Asset Optimization via Crypto Mining

00:00

Sameer Soleja Well, hello, everybody. Hey, I know some of you. What am I supposed to say, anything? Hi. For those who don't know me, I'm Sameer. I'm the founder of Molecule. And in case you are unfamiliar with Molecule – well, really two things. We bill ourselves as the world's most technology-forward ETRM company, one. And two, if you've been here a couple of days, and you still haven't heard of Molecule despite the seven foot tall banners sitting in the conference room, you may want to schedule an appointment with the eye doctor; I'm actually a little concerned.

Anyway, Molecule is cloud-native ETRM. We handle physical and financial transactions across 50+ commodities, including crypto and derivatives related to crypto and mining. Our customers are really interested in the subject. We think what we're seeing in the market is sort of the bleeding-edge of, let's just say the, the making of crypto into a more realistic commodity. And we have, well, we're seeing a lot of interesting things, and Pat and his team have been seeing them as well. So here to talk about what he's seeing is Pat McKinnon. I suspect that for many of you, he needs no introduction, but unfortunately, I needed an introduction to him.

So here's a little bit about Pat. He started in the oil field unloading trucks, working his way up through companies such as Oxy and CME, where he helped work on their weather derivatives. Spent the last few years at Euler Hermes building the alternative assurance practice from scratch. And, on the crypto side, he spent the last several years working in the market with CME Group and now the Redivider Opportunity Zone. We met earlier this week, had a fantastic conversation, and I can't wait to see what we talked about today. We'll have time for questions at the end. So please ask the real hard ones to him. And yeah, without further ado, here's Pat McKinnon.

02:15

Pat McKinnon Well, I'm glad the room got some people in it. Thank you very much for attending. And yes, you can play “stump the chump” at the end of this thing. I won't be offended; I'm happy to do it. Yeah, my background, I will often say, is like the worst managed career in the history of the energy business. But I do have 30 years out there.

And just to background a little bit, I am equity both on the production and distribution assets side for the gas business. And I'm also equity in the crypto business. So I own pieces of this, so it's a little personal to me. But, what I have found in the market is that there's a great lack of knowledge and a whole lot of Wikipedia experts – that's not a good thing. Right? And so, when I was asked, given the opportunity to give this, I relished it. And, I'll tell you that I'm not typically a dais speaker. In the small room, I'm usually sitting down and just having a chat. But, that's how I'm still going to approach it. This is more of a conversation. I'm not going to try to impress anybody with my elaborate artistic PowerPoint skills. All right, I promise, you will notice that they're not there. And I tried to use some themes that would be familiar to you.

So on that note, when I start talking about crypto to people, this is the reaction I usually get. Because they’re unaware, they're a little bit scared of it. And because what they may be aware of is it inaccurate, they're even more scared of it. So once you break this down, it actually becomes very simple and very familiar. So, I'm going to spend the first part of this conversation talking to you about what it is. If I'm repeating or not elaborating, some of you guys may be more knowledgeable, I'll apologize if this is redundant. It's not this guy. Okay. Crypto mining is not this guy, right?

Crypto mining is more that guy, right? It is literally taking a whole lot of computing power and solving for an algorithm. That algorithm is actually pretty simple. It was written in 2004 or 2005 by a guy named Finney. And, it searches for an independent, single-use string of hexadecimal code. Wow, does that sound sexy. It's looking for an independent, unique string; it's called knots, a number used only once. So, you take that algorithm, and you get the Bitcoin (BTC) network and you start looking at the nodes on the network, which anybody in this room could be about. Anybody. It's a volunteer network of nodes, and it's millions deep.

Crypto was deposited on those nodes, and you have to go find it. There's two reasons for that. First, the discovery process validates the blockchain. Did I just go over anybody's head? If you say yes, it's okay because it went over mine. All it does is say that this particular distributed ledger of record is accurate. So, it self-polices in its accuracy and it self-polices in the values that are available in market. When you find these unique knots, it is the beginning of the process to find the whole changes needed to create a digital currency string. A digital currency string, once you found it, you're rewarded with either currency, or fees.

So, if that computer, looking for a number – when it finds the number, and it validates that the number’s independent and unique, then you get rewarded with a digital currency token. A token is nothing more than unique things. But since it's processed and applied to a ledger, validated a million times, it's not long. So, it does have substance; it is reality. And it's very, very hard to affect. Okay. So with all that said, I'm sure there's some of you in the room with that reaction. Right? I get it all the time.

The biggest question I get with this is, “is it real?” Hopefully, by the end of this conversation, you'll realize that it is very, very real and very, very good if you're looking to optimize your assets in a new and better way, rarely, in some cases. So, all we do when we're out mining for coin is we take natural gas turned into electricity. We take electricity, whether it be from a busbar or off the grid, or we take renewable power. And we take that power, and we put it into a big room of computers or a small room of computers. A lot of my sets are containers. Think shipping container – they're about that size.

Alright, some of the outfits out there do acres of computers in a building. Huge energy consumption do this. Why? The computers have to do a great deal of work to find these numbers. It's very, very hard for the computer to do it, and it was designed for it to do so. So, there is – what's called – two things. There's congestion rate. Okay. And, there's a difficulty rate. And they consistently go up until every Bitcoin is mined. So, the earlier in the game, the more you're going to be rewarded because it's a little bit easier early in the game. And as it gets more and more difficult, the computing power required to do it gets harder, and you have to be… you have to constantly upgrade your equipment to keep up with the difficulty and congestion rates. That's really, it's simple. That's all it is. We're taking energy, we're sticking into some computers, the computers do the work and we come out with money.

Now, there's lots of Bitcoins, like lots and lots and lots of them. It's kind of like the coin of what's happening now. Right? And the way a Bitcoin gets created is a group of people get together and they go, “I want my currency to look like this. I want it to act like this.” All blockchain applications, let me go back to this, never, never never equate Bitcoin and blockchain as being synonymous. They're not. They are not. Bitcoin uses a blockchain technology or process to police itself into existence. But it's the use of a process. It is not in and of itself, that or a theory, or a Dutch coin, or any of them that are out there. They simply use that methodology to operate.

Now, this is a small sample of how many coins are out there. You say, “Well, what's their value?” I'll show you later how you can go look for yourself every day. I can show you on my phone for a lot of these. They have a value, but many of them there's like 92 decimal, 92 zeros, in front of the popular decimal, right? They have very little intrinsic single coin value. Other Bitcoin have $30,000 dollars, at one point $60,000-$65,000. So it’s a market where the perception of the value is determined by the oldest rule in the training business. Is there a bid? Is there an asset? That's what determines the market. No matter how much effort you put into a market to validate it, the value of that market is always the difference between the bid and the ask. And unfortunately for some folks, and fortunately for others, the market is always right.

You can think what you want unless you can liquidate it for what you want… that's where the market is always right. So, there is a market for these and you can find them, and I'll show you were here in just a minute. But these coins are bought or created, bought and sold every day by the 10s of millions. And this is just a few of them. One of the other things when you think about it, is it real? Can I spend it? Can I go down by coke or my case of bottled water? Well, the answer is yes. You can now have a Bitcoin Debit card. You can now have a Bitcoin credit card. You can now use Bitcoin to support a loan. It's gotten steady, okay. If you want to write that down and look it up, it's kind of an interesting topic. And, you get paid for that. You can literally donate your coin to a pool that will stay in underwriting for a loan. And you can get a piece of the interest that's being built on that loan.

I will show you later who's involved in that process, and I think it might shock a few of you – about how well people are doing this stuff. But it’s becoming more and more fungible. It was over a decade ago that the guy that founded Virgin Airlines traveled the world on Bitcoin only, and he made a big deal of it. And it was far less accepted then; it was far harder to do, but he still did it. Today, you can do it every day, it won't be long before you buy airline tickets. So, it has become an acceptable commodity. A lot of that has gone because the Fed has now certified certain coin types as being fungible for use in the markets. And that's when the banks will pick you up, when they got the stamp of certification. But it's happening all over the world. So, you will see now, like I'm planning a summer vacation, and the hotels offered Bitcoin as a method of payment. That wasn't that common a couple of years ago. So, what you're seeing is coins becoming more regular. It's becoming something that people have, and something people want to use, and they're treating it just like money. And as long as they do, it will remain money. Do not think your dollar in your pocket is backed up by solar. It's not. It's backed up by the full faith in credit and the U.S government. And, this is backed by the full faith in credit of market participants. Its value is that which they perceive it to be. So it's important, and I'll show you in a minute, but it's also fungible. And we're going to talk about that in just a moment. What does it take to acquire Bitcoin? It's hardware and software, real estate, and energy.

12:12

Pat That's it. Does anybody here, anybody in this room, work for a company that has any of those? My guess is, yes. Thank you very much. I appreciate it. What that effectively produces, what the machines are designed to do is create what is commonly termed as a hash rate. Okay. The machines are called, within the digital world, they're called solving hash puzzles. Hash is nothing more than a component of a number… a parson of a number would be another way to think about it. So, you got 1,2,3,4 – 1,2 would be a hash of that number. 3,4 would be a hash of that number. Put them together, you have a string. Okay? So it’s called hashing.

A hash rate is what these machines are valued on. So when you buy the machine, you're buying it for its terahash value – how many trillions, trillions of iterations can it run in a second? Trillion. This goes up into the trillions, and every other Greek or Latin format in front of “illions” you can think of, right? So this is really what you're getting and this takes a great deal of horsepower to run. Alright, you don't get rewarded every three seconds, let's put it that way. You have to be a little patient. I'll give you some markers that you might be interested in: in a $30,000 Bitcoin market, except the rate of cost of recovery, is between 10-15,000. So you think in terms of what am I spending to get my money, right? They really try to work on half. Depending on who you talk to in the Bitcoin world, and me, I look at this all as like a giant midstream. That's, that's my background. So, I look at it that way. It's very much that mindset that I approach this market with. What does it cost me to get, you know, if I build X, what’s my Y area?

To me, 50%, gross notional profit is a pretty good number. Especially if you came up in a trading world where 2% was humble. Right? So it's, it's interesting to me how the people that have been the genesis of this market have been almost, what I would consider, myopic for the market that absolutely is fundamental to their success. And that's energy, right. If you go talk to most Bitcoin funds, or most of the guys that are there, let's just say they don't look like me. Alright. I'll leave it at that. I’ll let you figure out what that means. And therefore, a lot of the things that have been done have not necessarily been the most efficient or optimized way to approach the acquisition of energy for the purposes at hand because they don’t think about it that way.

This whole chain is talking about – well, we all do. But does that make real sense? When you look at a Bitcoin balance sheet for a lot of these companies who don't know how to look at them, there's a lot hidden in there. “Oh, we get our power for four cents?” No you don't. That's not your cost of production. They don't use the very same rules that we use every day to build a pipeline, or to buy and sell gas, they do not use them. So, be careful when you're looking at these companies, who you decide to be an exterior investor. Right? You got to understand what they're showing. And it's not hard, just hate to put it this way, but you’ve got to look at him with a little bit of a larceny in your heart, right? Because there was a little bit of larceny in good design. Right. So just be aware.

So once we create hash rate – and oh, by the way, we'll talk later about the fact that the hash rate now has a value. I think you guys recognize it, right? In the back of your software, you actually look at hash rate transactions, and that's a big deal. That didn't exist a year or two years ago, right? So you can literally trade hash rate. For those of you in the room that may be involved in the business from a commodity perspective, think hash rate the same way you think of heat rate. Okay? That's the right way. If you trade heat rate, you should be able to trade a hash rate.

Now, once you get a coin, you have to put it somewhere. Alright. So there is such a thing, like a digital vault, is the best way to put it. It’s called a custodial, and these are just a few of the ones that are out there. And, these are on both sides of the pond. But, there's plenty of places that will take your known physical coin identification number and put it in a vault and validate. Right. So you get it into a vault, or you get it into an exchange. Now, these are the US exchanges. These guys are pretty big – crypto.com has quite an aggressive advertising campaign, you may have seen them on TV. Coinbase is doing the same. But they're in exchange just like any other exchanges. They just specialize in cryptocurrency.

And, many of the things you can do on many of the exchanges you're quite familiar with, you can do on these. And, it's not just in the U.S, it's all over the world. These exchanges exist. My partner in Cleantech, his son owns BitMEX. Okay. So, there's a lot of opportunity to find liquidity is the point of my commentary. A lot of liquidity is out there, but you’ve got to kind of hone it down. And, you got to look at what other people are going to and what other people are doing. The fact that Coinbase is very consumer-oriented, to me, is actually a positive. Because no matter how much I put on there, there's a consumer out there that wants a chunk of it. So, I'm a big believer that liquidity is key. And, this market is providing an unbelievable amount of new liquidity to our markets in energy.

These two categories are studs in their world. So, the FTX is the Bitcoin version of the CME Group, right. But the CME Group, who was my ex-employer – I used to be the director of natural gas for NYMEX. We were talking about this, but it was first approached to come in and do it. The powers that be decided… they didn't think it was a lucrative enough market. So, it didn't actually come into fruition until just a couple of years ago. But, that contract designs essentially what we did over. This is not hard, it's just new. It's just new, that’s all it is. But when you get this kind of horsepower behind markets, and they believe that that liquidity is there, and they're creating the opportunity for that liquidity to participate in the market. It says something, and it says that this is truly real.

This is a dated slide, but I liked it because it was so dense with names, like a kill a bunch of birds with one stone. But, I want you to notice the names that are on here. And, these people are participating in both Bitcoin and blockchain consortiums, which I'm not going to get into; I'll leave that to your expertise, Sameer. But, you know, look at these names: New York Stock Exchange USAA, Wells Fargo, New York Life. I just like saying their name. If you go down the list, Western Union, Money Transfers, AXA in the insurance world, right? The biggest balance sheets in the world are committing to this market. The biggest in the world. It might be time to take a look. It might be time.

Now, the good news is that it's not a market where the more people that come in the less piece of the pie you have. Actually in the Bitcoin world, the more miners there are, the more people participate in the market, the better it is. Yes. So, everybody has an incentive to attract more people to the market. So in simple terms, here we go. This is where you're going to kick in. In simple terms, all you really need to think about is that cryptocurrency is a commodity, just like any other financial commodity: the dollar, the yen, the pound – whatever you want to choose. Cryptocurrency is just another commodity. Treat it like that. Think of it that way. It will help you sleep when you're trying to do this stuff. Because the ball is high. Think of the PLDA about it; it's a very high bar with a very long plate. If you're in options, you know what I'm saying.

Also, mining is a market for us, especially the mid streamers and producers. But not just the mid streamers and producers, and that goes across power and gas and crude to some extent. And, I'll show you in a minute, the idea here is to get this down simple when you're thinking about crypto. It's another tool in your kit. It’s something that is fungible. It's something that's real, something you may have an asset to participate in. It is simply another way to optimize your book. It really is. You don't have to get any more complicated than that. Depending on what asset you want to put toward it.

There's obviously… you have to have the ability to monetize that asset. That monetization process will be different for every person in the room. That’s unique to every person that owns it. However, it's being done. It's being done around you. It's being done all over already today. So, when somebody asks you about crypto, crypto is a commodity; mining is a market.

21:51

Pat Would you like to play – something about that guy is just familiar.

Sameer I just like to advise.

22:01

Pat Yeah. So let's talk about how you can play. He can outright purchase and trade it. If you've got sharp traders on a trade desk, he isn't – there's lots of vol. Volatility is a good thing, if you know how to play it. And, a lot of the traditional rules apply. It depends on how much liquidity you want to donate to the market and that can be a derivative of how much actual energy you're supplying to the market. But, there will come a time when just like a heat rate, this is going to be a mandatory dirty hedge in a lot of markets. Mandatory. If you got a ton of mining going on in your constituency, you're going to have to go to catch crypto over the piece. It’s time to learn how. The other thing you could do is directly just pay in mining.

I put two types of mining up here because they're predominant. I'm involved in both. One is direct production, meaning that you put a box behind the power supply, and you mined for coin, and you take the results. That's just simply putting the hardware and software down. The pool mining is where you get a group together, and you all do it together, and you share in that result. Okay. It is common because it allows people to dip a toe in the water without having 100% commitment which folks like. And, you'll find that your partners in those buying pools are usually pretty stout, so you can actually get credibility upright on one end, which your management would probably really like. You're going to see more and more and more of it because not everybody wants to take a full bite of the apple at the first pass. Right? And that's just reality. Go ahead and flip.

The other thing you can utilize crypto for facilitation of stranded assets. Now, we've all read the Wall Street Journal accounts or the USA Today accounts of stranded gas and going into a crypto mine. Right, you hear about it. It's something that people can digest, and they think they know what it means.

Caruso was one of the first companies to do a successful model of this, and it was highly successful. And fortunately, they put the round peg in the round hole. Right? The gas was dry, the land was available, right? The electricity and the infrastructure was there to do it. All right. And they had willing counterparties to do it. So, it all fit together and they were super successful. Other companies have tried to replicate that.

The problem is not all gas coming out of the ground is built the same way. So, they go out, and they say to those producers. And, you even have people out there trying to go to producers and get their gas for free to share in crypto from that as royalty numbers and JLA. Right. So, if you know what a joint interest billing agreement is, you'll know real quick that can be problematic because the royalty numbers want a certain amount of revenue. But all these problems are getting worse. It is being done. It does happen, and it is being done.

So, if you got a stranded gas well, and you can’t produce your crude oil because you're tied up, and you don’t have something to lease. This is a way to move that gas out. It can be done. It is being done. It just depends on the quality of the gas. If it’s super wet, pre-processing blows up these numbers. That's it, right. So what you want to look for in this is the opportunity to move your commodity to a higher value market. That's really all you're ever trying to do.

So, if the index is minus – sometimes it's not in West Texas. Not today, obviously. But you know, $8-$9 gas might be a good number. And maybe the crypto mining operation can produce it. And it goes back to turn it off. It's flexible. It's flexible. Infrastructure: do you own pipelines, and you own power infrastructure? Whatever your company does. Is any of that not fully utilized? If it is not fully utilized, at dead tap on a pipeline, with a couple of acres of leasehold around, it is worth a lot of money in the crypto world. Because you can put a box on that. You can open that tap back up with a cheap market, you don't have to spend $4,000 to do it. And, you can blow that gas into a generator. The generator puts on electricity; electricity moves into the mine; mine produces money. And it can be done.

Okay, so it's an opportunity to take stranded assets of all times and optimize for it. And then of course, imaging. The example I like to use for this is let's say I'm an IPP, independent power producer. And, I've got, sitting out there, with a peak load, a peaking plant. Why couldn't I baseload that peaking plant, sell that power off the busbar, and run that plant all the time? Why can’t I do that? There’s no reason, right?

If I have perimeter acreage and a facility, and I've got a power supply to that facility may be overflowing. And, that happens a lot. With overflowing from that power, and I've got ancillary acreage, I can lease that out to a miner and share in those profits. I utilized my property and optimized my asset. I've done more with it than I thought I could do yesterday. It's all because the mine was open. And most of the time, the miners would take almost 100% of that risk. Most of the time, not all most of the time.

So whether you just got a trading desk that has, you know, the mental power to go out and play market; or you've got some infrastructure affinity, and you want to go out and build your own capacity; or you want to share the process of building that capacity; or you simply have stranded assets that aren't being utilized today, you have an opportunity to optimize those assets by putting them into a facility that's going to generate points. And it's completely scalable. That's the crazy thing.

Now – oh, my slides screwed up. Does anybody know what that is? It’s a pickaxe, right? There's a reason, there's actually… this is a real term in the industry. It's called pickaxing. And, all it means is if you remember during the gold rush in the 1840s in California, the average income of a miner was far less than the average income of a guy selling a pickaxe. Okay? So, it's putting together the tools to do the project.

So, we literally have circumstances where guys are going out and building these massive farms or even small farms and saying, “Okay, here's all the tools I'm ready for a piece of the reward.” Right? You make less, but you didn't have to build or buy your pathways. That's called pickaxing. So, that happens a lot. I mean, there's been an aphorism title… I’m still trying to figure out how it's ESG compliant with 200 acres under concrete building. I don't get that, but there's one company that did that. Anyway, so there's lots and lots of opportunity going on. It's a little hard to find sometimes. But if you keep your eyes open, you'll find it.

So, to work it over again, this is a new market. If you're not doing it, you haven't done it. That’s important to understand. It's a new market. It has its own dynamics, but, fundamentally, we’re all based in the same world we lived in our entire careers. It's not something you can’t comprehend. It's not, you know, techno-speak guy – don't worry about him. Worry about whether you have the ability to use these tools to optimize for your benefit.

One of the things that's becoming a lot more popular, and this has been a good question. I wanted to address it in the room. Is that – who was fortunate enough to be here during Uri? Anybody? The rest of you were elsewhere? Ha, good for you. Right, because it was no fun. But Uri and other events like Uri have brought forth the flaws in our grid as they're created.

The grid needs a lot of work in a lot of ways. Distributive generation is one of the ways, which means a space that can power production in very small places in very small ways, all over the place. So, rather than one big plant shoved into the grid, you’ve got 1000 little ones. And, it's more sustainable, and the world is kind of headed that way. And they're looking for opportunities.

I've had people argue with me, “Well, if you put up all these mines, you’re just going to be horrible for the grid. You know, you’ll turn a couple of my lights off just to run your mines.” Well, no, because we're interruptible. I promise you, the moment that power makes more than my mine is making, I'm turning the mine off, and I’m selling the power. Okay, think about what I just said. Which side of that don’t you like? Either you're making money with the power in the mine, or you're making more money selling it to the grid; it's a free option in this business.

Even if you're not creating power through the gen-set of some kind, I mean, you're just buying power from the grid. Typically, you're going to buy that power interruptible, so you get the better price while you're producing. If you look at a three or four year study on it, you'll find you're bound to that offer, even in Houston, Texas where we get hurricanes and Uri, and all kinds of crazy stuff that shuts the power down.

If I had a facility sitting behind the Astrodome, in the last three years, I would have had to turn it off fourteen days. I'll take that spread. And, that's fine. So, this forces the utilities to create more power, the market grows from them; it's profitable. Once they create that more power, and you turn it off, you have greater sustainability. This is actually a loads pouring in domain.

31:40

Pat McKinnon If anyone tells you differently, I'll talk to you. Because, if I'm creative … if I had been fortunate enough, which I was not, if I had been fortunate enough to have 50 megawatts available in one megawatt increments across the grid that was plugged that I could turn off my mine and put back to the grid during Uri, do that math of $9,000 difference. I would have been pretty happy.

So, that's the kind of interface this market has for the grid. It's not deleterious to the grid and its support. It's really important to recognize that. It also gives you a new optionality. You're planning a project, you're going to do a midstream project pipeline. That pipeline is meant just to take gas from the Gasonet and the guy behind it. That’s all they care about. Oh, by the way, there's 200 acres in the middle of that. That landowner’s willing to lease. Put another tap in, half inch to the pipe. Feed the mine. The mine would pay off the pot. What does that do to the bottom line of your building?

It's integrated into your plans. It's a way to optimize for your position. It just gives you a new optionality. That example I gave earlier about turning off the power when the power gets high. You can take one asset making $1,000 a day, and you can – anytime you want, when the price is right – turn into making $1,001. You can. That's optionality, right? And, it's new liquidity. The people coming into this market are new buyers, wanting more supply. Right? To meet the demand for that supply is the business we energy people are given. To be able to leverage for that gives us more capacity on the grid that everybody shares in the benefit and the profits that are created. Everybody. So, it's a matter of, “do I want a hand in this, or do I want everybody else to have a hand?”

Because this is coming, and it's already here from a different lens. So, it's flexible, it's scalable, and it's adaptable to your circumstance in finite in the new content. It just happened. Again, there's firms out there today – I'll give an example. Some of the RFPs in Houston, two that come to mind directly, have over a gigawatt each where they're feeding mines.

And, during the last power shutdown, every single kilowatt was turned back to the grid. That kept people from going up. Because the mines were shut down. We're not critical. We're not serving the hospitals. Right? And, we're more than happy to take that low price for interruptibility. So, it really is additive to the circumstances. So, if you think about your individual circumstances, how can one piece of the supply could, you know… what would it do to your balance sheet to make an extra $2,000 a day over and over to you? Because the miner took all the risk. All you did was supply power or supply land or supply the tap. Whatever you got. Show us what you got, and we’ll figure out a way to work with it. It’s pretty straightforward.

So, it works with stranded assets, underutilized assets. It's a method of value optimization. It's a value of monetization on your ancillaries. You know, that comment I made earlier about perimeter acreage around an IPP, that could be Dow Chemicals perimeter acreage. That could be anybody's. Because most of these facilities are over-plumbed for energy supply. If you take a typical gas pipeline connection to an end user, it's over-plumbed, probably by them. Because they built it for expansion that may or may not have ever occurred. They didn’t want to do it twice. So, if you go with those individual iterations that are out there, they’re uncountable. You know, there's just so many of them, they’re uncountable.

So, as a tool for optimization, as long as you allow yourself the freedom to explore the opportunity, and the appropriate counterparties, then you’re going to find them. Again, there are some companies that are heavily invested in this that you may be doing business with today. I’m sure you know some of the names, but believe me, Sound Point knows this has happened. So does Entergy. So does TXU. So does the South Texas Co-Op. And so on. They all know what's happening because they're all feeding power with money.

So, that brings up my favorite part of the day. Stop jumping. Okay. I know you've had some things you want to lead with. So, I'm gonna pick on you. What you got as the first one?

36:15

Audience Member Pat, that sounds great. This was pretty fantastic.

36:25

Sameer Soleja I think probably the best, the easiest lead in would be to start at the end. We talked a bit about, sort of, the policy debate around whether crypto mining at scale is good or bad for grid resilience. And, I just like to pull the string on that a little bit more. So yes, I think we all understand that you can turn off a mine or a miner or mining facility at a moment's notice right when the grid needs the power. I guess the question is, does it also support expansion?

37:04

Pat McKinnon It does, because if the power companies like to sell power, right? I mean, that's what they do for a living. I have already run into circumstances where load was not available to me. Right. No matter how much… it didn't matter what check I wrote, they just weren't going to do it. Where you see expanding the grid occur is at the modal or micro-level. So, you might have a facility, one in particular that we're looking at now. It's got five megawatts of capacity already on the node. On the node, five megawatts of capacity. We need 50, right?

So, our negotiation with a power company is, “We'll put that 50 down. We'll pay for it.” They didn't have to go to the right place. If you want to put it in, what's the cost per kilowatt or per megawatt? Can you do that? If it moves my number by five or ten bucks? I'm not going to do it. I’m going to cap it myself. Right. And so… but they're willing to do that. Now, the only problem with that is, is that when that whole thing's over, am I going to take all that off? I have no need for transformers in my garage, right? No. So what we typically will negotiate is a buyoff price over time.

38:16

Sameer Soleja Okay, all right, for Center Point or Olympia.

38:17

Pat McKinnon Whoever you're dealing with. You'll just say, Okay, I'm gonna put it in. This is a five to ten year run for me. What's the depreciated value over that timeframe, and you can have it for that. Sometimes, that's a zero. That's a zero figure at times.

So yes, it does help support grid expansion. It helps support distributed generation creation. The key is, is that miner going to plug it back to the grid? Alright, we have a policy that those come first. You know, if I've got those two trades – one can go to the grid, one cannot – I do the one that can go. So it's, it is a supportive effort.

In fact, Governor Abbott, you know, took some heat from the crypto miners in Texas. He did – there was a lot of negative press over that, which I found surprising. But when I thought about it, it's really just because so much of the world is myopic on the subject. He wasn’t trying to sell them power. He's trying to sell gas. Okay. He wants to make crypto miners come in and buy gas in Texas. You know, those of you that produce in the Permian are well aware of challenges out there. Right. So, if you can bring a market that's at the wellhead for now, bring it out. Yes, sir.

39:25

Audience Member So, from a mining market standpoint, what do you assess the risk of people beginning to take the newly emerging quantum computers and focus them on this. And there, they put anywhere from the equivalent of 10 billion current processors to 100 million current processors when there's only 2 million Bitcoins left at a time.

39:45

Pat McKinnon Well, which will probably be down around 2100 which is probably down, right. The original data is around 2140. Down points that you mine. What I would tell you about that, remember my comment earlier: the more the better, right? You're validating more blocks, so there’s more coin on the market. That's really the mindset. A lot of guys out here. Computing powers, as you well know, the more power, the more costs, right? So there's a happy medium.

And so far, most of the miners are going to hit it, right? So, if you look at the map here, hash to the next level of Terra hash, they'll just make that iteration you're seeing here. I've heard a couple of conversations about it. But, from some of the credible players, they're just hacking up close to the lights, you know. As the next generation comes out, because it's economic, it's really driven by… even though you can throw that horsepower, it costs you 50 times more, but that level of computer on it, right? It blows your economics in the short term. And, most of these guys are pretty, honestly pretty short-minded. I mean, the 12-month payout is like the standard.

Yes, ma'am.

40:58

Audience Member So are you guys focused on solutions or optimizations? In particular, request access… issue?

41:10

Pat McKinnon Right. So for my group, we are economics. And so, I'm a field guy, I don't mind driving out to the woods, right? I kind of enjoy it. So, those always fall across my desk, like the most times.

But, you'll find that a lot of the miners out there are specific. I can think of one, block builds, that is building out 600 megawatts in-house, in Texas. Right now, in fact. And, they've got like four or five producers. And, they agreed to an index for their costs of power and cost of gas. And, they're building out that infrastructure as we speak. So, that particular company is very focused on production, gas, orientation.

We decided to be a bit more agnostic because we're looking at opportunity zones for re-dividers. And, opportunity zones tend to have a profile; they don't always have oil and gas, right. And so, sometimes when we operate… so we're not going to make… we're gonna look at the economy situation.

Yes.

42:09

Audience Member So, you've talked about Bitcoin, but it's also like exterior, gas, obviously. If we, in the unlikely event, are all wired into a central bank, digital currencies, do you think there'll be… what's your opinion on that? Mining off opportunities?

42:28

Pat McKinnon That's a really good question that really is. It has a long answer. Alright. Let me be captain… well, markets, those of you that come out of the commodities world will understand markets drive with highest value. So, the nature of the market is always going to be the drive to the highest value. Elon Musk can say all he wants about coin he’s hot on. It's not going to be as stable… and this is a big word: stability or stable coin. It's not going to be as stable as one that's more displaced. So, here's this – this is going to sound really academic. But in truth, it's one of the fundamental reasons all this works.

Cryptocurrency is the most small d, small d democratic currency of the world. You want to play, get out your checkbook. That’s your barrier of entry. You can buy in, mine it, whatever you want to do. The only barrier to entry was capital. There is no other currency in the world that isn't affected by government policy. And, why you may say crypto is affected by government policy – its revenue. Yeah, you got to pay your taxes. You don’t get a deductible on this stuff. But, it's not directly affected by monetary policy, other than the value of the dollar you can create with. So, in and of itself, it's completely democratic.

So, any coin that comes to the market, if they're… I think they will resist a central bank concept on this. I don't think the coin developers are going to want that. Because unfortunately, like in many things, remember I said the coin of what's happening now? They all think they’re mining. Everybody who gets the coin thinks their way is the better way.

44:24

Audience Member Or they're like, thinking you're going to scam them.

44:26

Pat McKinnon Well, yeah. You learn how to avoid that. The concept of proof-of-work (PoW) and proof-of-stake (PoS) are your garden ship to that. The actual methodology, the way the coin is produced, you can smoke that out. If it’s gainful, it’s fine. Alright.

44:43

Sameer Soleja Pat, what if we pull the string on that a little bit? And, let's imagine that the U.S government does come out with a digital dollar. Do you think the architecture of that might continue to support markets like you were just talking about?

44:58

Pat McKinnon I do. This is, I mean, this time with us, this is purely Pat’s opinion.

The digital dollar is really not much different than what you have today, with the exception of Proof-of-work (PoW) that exists in the bank or the Fed or the exchange. It has a registration number. What is, what is Bitcoin? It's a registration number. It really follows a lot of the same pattern. The guy that founded Bitcoin, Satoshi Nakamoto, was his name. And by the way, the penny version of a big list just so you'll – this cocktail stuff. If you want to know what a penny version of Bitcoin is called a Satoshi.

And, as Bitcoin has and becomes harder hit, people will start buying Satoshi versus Bitcoin. So, if the U.S government were to come out with a digital dollar, in my opinion, it validates cryptocurrency permanently. Right. So to me, it's not a bad idea, nor is it competitive. And, I don't think it's that big of a stretch. Now, do I want to give up my pieces of paper? Absolutely not. I like carrying cash. Right? That's because I was raising these taxes. Right. So you know, there's, there's… it's just something that I’ll do the rest of my life. But, if you look at a 25-year-old, you'd be lucky to find 50 cents in their pocket. They're just happy to use a card, man, for everything they buy. It can look like this.

So, that's a new world. The next generation is going to be digitally-oriented. And, their cash is going to be a piece of plastic in the form that's on that plastic. A form that’s convertible to a common currency, or currency, which it is today, by the way. I can show you on my phone right now how to take my demonstration account for calling Coinbase and turn it into US dollars in my bank spending.

Right, or I can put it in my E-Trade. So, I've got an opportunity. So, I think that's going to be the ultimate validation. And, I see it coming through the U.S dollar, British pound for major purchases. Frankly, because it will give the government oversight. And, that's what they desperately don't have now. So, if they create oversight, and they're still gonna use that as their core currency in the world today. I think a lot of people complained that that may change. I'm not so sure it will happen in my lifetime. I think it would be a huge boom in the market.

47:29

Sameer Soleja We might reduce some of the rent seeking behavior from Visa and MasterCard as well.

47:34

Pat McKinnon I don't think they like the idea. I don’t. I would say that the digital currency market is a true threat to the current construct of credit markets and has been so far.

Yes, sir.

47:48

Audience Member Not a question. Just to lend credence to what you said. I have a credit card with crypto.com.

47:56

Pat McKinnon Which are you using, if I may ask?

47:58

Audience Member I’m using crypto.com right now because it’s simple. Super easy to use.

48:02

Pat McKinnon Yeah, it's super easy.

48:03

Audience Member Yeah, so Bitcoin mining is obviously very electricity-intensive, compared to the other cryptocurrencies. Can you speak to some of the other ones, like Ethereum? And maybe other ones and kind of the magnitude of electricity consumption that they need to mine crypto.

48:20

Pat McKinnon Are you bringing this up because you're aware of what happened in New York State, just a few weeks ago? For the audience, I'll explain. New York State… the headline read: “New York State Outlaws Crypto.” No or outlaws Bitcoin. No, that's not what they did. They outlawed a method of location called Proof-of-work.

All right, there's two major kinds of ways these computers go out and do it. One’s called proof-of-work. One's called proof-of-stake. Okay. By the way, everything I'm telling you is intuitively explained in Google. Frankly, you could find this everywhere.

49:00

Audience Member Or, is there also coverage of some type?

49:02

Pat McKinnon There is, but it's not common. Okay. Proof-of-stake is because it's Ethereum, right? And, it's recruitment, so it takes less horsepower, hash rate, to go find a single unit of coin using proof-of-stake than it does proof-of-work. So, New York came out and said, “You're not proof-of-stake, you can’t buy…” So, they basically threw the whole ball of wax against the theory in New York.

Well, the miners that were invested in it – I'm trying not to go here, but I'm gonna have to because of this conversation. Each of the blades or the computer boards that do this have, what’s called, a basics chip on it. Okay? All that means is it's meant to do one thing. Alright. It has one purpose in life, and it's coded on that chip. It's either a theory or it's Bitcoin. Some of them have multiple capabilities, but it's not like they can do 90% of it.

So, what will happen is, those miners have infrastructures paid out. In New York, we'll just swap them here. The ones that don't will have to make an economic decision of whether or not they stand out. Either you swap to a…

50:06

Sameer Soleja As a margin on Ethereum mining is that the structure is different, right? The first step is: is the margin narrower, or is it just different?

50:16

Pat McKinnon It doesn't yield, like a Bitcoin does with the final economic result, okay. It yields. There’s plenty of miners out there doing it. It does yield. I know in our company, we're going to try to stake in a few megawatts of Ethereum strictly because I don't like being the one holding anything. Right?

So, Ethereum will be that choice. That’s because the machines are available, and they're efficient, and they do a good job in that realm. What, you know, Bitcoin is a finite resource, Ethereum is not.

Yes, sir.

50:52

Audience Member This is a small extension to that question. Can you speak to the different types of crypto mining that might be interesting to the individual or retail customer versus, you know, companies that might have the power and capacity and resources to mine for Bitcoin and Ethereum?

51:10

Pat McKinnon If I understand your question is, thinking of one guy and his wallet, what would he do versus what the corporations do? Is that accurate? Yes. Okay.

So one guy and his wallet. Well, you can go by machine right off the internet, and plug it in your house.

And, you have one? What’s your day rate, today right now?

51:34

Audience Member Yeah, I'm at two terahash right now. It’s sitting in my garage.

51:35

Pat McKinnon You’re at two terahash right now? Alright. What’s your yield?

51:37

Audience Member I mine Ethereum. And at two terahash, I get .2 Ethereum every week.

51:48

Pat McKinnon .2 Ethereum. Alright, that’s good… $15,000 worth.

51:58

Audience Member Yes, and, I’m totalling…

52:01

Pat McKinnon …Four kilowatts? Okay, that’s pretty cheap. For kilowatts, 60 cents. It’s still above your electric bill a touch.

52:15

Audience Member Oh, yeah. Sure. My wife's not happy about that, but then when I pay the electric…

52:18

Pat McKinnon So, the answer to your question is, an individual can do this. Here's an example. And I would say that that's not uncommon. If you really did – I know, ranchers that have been sitting in the barn because they called me and said, “Which one to want buy?” And, it's because they're son walked in the house and said, “I want a Bitcoin machine, so I bought it.” But the guy's pretty happy once he sees it gets a few extra bucks to buy, right?

So, it's really, though for the individual, depending on your level of market sophistication. For me, I actually treat coin like a binary. I don't care what the processes are. I care what it's going to be. So, from my perception, I just mine and collect, and mine and collect.

For most people, they didn’t want to convert. So really, it's kind of smarter to just hold it in an exchange. Let the market do it.

If you want to physically monitor, my thoughts on any one of the dozen websites, start mining tomorrow and stick it in your hands. So, it does work across the spectrum, just don't expect $30,000 values out of the box, right?

Yes, sir.

53:25

Audience Member Can you talk about some of the operational risks for, say, co-locating a mine on a renewable site or even a… site?

53:33

Pat McKinnon Absolutely and they exist.

First of all, you're giving a piece of advice to an outside counterparty, and, as a rule, that has troublesome issues you have to deal with all on its own because my guys know that piece, if you will. Not a lot different than if you have a pumper going out to a wellhead. It’s kind of the mentality you need there. Operations tend to follow because you are running a great deal of electricity. You have to make sure that those requirements are met from an engineering standard, right?

Delivering gas to a three inch pipe. It's not a huge deal, but meters don’t work, right? Some do have some operational considerations, but frankly, they are no different than you deal with if you have an electric motor. Okay, or you’re selling grasp on a slit pipe. Right? So, if you've got a gathering system, and you're selling split markets to different pipelines, and it's no more complicated than that. You're just another market.

Does that answer your question? And, did I answer your story that I give you all I could get?

Okay. Alright. Anybody else? One more on the front.

54:31

Audience Member Oh, yeah. Oh, God. Last time I talked to one of these guys, I was talking to Bitcoin miners. Their strike price was about $200 per megawatt hour… $200. So, he could mine profitably until the gas price hits $220.

But, this was when the closer, I think, it was about 40,000. He might have had other costs invented doing it like – I promise you. But, as you coin more, like it's going to consume more electricity, right? So, the strike price will come down. Am I understanding that correctly?

55:08

Pat McKinnon Okay, the way to think about what you're talking about is, what's your deal permit, right? So, that yield your targeting is truly bespoke. I know guys that will shut their mines down to some form. So, I’ve got a $10 megawatt, and I'm not making good money for the deal. I’m not going to do that.

55:32

Audience Member Well, how quickly do you think that will tighten?

55:35

Pat McKinnon Oh, it’s going to continue to tighten until the end of 2024.

55:37

Audience Member But do you think it’s more lenient?

55:40

Pat McKinnon Oh, it depends on how many people are in the market. So, I'm sorry to… it really is contingent on how many players there are.

Now, what we found, and what I found really quite shocking, is it's demonstrable, right? You can look at it on your dashboard. As the price of coin comes down, people leave the market because they spent too much money and make the point that their mines are inefficient.

That creates two opportunities for me. I'll buy the mine out, right. And as long as I like your equipment, and that's really good. That takes power out of the process, which is not good. So, what ends up happening in this weird dichotomy: price point comes down to turn off again. Right. Price point comes up, you get this mad rush. But then, the price of machines and infrastructure goes up. Okay, so either way, you're spending money.

So, the way I look at this is not in a portable mindset. As long as I'm profitable, I don't care because I'm always paying down that equipment. I know I have a resilience rate from replacing it, I just factored in here. So, the cost of the mine to point is going to go up.

Theoretically, the value of that coin over time and be commensurate to that rise. So, what you're really looking for is my cost of production. What's my ratio? My cost of acquisition? Or my value of production versus my cost of acquisition? And that's just because they don't track linearly.

Does anybody else? Come on? This is a lot more me than that. All right.

Yes, sir.

57:28

Audience Member Is there enough liquidity in the futures markets to be able to hedge for productive producers, right, to get more smooth revenue streams from your investments?

57:42

Other Audience Member I know the answer, but you picked the one month, but what did you spot you don't want to do that. I don't think the second role is in the public eye.

57:58

Pat McKinnon It's probably not, bear with teeth. I will tell you that there are markets out there that people don't particularly participate in. These are rare. There's a lot of private OTC markets, one of the players actually is JP Morgan, okay. They will make the market. Okay, and they will always make the market because they really don't care… even if it’s volatile, right? They will always make the market, and they did one of the front runners in that – that company I mentioned earlier, BlockFi does that OTC interest options transactions, and they use the big banks to do it, and then got plenty of liquidity. But, you want to go out for out 4,5,10 years.

Anybody else?

58:39

Audience Member I had a bit of a question about just, maybe less a market question and more practical question. You know, we were talking about how you can rent land or rent your node excess capacity to somebody who wants to build a data center site.

Just curious, what are these data centers like? Are they like the, you know, the cold stable data centers of back in the day? Or, is this like a trailer with just enough cooling to keep the thing running?

59:06

Pat McKinnon Well, somewhere in between. Great question.

If you walk into a field-dense datacenter of mined coin, a modern one, there's two kinds. There's air-cooling and water-cooling. Believe it or not, it's horrible. The blades are under a liquid. Right? That's what you have to do in Texas, because we seem to generate a tremendous amount of heat.

So, if you walked into one, it would look like a metal box. Right? It would have fans and blowers and crap on top. And, when you walk in, you would just see racks of servers, right? Or, you would see immersion, they’re called immersion hands, and the blades are sitting in those and just pure the water. It's like a babbling brook. It's just, the fluid that's covering those, is going through them.

It's being recycled to chill. It's Newfoundland – has a facility because it's so cold there all the time. And, the water’s so cold, they used to be scaling right through. And, I say, why bother to scale? And it's because it's the exchange. Right? And so, if you actually immerse the vapor, all right, so the heat exchanges more efficiently. So anyway… the answer to your question is, it's a little bit more like a sterile operating room than it is, you know the pump jack.

Okay. Any others? Yes, sir.

1:00:30

Audience Member Okay, so are they capturing that heat that is being generated?

1:00:34

Pat McKinnon Really good question. That's starting to happen… But you have to have a purpose for the heat. And, the heat is higher than atmospheric but not same quality, right? You're not able to turn it over. But, there are applications in place, especially all these guys that run turbines in front of the generators because turbine stacks are 500 degrees.

We're getting double recovery on those, and it's making the efficiency so high. Because we’re putting a windmill in that turns them out again, which makes electricity in addition to the turbine. And, when the heat on the on top is recaptured and recycled.

Anybody else? Yes, ma’am?

1:01:19

Audience Member We see a lot of emergency storage coupled with those… tap in… services.

1:01:25

Pat McKinnon Okay, if I only use the natural gas storage position… it doesn’t matter what you want. If I own one, I bought that position based on the price split. I bought it in the summer and sold it in the winter. It was 50 cents. If I can take that gas and make $1 with it on site, why wouldn’t I just leave it there?

1:01:53

Audience Member I'm talking about batteries. Yeah, energy storage, batteries, coupled with turbines.

1:02:08

Pat McKinnon The thing is, battery storage – now, I do not want to jump off the stands because I'm a lithium hater. Let me be agnostic. The battery storage, right now today, is not cost-effective, right? There’s not enough mass production. And it doesn’t have…

So why would you use batteries? I want to make solar power during the day, running 24 hours. That's a typical example. Right now, the efficiencies are not really there. We can get close, but it's really the cost of batteries themselves that is so high. And as ambitious as Mr. Musk is, he lowered his price. So, it's one of those where as the price falls, you'll see more and more.

1:02:58

Sameer Soleja But let's say you've got an average right? Should you – would you want the optionality of being able to heat a data center, or is really the optionality of what the grid provides you sufficient enough.

1:03:10

Pat McKinnon Right now, if that is true, Mr. Musk, rocket launching facilities are testing a form of assets. All right.

1:03:15

Sameer Soleja Thank you, everybody, for being here.

1:03:28

Pat McKinnon Thank you.