Mining for Bitcoin and Other Cryptocurrencies

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Fred Thiel explains the cryptocurrency blockchain mining process.

Announcer: to Not Your Father’s Data Center podcast brought to you by Compass Data Centers. We build for what’s next. Now here’s your host, Raymond Hawkins.

Raymond Hawkins: All right, welcome again, to another addition of Not Your Father’s Data Center. I’m Raymond Hawkins, Chief Revenue Officer at Compass Data Centers and your host. Today, we are joined by Fred Thiel, CEO of Marathon Digital Holdings. He is talking to us today from London, Fred. Good afternoon. How are you, sir?

Fred Thiel: I’m very well. Thanks. How are you?

Raymond Hawkins: Awesome. We’re glad to have you. We’re really grateful that are willing to talk to us today about cryptocurrency, certainly a unique topic and something that’s on a lot of people’s minds and fascinated to hear your history. So we’ll get into that. Love hearing from our listeners. Thank you so much for all of you downloading us wherever you get your podcast. And we are excited to talk with Fred. So Fred, thank you so much for joining us and let’s get on to hearing your story and, and, and your history. I’d love to hear a little bit of your personal background, where you’re from, where you call home today and then we’ll dive right into crypto.

Fred Thiel: Sure. So firstly, appreciate being on your program. I’ve spent 40 years in the technology industry. I am European by background. Parents are Swedish. Born in France, educated partially in France, the US, the UK and Sweden. Have always been lover of technology. Father and stepmom were both bankers. So sort of ate, drank, and the slept banking all my life, especially sort of my more formative of teen years when I lived in London. My first technology job was actually writing software in a bank in London when I was in high school. And back in those days, this is a kind of late seventies. You walked into a bank branch in London to cash a check and they still hand wrote in a ledger your, transaction. No terminals, no computers at the branch level. So I got to live the archaic, old fashioned way, all the way through to the modern developments and nowadays with cryptocurrency, the disruption of those old systems.

Fred Thiel: But growing up, I had the benefit of really understanding the difficulties that exist in moving money around the planet. And one of the things that my stepmom, one of the roles that she had, was as a Senior Economist for the OECD. And one of her roles there was actually to help put together the framework, the regulatory framework for countries in the east block in Europe, when they were going to come into the OECD and then into the EU. So securities regulations, banking regulations, lending, et cetera. So sort of grew up in that environment. And in working with software in banks I got to touch things like the SWIFT system, which is how money is moved around between banks, which by the way, was the technology in the seventies that they thought was kind of cool because it operated using telexes as opposed to the internet didn’t exist then.

Fred Thiel: So was the early way of kind of, if you would, electronic data exchange between banks. And when you think about it, what banks really do is they settle balances between each other. And that’s exactly the way the blockchain works with Bitcoin. You use it as a settlement network. That’s how Satoshi Nakamoto designed it. It was meant to be a settlement network. And so Bitcoin in the blockchain is the perfect tool to use for transforming our financial systems to make them much more efficient, much more secure because nobody can corrupt the data once it’s there. There’s no way to hold the data ransom if you would. And so it’s really a perfect solution for that. So I was first exposed to Bitcoin and blockchain a number of years ago, and got very involved in looking at facilitating trading Bitcoin. Built a project to build an exchange, to operate in Switzerland and then built an OTC trading desk in a company in Lichtenstein.

Fred Thiel: And I joined the board of Marathon in 2018 when a long time friend of mine who at the time had just become CEO of the company, needed to reconstitute the board and figure out how they were going to take the company and do something new. And they decided to go into Bitcoin mining. And so Marathon transitioned from being a patent company that collected patents and prosecuted patents to beginning to do Bitcoin mining. And it was a long process that required the company to recapitalize itself and Marico Komoto the then CEO and now current executive chairman did an outstanding job of getting the company out of debt, getting it recapitalized and positioning it to, in sort of mid 2020, placed one of the single largest orders with Bitmain for Bitmain ant miners to mine, Bitcoin that they’d ever received. And today we’re currently in the process of deploying 133,000 miners across sites in North America.

Raymond Hawkins: Well, that’ll keep you busy 130,000 miners.

Fred Thiel: It sure will.

Raymond Hawkins: That’s in multiple sites. I’m assuming for that kind of volume.

Fred Thiel: Yeah, absolutely. We’re doing across four or five different sites.

Raymond Hawkins: Yeah, figured. Gotcha. Okay. Awesome. Well that we are super grateful to hear your background and I love the fact that you make the connection to the SWIFT system and early ability to clear transactions, to transfer money, to operate as that clearing house electronically, even in the seventies and how today the blockchain does the same thing. I think that there’s a thousand ways we could take this conversation. If you don’t mind Fred, I’d love to go back and start with, I think I have a firm grip on blockchain, but I’m not sure everybody, it listens to us does. And then Bitcoin itself and not just Bitcoin, but all of the digital currencies. Can you talk us through just for two or three minutes blockchain and what the technology of blockchain is and how it differs from actual cryptocurrency itself, and then follow onto that. Then could you get in a little bit into crypto currencies themselves? I know you guys are in the business on mining, but can we differentiate those two first as a foundation for our listeners?

Fred Thiel: The blockchain is essentially a chain of linked blocks that each block consists of a certain number of transactions. So let’s just say, if you think about a ledger, like your check register, right? If you have a checkbook and you write a bunch of checks, you write them down in your check register. At the end of the month, you get a statement from your bank and there’s each check kind of who it was paid to, et cetera, and the amount. So those types of transactions are formed into blocks. Think of it as there’s kind of a buffer, a memory pool. All these transactions, as they’re happening, fall into this hopper. And then the underlying software for the blockchain and essentially allows miners to do this process of assembling these transactions into blocks. And then you run a mathematical… Essentially you do a mathematical proof, cryptographic proof on this data, and that generates a hash and that hash has to have a certain value to it.

Fred Thiel: And if it has the correct value, and that value by the way is very dependent on the hash from the block that immediately proceeds it as well as the content of the data in the block it’s processing. And when it gets that hash, it then has to be equal to or less than a specific target number that the blockchain is looking for. And if you, as a miner, guess that number correctly, and it’s a factoring exercise. If you guess it correctly, you will, in that block, you publish the block, other nodes validate the block, and then you receive a block reward. And so miners are paid by the blockchain for doing this assembly of transactions, validating them, putting them into blocks, getting the block approved, and then moving on to the next block. And so the process of essentially securing the blockchain is what mining is. And miners get paid by the blockchain, today about six and a quarter Bitcoin per block that they win. And there are only ever, every block is estimated to take about 10 minutes. So that essentially means that there are a little over 2,000 blocks a day or 900 Bitcoin issued per day. That’s how miners make money. They get paid in, in Bitcoin. Similar process with Ether and Ethereum until they move to per proof of stake and any proof of work based blockchain.

Raymond Hawkins: So the blockchain is the technology and the… I like the way you said it, the mathematical proof that says, okay, there’s this agreed upon multi node verified set of, for lack of a better term questions, mathematical questions. And once you prove that out and fall in the range and get validated by the network, meaning multiple nodes, I guess, of visibility, that then gives you produces this hash and the block is awarded and then follows with a Bitcoin. Got it. Okay. I think I got it.

Fred Thiel: Yeah.

Raymond Hawkins: Okay. Understood. And so when I think about then… So that bit… Excuse me, that’s blockchain and how it marries up to Bitcoin. In the rest of the crypto, which there’s a bunch now, how many of them follow that same process, handling a blockchain transaction and how many of them do it totally differently… Let me ask the question a different way is blockchain the best way and what are other ways that it gets done in the market?

Fred Thiel: Blockchain, think of it, as it’s really just a process of how do you create a record of data that can’t be changed and you do it by making sure that every block of data is dependent on all the prior blocks before it. So if you have 20 blocks and you go and edit any one block of those 20, then all of the blocks subsequent to that one that you edited will be incorrect and invalid. So there’s no way to go back and change a block. Now how you validate blocks can vary. So in the case of the Bitcoin blockchain, you have this process of proof of work that’s used. And that’s been currently the same process used by Ethereum and a variety of other proof of work-based networks. There are other networks that don’t use proof of work. They use more of a proof of stake system, which is what Ethereum is moving towards, which instead works on a basis of stake capital, essentially money.

Fred Thiel: In the case of Ethereum network, Ether. You deposit ether, and you become a stake node, which means you have as many votes as you have the size of your stake. And when you validate a transaction, you say this transaction, this block is correct. You’re essentially betting your stake, that you’re right. And if the block that you approved ends up not being correct, then you could lose that stake. So the onus is on you to make sure that that block is properly calculated, but it’s not done by this proof of work methodology where you have millions of computers around the world competing to solve the math proof here. It’s really, you’re just saying, staking your reputation is a way to look at it, that the block is correct.

Raymond Hawkins: Fred is the competition, is it about speed or is it almost for lack of a better term? You know, everyone, 52 different entities got the question, right and then it’s a drawing or is it just whoever gets there first?

Fred Thiel: Well, so in the case of proof of work, the way that the Bitcoin blockchain works, is statistically speaking if you of contributed computing power that represents about 10% of the total compute power of the Bitcoin blockchain, then you should win in theory, 10% of the blocks.

Raymond Hawkins: Gotcha.

Fred Thiel: That’s the theory, but there is a competition to it. It’s not if you have one miner and you plug it in, you’re not going to get a fraction of a Bitcoin every day.

Raymond Hawkins: I understand. Right. I gotcha.

Fred Thiel: You’ll get nothing. Nothing, nothing, nothing, nothing, nothing, nothing. And then you might win a block, all of a sudden. Then you get a block as a reward.

Raymond Hawkins: I gotcha. Gotcha. I see.

Fred Thiel: And so what miners do is, miners pool their miners together into what’s called a pool. And the pool is what kind of, think of it as the general that’s it directs the miners. Okay, go mine this block, you go work on this, you go work on that. And by aggregating and cooperating together, a group of miners in a pool, you have a more hash rate you’re contributing to the overall network, higher likelihood you’re going to win blocks. And the block rewards can be evenly distributed amongst the members in the pool

Raymond Hawkins: So the large miner entities like Marathon, do you guys participate in pools or do you act essentially as your own because of your ability to deploy at scale?

Fred Thiel: The vast majority of miners, no matter how big, cooperate with a third party pool. In the case of marathon, we actually do have our own pool for multitude of reasons. One, it’s a great business to have, because when you’re a large scale miner, it allows you to optimize what you’re doing for the luck algorithms that exist in the Bitcoin blockchain. Also, when you’re a very large miner, you want to make sure you can really control how your miners are being directed to mine. And that’s why we wanted to own our own pool. Now we have opened up our pool recently to third parties, and now other miners are starting to join our pool because they love the transparency that we have. We have a third party public auditor who audits our two transactions, so that we’re issuing out all of the rewards. We’re not kind of keeping stuff to ourselves and making sure that everybody’s getting a fair shake in their process. And most of the pools actually today are offshore, many of them in China still because it’s not illegal to operate a pool in China, it’s illegal to mine buy Bitcoin. And so you have ant pool and these other pools, F2 that exist in China, but the Marathon’s Marapool is one of a handful of North American pools.

Raymond Hawkins: So you mentioned earlier that there’s about 900 or Bitcoin available a day. This is going to open up a subject for me that I want to take a minute or two and go down. And I don’t want to… So Stockholm School of Economics, economics degree, child of an OECD economist. So I do not want to have a economics competition because I will lose. I will concede for where we get started. But when I think about the money supply and I think about how money supply gets controlled by a central bank in a normal economy with a fiat currency. And then I look at Bitcoin, can you talk with me about how the supply works? Because you’re talking about 900 new Bitcoin a day. How does the, for lack of a better term, how does the money supply work and how does it tie back into the notion of a digital currency instead of a currency monitored by or managed by a central bank?

Fred Thiel: The whole goal with Bitcoin, if you go and read the white paper that Satoshi wrote, essentially Bitcoin was meant to be a fully decentralized financial network that no one party could control and therefore nobody could control the issuance of the currency. And if you can issue more currency, you can essentially cause it to be debased. And so the network itself determines how and when Bitcoins are issued and there will only ever be 21 million Bitcoin ever produced. And we have already produced, to date, about 18.9 million Bitcoin. And of those 18.9 million Bitcoin. Most, probably six million of those were lost back in the early days when people were paying 10,000 Bitcoin for one of the trivia questions you asked, I won’t give the answer. It wasn’t worth a whole lot. And so if you kept your keys on your hard drive, your keys to your digital wallet on your hard drive and your hard drive crashed, it was like, “Ah, I lost a couple hundred dollars worth of Bitcoin. It’s no biggie.”

Fred Thiel: Then fast forward eight or nine years and all of a sudden, if you had a thousand Bitcoin in a wallet and the keys of the wallet are on a hard drive, that’s in a trash heap, there are people who have paid trash companies to go look for that hard five to try and risk the keys.

Raymond Hawkins: Sure. Well, at $44,000 a coin, a thousand keys matters today.

Fred Thiel: Yeah, absolutely.

Raymond Hawkins: Even to guys like you and me.

Fred Thiel: Absolutely. Yeah. The fact of the matter is that there is a finite quantity of Bitcoin. And so it’s a supply and demand issue. As people start transacting in Bitcoin, as more companies start using it, as more companies start holding it. There are companies like Micro Strategy that sit on thousands and thousands of Bitcoin. They have borrowed money, they have raised equity capital. And Michael Sailor is a huge proponent of Bitcoin and he puts his money where his mouth is. And they have, at this point I think, closing on almost a hundred thousand Bitcoin, I think if I’m not too far off. So he’s one of the largest holders of Bitcoin out there. Then you have Tesla has a billion, two of Bitcoin. And even Marathon, we don’t sell our Bitcoin.

Fred Thiel: We hold it, as many miners do. Most miners don’t sell their Bitcoin these days. So you have no supply, no new supply going into the marketplace. So with scarcity, it drives price up. And the whole expectation is that the price of Bitcoin will continue to go up over time as more and more people start using Bitcoin or use the lightning network like in El Salva to do transactions. All of those things require a certain amount of Bitcoin liquidity. And as investment funds start wanting to invest in Bitcoin, whether it’s ETFs, whether it’s the Galaxy Fund, et cetera, which is one of the largest holders of Bitcoin out there, I think they hold about $30 billion worth of Bitcoin at this point. There’s a scare supply. And when there’s a scare supply, it goes up in value. So as a store of value, you can kind of view it as like art.

Fred Thiel: It’s not backed by anything physical. It’s not like there’s a pile of diamonds or gold bars that you can get by trading in Bitcoin, but it has a value because of its scarcity and the fact that people attribute a value to it. Why is it Picasso painting worth what it’s worth? Well it’s because people attributed value to it.

Raymond Hawkins: Right, right, right. Something is worth what someone will pay you for it. It’s that simple.

Fred Thiel: Exactly. Right.

Raymond Hawkins: That is what determines something’s worth. So, so said something Fred, that is news to me. I didn’t understand it. 21 million ever. 18.9 currently mined. If I just do the math quickly in my head, that’s about six and a, just under six and a half years at 900 a day worth of mining left. What happens to the mining industry once we get to 21 million?

Fred Thiel: Well, it’s more complicated than that. Every four years, the number of Bitcoin issued per day drops by 50%.

Raymond Hawkins: Oh. Okay. I got to redo my math. Okay.

Fred Thiel: There will be Bitcoin issued until the year 2140.

Raymond Hawkins: Okay.

Fred Thiel: That’s when the last Bitcoin will be issued.

Raymond Hawkins: But there’s sort of a half-life sense to it. It diminishes. I got you.

Fred Thiel: Exactly. In May of last year was the last havening as it’s called. And prior to May of last year, 1,800 Bitcoin were issued per day. And at that point it became 900. In the spring of 2024, it will go down to 450. In the spring likely of 2028. It will go down to 225, et cetera, et cetera, et cetera.

Raymond Hawkins: How do you play the calculus Fred? If you’ve built this, not if, you’ve built this significant mining business and you’re out there with a pool chasing 900 Bitcoin a day and that number’s going to drop in 2024 to 450, is the calculus that the value of those coins in the future will be enough to offset the reduced opportunity to mine them?

Fred Thiel: Well, if you look at the appreciation that Bitcoin has shown historically, and even just in the short term, it more than compensates for that.

Raymond Hawkins: I gotcha. Okay.

Fred Thiel: So it makes good financial sense.

Raymond Hawkins: Got it, got it.

Fred Thiel: I think if you look at where Bitcoin was at this time last year and look at where it is today, it certainly seems worth that. And if you then use, sort of average out the appreciation and Bitcoin over the past sort of 10 years on an annualized basis, in theory, it should continue to do well. That being said, like all markets Bitcoin will eventually reach a place in value where it kind of, it achieves a maturity if you would, and levels off.

Raymond Hawkins: I see. So I’m in the United States. So when I see Bitcoin quoted, it’s quoted in US dollars. Obviously as a digital currency it can be in any other currency. Is that normal? Is the Bitcoin viewed globally as a dollar denominated asset? Or is it viewed as a digital asset purely expressed in local currency?

Fred Thiel: People in the industry view it as a currency, but the IRS doesn’t view it that way they view it as an intangible asset. But because people who trade it view it as a currency, there are these things called trading pairs. So it’s one Bitcoin to a dollar, one Bitcoin to a pound, one Bitcoin to a Euro, one Bitcoin to a Swiss Franc, one Bitcoin to a Japanese Yen. Et cetera, et cetera. So you can trade Bitcoin against any fiat currency.

Raymond Hawkins: I see.

Fred Thiel: It’s just going to be a different price quote, not unlike a British pound to a dollar, British pound to a Euro, British pound to a Swiss Frank British pound to a Japanese Yen.

Raymond Hawkins: Yeah. Yeah. Right, right. It’s not a perfect… It can be expressed in relation to any other currency, just like fiat currencies are. Got it.

Fred Thiel: Right. Yeah. Or gold. Gold is quoted in dollars, pounds, Swiss Franc.

Raymond Hawkins: Right. Fascinating. Okay. All right. I’m learning a ton here, which I’m super grateful for. So as we keep motoring down this way, as I think about a miner, you mentioned earlier, and I’m not educated enough to know who makes the best actual mining devices, I’m not even sure, is that what the best term form miners is? The actual compute device that does the calculation. I’m assuming there’s multiple companies that produce the miners and there are some that are better than others. Is that a fair assumption?

Fred Thiel: Yes. I mean, today, our personal belief is that the Ant Miner S19 Pro, which is made by Bitmain as the best machine. And what you have to realize is that the algorithm we’re calculating is based on an encryption standard called SHA-256. These mining rigs essentially are just massive calculators of this algorithm. And they require custom Asics. So the companies that make these machines have to design their own Asics, have the manufactured, you can’t use standard off the shelf microprocessors or GPUs. Bitcoin requires much more calc power than that. And so you can’t use a general purpose microprocessor at all.

Raymond Hawkins: That was going to be my question just are the GPU based or standard microprocessor based. So no. It’s its own specific, a logic to be able to handle this algorithm and calculate. Got it. Okay.

Fred Thiel: And what’s important from a miners perspective is, think of it like horsepowers with lawn mowers, right? You got a lawn mower, it’s got a two and a half horsepower engine or a five horsepower engine. And that’ll tell you how much strength it has if you would. More importantly, though for miners is what’s the fuel economy of, of the engine. So what’s the fuel economy of the miner and the fuel that miners use as electricity. And so the question is how many Watts of electricity does it take for the miner to produce one horsepower? And in the world of Bitcoin mining, we call it how many Watts of electricity does it take to produce one terra hash, a terra hash is essentially a million million calculations

Raymond Hawkins: I’m taking notes. Okay. A terra hash. So like riding the bike and it’s Watts to Watts produced in power to kilowatts of the weight of the rider. This is exactly what you’re saying. Watts of the electricity consumed to problems solved as expressed in a terra hash, a million millions of calculations.

Fred Thiel: Correct.

Raymond Hawkins: Got it. Okay. All right. So the most efficient user has the best ratio, right? The guy that can produce the most calculations on the least amount of electricity. And then I guess the other input then is what you’re paying for your electricity, right? That’s the other part of this equation is how much am I paying to get that Watt of electricity to then do the calc for me? And what’s the spread on my machine, my building, my electricity on the value of the hashes or coins that I can generate. All right. I’m starting to get the business a little.

Fred Thiel: Yeah. And so you have to wonder like in the oil business or the gold business, gold mining business, if you want to produce more gold or more oil, you just dig more wells because there’s more in the ground. It doesn’t work that way in Bitcoin because the network determines how many Bitcoin it’s going to award. And it wants to award a constant 900 a day for right now. At the next having, it’ll be 450, as I talked about before. And to do that, it has to balance the load because if there are only two people mining, then the calculation is pretty simple. It’s not very difficult. But if a million people are mining, then you need to make the calculation really hard because otherwise you’re going to produce more than 900 Bitcoin a day. And so it’s constantly adjusting the difficulty rate of the formula to make it harder the more people that mine.

Fred Thiel: And if you think about today, there are about somewhere between a million and a half to two million mining rigs operating in the world calculating the Bitcoin blockchain. And that number is growing at a very rapid rate. And so the difficulty rate, the amount of hash rate, if you would, that a miner has to have to maintain paying the number of Bitcoin they’re earning on a daily basis, has to go up commensurate with the overall growth of the network. And that’s one of the beauties of the Bitcoin blockchain it’s continually balancing itself, such that A, only 900 Bitcoin are made day. And more importantly, the cost to mine Bitcoin essentially reaches a point where eventually it will not be profitable to mine Bitcoin, because so many people have added capacity to the network that the difficulty rate has gotten so high. And because your electricity bill is, you pay a fixed rate per Watt of electricity that you pull out of the plug on the wall, eventually gets to the point where it may not be profitable for you to mine as a miner. You may pay too much for your electricity or something else. And so you drop out and then as people drop out, the network becomes easier to mine again. It’s constantly looking to balance itself and that’s one of the beauties of the Bitcoin blockchain.

Raymond Hawkins: Yeah. I think I want to summarize what I think I heard you say is, Hey, Raymond, there are more miners coming on. I think you said about two million today, one and a half to two million. As more miners come online, the proofs, the algorithms get harder. So is to manage the output of today 900 coins. And so, I mean, just to make the mass easy for me, if there’s two million mins and you owned it a half a million, you would theoretically get 25%. But if that two million went to four million, you’re now getting 12 and a half percent. And so it’s adjusting the challenge. So the pool constantly adjusts the blockchain adjusts for how much capacity is in, for lack of a better term, the pool. I know there are pools, but in the total pool. Am I understanding it properly, Fred?

Fred Thiel: Correct. Yeah.

Raymond Hawkins: Got it. Got it. All right. I’m going to ask an esoteric question. I think. You said it adjusts. So the gentleman and I don’t want to butcher his name. So I’m going to ask you to say his name again, the Japanese gentleman.

Fred Thiel: Satoshi.

Raymond Hawkins: I’m never going to… I’ll eventually get it right. So Satoshi builds this concept, writes this white paper says, “Hey, I want a currency that people can’t manipulate.” And when you say the blockchain adjusts, running that today? Is there a company somewhere, an entity? What’s behind the blockchain when you say it adjusts? Can you tell me what the it is?

Fred Thiel: Again, think of a fully decentralized network. Satoshi didn’t want any one organization, person, or body to be able to control the blockchain. So what happens is it’s a consensus algorithm. So when a majority of the people who are mining agree on something, they can implement a change. And it’s very hard to get everybody to agree. So therefore, there aren’t many changes. So the way the software is written, the software itself does all this automatically. And the software isn’t controlled by one person, but the software runs on all the miners. And if miners ran different versions of the software, there would be a fork. Meaning one group of miners running one software-

Raymond Hawkins: Who wrote that original code, Fred?

Fred Thiel: So it was written by Satoshi and a group of other individuals. It’s open source. So it’s not owned by anybody.

Raymond Hawkins: That was going to be my next question. I’m assuming it’s open source. So they wrote it, published it, and everyone’s got it. Okay.

Fred Thiel: Yep. You can download it off the internet at I think is where you can download it from, put it on a computer and run your own node and you’re in business. Doesn’t cost you anything for the software. It’s open source. And essentially the network makes sure that everybody’s running the same version of the software. So there’s consensus. And that’s how it operates. It’s an ingenious mechanism. Now, the Ethereum network operates differently. There, you have the Ethereum foundation and you have a core group of people who actually control it. So Ethereum is not decentralized in the way Bitcoin is. Ethereum is much more centralized. And with the shift to proof of stake, where the people who hold the most of amount of Ether have the most say in what transactions are valid and which ones aren’t. You have a recentralization of control that is no different than banks.

Fred Thiel: So if your purpose in building a blockchain is to move away from the type of control are one individual could potentially approve or disapprove a transaction at their whim, if you would, then that’s a centrally controlled system. And with proof of stake, the Ethereum network is moving more towards that model because the largest stakeholders will be the people who hold the most ether. And those will be coin based and the big exchanges as well as the banks. And so we’re not achieving at all what the original ethos, if you would, of Bitcoin and cryptocurrency were designed to be. So Ethereum is a great network however, for the development of applications. It’s super easy to write an application to run on the Ethereum network. And that’s what it’s great for. It’s great for innovation and creating all these DeFi platforms that you see being built on Ethereum.

Fred Thiel: It’s a great way to develop those, tests them and build them out. Now, you could argue that because it’s an innovation sandbox, whereas the Bitcoin blockchain is this very rugged, if you would, and highly secure, highly decentralized system. If you’re reading the press on a weekly basis, you’ll see, there are a lot of applications built on the blockchain that have hacks, they get bugs. Even the London fork of Ethereum, before it was released, they discovered bugs where somebody could have issued an infinite amount of Ether to themselves. So the Bitcoin blockchain, there are no bugs in it. It’s been operating for 12 years. There’s a major update called tap root, which is being implemented right now, which essentially gives the Bitcoin blockchain all of the same benefits that Ethereum has in the way of smart contracts, multi signature, et cetera. And I personally believe that the Bitcoin blockchain is where you’re going to see most financial institutions and anybody who is building an application, whether it’s an online MLS, personal identity, health data, if you want to make sure that data is secure and that network is going to operate flawlessly, then the Bitcoin blockchain is the place to do that.

Fred Thiel: I mean, think about it. China shut down all mining in China, about 50% of the mining for Bitcoin in the world was done in China and the Bitcoin blockchain didn’t have a hiccup.

Raymond Hawkins: Oh, wow. Half the compute disappeared. That’s incredible. Well, I guess picked up and moved. Right?

Fred Thiel: Didn’t have a hiccup.

Raymond Hawkins: Yeah.

Fred Thiel: Well, BS picked up and move and it’s not fully moved yet, but regardless no central government can attack the Bitcoin blockchain and shut it down because you have to shut down all of the miners everywhere.

Raymond Hawkins: Yeah. The decentralization, back to Satoshi’s idea of no one controlling, no one government or one entity. That’s some brilliance in that.

Fred Thiel: Yep.

Raymond Hawkins: So I do want to come back to the China question, but I want to get one more that’s burning in my brain. So I’ve got this digital currency. I’m part of this blockchain where all the blocks are confirmed and the network nodes all have to agree. I love understanding how that works, but I see Bitcoin expressed in dollars. I know I live in the US and we talked about trading pairs. It’s interesting to me, when I talk to friends about investing in Bitcoin, they talk about their Bitcoin in terms of dollars. But does that miss the point a little Fred help, help me think about that a little. Is Bitcoin as an exchange of value itself, instead of having Bitcoins and then going on often trading them for another currency? I know that’s sort of a weird way of trying to ask a question, but help me think through that, the appropriate way it has its own, it’s its own, for lack of a better term, currency, but it also gets expressed in fiat currency. What’s the right way to think about it?

Fred Thiel: You have to think about what is the purpose of money. The purpose of money is that two people agree on a unit of value, such that you can price things in a way and exchange things without having to do traditional barter.

Raymond Hawkins: Yeah, get me out of the barter system.

Fred Thiel: If I’m a farmer and I have eggs. If I’m a farmer and I make eggs and you’re a farmer who has milk and we need chickens, you’re going to trade milk, I’m going to trade eggs. That’s how it’s going to work. But if you have money instead, then you know that, okay, eggs are priced at a certain number, units per dollars and milk is priced at a certain dollars. And so you and I have a medium of exchange that we both trust and agree on. The problem is if that is a fiat currency issued by a government, the value of that dollar, if you would, can go up and down based on how many dollars they print and how the economy of that country is going.

Fred Thiel: So it’s not in control of the farmers, the value of that dollar. And so as the farmers, in time of inflation, if the food you feed your chickens or the grain you feed your cows, as the dairy farmer, goes up in price, you’re going to raise the price of your product. And so that’s how you get inflation. And that dollar becomes worth less, not worthless. It becomes worth less. And so you can look at the price of Bitcoin and say, okay, Bitcoin is $40,000 today. It was $30,000 yesterday. Is that because Bitcoin is increasing in value or is it because the dollar is decreasing in value.

Raymond Hawkins: Right and that whole back your coming to the barter, eggs and milk and is the value of the dollar worth less. I love that. It’s back to our money supply central bank question, right? Are they putting more money in the economy? Is the economy growing and expanding on its own? Does the money supply keep up with the growth of the economy? Is the economy shrinking? Is the money supply shrinking commiserately right? There’s all these multi nuanced factors that in increase or decrease the value of the currency and everybody else tries to keep their goods in line. And yeah, it’s a way to trade without trading things, but rather trade stores of value and Bitcoin can be just that.

Fred Thiel: Yep.

Raymond Hawkins: All right. Let’s go back to China. What was behind the decision by the Chinese government to shut down all mining in China?

Fred Thiel: China’s a country with currency controls, meaning you can’t easily take your Renminbi and send them to a bank in the US. Back in the, few decades ago, when they started opening up the economy. People would essentially move money offshore by buying real estate assets, or companies would acquire other companies. And then they started shutting that down because so much money was… And part of the reason was people wanted to hold their assets offshore. And so when Bitcoin came along, all of a sudden it was the perfect vehicle for moving money offshore, because you invest in some mining equipment or a mining company, you get paid in Bitcoin, this Bitcoin goes in a wallet, that wallet is uncontrolled and you effectively have your money outside of the financial system. And anytime you wanted to deposit fiat in a foreign bank, you simply sold your Bitcoin on an exchange outside of China. And it was deposited in a foreign bank. So that was one of the reasons. The other-

Raymond Hawkins: Now I’m now I’m getting why the Chinese didn’t like it. I get that one the clearly. Yeah. Okay.

Fred Thiel: Yeah. So if you have all these very wealthy billionaires, and by the way there a number of party officials in China also were quite large holders of Bitcoin. And that’s really just based on the patriarchal system that exists in China. So if you’re a Bitcoin miner, you had to get effectively tacit permission to mine and you had to buy power and power was being provided by the provincial power utility. Typically the provincial power utility was somehow controlled by somebody who had a friend in the political bureau. So there was this cycle of kind of, let’s just say it, the profits tended to flow. For premieres E the issue in China was he’s very much against corruption, he’s very much against this type of favoritism. And he wants to control the economy in a way such that he can direct investment in areas that he wants and have the ability to put their money in Bitcoin and have it outside of government control, he viewed as a threat.

Fred Thiel: And so the e-Yuan, which is the digital currency that the Chinese government has, is a way to even further control the economy. Because now think about it, the government, what you have in your wallet. They can say, “Oh gosh, guess what all the money in your wallet disappeared because your social score is bad because you wrote something online that you shouldn’t have done and therefore we’re going to fine you. And we’re just going to garnish your wallet.” It’s kind of like the IRS going after money in your wallet. And so Bitcoin was an anathema to them. And so they couldn’t just stop the trading in Bitcoin because most Bitcoin trading actually happens outside of China. They had to stop the mining, the creation of the Bitcoin in China, because that was how most Chinese acquired Bitcoin.

Raymond Hawkins: I got it.

Fred Thiel: Because they essentially invested in Bitcoin mining.

Raymond Hawkins: Makes perfect sense.

Fred Thiel: Bitcoin from miners. Yeah.

Raymond Hawkins: Well, Fred, this has been an awesome 45 minutes. I, frankly, I don’t know what your team and schedule would be willing to do, but we’d love to have you talk more. This has been more educational than I ever could have hoped. It’s awesome. I hope our listeners enjoy and understand a little bit more about crypto and blockchain and all of the things that, whether it’s Ethereum and the other coins as well. Just super, super helpful. I took a ton of notes. I really appreciate you recording with us and would love to have you talk again. It’s just been great and I appreciate you doing it especially late in the evening where you are. So thank you for that.

Fred Thiel: Happy to come back anytime.

Raymond Hawkins: Awesome.