The following is a rough transcript which has not been revised by The Jim Rutt Show or by Steve Barbour. Please check with us before using any quotations from this transcript. Thank you.
Jim: Today’s guest is Steve Barbour. He’s the founder of a very interesting little company, maybe not so little, called Upstream Data Inc. And they do something that I had no idea existed. Steve, why don’t you tell us a little bit about your company?
Steve: Sure, Jim. Thanks for having me, first of all. Yeah, my company name is Upstream Data Inc. Well, actually, our fab shop based in Lloydminster, Saskatchewan, just on the south side of the border there. But I’m presently located in Calgary. I started Upstream back in 2017. Prior to Upstream, I’ve been working in oil and gas as a facilities engineer and a production engineer since 2011. So that was since I graduated. So basically, my entire career has been in oilfield. And started Upstream effectively … I won’t give you all the full background before, and it is not too relevant.
Steve: I was just working at oil companies and then service companies designing downhole tools and stuff. But in that period, actually, there’s a period of time where I had quit in oil company to pursue a downhole tool design, which is something I’m very passionate about. I used to work a lot on pumps and production tools. And so, in that period where I had quit the oil company to start almost like a little design and licensing firm, I had started learning about bitcoin. So that was around the 2016 timeframe.
Steve: And really, before that, I’d heard bitcoin, but never really, as they say, jumped down the rabbit hole. Because all I really heard was what they say on the news, and they didn’t really make it too exciting back in those days. But when I had this downtime, like just starting this new business, I started learning about bitcoin mining. And of course, when you learn a bit about mining, you see that it’s very energy intensive. And because mining is … It’s an energy consumer of electricity and it doesn’t really matter where it’s happening, so it struck me as a great potential technology to help oil and gas producers deal with their stranded energy problems.
Steve: So that’s like flare gas, vented gas, and even just sitting gas wells and bottleneck pipelines, all those things. So I started a company just a few months later, January 1st, 2017, because really, I was looking around and nobody was using bitcoin mining as a solution to this waste energy. So I couldn’t find anyone doing it. So I thought, well, someone’s got to try it. So that’s when I started the company in 2017, and got our first prototype out there. And effectively, started a business around selling effectively just bitcoin mines. I call them bitcoin mining data centers to the oil and gas industry.
Jim: And so, these things are what typically put right at the wellhead, or where are they located?
Steve: Yeah, exactly. So the cool thing about bitcoin, as I alluded to, is that it’s an energy consumer and it can be located anywhere. It doesn’t really need to be located, say, on a grid or off a pipeline. So we deploy these natural gas engines, so gensets. So we feed the engine with the surplus fuel or the stranded fuel, because we don’t actually just exclusively mine bitcoin on vent gas or flare gas, which is certainly our biggest market. But we actually help even stranded gas owners like guys with mature gas wells.
Steve: We have clients in Pennsylvania, in New York State with these very old, mature, depleted gas place that are no longer feasible to feed the grid just from the lifting cost, like the operating cost and the compression cost to get it to market. And so, we offer this solution, which is basically an engine. We mostly specialize in small motors, like small engines, not the really big stuff, not the big Waukesha style brands, more the small automotive style engines, small Cummins engines. So we basically plumb the engine into the source of … Usually, it’s waste gas.
Steve: So usually, it’s like vented methane or flared methane or flared natural gas. And we generate electricity right there on site. And with the electricity, we feed a building, which I just refer to as a data center, but it’s a bitcoin mine. So it just feeds the building, which is just computers connected to the internet. And of course, just mining bitcoin. That’s what they do.
Jim: And so, give me again the sense of the range of scales. What are the kilowatt outputs of these generators? What’s the range?
Steve: Well, the range isn’t really limited because you can … Whether you’re deploying multiple engines or you’re deploying just bigger engines, you can go anywhere from our smallest product, is a 50 kilowatt genset. So that’s specifically the motor, and most people listening would be somewhat familiar with this motor. It’s a V8 Chevy 5.7 liter. Some call it a Vortec engine. It’s a truck engine. It’s an automotive engine. So it’s an engine that’s quite commonly used in oil field just to run wellsite, especially in Canada. It’s also used all over the US and small scale industrial applications.
Steve: So it’s a very commoditized engine. And so, that would be the smaller end. We could do smaller than that, but I find that this engine is … Because it’s a commodity from the economic standpoint, like cost per kilowatt, it’s a good bang for the buck. And then anywhere above that, so one of those little engines would consume at about 50 kilowatt. We consume up to about 400 to 500 cubic meters of gas a day. So in other terms, that’s about 15,000 to 18,000 cubic feet.
Steve: So usually, this engine is actually a really good choice for these Upstream oil wells, which have associated gas, solution gas coming off tanks or just coming off the casing of the oil well. It’s a good solution where, today, a lot of these producers producing small scale … We’re not talking big frack pads, we’re talking just smaller conventional oil wells. They can’t do anything with this gas, so they end up just venting it to atmosphere in a lot of cases. And of course, the drive behind the venting stuff is with additional increasing emissions regulations.
Steve: These small engines are perfect fit to scale, really, to any vent volume. It’s one of the only, I would say, commercially scalable. And it has its own limitations, but it’s one of the few commercially scalable solutions for this small scale vent problem.
Jim: And just for our audience who are guarantee, hardly any of them know anything about the oil business, an oil well, oftentimes, will also bring some natural gas up. Which if the scale isn’t right, if it’s not close to a pipeline, et cetera, there’s no really economically viable way to do anything with the gas. So they typically either vent it directly to the atmosphere, which is not so good from a greenhouse gases perspective, or they’ll flare it and burn it off, essentially, and it’s just a waste. And so, the idea here is take something that’s a waste and turn it into something arguably, and we’ll discuss this later, has economic value, which is mining a bitcoin. That essentially at the highest level?
Steve: Yeah, absolutely. That’s right. So, I mean, we can call it associated gas. So, pretty much, every upstream oil well will have some amount of gas coming out of solution. It’s different with different pools, different formation characteristics. But my background, for example, my entire career has been in the Canadian heavy oil industry. So just by nature of how this oil is produced, when I say heavy oil, we mean it’s … Physically, the density is higher than, let’s say, lighter oils.
Steve: And it’s also viscosity is very thick, and it actually produces a lot of sand because it’s an unconsolidated sand formation. So instead of, let’s say, these … Today, everyone hears about fracking and stuff. Fracking is in a very consolidated, very tight sand formation. So you have to basically pump hydraulic fluid and crack effectively the sandstone to get access to the oil. Whereas in this heavy oil, to contrast this heavy oil industry, you don’t need to do any of that. It’s more conventional production techniques, just like putting a pump down hole and pumping to surface.
Steve: There’s no fracking. But because it produces so much sand on surface, when you pump the oil to the surface of the oil well, you cannot pump it down pipelines and have networks of pipelines everywhere. And because you don’t have pipelines, you haven’t trenched a pipeline. You’re not going to have gas lines either in most cases. I mean, obviously, it depends on the facility. But in most cases, you’re not going to have pipelines. And so, when the gas comes up with oil, which it does, practically, every single oil on the planet is coming out of solution, as the oil loses pressure as it goes from downhole pressures to uphold pressures.
Steve: Then you have this associated gas that’s released at a solution, almost like opening a can of Coke. You shake a can of Coke. As soon as you open it up, all the gas comes out and it foams up. It’s actually the same thing with oil. Oil actually gets foamy as well. And so, you got to deal with that gas. So, traditionally, before bitcoin mining was an option, because we’re not the only company now doing this, before bitcoin mining was an option, the producer would use as much gas as they could on site to fuel their equipment.
Steve: So it could be fueling motors, fueling burner systems in tanks or treaters and that kind of thing. And then they would try to sell the rest of the gas. So they tried it … If there’s enough gas and it was reliable for enough time, they might sell it to the local county. So there’s plenty of places that … In Canada, like Medicine Hat is a city built on gas infrastructure. Most counties in Alberta that have oil production are often fed by these upstream wells.
Steve: But when you cannot feasibly, like if a project payout doesn’t make any sense to install a pipeline, because maybe the gas volumes are very low, then that’s where we come in. Our bitcoin mining stuff doesn’t need trench pipelines, and it’s all portable. So whatever they invest in our equipment, whether it’s an engine, they might need an engine. We build them or they might have their own. Then we bring the data center like the bitcoin mine to the equation. And so, all the capital put into this equipment is now portable and it’s not sunk, like you would have a sunk cost and a pipeline. So for that regard, it’s extremely cost effective and it’s beneficial, where they can just move these things around as needed.
Jim: Yeah, that makes a lot of sense. Certainly, there’s going to be some situations where there’s no other economic use for it. And then just for my own curiosity, do they just vent the natural gas or do they flare it? They burn it as it comes out the well if they don’t have any other use for it.
Steve: Yeah, every jurisdiction is a little different. So there are certain, let’s say, in the states, and I’m not as familiar with some of the regulations in the States as I am in Canada. But there are certain states where you have extremely strict regulations such as Colorado and California. There’s other states like Texas, Oklahoma where the regulations aren’t as strict. In Canada, specifically, every single oil and gas facility, which is basically any individual location or oil well, you’re allowed to vent.
Steve: And venting, just so your audience is clear on what that means, it means this excess gas that’s produced is just released to atmosphere. It’s out of a pipe. I actually have a little video on my website about it, if you look at the field report section. So it’s certain vent volumes are allowed. So in, say, Alberta, where we’re based, you’re allowed to vent on every single oil well up to 500 cubic meters a day. So that’s about 15,000 cubic feet a day of gas at standard conditions. That’s allowed. So the regulators won’t require you to do anything. You’re allowed to do that.
Steve: You just got to report it. Above that volume, you have to capture it or flare it. And they’ll only permit you to flare in cases where you show … You have no justification to install a pipeline, meaning it’s not economically viable, so that the payouts … They have a formula actually. It comes down to net present value. But if you can’t show that it’s economic to install a pipeline or some alternative conservation method such as what we offer, then you’re allowed to flare it. Those rules will vary in different jurisdictions. Each state might have their own, and each province has their own in Canada, but that’s the gist of it there.
Jim: And then from a greenhouse gas perspective, we have pick your poison. Methane doesn’t last as long, natural gas, being methane mostly, doesn’t last as long in the atmosphere, but is many times, 70 or 80 times, as effective as a greenhouse capture gas. While if you flare it, you convert the methane to CO2, which has less short term impact, but lasts for hundreds to thousands of years in the atmosphere. Is that approximately correct?
Steve: I’m certainly not an expert on how they measure the equivalency, but I know that for methane, for strict methane, so CH4 molecules, and again, natural gas consists of not just methane. There can be nitrogens, there can be CO2, and there could be heavier hydrocarbons like pentanes, hexanes, et cetera. And so, each one will have a different, call it global warming potential. So that’s the measure they use, basically. So there is effectively an environmental agency, I don’t know who is the governing body that that dictates this, but they’ve agreed that methane, for example, when you look at … Yeah, you mentioned timescale.
Steve: So on the 100-year timescale, which is the industry standard scale, methane is approximately 25 times worse on a global warming potential than CO2. So basically, what that means is, if you’re venting methane versus combusting methane into its constituent products, which is water, a CO2, and then different nitrogen compounds, NOx emissions, at least when you compare the mass of methane versus a mass of CO2, it’s combustion products. Methane is considered 25 times worse.
Steve: So when it does come to … When an oil and gas producer that’s operating under these regulations for emissions, if you’re venting methane or venting natural gas, you’re going to be penalized significantly more per volume from venting than you will be if you’re combusting, such as in a flare or a combustor or an engine.
Jim: Okay, got it. So you’re basically converting the methane to CO2, plus a little nitrous oxides, et cetera. And so, equivalently, presumably your gensets, your generators, they can convert the methane and hydrocarbons to carbon dioxide. So, from an environmental perspective, in the raw sense, they are the equivalent of flaring it. Is that about correct?
Steve: Yeah, pretty much. In the oil industry right now, certainly, what’s being marketed to producers is, okay, you’re either going to flare it. There’s another product that’s equivalent to a flare, which is called a combustor or an incinerator, they call it. The combustion process is more contained. Whereas the problem with flaring is you have all this gas coming from whatever upstream pressure it’s at, blowing out the top of a pipe, like out of the flare stack.
Steve: And flaring is … It’s well established, although I’ve never been able to find good reliable numbers that are cited throughout industry, but it’s known that your actual combustion efficiency. How much of that raw gas is truly getting combusted at the flare stack varies based on many factors, including just ambient temperature, as well as how windy it is that day. So you can imagine that on a very windy day, the combustion process at the top of a flare stack isn’t as complete as it is on, say, a very calm day.
Steve: And there are also different elevations affected humidity conditions, all kinds of things can affect it. So for that reason, one reason why I know locally in Canada, a lot of these combustion companies, these guys selling combustors, so this is a competitive product of flares, they market their products as being a more complete combustion. So you have less fugitive emissions from non-combusted hydrocarbons. So when you compare it, it’s always a little different. So combustors are considered better, more environmentally friendly than flares.
Steve: And engines are in the same spectrum as combustors. Because engines have a much better complete combustion profile than flares. Although I’m not exactly sure, to be honest, how it compares on NOx emissions, engines obviously emit NOx, flares. NOx is effectively a function of how rich you’re burning and how hot the combustion process is happening. So I know in the engine space, people designing engines for low NOx, they’re really looking for a lean burn, which is high oxygen, high air ratio burn, while also minimizing temperatures. So there’s a bit of nuance there. But absolutely, if just for high level, you’re not looking at the nuance. An engine and a flare are pretty equivalent.
Jim: Okay, yeah. That’s good. I do understand the scale of these two now. I think about you’re doing these 50,000 watt packages. Think about it, that’s actually the size of the generator I have at my farms, 45,000 watts. It’s a Ford marine V6, actually, and hooked up to burn propane, so very similar rig, so that resonates with me with what we’re talking about here. A, I mean, pretty powerful engine and produces quite a lot of power.
Steve: Yeah. I mean, and like I said, the engines, we specialize in building ourselves, because it’s more of a commodity. When you get into the bigger engines, you have to really have a lot of manpower behind it, like supporting it. So that’s something we’re growing into. But because we’re a relatively small company, I mean, I only have 18 employees right now. We’re still focusing on the smaller engines, but power generation is a core part of our business. So we are growing into the bigger stuff. For the audience, I mean, these engines that we build, they’re basically just automotive engines or what you see, driving around an old Chevy trucks, basically.
Jim: Now moving downstream, we got some kind of generator. Lots of different people that make generators, doesn’t really matter. You guys have opinions on which ones you like, but for our purposes, it doesn’t matter. And then the electricity runs into a bitcoin mine. Now, I will say, I used to follow carefully what the state of the art was. And I watch the evolution from CPUs to GPUs, to the early days of ASICs, et cetera. What’s your version of the state of the art in bitcoin mining that you include in your operations?
Steve: So when I started, we are already at the ASICs. We’ve already reached the ASICs side of the technology ramp. Like Jim is saying, it started with when bitcoin started, bitcoin is a software, of course. So when mining really took off, it became competitive. People went from the very early people who are just mining on like laptop computers, they started optimizing. They learned how to write some code to optimize like graphics cards, which can really just boost the hash rate. And hash rate just means calculations per second.
Steve: And then it went from graphics cards to guys started building specific, I think it went to FPGAs after that, field programmable gate arrays, that’s what they are. I don’t really know a lot about that. But then by the time I started my business, they’re already into what I call the industrial era of bitcoin mining, where it had already gotten so competitive and so profitable, that people who are in the semiconductor and chip design industry started designing chips right upstream right at the fab, specifically designed for bitcoin mining.
Steve: And so, with that, you have these specifically designed chips, these specifically designed circuit boards, what we call hash boards. They all generate a lot of heat, because they’re effectively computing at such high rates and it’s power draw that there’s a lot of heat being generated. Now since, really, I would say around the 2014 timeframe, is when the industrialization era really began in earnest. That’s when Bitmain and there’s a few other companies, Avalon, Samsung builds some of the chips, TSMC fab some of the chips.
Steve: And that’s when it really took off on the industrialization side of things. I mean, if you look at what we do, and we’re effectively deploying these computers in this power dense configurations as possible. We’re trying to consume as much natural gas as we can for a given footprint, because that’s what it’s all about. We’re trying to deal with this energy. We wouldn’t be able to do what we’re doing now, say, in the early days of bitcoin. Because in the early days of bitcoin mining, all they’re doing, like Rosche was saying, is computer chips and stuff, and the power draw just wasn’t there.
Steve: So really, certainly in the mainstream media, bitcoin has gotten a lot of heat over the years for its environmental footprint. But there’s certain aspects to it, like what we’re doing, where you wouldn’t even be able to do it without the industrialization and the high intensity energy consumption.
Jim: Yup, interesting. Now, again, it’s not directly relative to your story with this or for general interest, are the ASICs continuing to get better and better? Are they essentially plateaued in this that’s technology fairly stable at this point?
Steve: It is becoming more stable. I think we’re probably at the point where we’re around 15% to 20% efficiency improvement every year on average, maybe a little higher. But it went from doubling, tripling, or quadrupling efficiency, meaning like how many calculations you can get per watt hour of energy consumed. So we look at that, the metric in the space is watts per terahash. So how much energy per calculation is being used? So it’s becoming more and more efficient, really, every year and every new model, so like Bitmain.
Steve: Bitmain has gone from the S1s, which is one of the first models. They’re all the way up to the S19s right now. The S19s were, I’d say, I don’t know off the top my head, maybe 20% to 30% more efficient than the previous model, which was an S17. And it’s only maybe a year-and-a-half later to market. But we are definitely … When you look at the efficiency profile, which some people have published of these chips, they’re slowly plateauing in the same way any technology eventually plateaus. You look at the history of engines. Early engines were pretty bad.
Steve: In the first few decades, there’s pretty big step change improvements in engine efficiency. But now you look at the engine industry, it’s had over 100 years of commoditization, while there are actually lots of cool things happening in the engine industry. It’s not major step change efficiency improvements. So that’s where we’re going with the chips, but we’re probably still ways out.
Jim: Yeah. I mean, the dimensions keep getting smaller on the chips, they get smarter in how they stack the transistors in three dimensions now to some degree, et cetera. So there’s always room for incremental improvement. Now, let’s get to an interesting economic question. In the compute component, let’s not count the generator, it conclude the whole capital cost versus the energy. If you had to buy the energy, so let’s ignore the fact that you’re getting essentially free energy.
Jim: But if you had to buy the energy in the mining of one coin, let’s say, what’s the ratio between the cost of the energy and the capital cost of the infrastructure? So let’s ignore the generator or you’re buying gas for one of your generator, it doesn’t really matter, so the ratio between the energy cost and the capital cost of the equipment
Steve: That’s definitely a good question. Over time, the cost has been shifting from high CaPEx. Certainly, when you look at CaPEx per unit energy consumed, the CaPEx used to be extremely high, while the OpEx was extremely low. I mean, contrast a CPUs versus modern ASICs, the watt consumption of a CPU is relatively low. Whereas modern, what we call ASICs, application specific integrated circuits, which are these specifically built beasts of machines to compete bitcoin, they’re already at a little over 3.5 kilowatt per device.
Steve: And so, when you look at the cost per kilowatt now while CPU back in the day, in a sense, it’s a lot cheaper than what we’re seeing with these modern computers when you divide it into the ratio of capital to total energy consumption. There is much higher CaPEx in early days than it is today. And so, and effectively, the costs of mining bitcoin are continually shifting towards operating costs, especially as these computers have longer and longer lives. So we talked about the slowing down of how fast these computers are improving.
Steve: A lot of people are familiar with Moore’s law, the idea that efficiency of chips double every two years or it’s around that timeframe. The chips for bitcoin mining has already reached the forefront of where we are with chips in industry, in general. And so, all the data is showing that when you invest in bitcoin mining, most of your lifecycle costs now of your mine is moving into operating costs, which means energy costs, mostly, mostly energy costs.
Jim: I just did a back of the envelope calculation. I don’t know if this is right or not. But let’s say electricity, 10 cents a kilowatt hour, plus or minus. 700 hours in a month, that would be $210 a month of energy to run 3 kilowatts. 30 cents an hour to run 3 kilowatts, 700 hours, $210 a month. What’s one of those 3 kilowatt ASIC chip packages cost?
Steve: Their price actually varies with how much revenue they make. But right now, because bitcoin has been on a bit of a bull run, I just corrected, of course, the other day, it’s dropped maybe 40%. But price of bitcoin is somewhere around like $38,000 today. So what we’re actually seeing, and I know this as a supplier of these computers that we’re always buying and selling them for our customers, the prices are going to be coming down again on these things. But just for easy numbers, the newest gen hardware, like an Antminer S19, which does about that 3, say, 3.5 kilowatt. It’s approximately $10,000 today.
Jim: Okay, so it’s still going to take a long time. It’s going to take 15 months to burn as much energy as the cost of the board if I did my calculations right. The CaPEx is still dominant in the economics.
Steve: Yeah, it actually depends now. Because you’re right, if you’re getting new gen computers, you’re going to be a lot higher CaPEx. But let’s say, my customers, my customers who are oil companies, they’re not as actually interested in mining bitcoin as they are in dealing with their gas in a way that has a better economic payout than their alternatives, which means a pipeline or even a flare or combustor. So for them, we actually don’t … We have very, very few customers who are using these new gen top of the line computers.
Steve: And the reason, I personally don’t advocate for my customers to buy this new gen stuff, the newest age, newest efficiency stuff, because of the cost. And the cost, it’s not just capital output, but we’re putting these things in the middle of nowhere. They’re all locked up, and they got security systems on them. But we have stuff that’s … Before your show, we’re talking about how remote where you live half the year is, and a lot of these wells are the same deal. It’s the closest house or the closest operator, at least the person that might be able to check the well is an hour’s drive.
Steve: Our customers use the older gen. So, for example, mostly what we’re using is Antminer S9s. They’re a lot cheaper, about a 15th as pricey as that new gen stuff per kilowatt. So we can deploy and consume their gas or conserve their gas for much lower CaPEx than using this new gen stuff.
Jim: Cool. So let me, for our audience, try to describe how I see it and you can correct me or I’m inevitably going to be a bit wrong. So there’s oil wells, and all oil wells have gas and solution in the oil. In a number of cases, it’s not economic to do anything with the gas, put it into a pipeline and use it in a city, or even put it into tanks, compress it, and ship it away for various reasons of scale and location. And so, the alternative would be either to just vent it, put methane into the atmosphere or to flare it, which is to burn it, and turn it into CO2 or use a combustor, which is the equivalent of flaring it.
Jim: And so, that was the status quo ante. Now, along comes you guys, and what you tell these oil companies is you can take that gas, which there’s no economic way to send it anywhere, and you can run it through a motor which turns a generator, which brings electricity, which runs these special ASIC boards designed for mining bitcoin, and at some known … Stochastic, but known rate, you can turn your waste natural gas into bitcoins. Is that a fairly decent picture of what’s going on here?
Steve: Yeah, it’s a beautiful summary. Absolutely, yup.
Jim: Okay, good. Now, of course, then comes the next question. We know that bitcoins just flip a whole bunch of coins, so you’re basically generating random numbers till you find one and it’s magical, and that turn into a bitcoin. What’s the ROI on these kinds of structures that you’re delivering to people?
Steve: Yeah, that’s great question. That’s the big question, right?
Jim: Yeah. It’s a dark question, right?
Steve: [inaudible 00:30:29] question, absolutely. So one, I’ll just contrast what we do with what normal bitcoin miners, say normal meaning, not these off grid miners do. China has historically been a dominant player in the bitcoin mining space. They’ve been mostly grid based. And actually, Washington State has been a big into bitcoin mining for many years now, because they too, like China, have a lot of surplus cheap hydro, hydroelectricity. There’s actually plenty places in the US that have been great spots for bitcoin miners to go to, but these are mostly grid base miners.
Steve: And so, when we mined say, on the grid, your major CaPEx is going to be your computers, and then you got to retrofit a building or you got to build a building to distribute the power from the grid to your computers, but that usually is relatively a low cost. The downside of being on the grid is that you’re going to have higher energy costs than you will if you’re off grid. Say, when you’re upstream of the grid, so our customers who are off grid or upstream of the grid, where the … My customers, the oil companies are, in many cases, the companies producing the gas for the utility who provides the grid power.
Steve: But for us, our products, when you look at what, if I quoted, say, you’re an oil company and I quoted you on one of our, say, small units, something to trial, you’re going to see a payout range from between one to two years, probably about a year-and-a-half, depending on the day because of the way bitcoin fluctuates. You’re going to see a pad around that one-and-a-half years, strictly on what you have to output in capital to us and what you’ll mine in bitcoin. However, when you look at that payout, it actually is worse than what a typical grid miner is doing.
Steve: Because a grid miner, he’s only having to really just buy computers and the computers are usually paying themselves off in around 300 days to a year, generally, depending on, of course, power cost. But if you have reasonable power cost, then you’re going to be in that range. So the big difference, though, I’ve had a lot of people call me over the years, confused, as to how our business model works, because the payouts and the CaPEx is a lot higher than, say, a grid miner.
Steve: But the thing people always forget is we’re not actually competing with the grid miners, because the reason that oil companies are buying our products isn’t actually strictly for the bitcoin payout. It’s because of all the alternative benefits they’re getting. So commonly in Canada, I’ll say Canada specifically, but commonly in Canada, our clients are oil companies that we work with. They’re in a situation where if they don’t do something with the gas, they have to shut in their oil well.
Steve: And in many cases, just based on how regulations work, it can take a lot of time and a lot of money to get a permit for something like a flare. So when they come to us, and we can actually just … Either they buy the equipment or maybe they work with us on a lease or some other form of financing, we’ll bring the equipment to their site, deal with all the problems without the regulatory headaches. So they’re not just benefiting from the revenue that they’re earning on bitcoin, but they’re actually incremental. They might be making incremental oil than what they otherwise would have. And that’s what ends up justifying their projects. It’s not strictly just the bitcoin mining.
Jim: But even so, in an industrial context, one-and-a-half year of payback on capital investment. It’s fucking remarkable. Certainly, in utilities, look at 10-year, 12-year paybacks on their investments in generating capacity and things of that sort. So 1.5 ain’t bad. Though, of course, it’s probably not as simple as that. Because the difficulty ratio rises, that payout tail starts to go down in the future, I would expect. Though, I suppose that’s a function of what happens to the price of bitcoin as well.
Steve: Yeah, yeah. When you start integrating the future difficulty profile, I’m saying a payout of between, say, one-and-a-half years and two years, that’s integrating that because if difficulty goes up and revenue goes down, well, the computer pricing actually always also goes down. So purchasing at that time, your actually lower CaPEx. This is just what we’re seeing historically, but it’s also not accounting for bitcoin appreciation. So if you’re actually … Those payouts are based on if customers are selling a bitcoin the day they get it.
Jim: Yeah, which is what you should.
Steve: Yeah, a lot of our customers …
Jim: It’s what you should do from a … If you don’t want to be a speculator, if you’re essentially just an industrial producer, no reason to combine those two businesses. If it doesn’t make sense from selling it the day you mine it, then you probably shouldn’t mine it. Might as well just buy it from somebody else, right?
Steve: Yeah, you’re right, you’re right. Because most of our customers, they do sell their coins. It’s not daily, it’s monthly, just because it’d be accounting nightmare to do it daily. So we actually buy their bitcoins off monthly. A lot of our customers just do that with us, because we just make it easy for them so they don’t have to … Because again, we’re talking to oil companies. So they don’t want to have to sign up to an exchange and figure it all out themselves. So we just do it for them.
Steve: But you’re right, most of these guys, especially these blue collar oil guys that aren’t investing in this to speculate on bitcoin, they’re selling it pretty frequently. Now that being said actually, we have plenty of customers who were the smaller oil companies, more mom and pop guys that aren’t selling their bitcoin. They’re holding on to it because they’re investing in it, not just as a solution for their facility, but they think it’s a good long-term investment. Because there are certain aspects of mining bitcoin that are attracted to people as opposed to buying it as well, including the fact that it’s non-KYC. Nobody knows you have it.
Jim: Yeah, that’s interesting. It’s a good way to do tax avoidance. I assume the bigger oil companies are not playing that game.
Steve: No, no. I mean, I know many, many, many people just in my circle, in the oil industry, who even went out and retrofitted their own building, like paid an electrician just made a bitcoin mine. Some of these guys, yeah. I mean, they’re just seeing it as an additional revenue stream. And what they end up doing on the tax side, I have no idea, but they’re not the big oil companies. The big oil companies are all completely transparent, whether they want full clarity and what’s being earned and what’s being reported and how the tax works. But it is true, Jim, the bitcoin mining, bitcoin itself is sort of … It is a great vehicle for generating wealth under the table, out of view. And that is actually what drives a lot of the … Call it the value the market puts in bitcoin.
Jim: Yeah. That’s why sometimes I’m somewhat of a skeptic of bitcoin. I mean, I read Satoshi’s paper two months after it came out, and I slap myself in the head and say, god dammit, that’s a brilliant idea. Why didn’t I have that idea? Because it’s not that hard, I mean, to actually implement a bitcoin style block chain. It’s not rocket science, but it was a brilliant idea, the way he pulled it all together. But when I really look at bitcoin, it doesn’t have that many real use cases. In fact, like the joke a little bit, that the only really optimal case for bitcoin is for collecting ransom.
Jim: It’s almost perfect for that. The reason the Ransomware attack on the colonial pipeline, it’s one of the very few things that bitcoin is the best answer for. And yet we’ve got caught up in the psychology that bitcoin is the thing. And as long as that collective hallucination holds, the valuation will continue to go up. But frankly, I’m surprised that people are surprised that the recent volatility, because it’s essentially a pure collective hallucination and mathematical grounds, want to have essentially infinite volatility both up and down.
Jim: So, if you want to play the bitcoin game, you ought to be ready for some volatility because there ain’t no guarantees on that land. Because unlike a nation state security, people don’t really know this, nation state currency is also a collective hallucination as we know, but there is a major pump driving nation state currencies, which is not true for bitcoin. And that is that taxes are payable in nation state currencies. And if you start running the flow diagrams of currency flows in major economies, a big component of the currency in play actually flows through the taxation process.
Jim: So, that provides a pressure gradient, which produces the flow, which allows national currencies to be useful for transactions. None of that’s true for bitcoin. It’s all pure, collective hallucination around speculation. So that’s really, really, really important to consider when you’re playing the bitcoin game. And that’s somewhat unlike some of the other coins like Ethereum, for instance. Most of its values, and the fact that it has the smart contract scripting language associated with it, and so there’s a whole lot of cool things you can do on the Ethereum blockchain that you can’t do on bitcoin.
Jim: Ethereum is what we’d call a second gen coin. And now we have some third generation coins like Cardano is the one I’m most familiar with, which is much more efficient than Ethereum. Ethereum has gotten to the point where it’s ridiculously expensive to do a transaction, $5 to $10 per transaction, which is fine to do a big one, like a business deal or buy real estate or something. But you’re not going to go to the store and buy a six pack of your favorite IPA with Ethereum with a $10 or $5 transaction cost each time you do a transaction.
Jim: So anyway, these things are, for the longer term, very important to think about with respect to these crypto based currencies. But in the short term, they look like there might be fun, who the hell knows. And as long as you’re selling the coin every month and the CaPEx cost relative to the coins coming out of one-and-a-half, two-year payback, and if you’re a big oil company, your cost of capital is relatively low. Why wouldn’t you do it? It seems like a pretty brilliant business model.
Steve: Yeah. I mean, there’s a lot to unpack there. I mean, I think it’s totally fine what you said because the value inherently is subjective. So I mean, a lot of people look at Bitcoin and just speaking specifically bitcoin because, obviously, we could talk about the Altcoins as we say, like Ethereum and Cardano, and et cetera. But I mean, everyone values it differently. I never really tried … When I talk to it, because I talk to a lot of newbies like most oil and gas companies, for example, when we’re doing pitches. They’re pretty new to this.
Steve: Actually, more and more when I go do a pitch when we’re allowed to see people or I’m even doing it digitally, like in a Zoom session or whatnot, more and more, there’s engineers at the table there that know quite a bit about cryptocurrency now. Whereas a few years ago, wasn’t the case. But when people ask me and people comment on, it’s a shared hallucination, I don’t disagree with that at all. Because like you said, so is fiat money, so is like the US dollar, but I guess you contrast it that there are certain pressures that continue to support the value of these things.
Steve: But I think one thing people need to remember is that fiat money, say, the US dollar, it’s not like it’s a new tech, it’s been around … It’s obviously changed form prior to 1971. It was backed by gold, you can redeem your fiat and gold. And then even central banking and how the dollar was even issued changed back in the early 20th century. But even before that, gold being the basis of money, has been the truth for quite a long time. And so, when you compare something new like bitcoin and its volatility to anything we’re used to, like fiat money, government money, it’s not exactly fair because the government money has a long, long history and a precedent on the market.
Steve: So that’s partially why it is so stable and so liquid, people have the precedent for it. Because one thing every bitcoiner, like myself, I’m a pretty hardcore bitcoiner, we still use this money, this old money, whereas most people don’t use bitcoin. There’s only a small percentage of people even using this new tech, so it’s very much different. So I usually just say, subjectively, Jim, doesn’t sound like you’re a huge fan of bitcoin in terms of … Maybe you’re a fan, but you talked about the theory of Cardano being newer gens and stuff and maybe more useful.
Steve: And I think that’s fair, because that’s a personal thing. You find it more useful. I, personally, when people ask me, is bitcoin … When they talk about these things, what people in the media say like, oh, it’s going to be obsolete. It’s going to be banned, whatnot. There’s so many different … What we call fad or arguments against bitcoin. But for me, the reason I continue to invest in it, aside from the fact that, obviously, I have a bias with my company, which is building these bitcoin rigs, one thing bitcoin has that none of these other coins have, these other called second gen or Altcoins, is it has this predictability.
Steve: Bitcoin has a culture of not changing anything for political reasons. And that’s the big difference between bitcoin and, say, Ethereum. I’ll just contrast it with Ethereum, which is call it a competitor bitcoin or call it new gen bitcoin, whatever you want. Ethereum has a precedent of constantly changing its structure, like its software, based on political pressure. And I actually wrote a pretty long piece a year or two ago on what Ethereum is all about. And really, it’s meant to be competitive to state issued money that is top down issued currency.
Steve: Where Ethereum is a very much bottom up currency. And I invest in Ethereum personally. And I value it personally because of its predictable aspects. The fact that I know that no charismatic politician or leader is going to just sprout out of nowhere and manipulate its monetary basis, such as its supply cap, how much is issued. The community has shown resilience against … and there’s many such cases showing this where the bitcoin community has resisted what I’ll refer to as political attack.
Steve: And you can contrast that with, say, central banking, who, like these guys, you look at central banking interest rates, the lending rate, the prime rates for banks, it’s flip flopping every other year. They’re trying to adjust it, I’m sure it’s with best intent to accommodate market conditions. But they’re so bad at predicting market conditions, that they’re having to adjust interest rates all the time and how much money they’re printing, because they really don’t know what they’re doing. And there’s that unpredictability of central banking. That’s what drives people to bitcoin. That’s the whole point.
Jim: Yeah, I like that point. And I’ll actually amplify a little bit why Bitcoin is more resistant to politics than these other projects. One is that it’s the simplest, things like Ethereum and Cardano and Ocean Protocol, which I’ve been involved with a little bit and the SingularityNET AGI token. They have rather complicated semantics. And sometimes those semantics aren’t quite right. Or they allow themselves to be subject to certain kinds of unanticipated hacks. And then they have to have some political response.
Jim: One of the coins I know about how to do a fork, basically, to undo a hack. And those kinds of things are, as you say, not allowed on bitcoin. And they’re much less necessary because bitcoin is very, very simple. I mean, bitcoin was designed to basically emulate gold. I would dispute a little bit that bitcoin is equivalent of money. I mean, it’s really more the equivalent of gold. And we’re now seeing with distributed finance, some very interesting things emerging where bitcoin is underlying other kinds of things, which makes a lot of sense.
Jim: Because bitcoin itself is awkward to use to buy anything, but it’s not bad to use for bulk moves or fairly substantial $10,000 or up amounts of capital in and out of various financial instruments through distributed finance. I think that’s going to be quite interesting for the future of bitcoin. That’s the good news on bitcoin.
Steve: Yeah, absolutely. I mean, there’s many ways to layer stuff on top of bitcoin. Right now, I mean, the two biggest things that sometimes are overlooked like, well, people, if you’ve been paying attention, you’ve heard of these called decentralized layers like lightning network, but they’re relatively low adoption. In my opinion, there’ll be reasons why they will stay relatively low adoption for quite some time. But there’s other, call it more trusted layers like custodial layers, such as just online exchanges.
Steve: There are certain exchanges you can buy and sell bitcoin use these stable coins, you’re never really pulling your bitcoin off the exchange. You’re trusting the custodian. These custodial models will allow people to use Bitcoin without ever having to take possession of it. Now that in and of itself is not necessarily a good thing. But it is a way to have a payments layer or even a smart contract layer on top of bitcoin, because there’s other protocols like semi-trusted protocols, like liquid network.
Steve: But even mining, you look at mining right now, most people, myself included, my business and all my customers, we don’t mine bitcoin directly using full notes, which is the base way of mining. We’re trusting a pool, we’re trusting a mining pool, which is acting like … Well, is a custodian, and is similar to an online exchange and that we don’t actually own the bitcoin until they send us the bitcoin. But by trusting that custodian, it gets rid of all the volatility of when a miner will actually find a block and be rewarded bitcoin. So it’s always a lot of nuance when comparing.
Steve: And unfortunately, when you see what we call certain fad about bitcoin certainly on a mainstream, they’re not really addressing this nuance. Because bitcoin, you’re right, you’re not going to go use bitcoin for a small payment just because the network feed to move bitcoin is relatively high. But for the most part, that’s not really what I think most of the market is interested in bitcoin for. It’s not these small transactions. It’s more of these bigger transactions, and actually just having a more predictable monetary asset, something that cannot be inflated away. Which is, right now, I think one of the biggest concerns going on in today’s society. We’re seeing that inflation is on the rise predictably based on all the money they’re printing.
Jim: Yup, can be.
Steve: And that’s what drives a lot of people to bitcoin, is you can’t do that with bitcoin.
Jim: Yeah. And again, this is one of my somewhat religious points, is that like gold, bitcoin is kind of sterile. Though I will confess that the development of distributed finance has made bitcoin somewhat less sterile, and that can be used as a stake versus loans and that loan can be used for productive purposes. But putting your money in bitcoin, in a pure sense, is very much like putting your money in your mattress. It is not lent out to businesses for productive purposes.
Jim: And so, it’s very understandable, particularly in the face of coming inflation that you would stick your money in bitcoin. I tried to remind people, that’s not the only alternative. Most people who have money don’t keep it in cash. They invest it in productive assets. If you owned an apartment building, your own oil well, you own farmland, those are assets that will keep their value even across inflation. In fact, may actually outperform other asset classes that are more exposed to fluctuations in interest rates, et cetera.
Jim: So realize that things like bitcoin or gold are somewhat anti-social, and that they are not contributing our savings. And our savings are essentially work we have done which we did not consume. It’s really quite simple. That’s what your savings are. And so, if you put your savings into, let’s say, starting a company or lending it to somebody who’s starting a company or buy stock in early stage company or building a house for resale, you’re actually creating value with what you did not consume. But if you park it in bitcoin or gold, nothing is happening. It’s sterile.
Jim: It’s been pulled out of the productive economy. So I think that is, even though it may make sense in the individual case, when everybody does it, it may have some unfortunate side effects for the unfolding of our society.
Steve: Yeah, it’s hard for me to comment on that. I mean, I think that bitcoin just gives people a choice to save as an alternative saving vehicle. Now, I didn’t ever think that offering more choice will end up being a detriment to society, though, there have been people that have speculated that. Because bitcoin is effectively a deflationary asset, meaning, over time, there’s actually less and less bitcoin available on the market, and that’s because it’s capped, and then people lose their bitcoins and stuff. So it’s effectively deflationary. I actually think this is actually a great thing for society.
Steve: Because I mean, when you look at … I’m always contrasting bitcoin and people like me online, we’re like bitcoin salesmen, but I’m always contrasting bitcoin with legacy systems. People are naturally pretty good at saving money, saving, like putting money in your piggy bank, even children can do that. Even toddlers can be taught, okay, save your pennies, put them in this piggybank, good things will happen later. You’re going to open up your piggybank and get something you need and get some candies, whatever the case.
Steve: So it’s a very natural human concept to save, to hoard. And contrast that with our current system, which punishes savers. If you’re without say, gold or bitcoin or any of these call it sound money assets, anyone holding fiat money like US dollars under their mattress, well, all the data is showing you that your purchasing power is just inflating away, it’s being diluted.
Jim: You should never do that. That was my point.
Steve: Yeah, absolutely, never do that.
Jim: Yeah, putting your money in the mattress is something you should never … Frankly, leaving your money in a checking account, I think, you should never do. But I point out the alternative, which is to take that money and invest it into productive assets, which are not subject to inflation, in fact, will actually outperform financial assets, generally speaking.
Steve: Yeah. So the point I wanted to make on that, the problem … Well, you’re absolutely right, and that’s what I do as well. The bitcoin my company earns, we ask strategic points, reinvest in more equipment and to expand our business. But I just wanted to say that when you think of the current economy where the only way to get ahead on this fiat economy is to put out most of your cash, not save it in the bank account, but put it into stocks, put it into buying shares and companies, putting it into real estate, whatever.
Steve: This is all a much higher degree of complexity than just simply saving the money is. So I think that’s why bitcoin is so powerful, is because, for whatever reasons, it historically has appreciated in value so much, that everyone who has chosen to save it in bitcoin, over any extended period of time, has actually, in many case, and probably most cases, has outperformed investing it on the market. Now, I don’t think that’ll always be the case. I think as bitcoin continues to grow and be adopted, eventually, market rates of return for investments will be very competitive with bitcoin. But I think it’s got a long way to go. I think bitcoin is going to be a pretty good investment for quite some time.
Jim: Cool. Let’s wrap up with the last thing that I invited Steve to come on the show based on a minor argument we had on Twitter about whether what he was doing was environmentally good or bad or neutral. And now that I’ve learned a little bit more, I’ll retract the fact that I thought it was bad, because the alternative is not so good either, which is, worst case, venting, and the next, best flaring or combusting. So, from that perspective, it’s probably not particularly environmentally bad versus the alternative.
Jim: Though, I suppose you would have to look at what are the embedded greenhouse gas costs and building the gensets and the ASICs. And that would be the potentially incremental, bad environmental aspects, but that’s relatively modest on the scale of things. So I’ll retract my complaint about it being an environmentally bad idea. Even if I do think that, in general, bitcoin is not worth the environmental cost. In this particular case, because the gas would be vented anyway, either vented or flared., I think the environmental impact is actually not too bad. So I’ll retract my complaint about that from Twitter.
Steve: This obviously the environmental footprint of bitcoin and of anything really is a hot topic these days. I’m personally, while my business focuses on, because the producer has a liability associated with venting or flaring, because there’s a regulatory requirement that they’re not allowed to do it. They’re losing oil production or something because of it. We help them there, but we actually like … I have no problem from a moral or ethical perspective, helping even producers that are, say, selling gas somewhere else or maybe stranded gas wells.
Steve: We have several clients that have sitting gas wells that aren’t doing anything. So they’re not currently producing, not currently, say, emitting carbon, but we are helping them get set up to mine bitcoin. Fundamentally, I look at it as carbon is certainly one part of the equation, but benefiting society by allowing them to produce more economic value, whether or not you agree that bitcoin, and not you necessarily, but whether or not the listener agrees that bitcoin mining is useful or not, or bitcoin is useful or not.
Steve: The fact is, it’s useful to people that are paying for it, for whatever reason, whether they’re using as a hedge against inflation, maybe they’re just using it to evade taxes. I don’t really know. But for whatever reason people are using it, they’re finding value in it. And so, I don’t see any problem with helping people mine bitcoin in any circumstance. I think we’ve, as a society, have somewhat lost the narrative on what it is we should be investing in. I mean, look at coal, the coal industry has been demonized for many years.
Steve: And in North America, especially in the States and Canada, coal fired electricity has been due to regulations, has been forced to ramp down. Meanwhile, over in China, they’re ramping up coal enormously. And guess where most solar panels and wind turbines are manufactured? It’s in China, and it’s off this cheap coal that they’re producing. I think people need to remember that, I say this to people when I’m arguing with them about this renewable stuff.
Steve: If you walk around your house and look at all your possessions, almost every single thing you own is built directly from fossil fuels or indirectly from fossil fuels. And to just demonize the whole thing like natural gas production is bad because it has emissions or coal is bad because it has emissions, I think there’s a lot more nuance to it than that. And a lot of people are just for better or for worse, I think for worse, disregarding that and disregarding the economic utility that is providing humanity.
Steve: So I find this is a funny thing about bitcoin, is because it’s so transparent, you can look on your own bitcoin node exactly what the hash rate is, and you can apply from the hash rate what the energy consumption is. People get caught up on bitcoins energy usage. But what’s not transparent is … Okay, so bitcoin, for example, is competing directly against the central banking system. And what’s not transparent is how much emissions, if you want to use emissions, which I’m not a fan of, I don’t consider that legitimate of a metric for resource consumption, but if you look at even just central banking and not including many of the other banking and financial layers built on top of it, what’s the emissions of central banking?
Steve: It’s very obscure. And I think you could try to put some constraints and assumptions on it, and you would see that it’s actually quite a bit worse than bitcoin mining is. And bitcoin and cryptocurrency is as a new form of settlement layer. So, I don’t know. There’s a lot to unpack on the environmental side of things, but I would like to see people talk and think more about the economic value it’s providing to humanity.
Jim: Well, I think we’re going to wrap it up there. I think, Steve, this has been really an interesting and fascinating exploration of an interesting economic niche I had no idea existed. And I think you’ve done a wonderful job of explaining what you do and why it makes sense, at least within the context of monetary economics. And this has really been fascinating. Thanks for coming on.
Steve: Yeah, Jim, thanks a lot for having me. I mean, it’s been quite enjoyable conversation. So any anytime or offline if anyone needs to reach me or just wants more information, I mean, half my life is educating the public on this stuff. So you can reach me on Twitter @SGBarbour or through my website, upstreamdata.ca.
Jim: And as usual, those will be available on our episode page at jimruttshow.com. So I think we’ll wrap it right there.
Production services and audio editing by Jared Janes Consulting. Music by Tom Muller at modernspacemusic.com.