Clay Finck (03:15):

So, the miners, every 10 minutes, they are paid a block reward. And a little bit of that is the transaction fees that people are paying as they make transactions. And then there’s the block reward, which currently is 6.25 Bitcoin every 10 minutes. Is that right?

Whit Gibbs (03:32):

That’s correct.

Clay Finck (03:34):

And one thing about Bitcoin mining that I find really interesting is how there seems to be just this perpetuating cycle where people buy miners because it’s profitable to do so. They’re able to produce Bitcoin as income and pay these electrical costs that are less than the income they’re receiving, so they’re incentivized to purchase miners to mine Bitcoin, and as more miners come online, the Bitcoin network becomes more secure. And as Bitcoin’s network becomes more secure, that incentivizes more people to buy Bitcoin because they know that the network is stronger than it was in years past.

Clay Finck (04:10):

And because people buy it, that pushes Bitcoin’s price up, and then that brings on even more miners. So it’s like this self-perpetuating cycle that just seems to be playing out over time, and I just find that just so fascinating.

Whit Gibbs (04:22):

Yeah. And now, because of the introduction of new financial services for miners, you also don’t get the sell pressure from the miners who are generating the new Bitcoin that you used to get, so that also in turn increases the price of Bitcoin, because that new supply is not being effectively dumped onto the market, the miners are holding it to speculate further on the price of Bitcoin, which of course just brings the a cycle even more into account.

Clay Finck (04:44):

Another interesting development I’ve been seeing is all these companies going public that are mining Bitcoin, there’s Riot, there’s Marathon, Hut, Bitfarms. And like you mentioned, a lot of these companies aren’t selling any of the Bitcoin they mine because they’re able to issue shares and just get very cheap debt to cover all their expenses. So that’s just another interesting development that I think really legitimizes Bitcoin a lot more and it’s just so fascinating to watch play out.

Whit Gibbs (05:12):

Clay, that’s a very important point because access to capital markets is a critical thing. And really, one of the big advantages to mining really in North America, but specifically in the United States, because Bitcoin mining is capital intensive. You need a lot of money to build these data centers. You think about what it costs to build them. And you’re anywhere from 150,000 to $300,000 per megawatt to develop one of these Bitcoin mining data centers. And then to buy the machines for one megawatt can be upwards of three to $4 million per megawatt. So when you think about the scale of some of these operation that are 100 megawatt facilities, you can easily push up into the 350 to $400 million total cost just to get one up and running.

Clay Finck (05:53):

Now, the annualized return of Bitcoin is anywhere between 100 to 200% per year over the past decade. And it makes me wonder why, if it’s something that’s appreciating that fast for anyone that has a long term time horizon, why would anyone want to mine Bitcoin and put all this work into buying the rigs, figuring out how it all works? Why would someone want to mine it instead buying it?

Whit Gibbs (06:16):

There’s two reasons, and one is kind of a corny answer, but one Bitcoin will always equal one Bitcoin. So if I want to buy more Bitcoin, I’ve got to put in more cash to get that Bitcoin out. However, if I want to mine Bitcoin, I can buy an ASIC for 10,000 bucks, it’ll generate me $10,000 worth of Bitcoin in the first nine to 12 months. And then every month after that, it’s going to be additional Bitcoin that I’m accumulating from that initial purchase. So I don’t have to put in more cash to get more Bitcoin. Now, the other aspect of why people like to mine versus just buying is, you actually get two assets. When you purchase the ASIC, you’ve got an asset in ASIC… I should back up there for a second. Those of the computers use to mine Bitcoin.

Whit Gibbs (07:00):

ASIC stands for application specific integrated circuit. It’s just a fancy way of saying a server or a computer that is specifically designed to do one thing very well, and in this case, that one thing is mining Bitcoin. Now, these ASICs generally cost between eight and $12,000, but as the price of Bitcoin goes up, the price of these ASICs also goes up. So you have an asset correlated to the price of Bitcoin that is also producing Bitcoin for you. So effectively, not only are you getting the Bitcoin as a reward for your efforts, but you’ve got this ASIC, this asset that’s also appreciating in value that you can then turn around and sell at any time to the market and make more money off of.

Whit Gibbs (07:38):

So I think that is also something that’s very attractive for people who are getting into mining. And really, it’s why a lot of these publicly traded mining companies trade at such a high valuation. They’re basically getting priced at between 600 and $1,000 per terahash, which is a unit of measurement associated with those computers, but they can buy that terahash where that unit of measure for between 80 and $100 on the open market. So they’re immediately 10Xing on their value just because they have access to these ASICs. So it makes mining that much more attractive.

Clay Finck (08:09):

Got it. Now, Bitcoin operates on a proof of work network, which is something that is very highly debated because with the proof of work, these miners are performing very intense calculations that ends up consuming energy. Some people say that the consumption of this energy is wasteful. Could you talk about the importance of Bitcoin using this concept of proof of work to operate?

Whit Gibbs (08:36):

Proof of work is the consensus mechanism that’s used to validate the blocks. And again, it’s part of adding the new blocks to the blockchain. The energy consumption is a feature and not a bug. If you think about a network for an asset class like Bitcoin that is worth over a trillion dollars depending on where the price of Bitcoin is, you want to have a resilient network that’s hard to attack, that’s impossible to hack that requires a lot of capital and a lot of energy to maintain it because that just makes it strong, that secures it, and it allows you to then build and develop on top of Bitcoin.

Whit Gibbs (09:08):

So when people talk about the energy consumption of Bitcoin, my two retorts to that is, one, it uses far less energy than the dollar does to maintain it, especially when you factor in banks and the money printers and the armies and the governments that are all required to sustain and secure the dollar. And then two, for what it is using, it’s actually a great balance for a lot of the grids that are out there. You look at Texas, which has been a champion for Bitcoin mining, and Governor Abbot came out with an announcement a couple of days ago, where he is asking more Bitcoin miners to come here because it balances out the electrical grid.

Whit Gibbs (09:42):

And it’s a huge win. Even though it’s consuming a lot of energy, it’s not consuming nearly as much energy as we waste nationally in this country, so it’s a net positive, I think.

Clay Finck (09:52):

I think some people might be confused by how you just mentioned that Texas’s energy grid is essentially being stabilized with Bitcoin miners. Could you dig into the details a little bit more on that?

Whit Gibbs (10:05):

Yes. So when you look at Texas, and most of us are aware of the challenges that their grid had a couple of years ago with the cold wave that they had and how a lot of people were without power in Texas. It was a catastrophe here. What happened following that is you had a ton of Bitcoin miners that actually moved into the state to start to use this plentiful cheap energy that Texas is able to provide. It’s the energy capital of the world. So in coming to this grid, there are fees and expenses that miners take on, which actually helps to improve the infrastructure itself statewide, so that’s a part of it. But then also, because of the controllable load programs that Texas has, which is effectively just a way of saying high power consumers can switch on or off their amount of consumption to feed that energy back into the grid at times when other people need to draw on that power, that is where the real benefit comes in.

Whit Gibbs (10:56):

Because if I’m a power producer, I can produce more power than the state needs knowing that miners or other large consumers are going to take that on and I’m not going to be losing money as a power producer, and then in times of need, those high consumers, they can switch off their load and feed that energy into the homes and businesses that need it so that no one has to go without power or no one has to freeze in times when it’s incredibly cold.

Clay Finck (11:19):

So essentially, the Bitcoin network is a consumer of energy, so it creates demand for energy so when these crazy things happen with like the things we were seeing a couple years ago in Texas, when that happens, all the miners can turn off and we can put energy towards something that is more in need of it at the time.

Whit Gibbs (11:39):

Exactly correct. It’s called the demand-response program. And that’s just that, a respond to the demands of the grid to make sure that if there’s extra power, it can be consumed without waste, and if there’s the need for more power, they can cycle off and feed that power back to the grid.

Clay Finck (11:54):

Now, you mentioned on [Pom’s 00:11:56] podcast that Austin, Texas is the Bitcoin capital of the world, and it’s where you live. Could you talk about some of the exciting things that’s happening in Austin?

Whit Gibbs (12:07):

It has been amazing to see just the life that Bitcoin and Bitcoin mining has here in Austin, Texas. We had a meet up a couple of days ago, there were almost 300 attendees at a meetup that, this was the second one that we had. It was such a good gathering of different businesses that have started to spring up to support this growing industry. And then you have Governor Abbot who’s been on the front foot with regards to bringing Bitcoiners, Bitcoin companies and Bitcoin miners into Texas, and providing incentives to get those businesses here.

Whit Gibbs (12:39):

And you have also those that are running against Governor Abbot now mentioning that they are considering making Bitcoin the legal tender in Texas if they get elected. So it’s becoming this situation where there’s a lot of single issue voters in Texas, and that’s single issue is Bitcoin. And you’ve got politicians that are playing to that crowd. And then you have a ton of businesses that are coming on. Unchained Capital has been here for a very long time. They’re a standard when it comes to Bitcoin. And as far as institutions go in Austin, they are probably the first and the trailblazer, but there’s more and more companies that are moving down here.

Whit Gibbs (13:12):

You can just hear it everywhere you go, you can hear people talking about Bitcoin, you can see businesses accepting Bitcoin. It’s a really cool thing to see. The new wave is here.

Clay Finck (13:21):

Another interesting development I’ve been seeing over the past couple years is states and even sovereign nations getting involved with Bitcoin. Just the other day, I heard Vladimir Putin out of Russia saying, “Yeah, Russia has advantages in mining Bitcoin.” It’s just crazy to see these massive nations make these statements. You see these things all the time on Twitter. I’m not sure how legitimate some of them are. And I’m just so curious, what incentive is there for nation states to mine Bitcoin rather than just being something that happens in the private markets or the public markets?

Whit Gibbs (13:57):

Well, I’m a big believer that the accumulation of hashrate within your borders is a matter of national security. I don’t know if Putin actually said that there’s an advantage if this was a headline that people were eager to put out, but we have a lot of mining in Siberia, and it is one of our best ran operations. We’ve got cheap plentiful hydro, the weather is perfect for it, the climate is beautiful for mining, it’s nice and cool for the majority of the year. And you’re in a spot in Siberia that has a ton of surplus energy, upwards of six gigawatts of extra energy that’s being produced, but it’s so far east that they cannot transport that energy to the Western part of the country where the population centers are. So if they don’t use it in Siberia, it gets lost.

Whit Gibbs (14:41):

So it just makes for a very fertile environment for Bitcoin mining. So I do believe that Putin is right in saying that they have a nice advantage, and we’ve been very happy to be mining in Russia. But I think that this land grab, if you will, is really what it’s all about right now, how much hash rate can people get within their borders, because that hash rate is effectively your market share of Bitcoin’s security. And it is a bit of a race to see who can accumulate the most of the network within their borders. We were all very worried when it was China. When China had over 60% of the network, everyone is freaking out. And now that we’ve seen 30 to 40% of the hash rate come to the United States, probably another 10% or so find its way to Canada, it’s likely that we’re going to see this distribution continue to occur.

Whit Gibbs (15:22):

I do believe that the United States is going to be the clear winner, especially with Texas here in the next five years or so, but who knows? Anything could happened. There are all these black Swan events that could occur to push this hashery to a new area, maybe somewhere in South America, maybe Scandinavia.

Clay Finck (15:39):

It’s just so fascinating to think about nation states getting into Bitcoin. One recent one within the past few months is El Salvador announcing their billion dollar bond issuance. They said they were going to use half the billion dollars to just buy Bitcoin and the other half to start harnessing the energy in their country to start mining it, which is just really incredible to see given that Bitcoin, the network and the asset’s only 12, 13 years old, just insane to think about.

Whit Gibbs (16:08):

Well, their president is the character. When Bitcoin’s price dropped, he changes profile picture on Twitter to have McDonald’s cap. He’s playing right into the whole Bitcoiner crowd. But I think that the steps that he’s taking, they’re bold. And there’s been a lot of people that are saying he’s either going to bankrupt the country or he’s going to put them in the top 20 rich lists for nations in the next couple of decades. And the jury still out. Half a billion dollars to buy Bitcoin is a lot, half a billion dollars to set up mining operations for Bitcoin is a lot, especially when you’re talking about a very, very small country. But I think that what he’s doing, it’s the right kind of step.

Whit Gibbs (16:44):

If you think about a business or a small country, it has to make a radical change in order to establish a new presence for the country to put them on a new path. It’s a move like this that has to be made. And I think that he’s done a great job of setting this up in a way that is going to make El Salvador one of these bastions for Bitcoin over the next couple of decades. And we’re already seeing a lot of Bitcoiners start to move there, which is going to bring a considerable tax base to the country as well.

Clay Finck (17:09):

Now, let’s talk about Compass and what you’re doing there. Tell us a little bit about your background and what led you to starting Compass.

Whit Gibbs (17:19):

I bought the top in 2017, hard. I bought the top, all of my savings, took out a loan. I had just quit my job. I told my wife, I’m like, “This is it. This is the future. Bitcoin is the way.” And I didn’t know what I was doing at all. I spent the better part of 2018 traveling around, going to conferences, getting educated. And I built my first computer to mine Ravencoin actually, which is an alt coin, in June of 2018. And I realized when I built the computer, that it was complex. And I spent a lot of money to build something that was fairly inefficient. So I started a podcast. I’m like, “Look, I need to get around smarter people,” and I’d met a few people at these conferences and I realized that if I started a podcast, they would come on and talk to me and I could learn from them and hopefully other people would get to listen in and glean information as well.

Whit Gibbs (18:06):

Over the course of a couple of years, I got to know a lot of people in the mining industry. In doing that, I met my co-founders, Paul Gosker and Thomas Heller. I was at an event in May of 2019 that Fidelity threw, it was the Fidelity Digital Mining Summit. And that’s when I got firmly orange pilled. When I bought into Bitcoin and fully, when I stopped looking at alternative assets almost entirely and just wanted to focus on Bitcoin mining. And Thomas, Paul, and I put our heads together to try to figure out, “How can we start mining? How can we get into mining Bitcoin?”

Whit Gibbs (18:37):

And at the time, it was not possible, really, for anyone that had less than a million dollars, you needed to have a large sum of money, you needed to have access to these data centers and there were just these barriers to entry that seemed insurmountable, and we started talking like, “Hey, look, if we want to mine Bitcoin and we feel like this, there’s got to be a contingency of people that also feel the same way.” So we set out to build this Airbnb for Bitcoin mining, where you could buy one machine hosted at a good facility around the world for a fair price, and yet set up within 10 or 15 minutes of logging onto the website.

Whit Gibbs (19:05):

That’s what we set out to build and that’s what we launch in October of 2020. It’s been a ride. 2021 was an amazing year for Bitcoin, for Bitcoin mining and for Compass. And we’re excited for 2022.

Clay Finck (19:18):

That’s so cool. And I love that Airbnb for Bitcoin mining analogy that you brought up. For someone like myself, I wouldn’t think that mining Bitcoin would make sense because I don’t have access a cheap energy, but with Compass, I would be able to just simply buy a miner and host it at one of the facilities, working with you that has access to that cheap energy to tap into it. I’m also someone that doesn’t understand the ins and outs of how the miner works and the maintenance that’s required to run it, but your facilities will take care of all that for me. It’s all just done on your platform, which makes it so easy for just a regular person to get into Bitcoin mining and create that new income stream.

Whit Gibbs (19:58):

And that’s our goal. The one thing that we like to couple with is education. We do feel that people should be informed. This is certainly something that starts as a hobby for a lot of people, but if you treat it like a business, it’ll pay like a business. So we want to make sure that people have all the resources that they need to scale up and effectively get their own income producing asset in the ASIC itself or the ASICs that they’re deploying at the Compass facilities. We’ve got about 10,000 customers that are now using the platform. It’s been great to see people go from, “Man, I’m not sure if I can do this.” To now they’ve got 100 rigs at facilities around the world just cranking out Bitcoin.

Clay Finck (20:33):

Man, that’s awesome. So with Compass, customers can buy miners to get shipped to their house if they want to just mine it themselves, or they can buy a miner through your platform and have it hosted at one of the facilities contracted with you. Are there any other services that you guys provide?

Whit Gibbs (20:52):

Those are the main two. Our at-home mining service and then our bundled service or our hosted mining service. Those are the two main products that we offer. We do a lot behind the scenes with facilities as well. So people who have excess power, they can come to Compass and say, “Hey, look, I’ve got this excess power, I don’t know what to do with. We can help them set up a Bitcoin mining operation, either for themselves or to sell through the Compass platform. And then we do some consulting work like that also, but really our two core competencies are selling those ASICs and getting them hosted at facilities around the world.

Clay Finck (21:23):

I love that your company’s mission is to democratize Bitcoin mining and make it accessible to anyone. Could you walk through what the process looks like from start to finish for somebody that wants to purchase a miner and host it at one of the facilities?

Whit Gibbs (21:38):

Absolutely. So we have a great hardware page on our website. So if you go to compassmining.io, you go to the hardware page, you can select whichever one of the machines on that hardware page speaks to you. If you have questions, we’ve got a support staff you can contact, they can answer your questions about the machines themselves. Most people look to buy the machine that can be online the fastest. And when you buy the machine, effectively, you’re clicking that card on the hardware page, it’ll take you to your cart, it will automatically assign the machine to a facility.

Whit Gibbs (22:07):

And then you check out, you can pay with card, crypto or by wire. And then once the machine is on site at the facility and ready to be turned on, then we will contact you, we’ll get your pool information, your mining pool. And then we will get your wallet information to connect to your mining pool. And then that’s it. You’re set up, all the Bitcoin goes directly to your wallet. We never touch it. And we just bill you for power every month.

Clay Finck (22:30):

You mentioned mining pools, and I’d like to clarify what that means just so myself and anyone in the audience can fully understand how it works. So every 10 minutes, a Bitcoin block is mined. And that reward is only given to one miner out of the whole network. And from my understanding, a mining pool, essentially pools together many of the miners and distributes the rewards amongst everyone in the pool, depending on how much work they contribute to the pool. So for example, if you were in a mining pool that contributed 1% of the work to the network, then on average, that mining pool would receive 1% of the rewards paid out.

Clay Finck (23:09):

And you would receive your portion of the rewards based on the amount of work you contributed to the pool. Am I understanding that correctly?

Whit Gibbs (23:18):

That is absolutely correct. A pool is basically a way to guarantee your income and hedge your luck because that’s really what it comes down to, solving a block is based on luck, and it’s really based on the total network hash rate. And what percentage of that hash rate you are contributing. The lower the amount you’re contributing, the less lucky you are going to be in solving a block. It’s literally like playing the lotto, if you’ve got one machine trying to mine a block. But if you take your one machine and you add it with millions of other machines in a pool, now collectively, you have a better chance of winning that next block. So these mining pools, they will actually just pay you out for whatever hash rate you are contributing.

Whit Gibbs (23:57):

So if I plug in one ASCI, I’m going to make about 30 bucks a day in Bitcoin, but the mining pool’s going to pay out to me, whether or not any blocks are won. And then if those rewards are hit, then the pool is going to replenish their treasury so that they can continue to pay people out in this methodical way that is able to… It allows businesses, especially to be able to plan. because the last thing you want as a business, if you’re going to be spending millions and millions of dollars is to not have any idea if you’re going to see revenue, and the mining pools give you a way to know that if I connect to this mining pool, I am 100% going to get the revenue for the hash rate that I’m putting in.

Clay Finck (24:37):

That’s a very fascinating concept. So you contract with these facilities to have the mining grid set up. How many facilities are you contracted with? And I’m curious, what sort of energy source are they using?

Whit Gibbs (24:50):

We work with 23 facilities in five countries, and the energy sources vary. Most of our facilities are grid powered and the grids are powered by a mix of different energy sources. The majority of our sites are powered by renewables. We know it’s something that is top of mind for everyone, especially politicians who are looking now at Bitcoin’s power consumption. But I think the new number is 68% of Bitcoin mining facilities in North America are powered by renewables. Compass’ numbers on our site are about that, we’re at about 70% of our facilities are either 100% powered by renewables or the majority of their power is drawn from renewable sources.

Clay Finck (25:32):

And what are the five countries, obviously the US, what are some of the other ones?

Whit Gibbs (25:37):

Canada, Iceland, Russia, Kazakhstan.

Clay Finck (25:40):

Interesting. And another point I wanted touch on is the mining rigs and the chip shortage situation. So I know you can buy used miners on your site from other people who want to sell their rigs. Are new miners currently available on your site, or what’s the deal going on there? Because I know these miners use these chips, which are currently in a shortage.

Whit Gibbs (26:05):

So yes, the short answer is new machines and used machines are both available on the Compass website. We allow the peer-to-peer marketplace to exist because we want people to have an easy on and off ramp to mining. If I want to get started, we want it to be easy for you. And if you want to be done and you want to walk away and you want to catch your chips in, we want it to be easy for you. So you’re not bound, you’re not tied to a contract that’s going to make it a struggle for you to get in and out of one of these machines, you just sell it, and the next person takes over your contract.

Whit Gibbs (26:34):

With new machines, we’re constantly sourcing them from distributors in China. And we place last year about 40,000 new machines.

Clay Finck (26:43):

So whether it be the new or the used machine, if I log on today, get set up, send my payment in, how long is it until the miner is actually up and running?

Whit Gibbs (26:55):

It depends when the online data is, but if the online data on the site is quoted, then it would be within 72 hours of the time of purchase. So if the machine’s already on site, we simply just convert the wallets over, but if you’re purchasing a future order, so you can get a discount on the rig itself, then it could be up to a few months for the machine to come online. It just depends on pricing preference for people because if you’re purchasing further out, you’re going to pay less for the machine.

Clay Finck (27:18):

I’d like to dive more into the numbers. After someone buys a mining rig, what can one expect as far as income and expenses over their first month mining with you since I’m sure projecting further than that might prove to be difficult?

Whit Gibbs (27:32):

Yeah. It’s a great question. When you’re thinking of getting into mining, there are certainly some variable costs and some fixed costs. And your variable costs are mostly taken out of the equation when you work with a company like Compass because we’re bundling all of the operational expenses, like labor, etc, into your all in hosting rate. And then you’re just basically worrying about this fixed cost, which is your all in hosting rate. For most machines, it is about $160 a month. It differs based on a machine’s consumption, based on the model.

Whit Gibbs (28:03):

But generally speaking, your monthly bill is going to be about $160, which is good, because it gives you the ability to start to forecast and plan how much your machine needs to make on a monthly basis to assume profitability.

Clay Finck (28:15):

And then what does the revenue look like? And how much is someone putting down for a miner?

Whit Gibbs (28:21):

So you should definitely look at third party resources when it comes to breaking down all of the financials and how much you’re making on a machine. Right now, profitability for the newer generation machines is about $20 a day, last time that I checked. And then when it comes to how much you’re paying for a machine, right now, the machine prices are dropping because we’ve seen Bitcoins price start to drop. So we’re looking at machines anywhere from 7,500 to $10,000 on the higher side. So you can certainly get into a machine right now at a price that’s going to allow you to see a break even period sometime in the next 12 to 16 months, which is nice.

Clay Finck (28:55):

Okay. So 7,500 to $10,000 put down and then $20 a day in Bitcoin or USD, you get to choose. So $20 you get 30 days, 600 bucks, you’re bringing in, expected say, the first month. That can definitely change with Bitcoin’s price move in the future. And then you’re paying $160 in total costs. Does that change over time? Is that adjusted with energy costs and other things?

Whit Gibbs (29:21):

Yeah. If energy costs adjust, then that number will adjust, but it’s a fairly slight adjustment. One thing I will say that you mention is, payouts are always in Bitcoin. So if you would like to convert to USD, you certainly can, but that’s all done at your discretion using your wallets and your exchange accounts. It’s not something the Compass facilitates for you, that’s certainly something that you can do for yourself. But yes, your energy costs on a monthly basis could fluctuate based on uptime of your machine, maybe there is a power outage of the facility and your machine’s offline for a day or a few hours, that would cause an adjustment in your power bill or the time of a contract renewal if the facility decides to increase the power rates, that of course is going to change that cost as well.

Clay Finck (30:01):

How much can they expect the rig to be running? Should they anticipate any downtime over a month? Or how do you think about that?

Whit Gibbs (30:09):

I always encourage people, we put in our contract that we’ll take best efforts to make sure that machines are up and running 95% of the time or more. Most of our facilities are at 98% or more, but it’s important to always have some calculation accounting for downtime, and 5% is a good number. Most of the time you’re going to be running above that, but sometimes you may be running at that. And it’s good to just have that metric in mind so that you’re able to accurately gauge what the profitability of your machine would be.

Clay Finck (30:36):

Yeah. 5% seems pretty reasonable to me. Now, you mentioned earlier that these mining rigs appreciate and value if Bitcoin’s price is moving up. So how long can someone expect these rigs to last in general?

Whit Gibbs (30:51):

The jury is still out. I think that the current machines that have been released are going to run for 10 years notwithstanding some major development on BitMin side where they put out a machine that kills the profitability of the current generations, but we seem to be reaching this plateau in the improvements machine to machine. So these machines could run much longer. When we look at historically, the S9s which were released in 2016, they’re still running profitably in 2022. And you got to think that these machines, when they were first put online, they were put on in these ratchet facility use that were dusty and dirty and not conducive to proper maintenance over the life of the machines.

Whit Gibbs (31:29):

Whereas now we have these purpose-built data centers that are clean and dust free. So the machines that are coming in now are racked in optimal conditions. So I do think we’re going to see the newer ones run for up to 10 years.

Clay Finck (31:41):

There’s this really interesting dynamic with Bitcoin mining and with technology improvements, these miners are getting more and more efficient, and as you mentioned, they’re likely able to last a lot longer. And when thinking about Bitcoin mining relative to say real estate investing, on the Bitcoin mining side, you have a payback period of 12 to 16 months, and you’re not exactly sure how long you’re miner is going to last, whether it’s five, 10, maybe even more than 10 years. And the returns on that seem very good, assuming Bitcoin’s price at least appreciates over time, which someone that buys a miner would generally expect that because in a way it’s a call option on Bitcoin’s price.

Clay Finck (32:23):

Whereas with a house, you’re putting down $20,000 on $100,000 house, you’re getting maybe a few thousand dollars in profits off rental income on the house. You expect to just earn rents and perpetuity, assuming you keep up the property and do all the maintenance and everything. So it’s an interesting dynamic between the two.

Whit Gibbs (32:43):

It really is. And there’s going to be, much like the housing market, it’s cyclical. So the price goes up with the price of Bitcoin on these ASCI, but it also goes down with the price of Bitcoin. There are times when you’ll be buying ASCIs and you’ll be buying closer to the top of the cycle. Other times you’ll be buying close to the bottom of the cycle. Sometimes you’ll be buying within a range. What it is for us and how it does differ a little bit from real estate is you’re able to combine the mindset and the mentality of acquiring stocks. It’s not just timing the market, it’s time in the market.

Whit Gibbs (33:13):

And fortunately, the sticker price for these is still small enough. It’s not small, but it’s small enough to where you can average down if there’s a market drop. Whereas with the house, if you buy close to the top of the housing market, depending on your financial situation, most people are not able to average down into another house. You’re not able to bring your average cost per home into an equation, but you can do that for ASCI.

Clay Finck (33:36):

And I’m also curious, we’re seeing a massive ride as an asset prices in general over the last decade or so. So that leads to lower returns in asset classes such as stocks and real estate. Do you think that’s led to, or will lead to just a massive flow into something like Bitcoin mining because of the much higher potential returns?

Whit Gibbs (33:58):

I do. We saw it already. Once the money printer started to really go nuts earlier, well, in 2021, we saw a flood of new customers who were looking to get out of their dollars and get into something new that could provide depreciating asset in Bitcoin for them. I think we’ll see it more and more, whether it’s getting into Bitcoin proper or into Bitcoin mining, we’re going to see more people come into this space, especially now that they’re understanding. And really this is, I think, we saw more people start to grasp what inflation was over the last 12 months than ever had before. And that just then highlighted the importance of this sound money in Bitcoin. So the market overall has benefited.

Clay Finck (34:35):

Could you talk a little bit about the hash rate for our audience? What an impact does hash rate have on profitability? And maybe for those not familiar, talk about what the Bitcoin hash rate actually is.

Whit Gibbs (34:49):

I will bring up the Clark Moody dashboard to check total network hash rate. When you are thinking of what hash rate is, hash rate is the total amount of compute on Bitcoin’s network. It’s generated on an individual level by these ASCIs, the computers that we talked about earlier, and then together, they make up the total network hash rate. Now, that network hash rate, it signifies a couple of things. One it’s the total resilience of Bitcoin’s network. It is the amount of contributors that are on the network supplying this compute. It is also this beacon to say, “If you wanted to attack Bitcoin, this is what you would have to overcome or surpass, at least 51% of it in order to cause a meaningful change.”

Whit Gibbs (35:35):

The total network hash rate right now, we are looking at, let’s see here, we’re at 189 Equihash. So it’s still below what our all-time high was of last year, but I think we are pushing up to 200 quite quickly. The other thing that hash rate signifies is that the more people that are on the network supporting Bitcoin, it’s more people, more ASCIs that are competing to win these block rewards. So it makes winning these block rewards more difficult, which is why also you have a difficulty metric that we track when it comes to Bitcoin. And that difficulty metric goes up and down every epoch. Now, an epoch is 2016 blocks for each epoch, which generally speaking is about two weeks.

Whit Gibbs (36:22):

So more a little bit less depending on block times, but I know that’s a lot of information that I’ve just thrown out there, but that’s how all miners are looking at total resiliency of the network, total difficulty to mine, how that would impact profitability.

Clay Finck (36:38):

Currently there’s 6.25 Bitcoin being mined every 10 minutes. And in general, the hash rate has gone up over time as more miners come online. And since the protocol doesn’t allow for more than 6.25 Bitcoin being mined, that’s where the difficulty adjustment comes in. So thinking about this dynamic of mining revenue, as hash rate increases, your revenue and Bitcoin terms will decrease, all else equal, but we’ve also seen Bitcoin’s price go up in general over time as well. So although the amount of Bitcoin you’re mining is going down, the USD value that you’re actually receiving is going up. Am I articulating that correctly?

Whit Gibbs (37:21):

That is correct. Yes. So when you’re looking at, your Bitcoin rewards are dropping, but the value per Bitcoin is increasing because now you’re running into the laws of supply and demand. There’s just less supply, which when you have increasing demand leads to price appreciation, which is what we have seen year over year for Bitcoin, which is why it’s the best or if not, one of the best asset classes over the course of the last 10 years.

Clay Finck (37:46):

I posted on Twitter that I was considering purchasing a mining rig myself, and I stated that the payback period was around 12 months. And I got some replies saying that it just seemed too good to be true. Outside of the Bitcoin going against you, what are some of the other risks with mining if any?

Whit Gibbs (38:04):

Yeah. The Bitcoin price going against you is certainly one, massive increases in hash rate and thereby difficulty is also another that impacts your profitability. And then also, it’s just good capital management. When are you getting into the market? Are you averaging down when the price drops? If I buy a high this month, the next month’s Bitcoin price drops, if I’m a responsible operator, I’m looking to scale into those cheaper machines. So there are quite a few factors that play into it, really effective capital management, hash rate and difficulty and Bitcoin’s price, those are the things that are going to long term, either guarantee your success or impede your ability to mine profitably.

Clay Finck (38:41):

I’d like to talk a little bit more about some of the things that Compass offers. Could you talk about the financing option that Compass has? I find that very fascinating where I don’t have to sell any of my assets, and if I wanted to purchase a miner, I could just get on your website and just finance my purchase of a miner and not have to put the full cost down up front. So could you talk a little bit about that for the audience?

Whit Gibbs (39:03):

Absolutely. When it comes to big ticket items in life, generally, there’s a financing option. And for institutional miners, there’s financing, but for retail, there just wasn’t. And we set out a year ago to find a way that we could provide some kind of financing, even if it was at a smaller scale to people who wanted to get involved in mining, because our mission is to democratize hash rate and allow everyone to buy Bitcoin, and not everyone can afford eight, nine, $10,000 per machine. So what we’ve done is we’ve launched a program where people can put down 25% and then they can pay the rest of the machine off over period of three, six, nine or 12 months.

Whit Gibbs (39:38):

And the options are all laid out based on what is available for sales through the site. And we run these in very limited batches so that people don’t overextend. We don’t want people to come in and like, “Okay, I was going to buy one machine at 10,000, but now I want to buy five machines.” We want people to be able to get in responsibly, but we run these in all tranches so that we don’t yet over extend people who are trying to capitalize on a roaring bull market.

Clay Finck (40:03):

Yeah. That makes sense. There can be a lot of fear and greed in the Bitcoin market with how much faster things move. How about the insurance product that Compass offers? Tell us a little bit about that.

Whit Gibbs (40:14):

We haven’t officially launched it yet, but soon we will be offering an insurance product to customers so that they’ll be able to insure their machines directly through Compass. Again, it’s just one of these products, it’s not really available for retail, it’s always been available to larger customers, people who are looking to insure over a million and under 500 million in hardware, but it hasn’t existed for the person who wants to insure one machine because the underwriting and the paperwork is fairly complicated. But with Compass, we obviously have all the information that we need to write that policy from the get-go.

Clay Finck (40:45):

Got you. And I had one more question related to the financing. What are the financing costs? Is there an interest rate or how does that work?

Whit Gibbs (40:53):

Yeah. Technically, we charge a program fee and not interest. So you don’t have to apply and be approved, it’s effectively available to anyone who wants to do it. And then we just charge a program fee for us carrying that costs on our balance sheet for a certain amount of time. And generally, it is between six and 10%, just depending on the length of the term.

Clay Finck (41:17):

Before we wrap up the episode, you mentioned that Compass also provides education around this space. Could you talk about what you’re providing on that front?

Whit Gibbs (41:25):

Clay, this is actually one of the most exciting things for me personally. Selfishly, I love people and I love creating content, I love having conversations like this, and Compass started as a podcast. So our goal has always been to gather and disseminate as much great, actionable information as we can. And Will Foxley who heads our content and multimedia division has just been awesome at providing video footage, written content, audio content that can positively impact the mining space, whether it’s evergreen pieces to help people understand what is Bitcoin mining or it’s more detailed pieces like the video that was shared widely on the Navajo Indian tribe mining Bitcoin.

Whit Gibbs (42:08):

Those are all resources that we put out to just help people understand that there’s this big world of Bitcoin mining and a lot of intricacies and nuances to it, but if you take the time to really understand it, it can be a massive revenue driver for you, for your business, for your family.

Clay Finck (42:23):

It’s great that you guys provide that education because not a lot of people are super familiar with Bitcoin, let alone Bitcoin mining. So it’s this new emerging technology and there’s a lot to learn, and I just find it all so fascinating. So Whit, thank you so much for coming on to the Millennial Investing Podcast. I learned a lot chatting with you and I’ll definitely be looking into potentially getting into the Bitcoin mining space myself. Before we close out the episode, where can the audience go to connect with you?

Whit Gibbs (42:52):

First and foremost, Clay, thank you for having me on. It’s been awesome getting to chat with you, and we do have to get you mining. For anyone who wants to find me, I’m pretty easy to find on Twitter @Bitcoinbroski. And you can also find out about Compass, get involved with mining at compassmining.io. Just go to the website, everything is very straightforward. If you need any help whatsoever, click on one of the links to contact us and a member of our team will reach out and get you squared away.

Clay Finck (43:19):

Awesome. Thank you so much, Whit.

Whit Gibbs (43:21):

Thanks, Clay.

Clay Finck (43:23):

All right, everybody. I hope you enjoyed today’s episode. Please go ahead and follow us on your favorite podcast app so you can get these episodes delivered automatically. And if you haven’t already done so, be sure to check out our website, theinvestorspodcast.com. There you’ll find all of our episodes, some educational resources we have, as well as some tools you can use as an investor. And with that, we’ll see you again next time.

Outro (43:46):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin, and every Saturday, we study billionaires and the financial markets. To access our show notes, transcripts or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.