“Eliminating Bitcoin’s exposure to the whims of the CCP is obviously a good thing. Broadening the geographic footprint is obviously a good thing. I don’t want 70% of Bitcoin’s hash power to be in any single jurisdiction.”
Nic Carter is General Partner at Castle Island Ventures, a public blockchain-focused venture fund based in Cambridge, Mass. He is also the co-founder of Coin Metrics, a blockchain analytics startup.
Today, Bitcoin consumes as much energy as a small country. This certainly sounds alarming — but the reality is way more complicated. Nic Carter joins us today to discuss several common misconceptions surrounding the Bitcoin sustainability debate, and ultimately argues that it’s up to the crypto community to acknowledge and address environmental concerns, work in good faith to reduce Bitcoin’s carbon footprint, and ultimately demonstrate that the societal value that Bitcoin provides is worth the resources needed to sustain it.
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SPEAKER
Nic Carter
General Partner
Castle Island Ventures
MODERATOR
Anthony Scaramucci
Founder & Managing Partner
SkyBridge
TIMESTAMPS
0:00 - Intro
2:40 - China’s Bitcoin and tech crackdowns
8:13 - Bitcoin mining and capital inflow disruptions from China
29:48 - Bitcoin energy consumption
37:27 - Bitcoin, El Salvador and the lightning network
43:29 - Bitcoin ETF approval timeline
49:03 - Using on-chain metrics
52:50 - Crypto venture investments
TRANSCRIPT
John Darsie: (00:07)
Hello, everyone and welcome back to SALT Talks. My name is John Darsie, I'm the managing director of SALT, which is a global thought leadership forum and networking platform at the intersection of finance, technology and public policy. SALT Talks are a digital interview series that we started in 2020 with leading investors, creators and thinkers. And our goal on these talks is the same as our goal at our SALT Conferences, which we're excited to resume in September of 2021 here in our home city of New York, and we hope you can make it.
John Darsie: (00:39)
But that's to provide a window into the mind of subject matter experts, as well as provide a platform for what we think are big ideas that are shaping the future. And if you've been watching SALT Talks over the past 18 months since we started the series, you know that the crypto or digital asset space is an area that we're keenly interested in. And I've had a lot of the top minds in the space here on the SALT Talks series and we're happy to take another one off the list here with the great Nic Carter.
John Darsie: (01:05)
Nic is a general partner at Castle Island Ventures, a Cambridge Massachusetts-based venture firm investing in startups in the public blockchain industry. And he's also the co-founder of Coin Metrics, which is a great blockchain analytics firm. Previously he served as a crypto asset analyst at Fidelity Investments. He holds a master's in finance from the University of Edinburgh and a bachelor's in philosophy from the University of St. Andrews.
John Darsie: (01:29)
As somebody with a Scottish heritage, I very much appreciate your academic background, Nic. But hosting today's talk is Brett Messing, who is the president and chief operating officer here at SkyBridge Capital, which is a global alternative investment firm with significant exposure, I might add, to Bitcoin and potentially other investments in the crypto, digital asset space coming down the pike. But with that, I'll turn it over to Brett for the interview.
Brett Messing: (01:56)
Thank you, John. Nic, it's great to have you here. I'm a big fan of your stuff. I think you've done a real service to the Bitcoin community, particularly in addressing concerns around the energy issue. I do want to timestamp this because it's June 22nd and eight days ago, I returned from a silent meditation retreat actually with Russ Stephens of [Night EG 00:02:20], and I came back to find Bitcoin at 41,000.
Brett Messing: (02:25)
And today it traded as low as 28,600, although it's higher. And there's a lot of China news, and so I think we should start there. Fortunately, this isn't a family show, so Nic, what the fuck's going on in China?
Nic Carter: (02:42)
I think we're all wondering that right now. I would say there's like several different intertwined threads in China right now. One is the hash rate transition, that's an entire topic. It's something I've spent a huge amount of time trying to understand, talking to Chinese miners that are relocating. That's one thing that's certainly affecting the price in a couple of ways we can get into.
Nic Carter: (03:05)
The second is this continued crackdown on the ability of regular Chinese folks to get exposure to crypto, and those channels are being constricted and closed off. That's related, I would say to the mining activity, but that's a distinct phenomenon. So those are two really dramatic moves happening at the same time in China, happy to start with either, but yeah. China is basically the most important nexus to the market right now.
Brett Messing: (03:38)
I want to hit both. Before we do, I want to put it in a broader context or I want to get your reaction to something. It seems to me that people in Bitcoin, probably myself included think that everyone is solely focused on Bitcoin, and that China is out to get the Bitcoin, so the politburo is getting together and all they're talking about is Bitcoin. It seems to me what's going on is a broader attack on tech and fintech.
Brett Messing: (04:06)
So we can go back to the Alibaba IPO getting pulled, which was, if someone who worked at Goldman and equity capital markets, a remarkable event, 48 hours before pricing. And by the way, I would point out that Alibaba is not as big as Bitcoin market cap-wise, but is not that far away. And if it had gone public and traded up, it probably would be about the same size as the market cap of Bitcoin is presently.
Brett Messing: (04:33)
We haven't seen Jack Ma, the CEO TikTok is forced to step down. There was another tech billionaire that I guess had his wrist slapped last week. I don't remember the guy's name. So this feels like a part of that mosaic and not a Bitcoin attack. I guess, I like your reaction to that, and then we'll jump into the miner discussion.
Nic Carter: (04:58)
China is the worst place in the world to be a tech billionaire. It's a very perilous occupation to be a tech founder in China. It seems that given the local appreciation or lack thereof for property rights, there's a cap on how large you can take a tech company until you start to get harassed by the government or it gets forcibly broken up or nationalized in a certain way. And so it's just a tough place to be a tech founder.
Nic Carter: (05:29)
I think you're absolutely right to draw connection between the crackdowns on Bitcoin exchange in mining and Alipay. It seems to me that ultimately a big part of the motivation for this is the creation of the DCEP, China's digital currency network effectively, which would basically seize power over the transactional financial sector from the private sector, from these intermediaries like Alipay and WeChat and consolidate that power with the state.
Nic Carter: (06:07)
And so it's not that surprise to me to see the pendulum swing back in the other direction towards centralized system like the DCEP, especially as these private sector entities had gained so much traction and were intermediating such a large share of the payment space. So that crack down on Alipay makes sense in that context. We're seeing the CCP is heavily investing in the DCEP. They're rolling out ATMs to connect physical cash to the digital cash product.
Nic Carter: (06:43)
And we can certainly talk about the interplay with Bitcoin there. But yeah, I think you're right, this is definitely part of a broader trend to reconsolidate power.
Brett Messing: (06:55)
Let's talk about the mining. About, I guess it's a month ago or so, the central party said, "No Bitcoin mining." There've been a bunch of Bitcoin mining bans for those of us that are relatively new compared to you and no one was sure what it meant. And we saw a bunch of miners leave the coal regions. I think it was a reaction, okay, okay, well, this has to do with clean air. This past weekend, we've seen a province where it's all hydro and we've seen massive shutdown.
Brett Messing: (07:28)
It's real, it's not just a proclamation. I'd also add, and maybe you can speak to this, I've tracked the prices of mining equipment. And a month ago, I would say they were soft. Now obviously the price of Bitcoin is down a lot, but the price of the mining gear, well, not yet at what I would characterize distress levels is down a lot. What does it all mean? I'm going to give you a couple of different vectors to go at it.
Brett Messing: (07:58)
One is for Bitcoin security. Is there anything to worry about? The environmental issues, which are no front and center. Why don't we just start with those two?
Nic Carter: (08:14)
Security and climate. The Chinese miner situation is the most dramatic hash power shift since industrial mining has existed in 2013. And so I think it's really worth understanding why so much mining capacity ended up located in China in the first place. China is the world's capital of basically stranded energy, so energy that cannot be brought to market for whatever reason. This is because typically because the transmission line losses, so energy doesn't travel well.
Nic Carter: (08:47)
So if you're generating a lot of cheap energy in one place and you want to transport 1,000 miles to population center where it'd be consumed, you're going to experience significant losses, it's not going to be worth it to do that. And so in 2016, China was curtailing on the order of a hundred terawatt hours of solar, wind and hydro energy. And effectively that's the perfect energy source to mine Bitcoin, because Bitcoin doesn't care where it's mined.
Nic Carter: (09:14)
And so because China had massively overbuilt their hydro, wind, solar resources, and they also had very abundant coal resources in the Northern provinces, that's why Bitcoin mining ended up dramatically located in China. And that's why China had this 70% market share of mining for the longest time. So that was good and bad. Good, because two of those big provinces where Bitcoin is mined were Sichuan and Yunnan, which are 90% hydro.
Nic Carter: (09:42)
But then the other two provinces where Bitcoin is significantly mined in China are Inner Mongolia and Xinjiang. And those are 60, 70% coal with the remainder being wind and solar. And so what happened was the Bitcoin miners would kind of seesaw from the Northern, mostly coal-powered provinces in the dry season to the Southern hydro-powered provinces in the wet season. Right now it's the wet season, so mining would typically be occurring in Sichuan and Yunnan for the most part.
Nic Carter: (10:14)
But what actually happened and was interesting is that trying to build out over the last decade, this high voltage transmission grid to basically turn their very fragmented multiple energy grids into more unified whole to bring this curtailed energy to market in the population centers on the south of China and the east coast of China, which is where the big energy load is.
Nic Carter: (10:40)
And so that's important context to understand something that might well be motivating this crackdown on mining is not simply this desire to marginalize Bitcoin and stem capital outflows and to promote their own digital currency, but also the very pedestrian fact that their grid is just working better and there's less stranded energy from minus to exploit. And so that's something that hasn't been covered as much in the discourse is just changing industrial policy in China affecting their tolerance for miners drawing on these stranded energy assets.
Nic Carter: (11:22)
So from a climate perspective, it's really going to depend where that hash rate ends up going. And we're talking about 50 to 60% of Bitcoin's network cash, something on the order of probably-
Brett Messing: (11:33)
Let me just interject, Nic. So do you think that all of it leaves or is there a black market mining? So a year out or so, let's assume it's 50 to 60 it's gone on the hash rate or computing power is in China, where do you think we're headed?
Nic Carter: (11:52)
I think all of the industrial mining, the large scale, 100 megawatt plus mining firms leave China. They're very easy to triangulate and locate. And the crackdowns we've seen, the first province to go is Inner Mongolia, they really cracked down on the province level with raids. They were able to effectively identify all of the major players. So I think you will see small scale operations, for sure.
Nic Carter: (12:16)
It's easy to run an ASIC or two with cheap power, but I believe that all the industrial mining capacity based on the signals we're getting from China right now, and based on what I'm hearing from miners on the ground will leave China within six months.
Brett Messing: (12:30)
Got it.
Nic Carter: (12:33)
I don't know when this is going to air, but in Sichuan, it looks like there's effectively a one month deadline from this week for miners to shutter their operations. So it's likely that we're going to see the Bitcoin hash rate declined by another 20, 30% because that's where most miners should be operational right now.
Brett Messing: (12:51)
And so where would you think it would go? I guess if you put your self in the shoes of a miner, where would you want to go?
Nic Carter: (13:01)
If I were a miner, I would have a renewed respect for political stability and the protection and respect of my property rights, and getting away from capriciousness on the part of the energy authorities. So it's no surprise that the number one destination for miners is to go to USA, where we have the second most capacious grid in the world. It's a federal system, so the states have different policies, some are favorable, some are less favorable.
Nic Carter: (13:29)
And indeed, we're seeing Greg Abbott, the governor of Texas pitched Bitmain clients at a conference in Chengdu last week saying, "Yeah, come to Texas, we have the capacity." And it's true, Texas actually does have the capacity to absorb the share of Bitcoin miners that are leaving the network. Their grid instability issues are an ancillary issue, but they do generally speaking, not at peak times, but most of the time Texas does have the capacity to absorb this. So the USA would be my first choice.
Nic Carter: (14:00)
There's not a ton of actual hosting capacity available in the U.S. right now, that's going to take six to nine months to build. So there might actually be this furlough period, where miners are just looking for a home. They're actually not able to onshore their hash rate. Leaving the U.S. aside, the other big destinations would be Russia and Kazakhstan and other parts of central Asia. Those are the less regulated, so you can bring an operation to bear more quickly.
Nic Carter: (14:28)
They have relatively cheap power. Unfortunately, in Kazakhstan, it's mostly coal. In Russia, you do have other renewables, you've got hydro. Those are some of the destinations I've heard kicked around. I've also heard Southeast Asia kicked around as a possible destination, but the truth is we're just not going to know for a while. And there's going to be a period of uncertainty and probably depressed hash rate as miners desperate look to actually find places to house their machines.
Brett Messing: (14:54)
So do you think Bitcoin will end up being mining will be greener or less green just again, based on the incentives and available places to go for miners?
Nic Carter: (15:09)
It's a good question. The Chinese story was complex because you had half of the year mining at an extremely low carbon intensity, effectively, zero with waste water running out of these dams that were already built. So there was no additional contribution to emissions by mining with that water that was going to run through the river, run through the dam anyway. And then the other half of the year, you're mining with coal from Xinjiang and Inner Mongolia.
Nic Carter: (15:37)
And so, your emissions factor, your carbon intensity is fluctuating dramatically based on the season. And so, you're still getting... Because coal is by far the dirtiest form of thermal energy, you're getting a relatively high emissions factor. If you on short all that hash rate to the U.S. the us grid has deemphasized coal in the last decade and it's much more natural gas-focused, and depending on the state, you have plenty of renewables too.
Nic Carter: (16:03)
That would probably be better overall for Bitcoin's emissions factor. If you were able to identify other hydro or renewable sources in Northern Europe and Russia, it is going to improve the carbon outlay of the Bitcoin system. If however, all of these miners just end up being mined with coal in Kazakhstan, it's going to be no better and possibly worse. So it's going to be a matter of actually monitoring where these machines are going, seeing if the pools are willing or the miners themselves are willing to contribute data regarding their energy mix.
Nic Carter: (16:36)
And that's something that I'm definitely optimistic about because miners have begun to understand that it's totally worth it to provide disclosure around this stuff, because if you don't disclose, then people just assume the worst. And so miners have begun to do this calculus where they realize, oh, if we do have 50% renewables as part of our energy mix, we should actually tell people about that.
Nic Carter: (16:58)
Hopefully this historically very opaque mining space becomes more transparent in the next year, much more, US-Based, I'm sure we're going to see that regardless. Hopefully more actually publicly traded companies and then they'll be doing disclosure anyway. So I'm very optimistic about the informational environment around Bitcoin mining, but I can't actually guarantee that it will become greener, especially because China is unnecessarily shutting down mining in the hydro-rich provinces, which seems pretty excessive.
Brett Messing: (17:29)
Nic, what's approximately the total revenues for the mining industry just globally broadly in a year?
Nic Carter: (17:38)
Current prices would be around $20 billion from Bitcoin.
Brett Messing: (17:42)
Okay. So we have a $10 billion business, call it approximately half of it quasi up for grabs. We're not completely right. Do you see any large us companies looking at this opportunity? And is it a natural fit for someone like Microsoft, Verizon, General Electric, Honeywell, Tesla, where they have existing infrastructure that they could probably get this going relatively quickly?
Nic Carter: (18:16)
The first one I would identify would be Tesla SolarCity, because it's totally viable to mine with a combo of wind and solar in conjunction with maybe a battery backstop or maybe a grid backstop. And that's going to give you a current levelized cost of energy. That's going to give you energy at three, four cents a kilowatt hour. You're going to be profitable at that rate. And I could totally see them creating a consumer product around that, around hosted mining that people could buy into.
Nic Carter: (18:44)
So any large solar producer distributor that also maybe has access to some wind assets. Solar alone doesn't work because it has a low capacity factor. If you pair it with wind, you get an uncorrelated distribution profile in terms of one of the energy is being created. So that portfolio of assets tends to work. And there are parts of the U.S. where solar and wind together work well, Northern Texas, for instance.
Nic Carter: (19:10)
That would be one obvious case. A lot of people have pointed this out to Elon, you can actually do something about the climate impact of Bitcoin if you rolled out a product like that. Other publicly traded companies that have some relevance to mining would be data centers. Amazon, Google operate huge data centers. When they have downtime with their GPUs, they could easily mine Ethereum, which is GPU-minable.
Nic Carter: (19:35)
My suspicion is that they may actually already be doing this. So at times of low load on those GPUs, they can turn that economically inner resource into something that is economically generative. That's not a Bitcoin story, that's more GPU-minable assets. But I think there will always be things like that, whether it's Ethereum or Filecoin or Chia. You could also use hardware to mine those. That's one very addressable thing.
Nic Carter: (20:06)
Lastly, the oil majors. These oil companies that have enormous gas or oil extraction wells, where they're producing significant quantities of natural gas, which they're flaring off in many cases because it's not economical to bring that gas to market. This enormous segment out there now, I call it pipe to crypto. Effectively, flared gas mining, you get a shipping container full of Bitcoin ASICs. You pair it with a generator that takes natural gas inputs, and you can effectively monetize the stranded resource, which you'd otherwise be flaring off.
Nic Carter: (20:43)
And that's completely not neutral from a climate perspective. So I've been paying attention to the earnings of the oil companies, expecting them to say, "Yeah, we're experimenting with flared gas mining," as a way to monetize this resource that they're otherwise wasting. So far, they haven't said anything about it. I'm actually pretty surprised that they haven't.
Brett Messing: (21:03)
I'm going to put on my Bitcoin PR hat and say, I'd be fine if they don't. Okay.
Nic Carter: (21:08)
I can see the headlines, [crosstalk 00:21:11] versus Bitcoin, that's right.
Brett Messing: (21:12)
I'm not sure that would be particularly helpful. This weekend, as I was watching this event on Twitter. There was video of mining equipment being unplugged as this... The beginning of this implementation, I wasn't aware until you said that there's a 30-day cutoff for all this mining to come out of this hydro-rich region. I was incredibly bullish and I think it's going to be the biggest event of the year. I guess we're going to kill the attack vector, China controls Bitcoin.
Brett Messing: (21:49)
I have to say, and I imagine others, I don't think I've... And I had my brain around that. I don't really understand what came out yesterday, which is the closing off of the on-ramps, how that relates to what happened previously and what that really... Are we going to see Chinese citizens unable to buy? Are we going to see for selling? I know it's early, we're 24 hours after they convened a meeting, but I'd love your perspective on the sort of the second leg, which did because this drop below 30,000, even though we've recovered since then.
Nic Carter: (22:29)
I think your analysis of the mining situation is spot on, eliminating Bitcoin's exposure to the whims of the Chinese Communist Party is obviously a good thing. Just broadening our geographic footprint, regardless of which country it's disproportionately based in is obviously a good thing. I don't want 70% of Bitcoin's hash fire to be in any single jurisdiction. And so, whether that threat was real or imagined, it's something that we can effectively mitigate.
Nic Carter: (23:00)
And so this seems like a stroke of luck that the CCP or the China would really crack down harshly on Chinese mining on its borders, forcing it abroad, forcing it to become more dispersed into a bunch of different geographies. Regarding the second leg down, I do think that's one of the more critical features of this, because we know there's a Chinese retail bed in these markets. That's where a significant portion of the capital comes from.
Nic Carter: (23:26)
And if you choke off that access, you're going to eliminate a significant inflow into the markets. That's not just through the exchanges, will be an Okcoin, the mainland on-shore exchanges. That's also through RMB to other OTC desks that are more informal, and it appears that China is also targeting those. And so there's a few sources through which capital can flow out of China into crypto, thus making it mobile and allowing people to ultimately invade those capital controls.
Nic Carter: (24:01)
It looks like China is taking an incredibly aggressive stance towards that now. From what we've seen, and it's still unclear what's happening, they seem to really be trying to choke that off. What I'm looking to is, are the executives, Okcoin and Huobi going to continue to be harassed by the government? We know that they've been detained in the past 12 months for a month or two at a time, and actually the market has sold off when those events occurred. Because people figured that there was a risk that those exchanges would be nationalized or the holders would be expropriated in some way.
Nic Carter: (24:40)
And so that's what I'm looking to, do those exchanges, which have existed under the watchful eye of the CCP and been tolerated by them, will they continue to be allowed to operate? But my guess is that there'll be some additional regulation or some additional attempt to control the funds in and out because the Chinese government has rightly realized, correctly realized that the crypto markets are means to offshore wealth from the country.
Nic Carter: (25:12)
And so it's just one of those ways that their capital account was being drained and looks like they were finally taking it seriously. It's a threat.
Brett Messing: (25:25)
Historically, when you ban things, it doesn't work; prohibition, drugs, but China's different. It's essentially an autocracy. So what I hear you saying is, this is a real negative, that we're going to... Because I do want to touch upon just the demand, supply dynamics in the marketplace. What I hear you saying is that we lost Grayscale as a buyer in January when the Grayscale Bitcoin Trust traded at a discount, which has persisted. That we may be looking at another source of buying that will disappear. Is that right? And can you quantify that?
Nic Carter: (26:12)
Yeah, correct. That would be the conclusion I would draw is that there's another inflow, which is being effectively cut off. And I would look at for instance, Tether creation, which is... We know Tether is a very popular instrument in those Asian markets as a bridge currency, basically to get access to crypto in general. And a lot of those mainland trades are brokered against Tether directly. And so if you see that rate of creation slowing down, that implies a waning appetite or a loss to the ability to get access to crypto.
Nic Carter: (26:52)
But I'd also look at the reserves being held by Okcoin and Huobi, which there's a bunch of Chainalysis companies that have triangulated those. I haven't looked this time, but during those previous events when the executives who were being detained, you could see there's an immediate outflow from those reserves as depositers of those exchanges started to fear that the exchanges would be closed up and it would be impossible to redeem their funds. So those would be kind of the two key indicators I'd be looking at.
Brett Messing: (27:27)
Right. I want to touch on the energy debate, which I think has contributed to Bitcoin's decline from higher prices firing the Coinbase IPO as there's been this heightened ESG focus, which is just a real thing in the U.S. And I think it has resulted in some institutional investors pressing pause and you've been out front and I think done a really fantastic job in making a case. I do want to raise an issue that I have a coral with broadly with the Bitcoin community and get your reaction to about the arguments that I think are being made.
Brett Messing: (28:09)
Firstly, I'm not particularly sympathetic to the, it's my energy, I can use it however I want. Because you buy land, we restrict where you can build, you buy booze, you can't give it to kids, you can't drive with it, so we restrict the uses of private property. While I have a libertarian bend, that argument, doesn't resonate with me. I hear two conflicting arguments on the energy issue. I hear on the one hand... Well, it's not that much. It's the amount of energy used for Christmas trees, it's the amount of energy for blow dryers, it's the amount of energy for YouTube.
Brett Messing: (28:50)
I don't know if any of those stats are correct, but you do hear other framing of energy use, the idea being, I saw a stat recently, it's only one or 2% of waste energy in the U.S. Again, trying to make it seem like it's not that big a number. But then on the other hand, we have this research piece by Square and Arc that says that Bitcoin is going to really facilitate renewables in the United States and globally.
Brett Messing: (29:23)
And those two arguments seem inconsistent because if it's small, how can it matter in furthering renewable energy. And by the way, it may just be, the answer is different people making different arguments. And one of the best things about Bitcoin is we're all not sitting in a room. But I'd like your reaction to that just generally.
Nic Carter: (29:49)
It's interesting because when I've written about Bitcoin energy, a lot of Bitcoiners will ask me to not apologize for it and to be defined and say, "It's our energy we can do with it what we want. It's a function of the grid and individual consumers of that grid energy should never be apologetic for using it, something that's been duly paid for." But I do think it's important to try and think about how Bitcoin could be rendered more carbon neutral over time. That's been a focus of my research over the last few months.
Nic Carter: (30:25)
I would agree probably that Bitcoin is not sufficiently material as a buyer of energy to really move the needle from an environmental perspective. I think that transition is just going to happen anyway from towards more renewable source of generation. The state is much more important in terms of doling out subsidies and the private sector through R&D, just through the general functioning of the economy, which is now prioritizing more renewable energy sources.
Nic Carter: (30:59)
If Bitcoin is this $20 billion per year pressure to find cheap energy, that's actually pretty small in comparison to the amount that's expended in the regular old energy sector. So I don't think it's really large enough to move the needle from a renewable perspective. I do think that just as time goes on and this might be a bit of a longer-term trend, the cheapest forms of generation will be renewable.
Nic Carter: (31:27)
And so that's kind of a secular trend if you look at any of the lasered levelized cost of energy studies, you see the utility scale, solar is now getting down to three cents per kilowatt hour and offshore wind is getting down to kind of sub five cents per kilowatt hour. Because we still have all this technological innovation be found there and these efficiencies to be found, I do expect the renewables will just simply be cheaper and better than thermal energy, where we've squeezed all the pips out of the lemon as far as coal or natural gas is concerned, and we're not going to get any cheaper in terms of coal-powered energy.
Nic Carter: (32:05)
So I believe that that grid transition is going to occur. I'm also pro nuclear, but there seems to be less political support for that in this country, unfortunately. But yeah, it's certainly a challenge. I think Bitcoin miners can abate it in a couple ways, so they can... And they're also being incentivized too, capital markets in this country are increasingly politicized. It does tend to matter. You do increasingly need to take broader stakeholders into account, not just shareholders.
Nic Carter: (32:36)
And so Bitcoin miners have started to realize this, that they have an obligation that goes far beyond just their mere shareholders. And so what I've seen from especially US-based Bitcoin miners is a pursuit of renewable energy sources, grids that are disproportionately renewable, even a purchase of renewable energy credits or offsets. I'm seeing that from a few different miners and hosts. And then just an effort to be more transparent about the type of energy being employed. So it's all pretty optimistic.
Nic Carter: (33:13)
And then the other good trend is that we're just going to see more hash rate onshore into the U.S. anyway, and be more exposed to U.S. capital markets and the demands that capital tends to carry these days. So more hash rate in the U.S. I think is just generally better for Bitcoin's ecology.
Brett Messing: (33:33)
Well, I'm not going to break news on this podcast, we have about $600 million in Bitcoin and we are looking very hard at purchasing credits. Because we think the ESG issue is a real issue and you take the world as it is not as you want it to be. And this is something that Bitcoin will be, in my judgment better off by taking seriously, as I think. Look, people don't like Elon Musk, Elon Musk will have done Bitcoin of service. He has focused people's attention, those of us in the community on this in a way that we would not have been.
Brett Messing: (34:08)
Eventually we would have ended up the same place, but I think he's going to accelerate. I'm certainly not applauding his tactics. He's been inelegant in how he's conducted himself, but if it has a good outcome, I'm fine with it.
Brett Messing: (34:23)
I want to touch on something else. You hear a lot about, well, Bitcoin can be used to balance the grid. And I want to press on that because it seems to me that if I buy a mining rig and I'm only going to use it part-time, how can that make sense when there's someone else who's going to buy a mining rig and find an energy source where they can use it 24/7/365. That argument feels to me like it sounds nice and it's sort of like get off our backs about the energy issue. It doesn't feel like a real solution. If I'm wrong, tell me how.
Nic Carter: (35:11)
Maybe there's just a little more subtlety I can inject there. It depends on the grid [crosstalk 00:35:17]
Brett Messing: (35:17)
That was a real polite way to saying, "Brett, you don't get it," which is fine, which is why I'm so happy to have you here.
Nic Carter: (35:23)
It depends basically on the nature of the grid. I agree, you definitely want to run your ASIC at 90% plus op time because you're depreciating it over, let's say three years and you don't want to have a significant period of time where it's economically not being employed for sure. Certain grids have these power-rich purchase programs, where at times of peak load, they basically pay big consumers of energy to stop consuming energy.
Nic Carter: (35:54)
The good thing about miners is that you can turn them off at short notice, which is very much unlike other industrial consumers of energy, let's say an aluminum smelter where you can't just turn it off at the drop of a hat. And so in the Texas grid, ERCOT, for instance, that's exactly what's in place. Most miners there will be active on these repurchase programs.
Nic Carter: (36:17)
And so during the time when the miners are idle at peak times where the grid is trying to direct power to households so that they can run their air conditioning at 6:00 PM on a hot summer's day or something like that. Those miners' actually still economically viable, it's just that they're being paid to turn off. And miners are particularly suitable for that because they can spin up and down so quickly.
Nic Carter: (36:43)
So I would say, in the case of formal repurchase programs existing, the grid stabilization claim does actually make sense to me. But that's not the case for all grids, that has just definitely be in place like an agreement like that.
Brett Messing: (36:59)
I was going to say, I think that's a pretty relative if you looked across the United States. There aren't that many places where the dynamic you described is in operation. Would you agree with that?
Nic Carter: (37:11)
This is where I'm reaching the limits of my expertise in terms of energy politics in this country.
Brett Messing: (37:14)
Okay, I get it. No, you've done great. Let's touch on El Salvador and I'll let John ask you a few questions, so we don't keep you. So big deal, little deal, no deal?
Nic Carter: (37:27)
I would say big deal because for the first time, this is an instance where we can call Bitcoin legal tender, currency and money. So a lot of economists always reject me or other Bitcoiners calling Bitcoin currency or money. They say, "Well, it has to be generally accepted as a medium of exchange in a specific jurisdiction." This Salvadorian law does that. And so while it is a small country, small GDP, not very important on the world stage, this is just crossing the Rubicon.
Nic Carter: (38:04)
Not to overstate the point, I would say it's as significant in Bitcoin's history is the time when Bitcoin initially monetized from being worth $0 to being worth 0.00, whatever dollars when that pizza transaction occurred. This is incredibly significant in my view because it's being institutionalized as a currency in at least one jurisdiction. To me, that's really huge.
Brett Messing: (38:31)
Were you surprised that they didn't buy any Bitcoin for the reserves?
Nic Carter: (38:36)
Honestly, that's how I thought that the first sovereign level actor would engage with Bitcoin. And I thought that we would see it from the Singapore Sovereign Wealth Fund or the Norwegian one, first, I thought it would be really technocratic, forward thinking, relatively affluent state that would be the first to take the plunge and diversify their reserves. That was obviously not the case.
Nic Carter: (39:02)
I was pretty shocked that El Salvador chose to go through the legal tender law approach and encourage Bitcoin as this medium of exchange, which to be frank, it's really not that suited for, especially in a country like El Salvador. So yeah, I didn't think that they would go this aggressively towards the medium of exchange. I think just buying some Bitcoin in your FX reserves is easier and makes more sense. They may still do it, who knows? I feel like the El Salvador story is not fully written yet.
Brett Messing: (39:33)
I would say that the only concern I have about what's going on in El Salvador... By the way, I agree, total big deal. So it was a bit of a setup question, is that somehow they screw it up. And so my question is, I think a remittance market, which in a prior life, I was actually deputy mayor of LA and remittances is obviously a big market in Los Angeles. And we did everything we could do locally to protect citizens, which was not a lot under city law.
Brett Messing: (40:04)
But I'm pretty current on the issues, any rate, I think it's 22% of their GDP. And so they're going to use the Lightning Network and my understanding is that, and I'll describe it, I want to send 50 bucks to my friend in El Salvador. I'm going to basically go onto like a Stripe, I'm going to convert my dollar to Bitcoin. When you use a technical term, it's going to get zapped to El Salvador.
Brett Messing: (40:30)
And then if they want it in dollars, they'll get another currency transaction from Bitcoin to U.S. dollars, and that happens right in the span of less than a second. Is it ready for that? In other words, I saw that there's something like $60 million of Bitcoin, I guess supporting the Lightning Network. Is it ready for such a thing?
Nic Carter: (41:00)
Lightning may not be at a current state of maturity where it could stand the strain of an entire country's worth of remittances. I will say that Bitcoin as a bridge currency is definitely a use case we've seen. So being that utility settlement layer between the end points in the remittance trade, there's certainly a number of startups that do it.
Nic Carter: (41:21)
There's a local Boston, one called LibertyPay that does their men's channel from Massachusetts to Brazil and they just settle up Bitcoin transactions between exchanges. And then the exchange is the nexus where you trade in and out of Fiat currency. So there are a variety-
Brett Messing: (41:38)
Nic, can you just explain that? Can you just explain it from one user to another, how would the Liberty do it?
Nic Carter: (41:43)
Yeah. Actually interesting and we're actually not investors, so I just find it fascinating. From the perspective of the user, they're really not aware that the transaction is actually through bidding through Bitcoin at all. That's just the settlement rails, but they cash in a supermarket or something. And that gets converted into Bitcoin, probably on a batched basis, batched end of day basis at an exchange, then the exchange settles up.
Nic Carter: (42:13)
They're probably even doing net settlement with the Brazilian counterpart exchange. And then at that exchange, it gets converted into Reals. And so there's relatively few hops involved. This was actually the original premise behind Ripple really, but as it turns out, the market didn't really see a lot of value in Ripple as the bridge currency and some of these remitters realized that they could ride on those Bitcoins settlement rails.
Nic Carter: (42:40)
Especially if there's local premium in Brazil, you can monetize that trade in terms of the inflow. That's definitely something that we've seen. There's a number of exchanges that are basically serving as defacto, like backbones for utility remittances. So you can almost overlay remittances on top of the crypto exchange network, which is one of the really interesting dynamics.
Nic Carter: (43:07)
But as far as like settling each transaction individually through Lightning, I think that's probably pretty cumbersome right now.
Brett Messing: (43:15)
By the way, I say that as a massive Elizabeth Stark fan. Just want to put that out there. Last question before I go to John. ETF approval, March 31, 2022, over, under? What do you got?
Nic Carter: (43:30)
I'm still going to go under. I'm still optimistic, I think the facts are on our side. I think Gensler will eventually see that. They're imposing a much, much more rigorous and much higher standard for a Bitcoin ETF than any other financial product ever, any commodity ETF. They've got 4X inverse levered, natural gas ETFs that it's truly decay to zero, that's allowed. But Bitcoin, one of the most liquid markets broadly dispersed, globally traded with professional high quality index providers, to still believe that that's unworthy of an ETF is beyond me. So I do expect that the SEC eventually sees the light.
Brett Messing: (44:15)
We have a filing before the SEC along with 10 or more others, so I shouldn't say much about it, but I would say I agree and I just think... I guess I'm going to say just what you said, the case forward is much, much stronger than the case against it, full stop. And to me, that wasn't the case several years ago and I think that is the case now. And I think we get one when Gary decides we want one.
Nic Carter: (44:44)
At this point, to be frank, I believe it's a political issue. And other asset classes have had ETFs at far less liquidity, far less overall market cap. There are many commodities than a much smaller than Bitcoin and more centralized and who owns them, and have less sophisticated market infrastructure. To me, Bitcoin has met all the criteria laid out in the prior ETF disapprovals.
Nic Carter: (45:10)
Whether it's a surveillance sharing agreements, whether it's qualified custodians of material, share of the markets being onshore. The existence of exchanges that are regulated by the CFTC. To me, it's met all those criteria. Now, it's just up to the SEC to see the light.
Brett Messing: (45:28)
I do think though that you raised the real concern I have, which is politics, and I'm increasingly worried that Bitcoin is going to become a partisan issue, where everything else in the world is mass, where if you think about the political's dynamic here, the Biden administration is not going to be able to deliver the progressive wishlist. He's going to deliver whatever Joe Manchin lets him. And I think he's going to try to play to the progressive wing on other issues.
Brett Messing: (45:58)
And so it worries me that Elizabeth Warren and Maxine Waters and Angelina, who I have not great history with, and will never come around on Bitcoin that he slow rolls it because it's a bone to throw to the left for a while. So I think you rightly point to that dynamic, because again, just purely on the merits, we should be there by the fall.
Nic Carter: (46:25)
It troubles me that it is so partisan. I tend to not believe the Bitcoin should be partisan. It's apolitical monetary system it's really neutral. Bitcoin doesn't care who you are, what you believe in terms of whether your transaction can settle validly. But I think I can probably only name two Democratic representatives that have expressed a pro Bitcoin sentiment. That'd be Ro Khanna and Darren Soto.
Nic Carter: (46:54)
Maybe I'm missing some others, but it does seem to be increasingly politicized, which is perturbing and unfortunate, I think at the state level, Bitcoin will have certain states that ended up taking very favorable paths and some that don't. And so maybe that's the saving grace, is just the federal nature of the system.
Brett Messing: (47:15)
No, and I think we as a Bitcoin community need to do a better job of making the case to the Progressives because after Elizabeth Warren did her Bitcoin rant or cryptocurrency, we have mutual friends and I had someone reach out to her and essentially say, "She spent her whole career focused on banks that repress, underserved and underprivileged communities. How can she not understand that this is an escape from that?" But she's doing the bidding of Jamie Dimon when she attacks Bitcoin. It's really that simple.
Brett Messing: (47:53)
By the way, we like Jamie Dimon. We'd love to have you come to SALT, but anyway. Hey, Nic, I'm going to let John ask you a few questions. This has been fantastic. Go for it, John.
John Darsie: (48:07)
And speaking of SALT, Ro Khanna will be speaking in September, so we're eager to amplify voices that look at things from a nonpartisan perspective, which I think Ro does on a number of issues, including on Bitcoin and crypto. I'm going to ask you about your two businesses that you're involved in Nic. One, Coin Metrics. You co-founded Coin Metrics, fantastic resource for a number of different sources of data on-chain metrics being one of them.
John Darsie: (48:32)
In terms of the way you've looked at this sell off and the way you look to identify potential turning points, and just the way you evaluate rallies and pullbacks in Bitcoin, are there are certain metrics that you're taking a look at right now that signal to you that maybe we've reached a bottom or maybe we haven't reached a bottom? I know there's been some discussion about change in liquidity from exchanges, off exchanges maybe signaling that hot LERS are accumulating Bitcoin again here at these lower prices. But how are you looking at on-chain metrics right now during this pullback?
Nic Carter: (49:04)
That's a great question and the beauty is that on-chain data has reached a level of sophistication and a variety of market participants too and providers that is really would have shocked me five years ago. I started Coin Metrics in 2016 when I was in business school and I wanted some verifiable data regarding crypto assets and just what the on-chain economy was like. And I was completely fumbling in the dark, I really had no idea what was interesting and what was worth looking at. It's incredibly immature.
Nic Carter: (49:34)
Fast forward to today, there's a number of different providers and this is an enormously robust industry and then tens of thousands of people that look at on-chain data and trade against all day. So it's really astonishing to see how far the industry has come. In terms of what I'm looking at, I would look at exchange balances but be careful with those samples because oftentimes the samples don't have all the exchanges in them.
Nic Carter: (49:57)
So if you're looking at exchange balances, oftentimes you'll be fooled about in and outflows. You might actually just be looking at rotations between exchanges. So you have to be very wary of the data quality issues in any of those datasets. I'd be looking at something like the ratio of market cap to realize capitalization. Realized cap shows you the aggregate cost basis of all the holders.
Nic Carter: (50:22)
Historically, that's been an oscillator that's been extremely good at picking tops and bottoms. It certainly was signaling top in May. I'd be looking at the share of coins that are currently active, especially the six month and one year cohorts. So we're fractional coins on Bitcoin have moved in the last six months, moved in the last year. When you see that number cranking up, that suggests that there's a lot of available liquidity in the market.
Nic Carter: (50:55)
And we actually tend to see that in rallies, as the rallies pull liquidity off the sidelines, out of long-term holders, who then divest and exchange those coins in near holders. And then more specific I'd look at the age profile of holders. So whether we're looking at short term holders for long-term holders, and the beauty of this thing is that you can assess this, you can have this granular data. You can track every single unit of Bitcoin and what kind of holder owns it, what address size they are.
Nic Carter: (51:24)
So that'd be the last thing I would also look at, whether smaller wallets are accumulating or divesting, what larger wallets are joining us. But also probably not enough time to take you through all the charts, but the on-chain data story is just such an amazing and deep rabbit hole.
John Darsie: (51:42)
The charting episode will be our second episode of SALT Talks with Nic Carter. But last question, Castle Island Ventures, you're wearing the great vest there. I think Patagonia now is refusing to finance companies logos on vests, maybe Castle Island will be exempted from that. But what type of venture investments are you most excited about in the Bitcoin ecosystem? You see market caps exploding or valuations exploding across private investments, across a range of different crypto type companies.
John Darsie: (52:11)
You got to think there's some baby in there, some bath water there, and what are the companies that you're most excited about? And what are maybe some areas you might not want to discuss this part of it, but do you think might be getting a little frothy or ahead of himself?
Nic Carter: (52:25)
Well, the thing is with Patagonia is that they just don't know if you buy the vest and have a third-party embroider it, so that's-
John Darsie: (52:31)
I thought there might be a loophole in that whole scenario, but-
Nic Carter: (52:36)
Yeah, it's not that difficult of a roadblock to route around, so that's my pro tip to any client experts
John Darsie: (52:41)
It's like peer to peer Bitcoin purchases in China.
Nic Carter: (52:45)
Exactly, exactly, with the equally powerful adversary. We just raised our second fund, we're actively deploying. Selfishly I think the market sell off is pretty great because it means that the private valuations that were extremely frothy, because obviously the public markets trickled down into the private. Those have come down a little bit. And frankly during the bear markets, the best companies tend to get funded, because you get the highest integrity founders, folks that want to build in the crypto space regardless of the valuations and have extremely high conviction on the asset class.
Nic Carter: (53:25)
And so if we were to enter an extended period of sideways trading, God forbid or a long bear market, that would be good for the average quality of entrepreneur, and that's what we're here to do. So we're not complaining too much about the sell-off in terms of what we're looking at. We've always been looking at seed and Series A stage financial infrastructure businesses in the Bitcoin and crypto space, whether that's exchanges, brokerages, lenders, asset managers, data providers, analytics, key management, wallets, things like that.
Nic Carter: (54:00)
Basically tools to take this asset class and make it mature, make it functional and bring it to the next billion users. We're only at a hundred million users worldwide. We think we can do a lot better. And so, one thing that we're specifically focused on right now is building sophisticated market infrastructure in X U.S. jurisdictions. So whether that's crypto dollarization in Latin America, whether that's retail brokerages in Africa, retail brokerages in Southeast Asia. That's where we're spending a lot of our time right now.
Nic Carter: (54:37)
I think the story of Bitcoin is increasingly been written outside the U.S. and it's a story of financial inclusion and giving people access to this apolitical settlement network. And there's some really key pieces of infrastructure that are needed do that. The U.S. exchange market is extremely saturated, amazing levels of choice as a consumer. If you live in Nigeria, you live in Indonesia, that's just not the case. And so we have a global mandate, so we're looking abroad to those kinds of jurisdictions to deploy this next fund.
John Darsie: (55:10)
All right, well, Nic has been a pleasure to have you on. We hope you can join us at the SALT Conference in September. You talked about how bear markets sort of reveal the real credible players in the space. We had our SALT Conference in may of 2019 in Las Vegas. It was during the tail end of a crypto winter and there were still tons of really smart people and exciting companies that came and that we featured that conference that were iterating in the space despite the price of Bitcoin.
John Darsie: (55:38)
So we always like to say, "Watch the news, not the noise." Adoption is growing, is accelerating despite price fluctuations. But thanks for coming on, we hope to see you soon. Brett, you have a final word for Nic before we let him go?
Brett Messing: (55:50)
No. Just thank you, Nic, this was fantastic.
Nic Carter: (55:54)
My absolute pleasure gentlemen. We'll definitely be there in New York.
John Darsie: (55:58)
All right, fantastic. We've been talking to your partner, Tim, over at Coin Metrics and look forward to having you guys there. But thank you also, everybody for tuning into today's SALT Talk with Nic Carter. He has done so much for the Bitcoin community in terms of combating energy FUD, China FUD, all kinds of different FUD. He's the king of combating FUDs, so we appreciate everything he's done.
John Darsie: (56:17)
Just reminder, if you missed any part of this talk or any of our previous SALT Talks, you can access them on our website. It's salt.org\talks. We have an entire series of SALT Talks on digital assets with most of the big voices in the space, so we definitely invite you to check that out and please spread the word. Talking about FUD, we like sending around these YouTube videos and podcasts episodes to make sure that people are truly educated on the asset class before they start casting aspersions.
John Darsie: (56:45)
But on behalf of Brett and the entire SALT team, this is John Darsie signing off from SALT Talks for today. We hope to see you back here again soon.