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but like many things you have um you know a hype an initial hype cycle when everybody goes wow and then you have a crash typically after that and then you have the realistic uh return to optimism driven by people actually doing things and evidential um information that shows that you know adoption is actually happening Fred Thiel is the CEO of marathon digital Holdings and he's here to talk to us about the recent news in the Bitcoin and crypto space Fred welcome back to the show pleasure to see you again great to be back Marathon digital

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Holdings is uh the largest Bitcoin miner in the United States will be talking about your operations and any changes to your operations and strategies later on in the interview but first let's talk about recent news coming out of the Bitcoin space um I want to first ask you about uh the um filing for the spot Bitcoin ETF by BlackRock it came to uh uh to the attention the markets this week and it was a surprise to many were you surprised that this filing was finally made by the world's largest asset manager

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um I think I was a little surprised by the timing they're not surprised by the event I'd said a few years ago that this industry uh The Regulators would always favor the incumbents and I think um you could on the one hand if you're a conspiracy theorist you could say well the SEC has been clearing the decks so that the incumbents could come in uh on the other hand you could also say it just takes a long time for the incumbents to get their ducks in a row and make sure everything's in alignment

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BlackRock is approaching this in a an interesting way they've been accumulating Bitcoin for the past six to nine months um in purchases in the market uh they've structured this uh slightly as a hybrid in that unlike prior ETF uh applications from Valkyrie Arc and others this is structured in a way that provides the SEC with the market surveillance and you know the sec's counter argument to these ETFs has been risk of Market manipulation Etc um it's interesting to see that you know BlackRock obviously chose coinbase

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they're a large investor in coinbase I believe um so they're obviously going to favor one of their portfolio companies but you know the timing was interesting it seemed a little bit coincidental maybe that um you know while all the pressure is on these us-based exchanges who are now kind of moving offshore all of a sudden BlackRock comes in with an Institutional grade product of 355 ETF applications that they've made historically I believe the number is 354 have been approved so they obviously wouldn't do

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this unless they had a belief that uh they were going to succeed and uh you know NASDAQ has a custody application in with nydfs that should be decided on in July here and uh there's been some noise about NASDAQ potentially as a Next Step looking to do some form of trading of Bitcoin and ETF that Bitcoin and ether uh on their exchanges so I I think it's going to be very interesting to see how this plays out but it obviously likely you know existing incumbent institutions that are trusted by The Regulators will

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play a bigger and bigger part in this industry and it'll be interesting to see what's kind of left for coinbase uh and the others as The Regulators require them to kind of break up their businesses into separating custody custody and trading Etc I wonder what the source this confidence would be if BlackRock is certain that this would pass otherwise they wouldn't have either you know started this or be looking into this or follow this at this time we certainly we've seen many attempts by other firms grayscale just just to uh

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name something off the top of my head uh their application for a spot ETF was projected on the premise that the SEC didn't think it met their anting uh anti-money laundering standards or anti-fraud protection standards and so um either the standards have evolved or the process for filing ETFs has evolved or the SEC needs to uh let's just say improve the perception in the marketplace that they're not just uh trying to kill crypto but that they're actually enabling you look at this Prometheus uh exchange that magically

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made it through the sec's process and was approved uh and was highlighted as a poster child at recent hearings in Congress for the SEC be able to prove that yes you can get approved if you just follow the right channels and do the right things uh you know I think uh blackrock's fund as I said earlier has been investing in Bitcoin I think they believe Bitcoin is going to make a run you know wouldn't it be convenient that you have a large accumulation of Bitcoin that you can drop into an ETF instrument all of a

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sudden and monetize uh quite nicely and generate a nice gain on it you know Fidelity has had their custody product obviously and offers trading Charles Schwab and others have you know launched this edx exchange uh which is regulator friendly they don't do custody it's for institutions only to do trading it's kind of like a hybrid between an OTC desk and an exchange um so I I think you know all these people talk um BlackRock obviously has a lot of sovereign wealth investors Sovereign wealth funds are investing heavily in

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this you know our partners in UAE are one of the largest Sovereign wealth funds in the world they're obviously very focused on digital assets UAE is a country is very focused on it Bhutan is now investing in it uh you know it's there's more hash rate growing in non-pro non-public companies than in the public companies so if you look at the global hash rate growth of all the public companies and you look at Global hashford in general Global hash rates growing faster than the public companies are adding hash

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rate which is new and so that says that there are a lot of people who either are coming into this industry who are new to it uh or there's a lot of money all of a sudden coming in that's funding people to grow their capacity uh okay well that that leads us to uh the market itself now the Bitcoin price has reached thirty thousand dollars twice I believe this week just today we're speaking on Friday it's back up of thirty thousand dollars uh the last time we saw thirty thousand dollars was actually well prior to this week was

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actually last year so it's been a long time Fred um what are the key drivers for this push upwards keep in mind that I think a week and a half ago not even two weeks ago the market was uh despondent in light of the lawsuits against binance and coinbase well if you look at the step UPS in bitcoin's price this year they've been event driven right the Step Up from 21 to 28 most recently um before it pulled back to 25 was driven by the banking crisis uh you know before that um you know we saw the expectation that

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interest rates would potentially drop driving so I think what we're seeing is you know there's not a lot of liquidity in Bitcoin most of Bitcoin is held off exchanges it's held in Cold Storage uh the vast majority of wallets haven't moved in a long time and so it doesn't take a lot of interest to move the price of Bitcoin a whole lot right now and I think what we're starting to see is not just in Bitcoin itself but you know look at the shares in Bitcoin exposed stock you know look at what's happened

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most recently in uh like companies like ourselves you know we have 160 million plus shares outstanding and we traded over 80 million shares a day two days this past week you know and you know on strong uptick in price so that says that there's a lot of interest all of a sudden coming into this space uh and they want exposure across the sector all the mining companies are way up and it's not just because the price of Bitcoin is up it's because people believe we're now going into a new Bull Run I believe

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um but you know again I'm not a you know prognosticator where this is going um yeah I have my theories but I think you know we're we're going to see people believing that the trend historically will repeat itself as we go into the having and you know by the end of next year we'll see some strong price appreciation if it follows historical patterns well we can take history as a guide were there any um specific news or events that you could attribute the last bull run to I'm talking about the one in 2020 2021

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um there were a lot of things and not dissimilar to now it was a lot of that run was around the belief that institutional adoption was happening and so uh there were you know a lot of ETFs were being filed you had a lot of belief that you would have some form of positive regulatory environment but a lot of it was just around institutional adoptions being to happen um and you saw a lot of um you know drucken Miller was talking positively about Bitcoin you had a lot of these traditional uh Financial kind of Titans

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talking about uh digital assets as an interesting area and I think you're seeing a little bit of a repeat of that now but like many things you have um you know a hype an initial hype cycle when everybody goes wow and then you have a crash typically after that and then you have the realistic uh return to optimism driven by people actually doing things and evidential um information that shows that you know adoption is actually happening wallet wallet volumes and balances continue to increase uh in Bitcoin that speaks to Broad adoption

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lightning is um slowly but surely being adopted in more and more places you're seeing layer two applications uh in the Bitcoin space becoming more and more relevant so you know I think we're going to continue to see an option and what excites us obviously um as a Bitcoin miner is the fact that bitcoin's dominance market dominance is now almost at 50 percent it touched 50 the other day and you know at the detriment of uh altcoins and um to a lesser extent ether you and I spoke about uh Bitcoin Trend

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well Bitcoin mining costs but also Bitcoin um transaction costs overall last time an interesting Trend this year that's uh pushed out the transaction costs is more development activity on the Bitcoin layer one uh in particular the Bitcoin ordinals protocols uh what What's most likely outcome from increased activity from uh developers on a layer one yeah I think you're going to see most of the development happen at Layer Two uh part of the problem with the ordinals is similar to with when nfts first came out

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on the ethereum blockchain is you have limited block space and ordinals tend to be data intensive and so they're competing against Financial transactions and so the mempool which is think of it as the the uh the inbox for the Bitcoin blockchain as that starts getting backed up people start bidding up transaction fees to try and get their transactions prioritized and the mempool has now added a tiered pricing structure that they're deploying so that you can set priority for your transaction uh more proactive way

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um but that competition for Block space is what drove the transaction fees to jump up and the way to deal with that is you essentially deploy a solution at Layer Two that then just settles on the Bitcoin blockchain now you free up the memspace uh and the block space rather and you can do many more transactions higher volume with you could create a layer two for example for ordinals where you could have a uh you know a one gigabyte sized memory space in each block where you could put lots of Graphics or even videos even movies and

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so I think there's much more flexibility Layer Two and you have the benefit that the layer 2 Chains can settle on the Bitcoin blockchain meaning their hashes can be stored on the Bitcoin blockchain so you get all of the security and benefits of the Bitcoin blockchain without the cost of having to replicate the Bitcoin blockchain let the cost of having to do proof of work or proof of stake you're using bitcoin's own security system as a way to ensure the validity of your blocks has that development changed mining costs at all

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was there any impact whatsoever um no I think you know obviously um as ordinal volume drops you know transaction fees have come back down kind of back in the area where they were we're still they're still slightly elevated um but they're not um they're not at you know greater than one Bitcoin per block anymore certainly um I think what we're going to see though it's again continued lightning adoption more layer twos uh that'll come here over the next six months we're certainly very focused on looking at

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what are the enabling technologies that we could bring to bear to help the ecosystem develop and we think it's a very interesting space um we also think that um their potential opportunities as AI becomes a more relevant uh technology um you think about how the AI industry is developing now I'm talking about companies using these large learning models these llms to develop inference models for their businesses they're not going to want to share their data with public llm so other people get their benefit of their data they're

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going to keep their data proprietary so you're going to start seeing an interesting um Confluence of AI and blockchain Technologies and again I think um with these AI tools you know people are going to want to make sure that something hasn't been modified by AI so for example you could have a um a government report on aren't frozen orange juice Futures let's say that comes out um you would want that report to be stored in a way so you could prove that it had not been manipulated or in any way Changed by some tool just like

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photographs images movies videos you know AI today lets you manipulate things in such creative ways people want to be able to protect their copyrights they want to protect the authenticity of things they're going to want to protect the provenance of things whether it's wine trading art Trading whatever valuable asset trading so I think there's going to be this need to have a very secure place that you can go to to validate that something really is what it is and that is going to be the Bitcoin blockchain at layer 2 or layer

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three and you're going to see I think very many applications for things that have nothing to do with financial transaction settlement being built on top of the Bitcoin blockchain that act as ways to secure the validity of data so that in a world where AI can do pretty much anything you can prove that something is real and hasn't been adulterated interesting uh well you said specifically there will be a Confluence of AI and blockchain Technology what what is that Confluence exactly well I think you're going to see

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applications that either are um you know validation validators let's say for um uh it could be government data it could be corporate data it could be personal data it could be provenance data regarding things where um you essentially build these tools to protect against AI manipulation by the same token you know pun intended you could have tools that essentially act as um uh copyrights of information that AI could use to do things with right because if you think about how an inference engine works and these large

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learning models work they're ingesting huge amounts of data they are learning from that data and that learning drives their behavior well the old expression garbage in garbage out says that essentially if you give an AI the wrong data it will build the wrong inferences so it becomes very incumbent on producers of these tools and the output of these AI that the data they're ingesting is valid and not invalid so that the inferences are valid and not invalid and the only way you can prove that is by having that

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data available on public blockchains where anybody can go and validate it and so I think that's where you're going to start seeing the use of blockchains could AI or any computer software be Advanced enough today to alter uh transaction records on the blockchain no because that's an encryption problem right so uh quantum computers are not there yet um and uh the changes needed to be made to the core uh Bitcoin core software to make that even harder um are fairly easy to implement You're simply increase the difficulty and

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methodology of how the difficulty is calculated um so I you know the if you were to talk to post Quantum encryption Specialists the bigger problem with Quantum Computing and hacking is all the bank passwords today every single user access methodology is based on asymmetric Keys an asymmetric key is a system where it's very um you know you use seed phrases Etc to generate a key and then you can validate that key using a public-private key that's essentially how a lot of wallets work today and so the uh quantum

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computers are especially Adept at cracking asymmetric Key Systems and there's a Consortium of companies including Microsoft Google and others who are developing past key Technologies and other technologies that are quantum proof um and you know the biggest Target right now are banks and instant financial institutions the important quantum computer to bank hack all the passwords and take 10 cents out of everybody's account and before you know it you have billions of dollars and nobody's elizer for a while right so

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um the Bitcoin blockchain if you were to point a quantum computer and try and crack satoshi's wallet the minute a Bitcoin moves in that wallet the world will know it so uh they're much bigger fish to fry for quantum computers than than going after crypto today but I think by the time that is an issue uh it'll have been uh modified to protect and I think people pointed out to me that if quantum computers were sufficiently Advanced to break that the uh the uh to play to break blockchain it would already be

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breaking other uh passwords and financial sector yeah and then Banks and whatnot so yeah there needs to be um better security overall uh just on that note is there a way to develop uh counter measures from from the blockchain Bitcoin community yeah I mean the the the post-quantum encryption uh consortia which are groups of companies like Microsoft Google and others uh uh and even the federal government put out an RFP for Quantum proof um encryption Technologies and uh those rfps were submitted um last year uh the spring of last year

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and uh they're now nist which is a government standard setting Institute is now determining uh they're kind of focusing on two um Technologies um and they'll end up picking one or just recommending both and then what you'll start seeing is uh companies like RSA and others start rolling out these Technologies to their clients so that they can Implement them but you may have started seeing news about past keys and more biometric type Key Systems and that's you know part of this uh it's not

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the solution but these post Quantum or Quantum proof encryption Technologies or things that you'll start seeing rolling out over the next two to three years okay so generally you're not you're not concerned about um hacking being an existential risk to bitcoin right now no I think uh there as you said earlier you know much bigger fish to fry uh around that um and it's a nation-state level activity today uh you know U.

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S China potentially Russia North Korea maybe um it's not something that um your average criminal organization is going to have access to okay well let's turn to regulations now now uh the SEC suit against binance has taken a turn as binance now turned the table and and countersuit them from uh misleading statements so we'll see how that develops um my general question is whether or not changes in the regulatory activity have well I wouldn't say changes but developments in the regulatory landscape in the U.S have uh prompted you to look

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elsewhere for operations so we began a process of looking at International expansion last year um actually really at the end of 2021 and initially when we started having conversations with uh folks in UAE um we were searching specifically for areas where there were large energy usage asymmetries where you had a lot of excess energy at partial times of the year and UAE is a poster child for that where they have in the summertime four gigawatts of demand in the wintertime only one gigawatt of demand for energy

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um and so that project is now uh you know in its uh really final stages of execution they're in the process of uh we're well along in the installation process and uh you know that'll be fully live by the end of Q3 most probably this year um we're also looking in other countries and our goal is to be about 50 U.

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S 50 offshore in our mining operations over the next uh you know four to five years we think that um the need for diversity is not just regulatory in nature but um you know the amount of available energy and people's uh willingness to uh you know uh give us stranded energy is changing you know we have EVS coming on we have uh mandates to Electrify everything and so we believe that the uh renewable energy companies Battery Technology Etc are going to advance more and more such that the benefit we bring to the Grid at utility scale I'm saying large

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scale sites will start decreasing over time um and what uh we will be focused on for example domestically is much smaller scale sites where we actually focus on generating energy ourselves and controlling the whole stack so we own the energy Generation all the way through to the Bitcoin mining where we can take truly standard the stranded energy like landfill gas biofuel things like that so we're helping the environment we're reducing methane at the same time as we're converting that to energy and we're not being parasitic

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on their on the grid at all and potentially we could be a seller of electricity if you know pricing made that attractive internationally however we believe there are still opportunities for large utility scale sites and so internationally we'll continue to look for these big projects like UAE which is 250 megawatts like things that are going on in Latin America Bhutan uh places like that and there are some very interesting opportunities to partner with energy infrastructure companies to develop a lot of renewable

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energy in these developing countries especially sorry did you say you wanted to potentially look into selling energy back to the grid are you trying to diversify your operations away from solely mining Bitcoin well if you think about as you integrate vertically uh you know we integrated um from just taking minors and going to third-party hosting sites we're now developing our own sites we have developed our own technology stack gosh it kind of seems logical that you'd go to the next step down and start

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developing your own energy generation and if you're at your own energy generation now all of a sudden there may be times where the market uh is pricing energy at a price where it makes sense for you to sell energy to the market as opposed to mining Bitcoin right um that can't happen so you know I'm not saying that our strategy is to go into becoming an energy producer with the goal of selling energy to the market but by converting energy to bitcoin we effectively are doing that right we're committing we're converting energy

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into Bitcoin so that that energy can be used somewhere else um let's talk about um something that I found interesting I'm looking at your income statement for 2022 uh year-end uh total revenues were about 117 million dollars now um you have a line item called impairment of digital assets which was a negative 173 million dollars so overall your total operating uh expenses exceeded your total revenues uh for 2022.

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can you comment on what that I what that is sure so um the way the accounting rules work in the United States and let me preface this by saying that fasbi who kind of drives what a county standards are has already recommended that these rules change hopefully effective in 2024. so that currently in the US um if you hold Bitcoin it's deemed a long-lived and tangible asset it's kind of like a a patent you can't mark it up in value you can only mark it down in value and so if you look at the Bitcoin that we mined on the Bitcoin that we

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held in our balance sheet at the end of 2021 you know we were mining Bitcoin and the price of Bitcoin was you know obviously near sixty thousand dollars um you know we recognize revenue and the value of the Bitcoin at the time we mine it so we had Bitcoin on our balance sheet that was valued at sixty one thousand dollars a Bitcoin as the price of Bitcoin dropped and Remember December of last year the end of last year Bitcoin was in the close to fifteen thousand dollars um you have to mark that down and so you

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look at all the Bitcoin we had in our balance sheet and you have to Market all of the Bitcoin down to the lowest value at the time and the way the and the accounting rules are so um the lowest yeah that's a non-cash expense just like we also had a large impairment charge for our equipment because as mining equipment pricing Falls you have to mark it down as well so that's just standard accounting rules um yeah non-cash charges and you know if you look at our our q1 results you'll see that uh you know there was you know

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no impairment because bitcoin price is actually moving up and the unfortunate thing is we can't then Market Market yeah okay but Fazbear's rule change hopefully will if that's uh adopted which we believe it will be um then you know it'll be Mark to Market and by the way much bigger news than BlackRock doing in ETF is the adoption by um basby of Mark to Market because a lot of investors think of you know Michael Saylor's out there touting you should put Bitcoin in your balance sheet why don't companies

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do it yes there's volatility risk but there you talk to any analyst and they'll tell you the um risk-adjusted returns for Bitcoin are better than any other asset over any period other than two years right um so why don't they do it well because they don't have Mark to Market treatment which means when they carried on their balance sheet it would only be imperable it wouldn't be marked to market the minute you have Mark to Market treatment that opens up the door for corporations to now hold Bitcoin on the balance sheet

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that is a much bigger driver of increased demand for Bitcoin than an ETF you know an ETF might have a few billion dollars of value in it corporations putting one percent of their balance sheets into Bitcoin is trillions of dollars but they're not able to do that because of accounting standards you said currently well they're not incentivized to do it you know imagine here's a company and you're telling them the value of your assets are and you have these things on your books that you can only impair you can't

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Mark to Market yeah okay that makes sense okay uh while investors will just have to look at the footnotes and realize that's not um you know it's not it's not an operational defect it's it's it's an impairment of digital assets but okay Fred um you know but psychology drives markets right so yeah yeah fair enough um well your stock is done very well this year it I'm guessing that's because of the Bitcoin price yeah I mean we are a again back to this whole you know institutional investors

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what alternatives do they have for holding spot of Bitcoin many of them can't because of their uh own uh governance standards and rules so what alternatives they have well equities that are exposed to bitcoin what are the best equities from an exposure to bitcoin perspective well marathon is one of the ideal ones because we're the of the publicly traded miners we're the largest holder of Bitcoin with over 12 000 Bitcoin in our balance sheet um and so we're a perfect proxy because we give you not only exposure to bitcoin

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but exposure to the margins of Mining and uh you know Warren Buffett has you know famously been quoted in the past is saying I don't buy gold I buy gold miners because I want exposure to the margins and in a period where Bitcoin price is expected to run up our cost to produce Bitcoin is fixed from an energy perspective because you know Energy prices don't vary at the same rate that Bitcoin does um but more importantly um you know Global hash rate in today's market it's hard for minors to raise

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Capital other than the large miners like ourselves and so the growth in global hash rate uh is expected is not expected to be as insane as it was in 2020 and 2021 um and so people are thinking well minor margins are just going to go through the roof and so if you have miners with high margins and they keep holding Bitcoin on their balance sheet then you know you get this Compound Effect which people want exposure to if investors were to ask you Fred how could you uh minimize your operational costs uh what are some of the ways that

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you can respond well if you look at us compared to our peers in the industry we most probably have one of the leanest uh uh you know cost structures around sgna of any of our competitors because we don't have hundreds of employees we have 40 employees today as a company so RS GNA is very low and as we continue to deploy you know our Fleet it's the most energy efficient Fleet in the industry at uh about 24 joules per Terra hash we have a an opportunity to have enhanced margins and then we're very focused on

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lowering energy costs and doing things to bring our energy costs lower and lower over time would the fixed cost of operating the US be higher than other jurisdictions well the primary cost driver for Bitcoin mining is the energy cost so for example um in the U.S um you can find energy from a little over two cents per kilowatt hour up to as high as five six cents per kilowatt hour in some places um you know we have the benefit of sitting at places like in West Texas where we're behind the meter at a wind farm where we have a direct PPA for the

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wind energy at very low cost so you can find low-cost energy internationally you can also find those opportunities there are places in Latin America today where you can find low end low-cost energy where you have a glut of energy you have um uh you know places in Asia where you can start finding that too and you have opportunities for developing new energy generation sources based on geothermal and others in Africa where you could find energy at some three cents a kilowatt hour and that's very attractive

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especially if you can find an alternative use for either the Heat or other means to offset that energy cost uh then you know as you get closer to a marginal cost to produce a Bitcoin of the operating overhead as opposed to the uh the energy cost uh it starts becoming a business where you can be profitable kind of no matter what the price of Bitcoin is um you know well into the future uh is that where you're going next subsidence here in Africa um let's just say that you know we're evaluating a number of continents around

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the world all right um finally let's close off on the sentiment so given uh the topics we've discussed today I think regulation is a concern for many retail investors if someone were to say to you Fred I'm not feeling confident about Bitcoin overall primarily because all these major exchanges are getting sued left and right and I don't know that my my Bitcoin will be uh safely custody let's put it that way or even uh I'll have access to these uh Bitcoins if I invest somewhere uh with like an exchange like

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binance and therefore I'm going to put off my Bitcoin investment until there's more clarity or um less volatility in the regulatory landscape what would you respond so um I would say well would you trust opening an account that Fidelity or Charles Schwab to buy stock uh yes or no I mean historically let's just well play that historically they haven't been sued to the ground so I I would say I'm feeling a little bit better yes yeah so you could go to Fidelity today and open an account and buy and sell

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Bitcoin and they hold it by a trusted custodian so I I think the excuse is more one of fear of it being banned than um lack of you know good uh custody systems and I think again it's more of these institutional players come in uh both of those sentiments will shift more towards okay well maybe it is okay to go in and then I think we'll start seeing the retail buyers come back in it would be interesting have you ever considered uh becoming or starting some sort of wallet or exchange service it would be

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interesting to see a minor vertically integrate with uh a point point no I I think it is a totally different business miners uh who are privately held or unregulated businesses and they want to remain that those that are publicly traded or regulated only by the fact that they're a publicly traded company and I definitely would not want to um become a from a financial services perspective regulated identity all right well Fred I appreciate your time today thank you for your update and I'll speak to you again next time thank you

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absolutely thank you and thank you for watching don't forget to subscribe [Applause]

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