are very high right now but if you can manage how you arrange your hosting and power agreements there's no better time to invest so safe harbor statement we're public company you can read this if you want to
but this basically says that what i'm saying here won't be non-public material information etc so so you know the proverbial line from shakespeare's macbeth you know adapted for bitcoin to huddle or not to huddle is that the question well it kind of depends you know there are times when it makes sense to huddle and there are times when it doesn't you know charles dickens wrote a book the tale of two cities and the opening line of that was it was the best of times it was the worst of times and we're kind of in that type of a
market today so in the best of times miners are focused on growing and hodling capital's readily available look at last year mike touched on the numbers right you know cost of capital was super cheap everybody was throwing money at you energy prices were low and capacity was abundant it was easy to grow people invested in infrastructure they placed orders for miners well the capital markets giveth and they taketh away they pull the rug out from under you if we look at how the change in capital markets has flipped in the last 12 months
it's amazing last year in november we raised 800 roughly 750 million dollars in a convertible bond offering at one percent interest unsecured that converts into marathon stock at a price of seventy six dollars a share it most probably got priced at one of the top three days for our share price in bitcoin last year super cheap cost of capital and when your share price is going up at an accelerated rate your cost of capital is fairly low but in a market when it comes down things have flipped debt is double digit for most people
today if they're financing minors cost of capital is high equity markets are very hard to tap right now and it's hard to raise money and in the worst of times miners focus on having to sell their bitcoin to finance their growth and when you think about it selling when the market is down towards the bottom is the absolute worst time to be selling your bitcoin and so is there a better way to think about this and yes there is so selling's typically been reactionary not strategic if you look at the small chart on the
left the publicly traded miners have sold off 23 of their bitcoin in the last month alone that's a pretty substantial amount of bitcoin it's over 10 000 btc now if they had been managing that bitcoin all along they wouldn't all have been hodling they would have sold a portion of it along the way and they likely would have been in better shape but i think all of us were drinking the kool-aid last year and thinking you know bitcoin's just going to keep going up and then after the correction it'll keep
going up again but nobody really knows where this market's going to be and so we need to adopt a form of financial planning that's a little bit more prudent so what can we do better for those of you who are finance people weighted average cost of capital is a formula you use for basically determining what is the threshold at which an investment has to return payback such that it covers the cost of the capital you're going to invest in that deal now the formula here has a small little error between the two brackets of
the first set of brackets and the second should be a plus sign so i apologize for that but essentially what you're trying to do here is figure out what does it cost me to raise capital to invest in minors to invest in hosting capacity and what does it cost me to hold the bitcoin that i hold or should i sell it so think of it as it's a threshold it's kind of like if you go to your investment advisor and you say you know listen i need to get seven percent after tax return for to be able to retire when i'm 65 etc
that's a threshold that's a hurdle rate they're going to have to try and meet in their investments the weighted average cost of capital can be a little complicated if you're a public company because you've got to worry about the value of the equity and things like that if you're a private company and the only capital cost of capital you have is essentially debt then it's a lot easier you just look at what does it cost you to service that debt from a perspective of cash flow and interest rate and can you afford
to generate a return that's greater than that debt think about all the people who invest in real estate that's essentially the model they do right you find a piece of real estate what's the cap rate you know how much do you have to borrow to invest in that real estate what the rent's going to return to you and are you going to make a profit at the end of the day that lets you service the debt after and after tax generate a profit so you have more capital to invest in other things weighted average cost of capital is
essentially the same calculus but you're also including the cost of equity because as a public company our shareholders are expecting a return and while we don't pay a dividend most public companies don't they're expecting the share price to increase and the value of the company to increase such that their investment is going to generate an expected return and that expected return is typically um viewed in the marketplace if you would as a multiple of earnings and growth right it's your kind of pe
multiple so you calculate your weighted average cost of capital and that tells you what any investment you make whether it's new miners and hosting capacity or whether it's holding your bitcoin whether you should do it or whether you shouldn't do it because if the return on an investment when you risk adjusted is going to generate less than your weighted average cost of capital you're actually losing money so how do we simplify this well rather than asking whether you should huddle or not first question can you afford and do you
have the capital today to cover your operating expenses pay for your power pay for your employees pay for your ceo salary etc and the capex you're investing in you have the cash available today to invest in the miners in the infrastructure or not if you don't then you need to look at the next question is the bitcoin price going to grow faster or higher than your weighted average cost of capital so if your weighted average cost of capital is let's say 20 percent then the price of bitcoin has to go up by more than 20
if you're going to hold it otherwise you should sell it if you don't have to worry about funding opex and capex then as long as the price of bitcoin is growing at greater than zero percent or if you really wanted to look at um you know the kind of safe hurdle rate for capital you could take that bitcoin and invest that cash somewhere else whatever that hurdle rate would generate for you it's maybe seven eight percent then that'll help you decide whether you should hold or whether you should sell
so here's an example company has 20 million dollars of debt their equity is about 80 million it's the value of the company the cost of that equity meeting the expectation investors have is that it'll grow at 20 percent a year your cost of debt is 12 and your tax rate is 25 you do the math you end up with 17.
8 percent as your weighted average cost of capital any investment you make has to generate more than 17.8 percent or else it doesn't make sense so if a mining company believes that the price of bitcoin is going to grow at a faster rate than the 17.8 percent it can make sense to hollow otherwise they should sell the bitcoin and use that to invest it's pretty logical so here's another way to look at it over a 60 month period from 2020 to 2025 three different miners they have 500 pedo hashing capacity at
30 joules per tara hash paying 5 cents per kilowatt hour for electricity one sells 100 of their bitcoin one sells 50 of their btc and then one huddles everything here's the interesting thing and this is basically based on beduda's projections for hash rate growth and the price of bitcoin the seller who sells 100 of their bitcoin will generate about 101 million dollars the hodler will only have about 91.
5 million a bitcoin of dollars sorry of profits from that and the seller of 50 of their btc will actually end up with the highest return 115 million and again this is driven by your weighted average cost of capital so as you think about holding or selling bitcoin get smart look at the financial calculus figure out what your weighted average cost of capital is and decide should i sell my bitcoin or is bitcoin going to grow at a much faster rate than my cost of capital and should i therefore hold my bitcoin and for how long so it's all about being strategic
and with that thank you very much and i'll take whatever questions anybody may have uh great so the question was don't you run the risk of being a speculator by being a miner you are a speculator right if you're even considering selling hash rate to somebody you're speculating by owning and holding bitcoin you are speculating it's an asset and you're speculating on its growth rate who better than a miner should have an understanding of where global hash rate's going to go and the price of bitcoin
much better than the layperson so it really is a question of are you willing to place a bet on your assumptions being right of where the market's going or not if you don't feel confident in your own choices and your assumptions then just sell your bitcoin that's your safest bet but if you have a good feeling for where the price of bitcoin is going to go and where the global hash rate is going to go then it's easier to do so great question other questions yes hedging or lending out your bitcoin well
let's just say yield farming's not such a popular topic these days um and lending out your bitcoin typically has there's always counterparty risk right so um there's this concept in finance called the risk-adjusted return right and it's people say well you know private equity and venture capital venture capital returns much more than private equity well it's actually not true they're about the same when you adjust it for the risk so with hedging you know you have to look at different
hedging strategies you can do call option straddles which is a great way in an up market when there's good contango uh in the marketplace uh you can lend out the bitcoin if you lend it to a reputable third party who has a strong balance sheet it's going to be very small return rates and so you have to really think about other ways of generating yield on it but most probably the best strategy in a long market is selling just options on your on your bitcoin especially out of the money market calls um at 130 140 i'm not giving investment
advice by the way this is purely my opinion so um caveat on that but great question any other questions one last one okay well we are done thank you very much appreciate it
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