Stock Market Predictability Is It There a Critical Review

Episode #396: Wes Fulford, Viridi Funds – How To Get Exposure To Crypto In Public Markets

Invitee: Wes Fulford is the CEO and Portfolio Manager for Viridi Funds. Wes was previously the former CEO and Manager of TSXV-listed Bitfarms Ltd., one of the largest publicly-traded cryptocurrency mining companies globally. In July 2019, Bitfarms successfully completed a Canadian public listing.

Date Recorded: 2/ix/2022     | Run-Time: l:27

---

Summary: In today'due south episode, we're talking all things crypto mining. Since there isn't a Bitcoin or crypto ETF in the Usa, Wes wanted to provide investors the opportunity to get exposure to the crypto markets through the miners themselves. Nosotros hear about his groundwork in cyberbanking and condign the CEO of Bitfarms, which he took public in Canada. Then Wes shares why both experiences gave him the idea to launch an ETF focused on crypto miners and related businesses.

Nosotros get an overview of the miners' business model, the importance of clean energy, and how the miners are impacted by the volatility of the underlying crypto prices.

---

Sponsor: If you lot're seeking the less obvious and are curious about the e'er-irresolute world and how information technology affects investing, The Active Share  podcast is for you. Hear idea-provoking conversations with idea leaders, company executives, and William Blair Investment Management's ain analysts and portfolio managers as they share unique perspectives on investing in a world that's always evolving. Listen toThe Active Shareon Apple Podcasts, Google Podcasts, Stitcher, Spotify or TuneIn or visit here.

---

Comments or suggestions? Interested in sponsoring an episode? Electronic mail Colby at colby@cambriainvestments.com

Links from the Episode:

• 0:xl – Sponsor: The Active Share Podcast
• 1:14 – Intro
• 2:01 – Welcome to our guest, Wes Fulford
• iii:20 – Why Wes transitioned from traditional finance to crypto
• 6:09 – Wes' fourth dimension with Bitfarms
• 8:09 – What led Wes to launch RIGZ
• 10:06 – The thesis and overview of RIGZ and what they're trying to do
• 18:14 – Wes' thoughts on valuations in the infinite
• 21:09 – The importance of clean energy for miners
• 28:08 – Mining metrics and other considerations when analyzing miners
• 39:59 – Wes' thoughts on the time to come of Bitcoin and crypto adoption
• 43:17 – The public conversation and narrative effectually Bitcoin
• 44:51 – Learn more virtually Wes; Viridi Funds
• 46:06 – Wes' most memorable investment

Transcript of Episode 396:

Welcome Bulletin: Welcome to "The Meb Faber Prove," where the focus is on helping you abound and preserve your wealth. Join us equally we discuss the craft of investing and uncover new and assisting ideas, all to help you grow wealthier and wiser. Better investing starts hither.

Disclaimer: Meb Faber is the co-founder and primary investment officer at Cambria Investment Management. Due to manufacture regulations, he will not discuss whatever of Cambria's funds on this podcast. All opinions expressed past podcast participants are solely their ain opinions and do not reverberate the opinion of Cambria Investment Direction or its affiliates. For more than data, visit cambriainvestments.com

Meb: Hey, friends. We got a groovy episode for y'all today. Our guest is the CEO and portfolio managing director of Viridi Funds and the Viridi Cleaner Energy Crypto-Mining and Semiconductor ETF, RIGZ, R-I-G-Z. In today's episode, nosotros're talking all things crypto mining. Since there isn't a Bitcoin or crypto ETF yet in the U.S., our guest wanted to provide investors the opportunity to get exposure to crypto markets through the miners themselves. We hear well-nigh his background in banking and condign CEO of Bitfarms, which he took public in Canada, and he shares why both experiences gave him the idea to launch an ETF focused on crypto miners and related businesses.

We become an overview of the miners business organisation model, the importance of clean free energy, and how the miners are impacted by the volatility of the underlying crypto prices. Please enjoy this episode with Viridi Funds', Wes Fulford.

Meb: Wes, welcome to the show.

Wes: Cheers very much. Happy to be here.

Meb: Where practice nosotros find you today?

Wes: I am based in Toronto, warm and sunny Toronto.

Meb: You sound like you're Canadian by birth equally well.

Wes: I'm actually dual. I was born in Minnesota and migrated up to Canada with the family when I was 10, I guess it was. A long time agone.

Meb: We'll track the number of A'due south you drop in this podcast. So we'll meet if you're true or just a transplant. All right. It's an heady time in your earth. The news recently with Razzlekhan and her husband, and it's just like never a slow day in the crypto infinite. It has to be ane of the odder stories I've heard in quite some fourth dimension. Is that something yous meet and shake your head or express joy? Or what is the reaction when you see something like the recent $iii, $4 billion theft situation?

Wes: I think it provides a footling bit of confidence to the market and the groups supporting it or considering allocated capital, the fact that there is some course of traceability or auditability hither, and in the events of these major breaches that there are remedies through the powers that exist to recover losses. But more often than not speaking, in this marketplace, having been in this going on about five years, goose egg surprises me. It really doesn't.

Meb: You are the fund manager of the new RIGZ ETF, R-I-One thousand-Z, and we're going to talk all about mining here in a 2nd. But I wanted to rewind. It looked like you started out in the traditional finance cyberbanking world. When did you get the crypto bug and determine to make the hop to crypto earth equally a full-time gig?

Wes: I started my career in traditional nugget management and then I moved over to the wonderful earth of investment banking, all based out of Toronto for some multinational banks, and I gauge virtually recently, I led the FinTech and financial institutions investment cyberbanking practice for a Canadian bank. And that's how I got exposed to blockchain and crypto. Hither in Canada, the TSX or TSXV has always been a supporter of nascent and emerging marketplaces and sectors, you know, cannabis or crypto blockchain or junior resource evolution companies and hard-rock mining. Always been a great identify to capitalize business plans and new ventures and startups.

I had my pulse on groups that were looking at public visitor One thousand&A or potential public listings. And certainly, in the capital raising circles in this sector back in 2016, I really started doing a deep dive on Bitcoin and other leading altcoins, and just caught the issues really. Never looked back. I strongly believe that this has its place in the world, whether information technology be in your portfolio or just equally a medium of exchange for people globally that don't accept stable fiat alternatives. And I formally stepped out of the banking globe in 2018 to take over the helm as CEO of a individual visitor, which we took public in two marketplaces, a group chosen Bitfarms, which I retrieve is still sitting on the top of the leaderboard in terms of scale of computing power and dual-listed on the NASDAQ at this signal. I stepped away from that in 2020 to pursue some entrepreneurial endeavors, RIGZ being one of them.

Meb: It's not as well much of a stretch for a Canadian to be interested in mining. The aureate miners, all my Canadians, half their portfolio is in some grade of junior miners, mining companies. And then the fact that it happens to be crypto, as long as you lot include the word mining, I think information technology'due south in all the Canadians' Dna for sure, Canada and Australia.

Wes: Toronto has always been, I call back, probably the single biggest resources development marketplace and capital letter market globally for hard-stone mining endeavors. Broadly speaking, it'southward unremarkably about 30% of the market cap of all publicly-listed companies in terms of sectoral weighting. And I spent v or six years of my investment cyberbanking career covering hard-rock junior resource and senior gold producer mining Cos. And crypto mining is very different than hard-rock mining, just you could draw some similarities.

Meb: You saw this attraction, you jumped ship. Tell us briefly what Bitfarms does and, you know, kind of as the helm, talk a little scrap about the actual evolution of the visitor while yous were there.

Wes: I joined as…I don't know what employee I was, but really, joining a team of four founders that had congenital the company to what it was before I had joined, and they were sitting on a sub-200 petahash, and a petahash would exist a unit of computing power. When I left we had scaled information technology to almost an exahash, about 5x from when I first started. But they'd set a path for the entity to join the public markets through a takeover of a shell in Israel, of all places, on the Tel Aviv Stock Exchange. And that was absolutely the wrong motion for the company. It sounded peachy being the simply publicly-listed crypto company in Tel Aviv, but very dissimilar type of investor over there in terms of risk contour and attributes of public companies that they expect for.

So we pivoted the visitor dorsum to the Canadian markets, a process that was probably the most complex deal I'd ever done. It took almost a twelvemonth of planning and execution between shareholder and court approvals and regulatory approvals and sequencing all those events but migrated dorsum to Canada, which had already had, at that point, near x other publicly listed companies in the sector. And that was a amend path for usa to amass capital and proceed to fund our expansion and identify a new stable of investors to back the vision. But Bitfarms is a cryptocurrency miner. At the fourth dimension, they had v operations powered by hydroelectricity within the province of Quebec here in Canada, and, yeah, well-nigh an exahash of calculating power. At present they've got a facility in Washington and they're expanding operations downwards in South America, diversifying geographical and jurisdictional gamble in add-on to chasing other sources of economical ability.

Meb: You helmed that shop for a piddling bit and so eventually decided, what? I'm ready to become this entrepreneurial route, money direction. I call up I desire to capitalize on this trend as a public fund. Cypher out there. What was the thesis? What was the idea? What year in the timeline would this accept been?

Wes: We founded RIGZ Viridi Funds, which is the investment director that would act as portfolio manager for the ETF dorsum in early on 2021. But RIGZ and what we're doing at Viridi, incubating thematic ETFs, is another…very similar to what we were trying to do at Bitfarms, is marry a nascent emerging asset form to traditional fiscal markets. Getting ready to become listed company in the public market, it'due south not for the faint of heart. And frankly, if you've got access to the uppercase required to expand your operations and meet the sort of strategic vision of the concern, I wouldn't recommend it for anybody with the oversight, the costs and accounting fees and regulatory landscape you lot've got to navigate, governance, Chiliad&A and overhead you're adding to the business organization equally a public company.

But I digress. RIGZ is, again, another attempt to marry that emerging nascent sector, existence crypto, with traditional financial markets and blue-chip upper-case letter. You tin buy RIGZ in a PA, in a registered investment account, with the blessing that the service offering that is RIGZ is operating within the confines of the SEC and has the regulatory and governance oversight, versus going at this on your own with an exchange account, buying crypto directly and dealing with cold storage, custody, and y'all proper name it. It's merely an easier way to bridge the gap for the people that are willing to extend out on that limb or lack the technological aptitude to get figure out how to own this direct and make it easier to access the sector asset form.

Meb: Give us the overview. What does the fund actually exercise? What's the thesis? What's the theme that it'southward trying to capitalize on?

Wes: And then RIGZ is an actively-managed, and that's important, product or ETF investing in global equities of crypto mining companies, primarily. 80 per centum of the funds roughly, our AUM, are allocated to publicly listed cryptocurrency mining stocks. We got about 20% of the portfolio in the foundries, the AMGs and NVIDIAs of the globe that are producing the chips required to manufacture the computers that these miners are running. We wanted to become downwardly the value chain. And bluntly, the foundries have been stellar performers since we launched RIGZ in July of 2021.

Merely the thesis for owning a miner really is that infrastructure provider, which is really providing an essential service to the network, which is the validation and verification of global cryptocurrency trades. The miners are all competing confronting each other on a global computing power network to race to solve an algorithm generated by the network itself that underpins Bitcoin, for the right to create a block. And that block, recollect of it as an empty digital envelope ready to exist loaded full of a megabyte, or just over, worth of cryptocurrency transactions, call it 22 to 2500 transactions. Only after which that transaction finds its way into that empty envelope, that block, that that miner has created, that envelope is sealed and hashed, or tied to all the blocks that created it, thus the term blockchain, and it becomes verified. And that BTC that you bought and then lands in your business relationship and is bachelor to spend or transfer to a cold wallet or whatever have you.

So the miners are providing that essential service. They're paid by the protocol itself coded in the software in the class of a mining reward, new BTC, tied to each block granted by the protocol. That's the acquirement puddle that the miners are creating. The more blocks that they create, personally, or as an organization, the more rewards they're getting for that service. And they can practice what they want with those BTC. Merely we buy the miner considering of the infrastructure play. There's a tangible input cost that goes into the creation of a block in the grade of the CapEx on the infrastructure and the mining hardware and the power spend required to run these high-energy intensive computing equipment. But there's a real economic business organisation that underpins these mines in the class of cash menses and stiff paybacks, if they're buying correct on their hardware, and operational insulation to crypto winters, or downturns in crypto pricing, through existence a low-cost provider inside the global network of computing power.

And then, the trend in 2021 has besides been to inventory amongst all the public miners, to inventory as much of their production every bit possible. Then you've got exposure to the growing digital asset inventory on the balance sheets of these public co-issuers or listed equities. And much like a senior going back to this junior resources or mining resource analogy is you've got leverage to piece of work through a miner to that underlying article of choice. So as a senior golden producer, if the price of gold goes from $1,800 an ounce to $2,500 an ounce in a week, there's really no respective straight increase to their price of production. All of that boosted margin flows to the lesser line in the class of EBITDA or cash period, sort of the same for a miner. If there's a run in BTC and a leg in the growth of the computing ability trying to capitalize on those heightened mining economics, that miner experiences a period of heightened or sizable margin growth that they weren't a calendar week prior. And that's been a market condition that'due south been pretty prevalent through 2021, which is why you've seen all the activity in the public markets in this sector.

Meb: Is this an surface area that has dozens of potential companies? Certainly, I wouldn't think over 50 or 100 as far as it goes to the opportunity set. How much is public? Is a lot private? As far as the market cap, is it something that merely is going to grow by orders of magnitude in the coming years? What'due south it look like?

Wes: In that location'due south now over 50 publicly traded companies globally that accept some chemical element that are pure-play miners, pure-play infrastructure providers, hosting miners, or some combination of the above. Some aren't pure-play miners, but others might have a mining component or mining division inside the system. But there'due south over fifty public companies in the sector across the globe. And there's likewise a number of announced for the high-contour transactions with this spec process in the U.Southward. or others that accept withal to close that we anticipate closing in late Q1 and into Q2. Merely I do see the sector evolving in response to the attractive mining economical conditions we've experienced in 2021 and continue to experience. And it's getting institutional adoption and more credibility equally nosotros go here. But it'due south definitely evolving at a very, very quick pace.

Meb: What do well-nigh of these companies look similar? Nosotros actually had one of our podcast alums is a holding on HIVE Blockchain Technologies. Merely if y'all look at a lot of these in your portfolio, where do they stand? I mean, most, I assume, are existent acquirement-generating companies. Are they assisting at this point? Are they more in the cash flow positive simply growth mode, and then really expanding? Just give u.s.a. the banking rundown. Are they traditionally financed through offerings, or is it debt?

Wes: As I mentioned, the trend in 2021 has been to inventory as much of your production as possible within the publicly listed companies. And then you spend an enormous corporeality of money on ability and infrastructure and G&A overhead to generate that unit of computing power, a terahash being 1 trillion attempts per second to solve that algorithm created past the network, a petahash being 1,000 terahash per second. There's a lot of effort and capital that goes into scaling industrial crypto mining operations. Just the approval is you go and procure the hardware. Correct at present yous've got some pretty significant timelines, given the global supply chain issues and the heightened need for this mining hardware. Simply two years agone, you could go and purchase a new auto and accept it plugged in and operating ii months after, despite the fact that it'south on a boat or a flight from China and you lot're having to deal with those logistical delays getting it plugged in wherever yous're operating.

Simply as before long equally it's operating, information technology's generating greenbacks flow, bold that your BTC rewards from that computer mining hardware are greater than your ability spent. When nosotros were scaling Bitfarms nether my stewardship, I was looking at 220 to 280 solar day payback on our mining hardware investment per CapEx, which in any regular concern is extremely attractive. Even considering procurement timelines and shipment timelines, you can go out and fully return your CapEx on your hardware inside of a year. It's a pretty bonny business organisation. I would say that, across this sector, groups have certainly been relying upon the disinterestedness capital markets, fundraising through common stock offerings, through convertible debenture offerings, or equipment financing, which has as well been a sub-sector of the mining industry that'south been emerging over the last 2, two and a half years to ensure that they've got the upper-case letter required to expand, to pay their power bills and so that they tin can actually inventory their production and not have to sell it to fund their OpEx.

But profitability across the sector varies widely from company to company. I would generally say a lot of the nuances in greenbacks menstruum from one entity to the other has largely been driven by some of the corporate G&A, i.eastward., the stock options and your funding decisions that they've made at the corporate level to expand.

Meb: Where do we stand right now? Evaluations? How practice most investors, or how do you view the opportunity set here? Is information technology price to revenue multiple? Are you guys looking out to 2025 for EBITDA? How practice you think about the portfolio and the construction also as the secular and cyclical forces that play on wanting to identify a bet hither? Or do yous guys just market cap weight it and washed with it?

Wes: No, no. Merely one of the agendas with RIGZ under an active management structure was to capitalize on what we believe to be fairly relevant or evident mispricings in the disinterestedness markets. I mean, you lot've got some pretty loftier valuations trading out in that location, companies with $3, $4 billion marketplace caps which may non be able to abound into those through the expansions that are underway, especially when a significant component of that expansion is unfunded. And they're going to accept to pull down upper-case letter through the public markets or other avenues and likely dilute shareholders accordingly. But we expect at certainly not 5 years out, nosotros're looking at correct now stop of 2022 and max 2023 year-end basis, and taking what we know about their mining hardware fleets and their price of power and their scaling objectives, which are generally publicly announced and forecasting out where we conceptualize them to be sitting and what the rest sheet looks like to support that growth and making some sort of pro-form multiple analysis or diagnostics in terms of evaluating 1 or 2 versus the other. And nosotros do it on an enterprise value to EBITDA ground, enterprise value to revenue basis, and even look at things like EV to terahash to see how they're trading as a office of replacement toll.

When you wait at this business, information technology really is as uncomplicated every bit, how much hardware practice you have? How much hardware do yous have on order? Where are you going to? What does that hardware look like, the calculating power in aggregate of that hardware relative to the current network, and where we anticipate the network to go, i.e., what's your market share? And what does the makeup of that hardware fleet look like in terms of efficiency, which helps you drive some assumptions around cost of production and electrical spend price? Electricity is your single biggest OpEx item on your income argument for these entities. If you're paying three cents running brand new generation equipment, you're much improve positioned for the long term versus the groups that are running mid or older generation equipment paying seven cents per kilowatt-hour nether a hosting contract.

If you stood up industrial operations and you lot understand what really makes one group successful versus some other, and the armada makeup of their operations, the type of hardware they're running, it's adequately obvious to derive some multiples to comp one versus another.

Meb: Talk to me a little chip virtually…you mentioned power being the biggest input. Your fund has an angle that you mentioned, which is essentially this cleaner energy concept. Talk to u.s.. What does that mean? Is this a very specific input into the selection criteria? Unpack that a trivial chip for us.

Wes: … business, it was basically 100% renewable-based. I practice believe that mining operations do have the responsibility, we call it good corporate citizens. In that location's a ton of heightened scrutiny and interest in ESG policies upwardly at the board and officer level for these organizations. In that location are pressures from shareholders. We've done a ton of work in this theme lately. And we take the approach that, based on an internal scoring matrix that we've created where we example rank, coal, nuclear, hydro, air current, and the scale of the operations cartoon upon that source of power, nosotros create a scoring index for each company and criterion that against our internal thresholds to try and bulk weigh our mining investments to renewables-based or quasi renewables-based operations.

At that place are groups out there that are definitely going at this in a different artery using carbon offsets to net zero their emissions. I don't really think that'due south a sustainable model going forwards with the momentum we're seeing in the carbon markets. Simply we've definitely got a skew towards or heavily weighting our portfolio choices towards the groups that are renewable backed. And fifty-fifty only from a jurisdictional standpoint, I think there's a lot more sustainability or viability or less geopolitical hazard for those groups plugged into those sources of ability long term, assuming that they're being good citizens and not taxing the grid. And seeing some of those headlines in Texas, the recent storm and some of the operators pulling back to avoid taxing the grid at disquisitional times.

Meb: Information technology seems like not only a smart determination, just from some tertiary reasoning, merely just the cost and equation office lone, being located or trying to get the power from a renewable source just seems like would exist a practiced business decision in general. Is that kind of the case?

Wes: If y'all key in on hydro, by and large speaking, every bit long as that river doesn't freeze during the wintertime months, if y'all're operating upwardly hither in Canada, those turbines generally plough at the same stride 24 hours a day, 7 days a calendar week and generate similar power throughout the entire year. As a mining performance, yous've got the luxury of being able to locate side by side to stranded infrastructures. If you've got a dam way up in northern Canada, that there's surplus capacity coming off that dam, it's actually beneficial to get locate a crypto mining operation adjacent to information technology, versus incurring the transmission cost infrastructure for that transmission and the losses tied to transmitting that power over hundreds or thousands of kilometers. You tin can go where the ability source is. And because these mines operate 24 hours a day, vii days a week, things like hydro are the perfect source of power.

Meb: How much of that is essentially well known, though? Has the piece of cake, low-price power spots been picked over by these companies? Or is this a scenario where it involves a long permitting process with governments? How far are we downwardly that path where information technology's totally commoditized and people are now searching for second, third-level ability opportunities or developing new ones?

Wes: It'southward probably sitting around the bottom of the second or top of the third inning. This is all the same evolving. At that place are however lots of surplus capacity. Miners definitely aren't struggling to go detect places to plug in their hardware. They're definitely struggling to ally the infrastructure required to scale businesses and fourth dimension that infrastructure build to the commitment of the hardware. That's a challenge correct now amongst the public equities. Merely finding the ability is…sure jurisdictions are better than others. You saw the crackdown in June in China where they outright banned mining. There are problems in Kazakhstan right now. In that location are bug in Islamic republic of iran. Geopolitical chance is e'er a concern, and you've got to manage that every bit a miner expanding operations, especially across multiple facilities in multiple jurisdictions. But accessing the power itself hasn't actually restricted network growth at this indicate. And I exercise call up this evolves to the point where, downward the road, as the sector continues to mature and you see real bluish-scrap capital moves into the sector, and yous're seeing the BlackRocks of the globe start to accept position in some of the public equities. But the sticky, more than conservative endowment fund style capital hasn't really moved, not in the mining equities anyways. And I do run into this evolving to the point where maybe 5 years, 10 years down the road, you've got power infrastructure being scaled for the sole purpose to power a miner. And this isn't a flared gas operation in Northward Dakota or Texas. It's like real dams beingness congenital and constructed to power crypto mining information centres, as this sector evolves and continues to grow in size and calibration.

Meb: How much of this is a N American story, U.S., Canada, versus a global one? And is it complicated by just the habitation of the companies where their stocks are listed in the U.S., but information technology could be an Asian or a European company, etc.? But what's the geo film await similar?

Wes: Historically, because the two biggest hardware manufacturers are both in Asia, Bitmain and MicroBT. MicroBT articles the Whatsminer equipment. Information technology was founded past ane of the leading designers at Bitmain itself. So the staff is spun out Bitmain. They're based in Asia. And given the availability and early adoption of crypto and Bitcoin and other leading altcoins by certain Asian countries, China, in particular, you saw a ton of hash power concentrated in Prc, historically. Similar, dorsum when I was running Bitfarms in that location was 65%, 70% of the global hash rates sitting within Chinese borders. Now you've got this crypto ban, outright ban on mining in Mainland china. And that was announced in June of this last year. All of that hardware struggling to find new homes in a very, very rapid pace, given the attractive mining economics that have been prevailing throughout last year and fifty-fifty now.

But Northward America has evolved to be one of the biggest mining centres, if non the biggest mining center on the planet. In that location's an immense amount of hash rate plugged in, in the U.S., and Canada to a lesser extent, where information technology'south exponentially larger than it was two years ago. And the lion's share of the hardware orders that nosotros've seen appear past these publicly-listed miners are all going to North American operations. We're seeing a ton of growth. Yous've got more predictability from a regulatory and political side of things expanding in their home jurisdiction, and at that place'south access to economical power in lots of unlike states.

Meb: What are other considerations y'all think about as you analyze these companies. The hardware bending, I presume, that's one where it's only about a article at this point where they're constantly upgrading and refreshing every bit these rigs become antiquated or only run out of usefulness. Simply is insurance a big cistron? Is in that location a huge headcount required hither? Like, when you lot examine these stocks, how easy is it just to compare them only based on some very simple metrics on capacity and actual mining output versus other considerations that might be important we haven't talked most.

Wes: TNC insurance is actually quite reasonable. It's not a high-cost premium line item on your income argument. One time you've scaled a crypto mining operation with thousands of computers at site and y'all've got competent staff running in-house operational management software, information technology's not really all that difficult. The corporate G&A above and beyond your ability spend, putting management compensation bated, is quite predictable and a small component of your operating margins. That ability spend could grow to in times of weaker crypto pricing or periods where crypto pricing has been flat and you've seen a significant corporeality of network hash rate growth and you're running the same corporeality of computing power in a flat BTC environment. Twelve months later, the network has grown past 50%, that calculating power is 50% less constructive or less economic for y'all, absent-minded large increase in transaction fees or what have you.

That power spend is really driven by 2 things. One is obviously the toll you're paying per kilowatt-hour, what kind of economic rate y'all're spending. In that location is a big difference betwixt a group spending three cents being plugged into a hydro facility in Georgia, or a group that owns and operates their own infrastructure like the Rackspace, the network equipment, the loftier voltage electrical distribution, the data center, the modular-based installation, or the group that'southward hosting their equipment in Georgia with a third-political party infrastructure provider that's paying a hosted rate of 7 cents per kilowatt-hour. That line item on their balance sheet for power spend is significantly greater equally a proportion of revenues versus the group that is owner-operated that runs their own infrastructure. Only above and across that, the efficiency of the hardware is a significant commuter of profitability. The older generation equipment, the S9 ii years ago was all the same the nigh prevalent miner in the globe. The S9 without a firmware upgrade is…I'one thousand going to become into some like mining geek speak, but is running, let's only say for easy math, 100 joules, running at 100 joules efficiency, or 100 watts per hour of energy consumption if you're running that S to generate i terahash of computing power.

So if you're running that hardware for a 24 60 minutes menstruum, you lot're using two.4 kilowatts of free energy. If you're paying v cents for that energy, you're paying 12.5 cents per 24 hour menses to create that unit of computing power. Right now you're getting paid but over twenty cents of acquirement for that unit of measurement in the form of BTC rewards for creating those blocks. On a power-only basis, you've got just under a l% mining margin. If you're running the newest generation equipment, it's more similar 30 watts per hour of energy consumption. So in a 24-hr period, 24 times 30 is 724, or .72 kilowatts. And then if y'all're paying five cents per kilowatt-hour, and you're only spending .72 kilowatts to generate that terahash per 24 hour menses, you're but spending three.75 cents on your power per day, and you're getting paid the aforementioned amount in BTC rewards, merely over 20 cents. And so your mining margin is significantly higher than the grouping that's using the old generation, less efficient hardware.

Mining fleet makeup and the cost of that power, and whether or not you're running your own infrastructure or using somebody else's infrastructure, are all very, very material components to profitability in this business. And the groups that volition stand the examination of time are running best of generation equipment, they're continuing up their own infrastructure, and they take full control over the power pricing.

Meb: What do they do with the quondam machines? These things get recycled, trashed, sold, put them on eBay?

Wes: Basically. I hateful, a year and a one-half ago, the S9, the old machine, you'd be difficult-pressed to give them abroad at $xx, despite the fact that at that point in time, it was a four-year-former miner. At present the S9, you could purchase them through Telegram channels or on eBay or whatsoever. People are paying $250, $300 bucks for an S9, despite the fact information technology's a 5-year-old piece of mining hardware, yous're going to take significant degradation of its efficiency and computing power as you lot run it, and it'south significantly less profitable. I'm a picayune surprised to see people running five-year-old equipment profitably right now. A twelvemonth agone, they couldn't have washed that, or call it a year and a half agone they couldn't accept done that. But the price performance has been so potent since October of 2020. And mining computing power hasn't really caught up to normalize economics or mining economics. You've still got these outsized returns that people are chasing and proceed to expand operations to capitalize on, so you're able to utilize onetime equipment, less efficient equipment, today that frankly, I wouldn't have anticipated a yr ago having this podcast. Simply at that place'southward that element of luck being plugged in and it'due south expanding at the right time to capitalize on these ebbs and flows in economics driven primarily by cost appreciation, or volatility in BTC, but it comes with the territory of building a business concern in an emerging sector.

Meb: At its cadre, the business organization seems not too complicated. It seems easier than say, gold mining, where the rewards are totally unknown. I hateful, you lot do the work and you lot do all the seismograph geology that people try to practise, simply even then, it's unknown. This one seems a little more than assured, given all the input parameters of if you lot build something thoughtfully. What are some of the things that people aren't talking almost, whether information technology's in the media, your friends, other analysts, CEOs, about this space that you remember could utilize a niggling more attending, or something that's on your mind that yous recall other people just don't actually put much thought into?

Wes: It's definitely very, very unlike than permitting and developing and ultimately producing a gold mine. Yous accept the iii years of environmental permitting and advanced and extremely costly and timely technology reports, pre-feasibility study, the scoping report, the bankable feasibility study. You don't take billions of dollars of CapEx tied to the startup of a mine. You could jump on eBay right now and go buy a miner and have information technology plugged in your garage past the end of the week. There'southward actually no clogging to having an individual participate in the sector.

I think the difficulty that groups are experiencing correct at present, certainly in the public markets, is when you go and procure sixty,000 miners. When I left Bitfarms we were running 30,000 miners. We had 64 megawatts of power powering that equipment, five data centres where yous walk in and your hair stands on cease because you've got twenty megawatts of power flowing through a facility. It's loud. Information technology generates a ton of heat. There's a lot of electrical skills and technicality that get into stepping down a 25,000-volt electrical line to a 240 volts power outlet to plug a miner into. From an infrastructure standpoint, there's a nifty deal of, I should say skill, simply expertise required to calibration these operations and deal with the various elements. If yous're running trailers in Texas, dealing with 120 degrees Fahrenheit in the summertime months and pulling that sort of oestrus into the front of your miners and dealing with troubleshooting miners to those that are overheating that can't necessarily handle the conditions.

Operationally, there'due south definitely nuances that new entrants are going to struggle with trying to move to that tens of megawatts, hundreds of megawatts industrial scale, even but from a procurement standpoint. Like, nosotros were out there making deposits on our large transformers, 10-megawatt transformers, a twelvemonth in advance when nosotros were scaling our operations. I can simply imagine the supply chain is that much worse correct now. And then just architecting, scheduling this out from a logistical and a build out standpoint, the groups that haven't done it before are struggling and will proceed to struggle. Merely because y'all've got the miners ordered doesn't mean you've got a place to rack them when they're ready to be shipped. And that's certainly an element of how nosotros allocate funds within the portfolio is backing groups that we're confident in their ability to evangelize, that have done this earlier at calibration, that aren't brand new entrants, and are surrounded past the right technical and operational team to be meaningful participants.

Meb: What sort of catalysts are y'all guys think nearly would exist important waypoints in the next yr or two as you look out the horizon? It could exist legislation, information technology could be simply adoption, information technology could exist price of diverse currencies. What are things that you lot think are important, investors should exist thinking about on the horizon?

Wes: Exposure to this sector, as we speak, is definitely not for the faint of middle. We saw crypto striking all-time highs of $67,000 tardily terminal year. That was off of a year prior trading levels of effectually $10,000 or $11,000 bucks a coin, so you saw 5x increase, 6x increase in the price of the BTC in particular. I'm going to go on to talk nearly BTC primarily. There's a lot of volatility in pricing. Pricing leads to more media coverage, more products, more market players, and more than upper-case letter. So I retrieve catalysts, without question, are going to exist based on further price appreciation. I call up if crypto hit that $100,000, $2 trillion marketplace cap weighting, it's on the map. I saw an article final Friday, I remember it was where KPMG, a big-four accounting business firm, has purchased Bitcoin and Ethereum on their balance sheet and they've also married it to a carbon offset buy to exist cyberspace goose egg on that allocation. Simply you lot've got a large-iv accounting firm now putting crypto on its treasury and press releasing that initiative.

Frankly, our audit firm in Israel back in the 24-hour interval, considering of the difficulties and complications and timelines required for an international money transfer through the SWIFT system, like it was actually rejected a couple of times. Nosotros paid our first inventory in BTC because information technology was simply that much easier, instantaneous, non instantaneous, just inside of x minutes on boilerplate to get that transaction cleared and inside of a block. It's merely easier when you're dealing with international payments, ongoing adoption, cost appreciation, which leads to ongoing allocations. I call up, if we were to come across in 2022 to run across a big fortune 500 catechumen some of their fiat to BTC or another digital asset, that would be huge for ongoing support and adoption of this emerging sector. And other announcements like Republic of el salvador adopting crypto as a legal tender. Information technology'll be piecemeal. It'southward not going to be one big event. But collectively, these announcements with ongoing price appreciation, I think this looks very different two or three years downwardly the route.

Meb: I was actually chatting with Michael Saylor this morning, and he's had a pretty unique non-consensus view on adding crypto to treasury balance sheet. We had a similar line of thinking, arrived at a slightly different conclusion, which was our historical modeling demonstrates that investing at least a portion, a tertiary, half, etc., of an resource allotment, and and then this really applies to corporate but also to individuals, in a global allocation portfolio results in what we believe to exist lower volatility and drawdowns. Obviously, crypto as a portion of the global portfolio, it'due south small currently, potentially bigger or smaller in the future, who knows? Simply it's an interesting thought experiment that listeners should go through. We really do information technology with our unabridged balance sheet at Cambria, my company, too equally personally. Nigh people don't think that manner, and by most people I mean, 99.9% of people don't do that. So, listeners, the old post is called "The Stay Rich Portfolio." But at the very least, it could certainly get yous thinking in a unlike brainstorm sort of way,

Wes: When y'all await at what the Fed is going to do in 2022, and as the CPI numbers get-go to coil out, and this very evident stagflationary economic backdrop nosotros're currently in and so we'll continue battling waves of COVID and stimulus press. Aggrandizement is real at the end of the day, and BTC is merely a ameliorate version of gilded as a hedge for aggrandizement. You've got a tangible input toll that goes into the creation of a new BTC, similar that mining reward. The only new Bitcoin existence created on a mean solar day-to-twenty-four hour period basis are the rewards paid to miners for creating those blocks, which serves the purpose of clearing and validating those trades. And in that location's a tangible cost that goes into creating those rewards in the form of CapEx spend on your infrastructure, your equipment, and your ability and your operational overhead, your G&A. And y'all've got this fixed supply, and predictable supply, in the course of money growth, or supply of BTC, correct now existence almost 19 one thousand thousand. There will but ever be 21 million BTC outstanding. So you lot don't have in a fourth dimension of economical uncertainty, some governing authority that decides to consequence 2x more BTC versus the current pace. It'southward only not possible. It's architected in the protocol. It'southward very much a digital gold, but amend because you've got better security and cheaper forms of storage and ameliorate transportability. I don't need to deport gilded in my backpack across international borders. I tin can do it in a secured cold wallet in my pocket. The value proposition of BTC in general, given the macroeconomic surround, I think it has its place. It rewards the addition in a diversified portfolio. We have a ways to get to spend through some of the volatility that keeps people awake at night or keeping them from participating in this sector. But I recollect that volition sort itself out over the coming years and people will realize that this is existent. It's only going to get bigger, and the value prop is something yous can't ignore.

Meb: How exercise most people who are using your fund, individuals or advisors, slot it in? Do they call up it'south a thematic, that information technology just fits in the equity part? Is it an alternative, does it fit into real assets? Like what's the chat you're having with most people every bit to how they think about the narrative of how they use it?

Wes: There's been then much media coverage, y'all'd accept to be completely asleep at the bike for about three years to have never heard of BTC. Even family unit dinners iii years ago, when BTC hitting its get-go pregnant run in 2017 people are…five years ago, distressing, totally losing track of fourth dimension. I've got my parents asking me well-nigh Bitcoin, or my taxi driver on the way to a restaurant, "Have you seen the price of BTC?" Similar people know it's coming. Just from an inflationary standpoint, if yous're a millennial with $100,000 sitting in your bank account of hard-earned savings trying to purchase your starting time condo or house and yous wait a year, that $100,000 unless you lot're earning a return on it, purchasing ability is going to be less than it is today without question. The price of that firm is going to increase with the inflationary environment we're in, with the stimulus press tied to COVID that they need to realize a xx% or 30% render on that $100,000 to protect the same amount of purchasing power it had today. I think it's real. And this something at this signal, you can't ignore. They don't want to miss the boat. They see the negative correlation properties it has and what it represents in a diversified portfolio, and they're finally starting to find means to get exposure to it.

Meb: This has been a whirlwind tour. At that place are a scattering of other things I'd like to conversation about. We'll definitely have to circumvolve dorsum in the hereafter to check on whatsoever developments, including the Razzlekhan. At that place seems to be ane of those on occasion every once in a while, so it keeps your earth interesting. The best place people to get to follow what you guys are up to, keep track of your fund if they're curious about investing, what's the all-time spot?

Wes: viridifunds.com, Five-I-R-I-D-Ifunds.com. Y'all tin find all of our social handles on there every bit well. But you've got the portfolio and product announcements, the squad bios, etc.

Meb: Yous guys, y'all actually alluded to…let'due south meet if you can talk about this or non. Y'all work with our good friend Wes and coiffure at Alpha Builder, Empowered Portfolios. Are you guys going to do whatever more funds? Is this ane and done?

Wes: No. I mean, we're certainly going to be a thematic manager hither looking to innovate other thematic ETFs in the U.South. markets. Got a couple in the works correct now. A picayune bit as well early on to speak nearly. In that location've been some competitive moats we're trying to create. But there'll be more than to come certainly in Q1 and Q2.

Meb: Awesome. Looking forward to information technology. And we forgot, we tin can squeeze in, you've got another minute, what'south been your most memorable investment, good, bad, in between, over your career? Anything come to mind?

Wes: Frankly, being long Toronto housing is 1 of the hottest real estate markets in North America certainly in the last couple years has been my rubber bricks-and-mortar real estate, which is totally contrarian to our conversation virtually crypto this terminal hour. But frankly, Steady Eddy, stable returns very, very attractive returns and revenue enhancement-free capital gains on a principal residence. I can't beat that.

Meb: I had a guest on the show, years ago, that was talking about Canadian real estate being in a bubble and the ways to curt that thesis with the Canadian banks and everything else, and they just proceed chugging along. It'southward been one of the most unstoppable avails over the past bicycle, just romping through everything. At that place are so many people that are like, "No, this is crazy. It's going up and upwardly." And so it just keeps going. Information technology keeps going and going.

Wes: A sign of the times. Bricks and mortar, an inflation hedge on very long residential real estate, definitely not commercial existent estate, given this move to decentralized workforces and y'all name information technology. Offices are troubled. Industrial has been strong, merely residential existent manor, just given the revenue enhancement advantages and groovy spot to accrue some wealth, certainly, just all role of a portfolio, and crypto is part of that.

Meb: And a beautiful role of the world. I look forward to getting dorsum when it'due south not then common cold. Concluding time I showed up in like shorts and a t-shirt, I about died. So I've lost all of my winter skins. Wes, it'southward been a blast. Thanks so much for joining us today.

Wes: Absolutely. Thanks for having me.

Meb: Podcast listeners, we'll post show notes to today's conversation at mebfaber.com/podcast. If y'all honey the evidence, if you detest it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review u.s.a. on iTunes and subscribe to the testify anywhere good podcasts are found. Thanks for listening, friends, and good investing.

rogerswiltat.blogspot.com

Source: https://mebfaber.com/2022/03/07/e396-wes-fulford/

Share this post