Marathon’s Fred Thiel: The State of Blockchain & Crypto

Sriram Viswanathan: Hello everyone. This is the Tech Surge Deep Tech podcast presented by Celesta Capital. Each episode, we spotlight issues and voices at the intersection of emerging technologies, company building, and venture investments. My name is Sriram Viswanathan , founding managing partner at Celesta Capital.

Today I'm delighted to welcome Fred Thiel, the chairman and CEO of Marathon Digital. Fred. Many of our listeners will of course know Marathon Digital as a digital asset technology company and the undisputed global market leader in cryptocurrency and mining. Marathon actually has a much wider suite of diversified businesses, including energy harvesting, providing a full suite of technology products for data centers, and a slew of other blockchain related initiatives.

All of which, We're going to get into in this discussion. Fred has decades of experience as a technology executive, investor, and a board member in many companies in the industrial hardware and software space. Fred attended the Stockholm School of Economics and at Harvard, and is very fluent in many, many languages.

And Fred is currently a member of the YPO and former chairman of the YPO Technology Network. Fred, thank you very much for joining us. And I'm excited to have you on this podcast. It's great to be here. Thank you. So crypto and Bitcoin has been in the news for, for some time now. And it seems like it's really in a very exciting space.

So I wanted to start off by talking about the big picture. There's obviously been quite an exciting period, not just for Bitcoin, but in the larger sense of digital currencies in many geographies. And a lot of that is tied to where the economy is. A lot of it is tied to security. A lot of it is tied to just the evolution of the web itself and Web 3. 0. Many people hold very different opinions about the potential and the dangers in the sector. People feel that blockchain and other decentralized technologies will empower users with more control over their data, enable more secure and transparent transactions, and perhaps unleash new possibilities for innovation and creativity.

We're already seeing this shift. To have profound implications in the financial services sector, as you're well aware, and many others, however, are very wary. Uh, they are seriously concerned about the stability of the cryptocurrencies and they're worried about cyber security. They are seriously concerned about the energy consumption and the feeling that more regulatory involvement, and I use that word carefully and not oversight, is needed in broader, in order to sort of do the right things for blockchain technologies and the systems to really become mainstream.

So before we get started to talk about a number of these topics and unpack for our audience, you know, what. They should really be thinking about. Let's just get some basic nomenclature and definitions out of the way, because the one thing that I'm acutely aware of is that people that are in the field end up using a lot of jargon and regular audience probably sometimes don't really appreciate what those things mean.

So let's just get to the basic. What exactly is Bitcoin mining and what exactly is a Bitcoin network? 

Fred Thiel: So you can think of the Bitcoin network a bit differently. Like you think of the internet and the layer one or the base layer of the internet runs on a protocol called TCP IP. The Bitcoin network runs on the Bitcoin protocol, essentially, and think of it as a block chain, which is essentially a chain of blocks, similar to how a train runs is assembled, different train cars connected to each other.

And when you attach a new train car to an existing train car, there is a mathematical process called a hash key that's created. And essentially what that does is if you try and change something in a prior block, that hash key will not resolve appropriately. And so you'll know that somebody has attempted to change the data.

And so it's a very secure system. And it's essentially this long sequential chain of blocks, kind of like a ledger. If you think of the old accounting books where people would handwrite debits and credits in a ledger, um, then each block is essentially a set of transactions that have been assembled. And those are then attached to the prior block such that you have this sequential ledger.

And you can look at essentially the movement of Bitcoin between wallets. Which are essentially ledger accounts from the very inception of Bitcoin all the way to today. And that makes it not just very transparent, but extremely secure. And it's one of the most interesting aspects of it is that you can see trading in Bitcoin in real time.

You can't see that with stocks and equities. You have to wait for people to report and make filings. Here you can see movement in real time. Mining is a misnomer. We are not digging holes in the ground. We are not trying to exploit some commodity resource that exists somewhere. Mining is essentially the following.

There are two steps. One is assembling transactions into a block. So think of Bitcoin miners a little bit like the Visa MasterCard network. We're taking transactions that sit in what's called the mempool. It's like a hopper. And we pick transactions. We assemble them into a block to maximize the utilization of that memory space.

And then we calculate the hash, which is essentially the mechanism, which is going to connect it to the prior block. And that is a guessing process. So assembling the blocks easy. What's really hard is guessing, and we have to guess a number that is in the order of magnitude of accuracy of about the number of stars in the universe, and so it takes a lot of compute power to do that, and what all that compute power really does is ensure that somebody can't easily go in.

And modify transactions because they would have to recalculate the whole blockchain. So that is the security aspect. And as more people add more compute power to the network to validate more transactions and try and increase their share of the blocks that are won, the harder it gets. Because Bitcoin mining is a zero sum game.

So there are a finite number of blocks made per day, essentially one every ten minutes. And we are all competing for the rewards that are paid to miners for winning the block, essentially having guessed the right number, which gives us the privilege of adding that block to the blockchain. And today that consists of two components.

There's a subsidy paid by the Bitcoin network. Which is an incentive for us to do what we do. And that today is three and one eighth Bitcoin. And then there's a transaction fee, which is the sum of the transaction fees of the transactions we have assembled in the block. And that's essentially how Bitcoin miners make money, the subsidy and the transaction fee.

And every four years that subsidy decreases by 50%. 

Sriram Viswanathan: Yeah, that's the halving. Yes. So just continuing on, just getting the basic definitions level set for our audience. So what is a hash rate? 

Fred Thiel: So hash rate is the sum of the compute power being applied to calculating these hashes. So at what rate are we calculating hashes?

And we measure that typically on an individual compute rig, a minor, as it's called, which think of it as a computer full of application specific circuits, ASICs. We measure that in tera hash, which is in trillions of calculations per second. The global hash rate is measured in exahash. which is millions of terahash per second.

And that has grown today to where it's approximately almost 700 exahash per second, which in the supercomputing world, you talk about teraflops. Yeah. In the old PC days, you know, with the Pentium processor, how many megahertz or gigahertz could it do? Yeah. X a hash, hash rate. That's just a measure of the amount of compute power.

Sriram Viswanathan: Yeah. It's the amount of aggregate compute power on a global basis. Correct. And so you're sort of computing that as the total computer resource that is actually applied to mining and other crypto related. Activities. Now, you know, you touched on the fact that this is akin to how the protocol was established in the Internet time as TCP IP.

And I know that you in your past, you've sort of worked on networking technologies and Ethernet and token ring and all of that. If you were to compare the TCP IP and Ethernet and all of that, what would you say is the difference between the two? architecture or the protocol with the Bitcoin protocol.

Can you just highlight what are the big differences at the highest level? 

Fred Thiel: I mean, the highest level, what TCP IP enables somebody to do is address a packet, right, right, which is an internet packet of data such that you can essentially direct it to a computer or a compute resource someplace that has an IP address.

So essentially, TCP IP is a transfer protocol. And you're sending a packet to an address. And so every device on the internet has an IP address. And there are obviously billions and billions of devices on the internet today. And everyone has a unique IP address, which is in Bitcoin terms, the equivalent of a wallet, right?

Every wallet has a unique address. And when you and I Trade Bitcoin or exchange Bitcoin for a service or good or for money Then I am transferring from my wallet to your wallet and it's a ledger transaction Just like when you want to use Zelle on your smartphone to send money You're not physically sending dollar bills from your bank to the other bank.

It's just a ledger entry.

Sriram Viswanathan: That's how the bank sort of controls and maintains it, which is why it's not a public ledger. It's privy to only the bank and the bank knows you owe me money or I owe you money and they make an entry in the ledger that they maintain, which is not obvious to others. 

Fred Thiel: Yeah, exactly.

And this is the difference between centralized systems and not what most people don't realize is when you deposit money in the bank, that money is no longer yours, the bank now has a liability to you. When you deposit money in your Bitcoin wallet, you are in sovereign control. So you have self sovereignty of your assets, right?

And when I send my Bitcoin to you, Okay. I'm ceding control of that Bitcoin to you. One last thing that's very important for people to think there is no such thing as a physical Bitcoin, right? It's simply a way for you to track a unit of measure, right? And you have so many units of measure in your wallet, right?

Sriram Viswanathan: Okay, with that as the backdrop of the basic definitions, you know, now we can get into some some meatier topics in the Bitcoin space in terms of where the industry is, what are some of the challenges, what are some of the economic considerations, environmental impact. regulatory issues, and where is this whole thing headed?

So let's, let's talk about the state of the blockchain crypto industry today. Now, you've been at the forefront of this for quite some time. Where do you see this industry today relative to where it was, let's say, you know, 15 years ago, our post, the first white paper that allegedly, you know, an unnamed character called Satoshi wrote.

So if you could just draw the, uh, Comparison from where it was on day one to where it is today. 

Fred Thiel: Sure. So on day one, the Bitcoin protocol was running on one computer. And the Bitcoin protocol will run on a node as well as in mining rigs. So there are kind of two instances where it runs. A node is simply a computer that holds a copy of the ledger.

And so you have this highly decentralized system where you have millions and millions of copies of the ledger spread around, which makes it very hard again, for anybody to do anything bad with it. So, you know, initially there was one computer and then one of the collaborators in the software loaded Bitcoin on another computer and they moved Bitcoin from one to the other.

And that then generated some of the first Bitcoin. And over time, You know, initially Bitcoin had no economic value, it was simply a digital token that was being sent back and forth. And then there's this famous incident of the pizza purchase, which is where somebody paid, I believe it's 12, 000 Bitcoin, which...

Sriram Viswanathan: But that would have been a very expensive pizza in today's terms, wouldn't it?

Fred Thiel: Oh, absolutely. If you think Bitcoin at, you know, today, as of the date we're recording this, is about 60, 000, just do 60 times 12, 000, right? And that would be a very expensive pizza. So that was the first kind of exchange of Bitcoin for goods or services that happened. And then you started seeing a bid for Bitcoin appear.

So now there was a financial monetary value associated with Bitcoin. And then over time, the network grew. And at first you could mine Bitcoin on computers. And then somebody found a way to mine Bitcoin using FPGAs and GPUs. So similar to how AI is calculated today. And then you went to application specific circuits, so specialized chips to do it.

So now a typical mining machine is doing somewhere on the order of 300 trillion transactions per second or hashes per second. And then a company like us, we have hundreds of thousands. 

Sriram Viswanathan: Yeah. So today, about roughly a hundred million people Own bitcoins. And there's a finite number of bitcoins that's available, which is 21 million and roughly about 19.

4 million have been mined already, which leaves less than a, you know, less than 2 million to be mined further. And it's estimated based on the growth of the exahash or the capacity of computing that people expect to throw into this network. That it might take another 150 years before all of the Bitcoin are mined entirely.

Is that kind of the rough way to think about it?

Fred Thiel: So every four years the number of Bitcoins that are emitted by the network in the form of subsidies is halved. 

Sriram Viswanathan: Right. 

Fred Thiel: So today it's three and an eighth in 2028, when the next halving occurs, it'll drop by 50 percent then in 2032 by 50 percent again.

And at this point you're seeing less than one Bitcoin per block in subsidy. And it will continue to decay every four years until in about 2140, the last portion of a Bitcoin, it'll be what's called a Satoshi at that point is mined. And there are a hundred million Satoshis in a Bitcoin similar to a hundred cents in the dollar.

And we are actually at 19. 8 million Bitcoin mined today, and the vast majority of the remaining Bitcoin will be mined over the next eight years. 

Sriram Viswanathan: I see. I see. So it's really an asymptotically decaying curve. And as a miner, you're in the business of actually validating these transactions and adding blocks to the blockchain and getting compensated, as you alluded to earlier.

In two ways, one is the Bitcoin that you mine by yourself that you get to keep on your balance sheet as an asset and then you have transaction fees that you get paid and presumably over some long period of time and you know, none of us are going to be around, but a long period of time. That switch from value of the Bitcoin is going to transition over for a miner, if someone was still mining at that time, switch over to transaction fees.

Is that the right way to think about the miner business model? 

Fred Thiel: Yeah, let me correct you a little bit. So we are paid both the subsidy and transaction fees are both paid in Bitcoin. Right. So when you do a transaction on the Bitcoin network, you make a bid on how many Bitcoin or Satoshis you're going to pay in a fee to have your transaction processed if you want it.

Just whenever it gets processed or medium speed or fast speed immediately, you pay different fees. And so the business model was originally created with a very high subsidy so that people would have an incentive to mine and process transactions. And over time that decays to zero. Transcribed And then the transaction fees take it over.

So that is technically also called the security budget for Bitcoin, because you need to make sure that miners are earning enough such that they have a financial reason for doing what they do, because if miners stop mining, nobody's processing transactions, right? 

Sriram Viswanathan: Right. But, you know, I know that there's lots of comparison that people make about Bitcoin relative to gold, and some people call it digital gold.

But I think, isn't there a fundamental difference between gold and Bitcoin? Because gold, you can, you know, there's sort of an unlimited supply of gold, potentially, and people can continue to mine for gold. Whereas in Bitcoin, there's a physical limit. 

Fred Thiel: Exactly. So there will only ever be 21 million Bitcoin and there are about 19.

8 million that already are in circulation, right? Arguably of that 4 million Bitcoin have not circulated in kind of 10 years. And so they're deemed to be lost. People lost the keys to their wallets, so to say, back when it wasn't worth anything. And, you know, there's stories about some people, uh, digging up trash heaps to go find a computer that had a crash hard drive.

So it's a hard finite cap on the amount of Bitcoin. And so if you think about gold, the U S is the largest holder of gold reserves in the world. Roughly 40 percent of all the gold in the world is held in Fort Knox. Yeah. And the U. S. has that not as a backstop for its currency, but because gold is a store of value that people can use for payments and exchange of value.

Bitcoin is, in one notion, a store of value very similar to gold. It's been called digital gold because of its theoretical correlation to in high times of inflation, gold tends to go up in value as all other real world assets go down in value. The concept is the same with Bitcoin. Bitcoin has the added benefit that being finite, as demand for it grows, you can't just print more like the federal government can print more dollars.

You can't extract more like the gold industry does. And even the comparison to the oil industry, oil companies will pump or stop pumping oil depending on the price of oil. Right. Bitcoin miners can't do that because if we are not mining, no transactions are processing, right? And so because it's a zero sum game every day, there's that finite number of Bitcoin made per day If you're not mining, somebody else is getting your share.

And so we are incentivized to keep doing this like on a hamster wheel. 

Sriram Viswanathan: Yeah. So I think I want to go into the conversation about energy and oil companies and others. But before we do that, can you, you know, give us a sense for how the Bitcoin industry and the price of Bitcoin itself is correlated? To sort of the general macroeconomic factors, inflation and interest rates and availability of regular money, money supply.

Can you sort of elaborate on how that is correlated? 

Fred Thiel: Sure. So the Bitcoin has gone through a shift in its correlations over time. At first it was a novelty. Then it became valued for exchanging between people in the Bitcoin business, if you would, people who held crypto. And then over time, as more and more people got involved, and these were generally private individuals, not financial institutions, More and more Bitcoin was being held by a larger variety of people.

So demand for Bitcoin was increasing, more transactions started happening, more volume of transactions drives more liquidity in the market for Bitcoin. And then institutions started getting involved. Now, when private individuals, private investors are looking at markets. What drives them to be able to buy and hold Bitcoin is typically availability of cash.

Availability of cash is driven by their own financial situation. And so if they are earning good money and they have excess money, so in other words, there is a risk on environment, then you can invest in stocks or bonds or Bitcoin. If it's a risk off environment, because now you have lost your job. Or interest rates are high and your mortgage payment has gone up, then you don't have that excess cash to invest.

And so what you have to do is instead you have to sell some of your stocks and bonds. So Bitcoin has over time become more and more correlated to the equity markets. And then at the same time, Because of the belief that Bitcoin as a finite asset will outlive assets that can be highly inflated or deflated depending on which perspective you look at it.

So think of the dollar. In times of high inflation, the dollar loses value because things go up in price. Right. If you were to price things in Bitcoin, you would have seen huge deflation over time. Right. Because The price would have gone down. What used to cost a hundred Bitcoin now costs a fraction of a Bitcoin, right?

Because everything else has gone up in price in dollar terms, right? And the price of Bitcoin therefore has gone up in dollar, right? And so as a finite supply, now financial institutions have gotten involved and there are obviously much larger pools of capital held by financial institutions than there are by private individuals.

Retirement accounts alone equal roughly 41 trillion. And so earlier this year, the first Bitcoin ETFs were approved. Now it took 20 years for the gold ETFs to hit about a hundred billion in assets. Right. It took less than six months for the Bitcoin ETFs to hit 60 billion in assets. There are funds in Europe who hold hundreds of millions of dollars in shares in these ETFs.

Right. BlackRock, Fidelity, all of these funds that launched ETFs have been hugely successful. Right. So now you're seeing institutional capital, and we've just recently seen Morgan Stanley approve their wealth advisors, 15, 000 of them to solicit their higher risk clients, meaning the clients who are open to riskier assets for Bitcoin investments.

And so what we're seeing now is institutional capital coming in. We're starting to see pension funds start holding Bitcoin, SWIB, which is the state of Wisconsin's investment board, holds over a hundred million dollars in Bitcoin related assets. We're starting to see sovereigns holding Bitcoin. And you have to view Bitcoin over time is going to be an asset that will be very scarce because it's finite.

So think of it this way, a Bitcoin at 60, 000 Very few Americans will ever be able to own a Bitcoin when it's at 60, 000. Right. They'll own a fraction of a Bitcoin. Right. Sovereigns and governments have a national security interest to not only own a portion of Bitcoin because of three reasons, right? You have the de dollarization of the world due to the weaponization of the U.

S. dollar and the death of the Petro dollar. So countries that produce commodities are moving off the dollar standard. Saudi Arabia and others are starting to price oil in non dollar. 

Sriram Viswanathan: But you don't really believe that the dollar ceases to be a reserve currency in the foreseeable future. 

Fred Thiel: No, I'm not saying that at all.

What I'm, what I am saying is that similar to how you will try and avoid risks. Yeah. The U. S. has always been the safest place to invest money. It's been a haven for people, especially commodity producers. And that's why the petrodollar existed. They were willing to buy us treasury bonds. and U. S.

investments as a way to store their reserve assets. With the weaponization of the dollar and the ability for the U. S. to essentially take that, look at what happened to Russia after the Ukraine. China, Russia, India, Saudi Arabia, other countries have realized that they need to have an alternative. And there isn't a good alternative to the U.

S. dollar in fiat terms, right? Because I don't think people, the government of India wants to hold rubles necessarily, or renminbi, or Saudi currency for that matter. And so what alternative to the dollar is there? Well, Bitcoin, Is an alternative in that no government can control it and its emissions, if you would, is finite at 21 million.

And so a portion of their reserve assets will be held in Bitcoin. And if you now start seeing countries like Russia is proposing to do, which is to use Bitcoin for commerce in the trade of commodities, This now requires a much greater amount of liquidity in Bitcoin, right? Which in itself will create all sorts of derivative products, futures, options, call, et cetera.

And so these derivative products will create much more liquidity in the market, which will draw more demand, which will drive the price of Bitcoin up. And countries that hold one or 2 percent of their assets in Bitcoin will see a disproportionately positive return. Yeah. But this is kind of like that rainy day fund that if everything else goes to hell in a hand basket, you will always be able to transact your Bitcoin.

Sriram Viswanathan: But this is an important point that you're sort of making, because if I'm the treasury secretary in the U S or Congressman who is really focused on the strength of the U S dollar and the continued dominance of the U S dollar as the preferred currency for global trade, what you just said to me will be the reason why.

I would be very focused on either taxing or imposing significant regulation on how Bitcoin evolves. Would you agree with that statement or not?

Fred Thiel: No, I'll disagree veminently. Okay. The US Treasury, well, the US government is very interested in people holding assets in dollar denominated terms. Okay. The Eurodollar index, which was created by banks in London based on sanctions that the US imposed.

Mm hmm. It's totally outside of the control of Treasury. Right. Is, has a larger float than the money supply within the US today. Right. And that is not controlled by the US at all, but it is dollar denominated. Right. Stable coins are where the US government is very focused. This is the 

Sriram Viswanathan: This is the CBDC...

Fred Thiel: Well, Tether, USDC. A CBDC is a stable coin issued by a central bank.

Sriram Viswanathan: Yeah. It's a central bank digital currency. Yes. Is what it stands for. 

Fred Thiel: Right. And so. Essentially the digital dollar is A-C-B-D-C, right? Right. The money that your bank sends to a bank in the UK that's dollars is just a ledger transfer. Right. It's digital currency essentially. But Tether USDC, these are not issued by the federal government.

These are issued by private companies, and it's essentially a dollar deposit is received and a token is given back to you. Right? And so as long as these things are dollar denominated, you are creating a greater use for the dollar. Which is why the federal government has this kind of push me pull you attitude about things like tether It's yes, it's used for potentially money laundering and other things But they are the sixth largest buyer of Treasury bills in the world today, right?

Sriram Viswanathan: Right. So tether you would sort of think of it as another alternate mechanism to do digital currency, but it's not government sponsored It's private versus CBDC, which may be a sovereign digital currency, but these are just different approaches. So, so going back to my earlier question from the regulatory pushback or people in Congress who seem to be quite against, in some parts of the Congress, against digital currency in general, but more specifically they're against Bitcoin.

Can you elaborate on why that is and what is the argument that they make? 

Fred Thiel: So Charlie Munger once said, look where people's incentives lie and that'll tell you who has what motivation. The banking lobby is very much against Bitcoin because we have something called fractional lending in this country. You deposit 10.

It means the bank can now lend a hundred dollars. That's how we create credit and liquidity in this country. You can't do fractional lending with Bitcoin yet. And so if people are holding their assets in Bitcoin versus depositing them in the banks, you start drying up liquidity. And the federal government doesn't want to be issuing a CBDC for retail purposes Unlike what Senator Warren may say because then they have essentially killed every commercial bank every Savings and loan bank that exists.

So you may see central governments issue CBDCs for wholesale use, which is bank to bank settlement, country to country settlement, which is no different than the SWIFT system today. That's right. It's just a speedier process. And the Fedwire system has gone through an update, which now allows you to transfer money digitally in a faster form.

Sriram Viswanathan: But what you just said, that neither does help nor harm. Evolution of Bitcoin, would you say? 

Fred Thiel: So, so, Bitcoin has really, you have to look at it as there are two uses. It's a store of value, right? today in the developed world. You and I think of Bitcoin as an investment asset. I'm going to put my money in Bitcoin or not.

You and I are not thinking about using Bitcoin to go buy bus tickets and airplane tickets because it's this asset that's a bit volatile.

Sriram Viswanathan: That's right. Same pizza example, it may be a very expensive bus ticket if you did that.

Fred Thiel: Exactly. And so at the end of the day, most people are going to, just like you do with your brokerage account today, if you live off of the cashflow from your investments.

You sell some stocks or some bonds. And that gives you fiat dollars in your account. Then you use fiat dollars as your unit of exchange in the future. It may be a stable coin that's dollar denominated, right? But Bitcoin is a store of value in the developed world. And just for sovereigns, for corporations, you are now seeing more and more companies using Bitcoin as a store of value on their balance sheet.

And that is more driven by the returns it provides and the inflation hedging it provides. If you bought Bitcoin in January of 2023. It was at 13, 000 in four years over doubled in price. And today at Bitcoin 60, 000, it's over four times. Whereas the dollar has lost over 30 percent of its value in that same period.

And so it is a good place to hold your assets because as an alternative to the S and P 500 or us treasury bills, where you're getting 8%, maybe 9%, When you adjust it for risk, so many treasurers today are evaluating Bitcoin and allocation of two to three percent of their liquid reserves in Bitcoin, which will over a longer period of time potentially double the return they have on their treasure assets, which is why countries want to hold it that way.

In the undeveloped world, Bitcoin has a totally different purpose. In the undeveloped world, think of most of Africa, Latin America, parts of Asia, three quarters of populations don't have access to banking. So how do they transact? Well, essentially they are taken advantage of by people who do have access to banking and financial services, right?

And so for them Bitcoin and cryptocurrencies are a way to be able to Thrive if you would have self sovereignty over their assets People in war zones, think about people in Ukraine, those that were able to convert their Ukrainian currency into Bitcoin could leave the country with wealth stored using a code number in their head.

If you think about during the second world war and all of the refugees, people would sew diamonds into their clothing. Well, diamonds are very inefficient. When you buy them, you overpay for them. And when you sell them, you don't get the same value back. Right. Bitcoin is an easy unit of exchange to buy and sell, and so in the underdeveloped world, Bitcoin serves many purposes that have to do with financial survival and just providing you with the ability to have financial freedom because of your self sovereignty.

Women can't have bank accounts in many countries. They can hold Bitcoin. You're seeing circular economies developing in the developing world, and you know, digital currencies actually aren't a new thing in Africa. In Kenya, they had the M Pesa, which was essentially cell phone credits, which goat herders used for trading.

And that was, you know, started before Bitcoin. And today, 14 million people in Africa still buy and sell goods using M Pesa. And so the developing world Was much more interested in bitcoin right away than in the developed world because you and I's investors have to look at risk And we have to think about well if I put you know, a thousand dollars into bitcoin Will I still have a thousand dollars tomorrow?

How can I trade it? And now that you have etfs and you don't have to worry about opening a wallet and custody and transfer and trust It's much easier. And so the floodgates have been opened and I think we're going to see the developed world adopt Bitcoin as an asset, just the same way you look at stocks and bonds in your portfolio.

You'll look at stocks, bonds, gold, Bitcoin, and other things. And it'll form maybe two to 3 percent of your portfolio, but two to 3 percent of the savings in the world, which add up to about 230 trillion. Two to 3 percent of that's a pretty big amount of money. It's a big number.

Sriram Viswanathan: All right. Well, you know, clearly spoken as a bull that you are in the space, let's talk about some of the negative perceptions, clearly undesired consequences of really being very inefficient in doing mining, specifically in the context of energy.

There are reports about how some of the infrastructure that's being employed here, but actually power, you know, small cities, if you will. So Bitcoin mining is, Is really crucial in the energy ecosystem. Can you talk about that and how some people use renewable energy for it? And as you alluded to earlier, some utility provider or energy providers.

Use bitcoin as a way of not just store of value but really store of energy or excess energy. So talk about that.

Fred Thiel: So we could do an eight hour podcast just like yes indeed But uh, so think of it this way Bitcoin mining systems use a lot of energy electricity to power the computers that do all these calculations and we have two different incentives that drive us one is we constantly want to have more compute power so we can have more market share Of the bitcoin blockchain.

That's one thing that drives us The other is we're constantly trying to lower our energy cost And so we are constantly deploying less and less computers or rigs that use less and less energy.

Sriram Viswanathan: So more and more power efficient computer.

Fred Thiel: Much more energy efficient So i'll give you an example in the past three years the energy efficiency Has improved by over 50 percent in our systems.

And so we're...

Sriram Viswanathan: You and I are investors in one such company that actually uses you as a customer to deliver that. 

Fred Thiel: Exactly. So Aurodyne is a company that is the only US manufacturer really today of industrial grade Bitcoin mining rigs and the energy efficiency of these, they use less than 50 percent of the power of what was the state of the art machine three years ago and three years before that.

The machines used twice as much energy. So we've seen this huge decay in the amount of energy used by the Bitcoin network. And today the global Bitcoin network still uses less than a fraction of 1 percent of the energy on the planet. Now, when I say energy, I mean electricity, right? If you look at energy overall, it's even a much smaller number.

What people don't understand is the nature of electrical grids. 40 percent of the energy that's generated can't be used because it can't be transmitted from one place to another because of lack of transmission. And storage? Because you can't store energy efficiently. Yes, there are things called batteries, but at utility scale.

Batteries are very expensive and they don't last very long. They have a thousand charge, decharge cycles and then you have to replace them, which is very expensive. And so when you look at the energy grid today, all of the solar and wind that you have added is what's called intermittent energy, right? It only works part of the day.

And if it's cloudy, you get less solar. And if it's not windy, you get less wind. And the energy grid is like the plumbing in your house. If you try and put too much electricity into the grid, it's like trying to force too much water in the pipes in your home. Things will burst. And if you're trying to take more energy or more water out of the plumbing in your house, then the mains supplies, you'll get a drip versus a flow.

And the energy grid is constantly trying to balance demand and supply. And you have, Nuclear power, coal energy, and what's called dual cycle gas is what's called baseload. It runs 24 hours a day, same amount all the time, because it's very hard to increase its energy generation or decrease it. Above that, you have solar and wind.

And then you have what are called peaker plants, which are specialized gas fired power plants that you can turn on and turn off as needed that basically have a very high cost of operation. But when energy is in very short supply, they can charge enough money to make themselves profitable. What Bitcoin miners do is they can sit next to a solar or a wind site or gas, for example.

And when those generators can't sell their energy, We're a buyer of last resort, so we can buy that energy. 

Sriram Viswanathan: So excess capacity they have, excess supply they have, which is unused, which is typically the case for any energy producer. Correct. Because as you said, they are optimizing their production to peak demand, and so their supply is always in excess of demand.

And so you're saying that that delta between the actual demand and what's available in supply, Could be utilized for Bitcoin mining. 

Fred Thiel: Exactly. And so a solar site that's producing energy when there isn't demand in the market for it, can sell that energy instead to a Bitcoin miner who sits adjacent to it, or what's called behind the meter.

And then when the energy grid needs it, that energy could be taken from the Bitcoin miner and provided to the energy grid. So think of it this way. If demand exceeds supply, then the grid has to go by a supply. Supply somewhere else, right? 

Sriram Viswanathan: And that would not be the ideal time for them to be allocating energy to Bitcoin mining.

Fred Thiel: Exactly But more importantly when they do that, they have to go pay extra At very high prices to get that energy, right?

So the wholesale cost of energy typically in texas is about forty dollars a megawatt hour This is wholesale not retail at peak times. It can be as high as five thousand dollars a megawatt and these peaker plants as they're called turn on to generate electricity at those peak times, right?

Bitcoin miners can simply shut off their systems. Yeah, and in doing so there's no economic You Impact to the consumer of the grid, right? Because you're not having to buy or source more energy. Bitcoin miners are relinquishing energy. 

Sriram Viswanathan: So in that scenario. The energy producer would presumably pay you as a miner, potentially, some amount for you to not operate, essentially, or not mine at that time, but you're actually generating, I don't know if it's revenue or subsidy or reimbursement for not using the energy.

Is that correct? 

Fred Thiel: Yeah, so we can shed the load. It depends on the nature of the agreements that the Bitcoin miner has with the grid operator and the generator. Okay. But essentially you do an economic valuation of, is it better for me to mine Bitcoin or is it better for me to sell the energy? And there are times, for example, in Texas, where you have to give the energy regardless, which are called curtailment events.

And in those cases, typically the air cot, who's the grid operator in most of Texas will say, listen, tomorrow we are going to need so many megawatts. And then Bitcoin miners bid. To provide that right by shedding load. And then Eric says, okay, I'll take yours and I'll take yours and I'll take yours, but you offered too high a price.

And so it's a way that Bitcoin miners can act as a load balancer. 

Sriram Viswanathan: This is fascinating because it's not just a sort of a rare commodity that you're dealing with in the form of Bitcoin. You're actually an arbitrator of energy imbalance that might exist while that seems fascinating for a country or a sovereign that is actually producing excess energy.

How does it apply when a country is deficient or it doesn't have enough energy to supply to its demand? So are those countries inherently not ideal markets to go implement a mining business or how does that work? 

Fred Thiel: So Bitcoin miners are energy consumers of Right. Think of us as we go and try and uh, Buy up all the airplane seats that haven't been sold five minutes before the airplanes taking off or another way to look at it Is we will buy five seats on every Delta flight all year long and if we can't use it That's our problem.

And so we buy base load So we are that customer that will buy up the excess energy if you would countries and places that have a shortage of energy obviously We have no business being there because yeah, but the fact of the matter is most of the world has very inefficient energy systems And as I said 40 percent of the energy that's generated is not used because it's lost due to either Transmission transmission lines or congestion on transmission lines, right?

The u. s. Has a shortage of transmission. So think of it as The cables that connect a power plant to the consumer that is on the scale of three trillion dollars and no matter how much wind and solar we add Until you add the transmission a consumer can't use it Yeah And so 84 percent of all the renewable energy projects in this country get cancelled because there isn't transmission capacity, right?

Bitcoin miners solve the problem.

Sriram Viswanathan: Because you're putting those rigs right next to these production locations. 

Fred Thiel: Right. And we can become the customer that makes that financially viable until such time as transmission has been connected. 

Sriram Viswanathan: So going back to your earlier point about countries that actually don't produce enough energy, can you talk about why some countries that are obvious targets Or against Bitcoin mining, case in point, China bans Bitcoin mining while at the same time, one of the Chinese companies effectively is the global leader so far, not because of their performance and capability of the products, but they seem to have had the first mover advantage.

And I'm referring to Bitmain as a company, but can you talk about that? And that seems to be a sort of a, you know, dichotomy in some policy that China has. They want to make the picks and shovels, but they don't want to use it at all. Why is China against Bitcoin? 

Fred Thiel: So China's issue with Bitcoin was due to capital flight.

Prior to China technically banning Bitcoin, they didn't actually ban Bitcoin mining, but they made it very difficult for people to do it. 71 percent of all the blocks mined in Bitcoin were being mined in China, which essentially meant China could control the Bitcoin blockchain. And so because of that, it was the biggest market for buyers of Bitcoin mining rigs.

And therefore a Chinese company called Bitmain was both a Bitcoin miner and a provider of the technology. And so they became the biggest in the world of what they did because they had this large market. And as you know, from the semiconductor industry, scale drives everything economics. And so China's reason for wanting to ban Bitcoin mining was capital flight.

Somebody with money in China could go to a Bitcoin miner and essentially buy Bitcoin. And then in a second, their money was outside of China. It's more importantly, outside of the control of the Chinese government, right? And one of the ways that the Chinese government enforces control on capital flight and enforces obedience, if you would, is by being able to control people's access to their money.

And so Bitcoin, um, You know, fulfilled its promise of being fully decentralized and not under the control of any government. And so China basically said, well, if I don't have Bitcoin mining in this country, people in China will have a harder time buying Bitcoin because I can then ban exchanges. I can ban the trade in Bitcoin.

Right. And which they did. And that was the biggest boon to the U. S. because the U. S. has the biggest market share of blocks mined or what we call block space. 

Sriram Viswanathan: And also has the highest. capacity in terms of exahashes and the overall network. Correct. For any one country to have that capacity.

Fred Thiel: Correct. Yes, the U. S. has roughly a 35 to 42 percent depending upon the day, week, and month. Russia is closely becoming a number two, most likely. Yeah. Especially now that they've legalized, which is a national security issue, because if Russia were to dramatically increase the amount of mining in their country, they may be able to Have an impact on the Bitcoin network and people's ability to transact on the Bitcoin network because essentially they could shut out certain people from transacting, right?

And if you have now a growing number of investors in the Western world holding assets that are Bitcoin denominated, that becomes an issue of national security. Just like gold would be. 

Sriram Viswanathan: Let's just pause on that for a second. You made the point about China not allowing. Bitcoin mining largely for currency flight out of the country and sort of controlling that while at the same time they see the value of providing the infrastructure.

For Bitcoin mining itself through Bitmain and potentially other companies building that, does that create a problem for other countries in the case of semiconductors, obviously, you know, you and I will know that the entire global supply of semiconductors goes through this very narrow pipe, so to speak, which is called TSMC.

It's not quite narrow, but it's completely controlled by this one country or one company specifically. Do you see that sort of an issue in the context of, you know, a Bitmain and Countries like China controlling the infrastructure of how Bitcoin is mined. 

Fred Thiel: You have to approach that from a couple of things.

One is in our industry, we look at capital capacity and compute as the three constraint points. I call it the three C's capital is access to the ability to invest in more mining rigs. Which is what's called compute and capacity is the having places to plug those in. 

So in the 2021 period, when we had the last boom, we had the challenge, and this was when Orine was conceptualized, that essentially Bitmain was restricting supply and access to the latest generation of miners to drive the pricing up.

Because they had a quasi monopoly, and to give you as a point of reference, the S19 XP when it was launched had a price per terahash, think of it as the equivalent of price per megabyte kind of in hard drives, of 81. Today, the state of the art bitmain machine, the S21. As a reference price of about 20, right?

And so with all of that pricing power, it was deemed that they could essentially anoint which miner would be successful. And so that's why we deemed it a security risk. Yeah. And so it was time to help diversify the industry. 

Sriram Viswanathan: That makes a lot of sense. So effectively what you're saying is that companies that are like Bitmain because of their first mover sort of advantage, they've sort of had pricing power and now there are lots of other competition coming in and all of that.

So this is truly fascinating, but I want to sort of pivot to a slightly different topic. So as you think about this whole infrastructure, which is really, you know, compute infrastructure using very efficient energy sources to power these machines on the network to create. An asset, which is Bitcoin. And obviously you're going to be using that and benefiting from sort of validating transactions.

And it could be any type of transaction could be financial transactions. It could be, you know, health related information, any number of things, but do you see this naturally evolving to the favorite topic that's on everybody's mind? Which is artificial intelligence and sort of looking at, uh, inference and the data center.

Do you see that as a natural path of evolution for miners and, and companies like yourself, not only looking at Bitcoin as the, the mainstay of the business, but also looking at artificial intelligence and how you can actually provide services related to AI and inference. 

Fred Thiel: Uh, yes. So, um, Bitcoin and AI intersect on a couple of different levels.

Um, the Bitcoin and blockchain protocol has the ability to be a source of truth for AI systems, which suffer from risk of having data manipulation. You know, if you put garbage into the system, you'll get garbage out. And so there is a need for AI systems to have access to what are called Oracles and Oracles on the Bitcoin blockchain.

You would know that. Um, that data had not been manipulated in any way. So that's one level. The other area is Bitcoin mining and AI. Both are very power hungry, energy hungry systems. And so there is a natural tendency for people to want to locate AI in a place where you have Bitcoin mining because you have access to a large amount of power.

The difference between Bitcoin mining and AI is AI similar to Netflix, uh, you don't want to shut it off, uh, when the power company needs more electricity because your movie stops halfway through. 

Sriram Viswanathan: Right. 

Fred Thiel: So AI has this need to run, uh, nonstop, whereas Bitcoin mining can be curtailed, it can be stopped.

Right. So AI also has in its nature of inference, the demand load Uh, on inference varies during time of day, uh, similar to search traffic on the web, right? You have human to machine inference and you have machine to machine inference. The vast majority of inference that will be done is machine to machine.

Uh, regardless, you have this varying load depending on activity. And utilities hate when people's electricity demand varies during the day. And so, um, they price your power at very high prices if you have variability because they have to balance that somewhere else. And so if you marry a Bitcoin miner who can raise their load and decrease their load in perfect synchronicity with an inference AI site, You now present a perfectly level load to the utility.

And so there's a natural, uh, symbiotic relationship between Bitcoin mining and AI. It's not a, an evolution from Bitcoin mining to AI, um, but it is a symbiotic relationship. Yeah, where the two live and operate together. Um, it's obviously hugely more expensive to build a I data centers than Bitcoin mining data centers to a factor of 20 X and it takes much longer time.

And so many hyperscalers building a I sites will cite Bitcoin mining at the site first while they build the a I data center. Um, And then transition more of the power to the idea. So there's a very good symbiosis. 

Sriram Viswanathan: That's a great segue to the final section of our conversation here. Let's talk very specifically about marathon.

I know you're a public company, and obviously I don't want you to talk about anything that's, you know, non public information, which you won't. But just directionally, you know, some of your competitors, you know, of course, scientific and others. very much. I've actually explicitly talked about this evolution and this transition, if I might say, from just Bitcoin mining to doing AI, uh, data centers, and there's literally reframing their energy contracts.

Uh, do you see that as an opportunity for Marathon to do? And do you have plans of doing something like that? 

Fred Thiel: So our focus is more around building these symbiotic relationships such that as we create new data centers, um, and as we acquire, uh, access to more power, we will be focused on being able to leverage those relationships and those sites such that we can bring in AI operators.

As partners and in joint relationships, if you think about what core scientific has done with core weave, um, core scientific had originally created their data centers at locations with high speed internet access. Access to good, consistent power. All of the things that make those sites attractive for A.

I. Most of the data centers that companies like Marathon and others have actually are not connected to the Internet with high speed Internet connections because we can use star links at our sites. So we are more focused on being at areas of low power. But as we continue to build sites in different places, especially internationally, um, Yeah.

Being able to co locate AI with our sites becomes very important, but the other thing we've done is focused very much on the infrastructure of AI. We have some very unique cooling technology for cooling these AI rigs, which allows you to have a higher density of these systems in a smaller space. And keep them cool at consistent temperatures, which current technologies will soon kind of not be able to do.

And so we view our evolution of our technology business as being one where we become a supplier to all these data centers and all these people building data centers. Um at the same time as partnering with data center operators on operating sites and then managing their power needs. 

Sriram Viswanathan: All right. Well, this is Fascinating.

Uh, Fred, I think, as you said, we can we can keep going on for eight hours on this thing. But let me just try to wrap this up with a few very simple questions. You know, clearly, this has become a political issue in the cycle of the presidential elections, uh, you know, former President Trump. Has become more outspoken, uh, more recently about his support for Bitcoin.

You know, historically, uh, both parties sort of stayed away from that. While at the same time, I see some of the folks in the democratic side also talking about it. I mean, without putting you on the spot on what your political allegiance is. I mean, do you see a difference between the two parties and how they support it?

And is that, is that one that is more favorable to the, the mining industry? As you see it? 

Fred Thiel: Yes, so the Republicans have outlined a platform that has a number of pro Bitcoin aspects to it. Um, you know, they want to, uh, eliminate the, uh, kind of witch hunt that the SEC has been doing relative to going after the crypto industry more broadly.

Sriram Viswanathan: Although it's the same SEC that actually approved the ETFs, I might say. 

Fred Thiel: Yes. However, we as a minor suffered through 800 comment letters from the SEC over Accounting definitions, term definitions. And the SEC only recently changed their tune and here's an important thing. So the Republicans have a platform that is pro Bitcoin mining, pro Bitcoin, have a national strategic reserve, et cetera.

The Democrats have no platform yet because as of the time of this recording, Vice President Harris still hasn't announced a platform. Yeah, they haven't had their convention. However, 

Sriram Viswanathan: I would, I would fully expect, I wouldn't you agree that as the market moves in this direction, we will have a platform.

Fred Thiel: We will see the Biden administration, especially with the, um, Influence of Senator Warren has been very antagonistic to Bitcoin, and as I said, it was only recently that the SEC was kind of instructed to start going easier on Bitcoin, and you know, they just recently dropped all the remaining charges against Ripple.

Which was a case that the SEC proudly had won half of, they lost half of it, they won half of it, and now they've dropped the charges on the part that they had. 

Sriram Viswanathan: And Ripple is, as you alluded earlier, is another private, uh, CBDC like offering. 

Fred Thiel: Yes, and uh, they are courting actively the Democratic Party, um, and have been highly antagonistic.

Their CEO has funded all sorts of campaigns against Bitcoin. But I think, um, the Democratic Party has this challenge in that they have been anti Bitcoin. They have softened their stance to Bitcoin due to two major events. SAB 121 was a rule that the SEC put in place that essentially caused regulated banks to have to Limit their ability to custody Bitcoin, which means it limits their ability to hold Bitcoin and lend against it and do other things.

Essentially cutting Bitcoin off from those banks. Congress, both sides of the aisle, including, uh, Nancy Pelosi and Chuck Schumer voted for the repeal of that. So essentially voted against the desires of president Biden who said he would veto this. They voted for a repeal of the bill, and he vetoed the repeal.

Not long after these events, you started seeing a softening. And the challenge was that the Democratic Party in the current administration was under the belief that you can attack Bitcoin and crypto and there will be no price to pay. Well, 40 percent of, I mean, there are 40 million voters in this country, predominantly under the age of 40, the majority of whom are left of center, who hold Bitcoin and crypto, who feel very strongly.

About the fact that the government should allow Bitcoin to ring, uh, and be available in the form of ETFs, make it easy to use in Transact and not make it difficult, and that is the reason why Congress. Both sides of the aisle got together against the president's wishes and put forth this repeal. It's also, uh, there's also other legislation that both parties have worked on to bring to Congress that the president has been against.

And so there has not been any overt evidence. Yeah. That the Democrats are taking a position that is a softening of Bitcoin though We are hearing back channel that they're talking to the industry We're hearing back channel that they are interested in a softening approach But our belief is as long as Senator Warren wields influence in the White House and with what will be the potential administration They will remain to be antagonistic and try and limit as much as possible Bitcoin.

And remember, a key part of President Biden's budget proposal is a 30 percent energy tax only on Bitcoin miners. No other industry has a tax applied to its consumption of energy.

Sriram Viswanathan: We have no idea whether that's going to pass or not, but I think your point being that it's still it, the space is very, uh, murky right now and it's evolving and it's a fascinating time for someone in the industry that's actually leading the charge of a company like Marathon.

You're, you're in the eye of the storm and I, uh, I truly applaud what you're doing. Fascinating industry. You're a pioneer. And, uh, and before I, you know, close this conversation, just maybe ask one question. about predictions because neither you or I can say where this country is going to go with respect to the political spectrum.

Likewise, we probably don't know where the Bitcoin pricing is going to be, but I'm going to still ask you, can you predict, uh, and we can come, I assure you, we'll have you back at the podcast if you're right, or even if you're wrong, uh, you know, five years from now or 10 years from now, Bitcoin pricing in your assessment.

Fred Thiel: Uh, Gosh. So, um, Michael Saylor did a great presentation at Bitcoin Nashville a few weeks ago, where he estimated the price of Bitcoin to be over 10 million by 2034 or 2048. I forget which exactly, but in the tens of over 10 million, regardless. Bitcoin has over the past 11 years, uh, increased in value by an average of somewhere between 100 and 150 percent a year past three years, 400 percent over that period of time.

So it is easy to draw a line on the trend. And say that if Bitcoin continues to grow its value again, it's a finite supply. So there don't, there won't be any more Bitcoin than 21 million. And we're almost there. Um, 

Sriram Viswanathan: well, we were almost there for another a hundred years. 

Fred Thiel: Well, no, I mean, 19. 8 have been mined.

So there's just a million two left to mine. So from a supply shock perspective, to put it in easy terms. 20 billion of Bitcoin trades a day, right? So all of the Bitcoin left to be mined is not going to have in any way an impact. That supply shock won't have an impact on the price of Bitcoin. Uh, if anything, uh, people are now adopting more of a holding strategy on Bitcoin.

All the miners are. So even the new supply that only comes from the miners is not entering the market today. So I would say it's very easy to say that in, uh, in five years time, you'll see Bitcoin somewhere north of a million dollars in price. Yeah. And in 10 years time, most probably somewhere north of five to seven million dollars.

Sriram Viswanathan: Well, there you have it. All right. Well, on that note, uh, Thank you so much, Fred, for spending the time. As you said, we can, we can spend eight hours on this topic and, and, uh, and get into so many details. We've barely scratched the surface. Thank you once again for being at this podcast. 

Fred Thiel: Thank you.

Sriram Viswanathan: Thank you for tuning in to the Tech Surge podcast from Celesta Capital. If you enjoyed this episode, feel free to share it, subscribe, or leave us a A review on your favorite podcast platform. We'll be back every two weeks with more insights and discussions of all things Deep Tech. Bye for now.

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