Survival of the fittest
Many will not make it through this Golden Age of Bitcoin Mining.
We’ve been heads down building for the past several months. Like groundhogs, we poke our heads out to assess the market and right now it looks like it could be a longer winter than we’d hoped. It’s been bloody out there, folks!
Many Bitcoin miners live in the real world, having to communicate the insanity of the broader cryptoasset space to a diverse range of investors. Here’s excerpts from what we’ve said—
In lieu of a specific thoughtpiece, here are selections of what we’ve said to communicate to our capital partners as we enter what could be one of the most profitable bear markets for well-positioned Bitcoin miners.
It's been bloody across all markets not just cryptoassets. Tech stocks have faired worse than Bitcoin the past 6 months by some metrics. At least Energy is up, but the markets stare into an abyss. The Central Bank of Japan appears to be losing control of the yield curve while Westerners blame Exxon & Putin for high gas prices. Our current Administration supports that narrative. Inflation is the highest in my lifetime while bond yields aren't remotely close to enabling our generation to afford retirement.
I'm an armchair macroeconomist, but to be in this business of Bitcoin mining you have to not only be able to troubleshoot an ASIC control board but also: deal with exporters who only speak Cantonese, negotiate with a 3-toothed well Pumper, produce complex & unconventional financial models in dual-denominating currencies, and communicate a sophisticated heterodox perspective on Russian expansionism, NATO, and the Eurodollar system. So why not also be an armchair macroeconomist?
I've been buying Bitcoin for close to a decade now and am a veteran of these events, although they haven't lost that visceral gut punch. The 2014 - 2016 bear market was particularly lonely -- but the question at the time was whether Bitcoin, other cryptocurrencies, would even exist in the future. Now, the uncertainty is not whether this is just a niche market, but on what timeline and path we take along the adoption curve.
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I remember the March 12 COVID crash as the traditional markets went hard risk-off. [We], who at the time had [a significant amount of our] net worths in Bitcoin, watched the $8k -> $3.5k plummet in 48 hours (after a 2 year bear market). That was, notably, also the first time that Bitcoin & crypto broadly was directly correlated to equities, the secular economy. The following months we launched full time into trying to put Bitcoin mines on gas wells.
Since then Bitcoin has clearly been correlated to traditional markets as a risk-off asset. It's also taken us much longer to deploy mines than anticipated. Certainly our initial capital raise challenges played a part. But honestly a lot of it has come down to the fact that [I’ve] been unwavering in my insistence that we achieve under a certain threshold of effective power rate to our mines. Nakamotor's whole thesis behind mining Bitcoin at the wellsite is that there is unbelievable competitive advantage in unconventional energy capture, it is just quite difficult to execute.
Many of the other companies mining off natural gas have GPAs tied to NYMEX. Many companies like ours are not insured. Many mining ops like ours with a GPA are going to discover they aren't paying royalty owners what they're likely owed. We passed up at least a dozen easy deals over the past 24 months because [Charlie] insisted we absolutely protect ourselves against a punishing bear market and [Kyle] insisted that we be fully compliant & insured. To be reductionist, Bitcoin mining is about survival. You will outperform Bitcoin, even make a return in a bear market, but you have to survive. This is the foundation we structured Nakamotor upon and I'm proud to say that it looks like we have achieved an unbelievably low effective power rate across our mining operations, however likely at the expense of rapid expansion.
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The narrative going forward is that nobody can plug their ASICs in. It's really hard to predict Bitcoin price, but we can at least try to predict network hashrate. The big development the past few months is our industry discovering that it is much more difficult to build a Bitcoin mine than everyone anticipates. Supply chain, energy pricing, and market volatility create huge challenges. While the price of Bitcoin has not followed the path we expected, neither will the network hashrate. One of the largest public mining companies, Marathon Digital, announced a year ago that they would have 135,000 S19s online by June 2022. They have gotten some 35,000 online and the rest of the deployment looks to continue to be delayed.
That is to say that, if you reference [our] "Network Hashrate Projections” from last February, we identified a range in which we could see hashrate grow. We are almost certainly going to be on the absolute bottom of that range, which is a huge boon for [Nakamotor]. This however also implies a broader contraction across all traditional markets, not just Bitcoin & digital assets.
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Bearish macro environment
Bitcoin's short 13.5yr existence has only seen an era of Quantitative Easing and a historically bullish stock market. We're entering into a new era of possible recession, stagflation, volatility, or whatever it may actually be. This new era means Bitcoin could behave differently. New market forces drive Bitcoin price, thus making it harder to predict on a shorter timeline. The focus for miners, then, becomes to remain agile and resilient rather than just resilient. If the world does enter an extended recession, many bets are off. An optimistic scenario would be Bitcoin decoupling to the upside from traditional markets. However, history demonstrates that in the worst market downturns there are very few safe havens. Rather, the goal is to figure out how to position coming out of the downturn. Bitcoin mining vs spot exposure to Bitcoin allows cashflow during such downturns, and when credit/lending dries up, cash is king.
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For those outside the loop:
2 defining events so far: First, the Terra/Luna ecosystem collapse. Think $60b ponzi scheme involving some of the biggest funds in crypto, all of whom ignore basic seigniorage mechanics. Then, just 3 weeks later, one of the largest domestic crypto custodians, Celsius, could be a sort of Lehman to Terra/Luna's Bear Sterns. We will see how this plays out, but many billion dollar funds are fighting for survival right now. There was an insane amount of leverage in the crypto ecosystem and we've experienced a massive unwinding of it the past 40 days. However, the Bitcoin network chugs along as it has the past 13.5 years, without skipping a block.
We could see a continued route of leveraged entities, custodians. This could cause unprecedented price action to the downside. Each Bitcoin cycle, we have never fallen below the high of the previous cycle. Currently, the 2017 cycle high is $19,600 and we are right on that. While I refrain as much as possible from Technical Analysis, there is an important level around $14,000 that many insightful analysts have identified. At this time [we] don't know what to expect.
It often helps to zoom very far out and look at the Bitcoin price on log scale, the scale we use when measuring the adoption of a new technology. The long term logarithmic adoption trend remains clear.
There are very few certainties about the future, but we can be sure about Bitcoin's monetary policy for the rest of our lives and our children's lives. As long as Bitcoin blocks are produced, this is the monetary policy of the Bitcoin network no matter what happens:
We're still getting used to providing useful market commentary to our partners, but hopefully this helps. ASICs are historically cheap right now, and the risk/reward for deploying more capital into mining is quite disproportionate to the upside.
Charlie, Kyle, & Nathan