The World of Crypto

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Fred Thiel, CEO of Marathon Digital Holdings discusses the future of crypto.

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

Raymond Hawkins: Welcome to another addition of Not Your Father’s Data Center. We are joined back by popular demand, I might add, the CEO of Marathon Digital Holdings, Fred Thiel. Fred, thank you so much for joining us again.

Fred Thiel: Glad to be here.

Raymond Hawkins: Fred, I think the last time you and I spoke, you were in London doing some world traveling stuff. This time, where are you connecting with us from?

Fred Thiel: I am dialing in, if you would, from our new office in Irvine in California. And we’re still setting it up, so it’s not the fancy video suite that we’ll have in the long run, but it’ll have to do for now.

Raymond Hawkins: Well, the fact that there’s a video suite coming just tells me we’ll have to get you back for at least a third episode, so we appreciate you joining us in transition. Thank you for that.

Fred Thiel: Absolutely.

Raymond Hawkins: If you’re willing, why don’t we just jump off with the thing that is top of everybody’s mind today with the news cycle and the things that are happening in our world? Certainly, the oil price, the human tragedy, but I think that there’s certainly a crypto angle or crypto thought about how could crypto influence a war, impact a war, impact the funds around war, impact people’s assets during a war. I think it’s just a different way of thinking about currency and sanctions and those kinds of things in the context of a war. So as the CEO of Marathon Holdings, but more importantly, as somebody that’s an expert in the concept of digital currency, how does digital currency in an age of a war change things?

Fred Thiel: Yeah. It’s a really interesting use case for crypto. So if you go back to World War II, when people were being displaced and having to immigrate, leave their countries based on the onslaught of the Nazis, and all the destruction that was going on, they didn’t have many opportunities for moving their money. They couldn’t obviously carry a lot of cash with them, that was dangerous. They couldn’t carry gold with them. And so what many people did is they bought diamonds and sewed the diamonds into the hems of their clothing as a way to essentially be able to carry their bearer assets. It’s an asset you can carry with you across borders. Very risky obviously, and you’re going to pay a higher price to buy the diamonds because you’re desperate, and then when you sell them, you’re going to sell them at a discount because that’s the way markets work with these things.

Fred Thiel: Crypto provides a very unique thing in this world where sanctions have now become essentially a weapon and weaponized. So if you look at what the US and the Western countries have done to Russia with this war and their invasion of Ukraine, essentially, they’ve used sanctions as a weapon and essentially shut down the ability for Russian banks to interact with the West for Russian businesses and Russian business people to a great extent to work with the West.

Fred Thiel: And so, if you were somebody who had money in a bank and you wanted to transfer it to the West because the ruble has essentially been crushed by these sanctions, it’s now very difficult to do that. Plus Russia won’t necessarily let you move to foreign currency. So your only options are, what other bearer asset can you take? And Bitcoin happens to be a great example of one.

Fred Thiel: There’s been a lot of crypto buying going on. And once you have crypto, essentially, it’s very portable because all you need to do is have your keys and you can access your crypto anywhere in the world where there’s an internet connection. So yes, you do need to have an internet connection to do it. There are people trading Bitcoin, by the way, directly, face-to-face without internet connections that are literally doing it live between each other, exchanging keys, and then as soon as they get access to the internet, the transactions go live, but risky nonetheless as to how you do it. But it’s certainly easier than carrying diamonds or gold with you.

Fred Thiel: As a use case, using Bitcoin has become very popular, especially in the Ukraine where people are fleeing and so they’re converting their local currency into Bitcoin and then safeguarding that outside of the country, especially when you see these people having to flee, leave everything behind, and not being able to carry a whole lot, just being able to carry your keys is enough to safeguard your assets if you’re able to do that. So, that’s been a great thing.

Fred Thiel: Now people say, “Well, okay, if people who are refugees and people trying to avoid the depreciation of their assets by all these sanctions can move to crypto, why can’t crypto be used as a way to bust sanctions?” So I think Russia used crypto as a way to essentially be paid for the oil exports that they’re doing and then use that crypto to buy things.

Fred Thiel: Well, the crypto markets are not like the fiat markets. The total market cap of Bitcoin is sitting sub a trillion dollars. And you look at the average amount of Bitcoin traded on a daily basis, and it’s typically about 30,000 Bitcoin. That’s under $2 billion at current prices of Bitcoin traded a day. A nation-state like Russia can’t operate sanction-busting when they can only move a couple of hundred million dollars a day. It just doesn’t work.

Fred Thiel: Plus, obviously, crypto is very transparent. You can see where all these transaction goes and they go. And today, the tools that government officials have for tracking and identifying who holds the wallets are very sophisticated. So I think, as a tool for sanction evasion, Bitcoin’s not a good option. But what’s interesting is you are seeing a lot of people where they may be fearful of the volatility of Bitcoin. There’s been a huge uptick in Tether and USDC volumes lately. So that’s also clearly people are highly into those as ways to have access to a cryptocurrency that’s pegged to the dollar and more stable potentially and easier to trade in different markets. But it’s definitely proving the use case. I think we’ve also seen Bitcoin decoupling itself from the markets a little bit, the equity markets, which has been good, and it’s generally a very exciting time.

Raymond Hawkins: Yeah, Fred, as we think about the decoupling comment that you made, how is Bitcoin trading in regards to equities on a whole? I think when you say decoupling, you’re talking about that they’re not tracking quite the same, so you expand on that a little bit.

Fred Thiel: Since the fall, late fall, and the beginning of this year, we saw Bitcoin moving very much in lockstep to the Nasdaq into technology stocks as people move to risk-off with fear of the Fed raising interest rates and the impact that would have on equities. What you started to see at the beginning of the war was a decoupling where the correlation between Bitcoin and equities started separating and decreasing because obviously, all of a sudden now there was a real use case for Bitcoin that was very actual and very urgent. And so you started seeing Bitcoin move in an opposite direction of equities. And even Bitcoin-related stocks, which track the price of Bitcoin obviously started moving separately. So there were days where the Dow and the Nasdaq would go down, you had Bitcoin would go up and you saw the Nasdaq traded Bitcoin-related stocks like Marathon, for example, move in lockstep with Bitcoin. And so, we’re starting to see that decoupling.

Raymond Hawkins: Fred, is the thesis there that… You use this term, the use case, and I’m going to just play it out in my head. I’m a desperate immigrant wanting for my family not to be injured in Ukraine. There’s only so much I can carry. I’m going to liquidate my holdings and I’m going to take it with me in a digital wallet format. I’m going to sell my… And I don’t know what the Ukraine local currency is, but I’m going to sell my currency, I’m going to convert it to Bitcoin, and I’m physically, me and my family out of the country that that created a demand spike in digital currencies and Bitcoin in this case. And while the uncertainty of a war of this scale and this visible, equity markets don’t like uncertainty. So you see the equity markets wane but yet you saw this spike in demand, is that the confluence of events we’re describing here?

Fred Thiel: Generally speaking, yes. Essentially, what happens is we’ve seen since the late fall, the retail trading of Bitcoin decreased and institutional trading being the general, the bulk of the volume being traded, and when institutions are buying Bitcoin or trading in Bitcoin, it’s because it’s a store of value. And what happened, leading up to the invasion, with fear of the invasion, and then the invasion of Ukraine happening, people quickly look to crypto as a way to safeguard their assets. Because if you think about it if Russia invades any Ukrainian banks are going to be out of business pretty quickly. Right?

Raymond Hawkins: Right.

Fred Thiel: Quickly moving their funds to dollar-denominated accounts or into Bitcoin. And so that creates a spike in retail. And retail moves the price considerably. Again, there’s not a lot of Bitcoin traded on a daily basis when you compare it to stock markets. And so a spike in demand can move the price of Bitcoin significantly. I mean, if you look at a one-hour candle of Bitcoin trading or a 15-minute candle, it’s sub a thousand Bitcoin that are traded. And so you imagine, somebody who has maybe $20,000 in savings, that’s half a Bitcoin, they want to convert, it will take a hundred people at half a Bitcoin, and now you have 50 Bitcoin all of a sudden. That’s going to move the price.

Fred Thiel: And you could see it even by the time of day that these trades were happening, it tended to be more European time centric. So one of the great things about Bitcoin and crypto trading in generally is the transparency. It’s so easy to see what people are doing. And it’s easy to see where those trades are happening. Are they happening in the US? Are they happening in Europe? Are they happening in Asia? And you can get a better feel for sentiment. And that level of transparency makes it much easier to figure out what’s going on in the marketplace compared to the equity markets where it’s very small movements that are driven by sentiment.

Raymond Hawkins: Yeah. I just think the inherent transparency in a blockchain environment versus a traditional market maker environment in equity trading. They’re just much… Everything’s visible. Not only everything’s visible, everything’s validated by the larger whole. Right?

Fred Thiel: Yeah.

Raymond Hawkins: That’s the whole blockchain concept, so very, very cool. Well, I appreciate you talking out. There’s lots of conversations. Clearly, the war is on top of everyone’s mind, but conversations about how… I loved your explanation about why Bitcoin couldn’t be used as a way to circumvent sanctions. It’s just a sheer volume conversation. Right?

Fred Thiel: Mm-hmm.

Raymond Hawkins: I mean, when you have a GDP the size of Russia, if you soaked up the entire Bitcoin market, it’s still a blip on the radar. It’s just a rounding area. And so clearly not a vehicle by which any nation-state could circumvent economic sanctions. So, that’s a clear picture.

Fred Thiel: Or even an oligarch when you think about it, you know?

Raymond Hawkins: Right.

Fred Thiel: These oligarchs are starting to feel the pain of, yachts worth hundreds of millions of dollars are being essentially impounded. You’re seeing their assets being essentially impounded by banks. And while they may have a net worth of $10 billion, that’s not all in cash. A lot of that is held in assets like homes and yachts and airplanes and equities. And it’s not easy to dump all that stuff. And so, it’s very hard for them. So when they move into crypto, as I’m sure some of them have done, it’s been… I would assume it’s fairly easy to trace those bigger transactions.

Fred Thiel: And just the way the SEC looks at all of a sudden change in the trading patterns of a particular equity to see if an individual is trying or a group of individuals are trying to manipulate or pump a stock. The same thing can be done in the crypto world. And I think you’re going to start seeing the kind of law enforcement or the financial enforcement agencies responsible for dealing with sanctions, use these tools to really identify who’s doing what out there and make sure that those trades are being stopped or those assets are being frozen.

Raymond Hawkins: Got it. Well, Fred, thank you for helping us think through crypto when the world is at war and hate the human suffering and don’t want to discount that at all, but certainly wanted to have the conversation of how is crypto influencing or impacting or being utilized for good or bad, either way in the war.

Raymond Hawkins: Let’s shift gears to a little bit of a data center topic. As I think through cryptocurrency, and I appreciate you coaching me up that there’s the proof of work currency and then there’s the proof of stake currencies. And can you walk us through the difference between the two, and then how this leads into when I think about ESG, which is also on people’s minds today, how it impacts the energy being utilized by the crypto space? For us as a data center company, our industry gets looked at pretty intensely because we’re large users of electricity, same for my friends in the digital currency space. Can you talk to us about the difference between those two ways? And I hope I’m going to say it right. There’s different ways in hashing, is that right?

Fred Thiel: Yeah. It’s not different ways of hashing, but it’s different ways of validating transactions.

Raymond Hawkins: Got it. Okay.

Fred Thiel: If you think about proof of work, what proof of work is, companies invest capital in mining rigs and energy to essentially validate transactions. We’re processing transactions, assembling them into blocks, and then guessing a number. And if we guessed the right number, we win the block and we’re paid by the Coinbase if you would. The core network pays us.

Fred Thiel: In the case of proof of stake, proof of stake is essentially no different than banking. People say, “Oh, it’s decentralized.” No, it’s not. If you look at Ethereum, the vast majority of staking that’s been done resides on four platforms. So those platforms are essentially the core validators. No different than the banking world. So when you process a transaction on the Bitcoin blockchain, for example, where it’s proof of work, it gets processed by miners, and it typically will reach finality within a relatively short period of time.

Fred Thiel: And the fact of the matter is, no one person can manipulate that transaction because it’s a consensus-based algorithm. And there are enough people that do mining, and mining is so distributed around not just the world, but amongst individual companies and pools that it’s no one individual can do anything to manipulate that transaction without having 51% of the hash rate. So the investment in capital, in machines, and energy is what makes the Bitcoin blockchain the absolute most secure blockchain in the world. And it’s because of proof of work.

Fred Thiel: In the case of proof of stake, essentially individuals are staking their crypto holding. So in the case of Ether, to be an Ethernet, and Ethereum rather staker, I believe the number was, you had to provide 32 ETH, and you had to stake 32 ETH and that was locked up for a year, and then you had the opportunity to become a validator.

Fred Thiel: Now, the way the validators in Ethereum work, and I may have this a little bit wrong, but this is my understanding at least, essentially, you’ll be chosen to validate transactions based on the size of how much you have staked. And so the larger staking groups will have the bulk of the validation. Well, it’s really no different than having a group of banks validating transactions.

Fred Thiel: And oh, by the way, it is very easy in a staking, proof of stake model to manipulate transactions because if you’re a big enough stake node, then you could essentially sell, or rather you could buy, let’s just say a hundred ETH. And then you right away turn around and sell it, and then you go back and erase the buy transaction and leave only the sale transaction. So now, you didn’t actually buy, you just sold, but it’s almost like you never paid for the ETH. And it’s an oversimplification. But essentially, if somebody has a large enough percentage of… a large enough stake, they can do a transaction like that and it may go some period of time before that gets unwound or even discovered. Whereas in the Bitcoin proof of work model, you would need to have 51% of the global hash rate, which is an amount of capital that no company-

Raymond Hawkins: It’s unthinkable. Yeah.

Fred Thiel: … has, to be able to do something like that because you would have to essentially manipulate enough nodes to make that happen. So from a security perspective, proof of stake is, let’s just call it people… And I think Vitalic Buterin has said this couple of times, “It’s good enough. You have to trust it.” Well, people trust their banks, but now, go back to sanctions. Here we are and you have your money, your Ethereum locked up on a stake node, or you’re just trading Ethereum, and all of a sudden there’s a sanction event that happens, and this stake node that’s responsible for validating your transactions gets sanctioned.

Fred Thiel: Now, if you have a stake period, you may not be able to get it back. More importantly, your transactions may not get validated. So the concept of proof of stake is really just a digital version, quasi-decentralized, it’s not fully decentralized. A model that’s really just emulated of banks operating all on a blockchain. So, I’m personally-

Raymond Hawkins: Fred, I met somebody… Go ahead.

Fred Thiel: I’m just going to say, I personally think that if you want certainty and security in a fully decentralized network, there is no other choice than the proof of work.

Raymond Hawkins: Fred, in this proof of stake world, are there aggregators of… Someone shows up, there’s a bunch of individuals, are there aggregators who collect up people that want to stake? You mentioned that there are only a handful that was tightly held. I think you said four. Are they aggregating multiple people in that stake? Is that how it happens?

Fred Thiel: Yeah. So you have your large exchanges like Coinbase where you can essentially use your ETH to stake, and then you have a company called Lido, which is, sorry, one of the largest, And Lido I think has a couple of hundred thousand people who have staked through Lido, their Ethereum. But essentially, Lido becomes the validator. And so, you have four organizations represent nearly 50% of all the Ethereum that’s staked out there.

Raymond Hawkins: Got it.

Fred Thiel: Granted, people have staked through them. But again, it’s just like you deposit money in the bank and the bank gets to use your money to do things. So these organizations are earning money on the capital you have staked or the cryptocurrency you’ve staked and they’re using that and then they’re paying you as well a portion of that, but they’re earning a margin on that themselves.

Raymond Hawkins: I got that. That’s a great analogy. Thinking about traditional banking, I put a thousand dollars in the bank, a small dollar amount, I could walk up and get my thousand dollars at any time, but the bank doesn’t anticipate everyone coming and getting their thousand dollars every day, so the bank invests that money and earns a return on that money, and then pays their depositors a small portion of that return. And what I think I hear you saying is in the proof of stake, a very similar model that people staking their Ethereum for this example, are providing liquidity into the Ethereum market and providing a pool of staking and that transaction, there’s margin in that transaction which gets shared with the individual.

Fred Thiel: Mm-hmm. Correct.

Raymond Hawkins: Got it. All right. All right, very, very good. Well, Fred, I know when we had you on the first time, you did a great job, and we’ve had lots of people email and ask about the basics behind blockchain, the basics behind Bitcoin. Do you mind giving us a five-minute tutorial, just going back to the beginning and going, “Hey, here’s how it started”? And when I think about that, I think about the total number of Bitcoin, having the number that is available every month, just some of the basics for people who don’t understand. And I know it’s a Bitcoin-based conversation for your business, but would you give us some of those basics around Bitcoin that people that are thinking about Bitcoin for the first time just may not understand?

Fred Thiel: Sure. So Bitcoin was initially conceptualized by a whitepaper written by somebody using the pseudonym, Satoshi Nakamoto in 2008. And they wrote the whitepaper, and then basically published it. A group of people, core developers started developing the software. And the network was launched in 2009. And at that time, there was a little bit of a lag, and then the first transaction happened.

Fred Thiel: And if you look at the Bitcoin blockchain, it’s designed as a cryptocurrency based on a finite number of Bitcoin that can exist. And that number is 21 million. And essentially, every four years since 2009, the Bitcoin blockchain goes through a halving or a halvening, as some people call it, and where the rewards dropped by 50%. And today, for example, we’re down at only 900 Bitcoin awarded per day. No matter how many people are mining, no matter how many terahash of compute power are contributed to the global blockchain, it’s 900 bitcoin per day or about 6.25 per block, and there’s a block mined every 10 minutes essentially.

Fred Thiel: And the last halving event was in 2020, the next halving event is in 2024. And at that point, the Bitcoin blockchain will go from 900 Bitcoin issued today to 450, and then four years after that, 225 and so on, until the year 2140 when the last Bitcoin will be issued. To date, we’ve already issued or mined 90% of the 21 million bitcoin that will ever be mined. So the vast majority of Bitcoin to be mined have already been mined and are essentially in the supply.

Fred Thiel: Today, most miners don’t sell their Bitcoin. They tend to hold their Bitcoin. And so that limits supply even further. And when you look at the overall Bitcoin in circulation, roughly about 83%, based on the recent numbers I saw of the Bitcoin that has been mined has not moved in three months.

Fred Thiel: And so, that’s indicating that people are huddling their Bitcoin. About 12 to 18% of the Bitcoin that have been mined essentially have been lost. They’ve never moved. So these were mined, put in a wallet, and then never moved. If you look at the number of Bitcoin that haven’t moved in over a year, it’s somewhere around 20, 30% of the total Bitcoin. So a lot of Bitcoin is sitting in long-term holders’ hands. Some of it’s in the holders of wales. But there are more and more Bitcoin wallets being created every day. And we’re approaching, I think roughly, somewhere around between 30 and 35 million Bitcoin wallets in existence today with a balance of greater than zero on them.

Raymond Hawkins: Fred, can I stick a stake in the last one for a second? So you say 12 to 18%, around that number have never moved. Is that somebody… And I know you don’t know for certain, but as I think through that, is that someone that maybe bought a Bitcoin in the early days, 2009, 2010, 2011, when they didn’t know what it was worth or they were somebody that was very technologically curious and it was on a hard drive somewhere, in a digital wallet somewhere, and they’ve forgotten about it. They’ve passed away. What’s the thesis behind almost somewhere between 12 and 20%, 12 and 18% never moving?

Fred Thiel: These are coins that have been mined but never left the wallet from where they were mined. So, Satoshi Nakamoto has a large number of Bitcoin in a wallet, for example, and those Bitcoin have never moved. If you look at a Bitcoin that haven’t moved in over a year, it’s a significantly larger number than that. If you look at five years, it’s a subset of that. And then, the 12 to 18% is the Bitcoin that have never moved.

Fred Thiel: Yes. There’s the proverbial story, the urban legend if you would of the guy in the UK who had mined a bunch of Bitcoin or had a bunch of Bitcoin in a wallet on a hard drive on his computer, or rather had the keys to the wallet on his hard drive, and the hard drive crashed. And at the time, Bitcoin was maybe worth fractions of a penny. And he had maybe a hundred thousand Bitcoin. It was, “Eh, I’m not going to… It’s not worth it, trying to salvage this.” And the computer went on the trash keep, and then to the city dump. And then lo and behold, Bitcoin hits 19,000 back into a few years back and it was like, “Oh no, this is a lot of money.” And so this is the guy who’s been trying to get the city to dig up the dump to find his hard drive to salvage his keys. There are lots of stories like that. You have a point [inaudible 00:27:43].

Raymond Hawkins: I have to say, is that a real story, Fred, or is that an urban legend? Is that a real…

Fred Thiel: It’s a real story. It is.

Raymond Hawkins: Interesting. Okay. Yeah. Because I would think-

Fred Thiel: And you know, can Google it.

Raymond Hawkins:Yeah. Okay. All right. It’s a real story. Got it. I’m not in tune with the market enough to know, but yeah, I think about lost treasure. I think about a ship sailing across and sinks, and we’ve got records of that. And there are whole companies that go around looking for gold bars and coins on the bottom of the ocean. But similar, now that the Bitcoin got the value it does, I got to think that there are hard drives somewhere that someone has a digital wallet, and at the time, just exactly the story, I got to believe that that’s more than one of those stories globally.

Fred Thiel: Yeah. And the thing with the Bitcoin blockchain is there are people looking all the time to see if there’s any movement in these old wallets that have never moved. So for example, if coins were to move out of Satoshi Nakamoto’s wallet, then it’s either one of two things. One, somebody has the keys to his wallet, and whether it’s him or somebody else and they’re moving the coins or B, somebody hacked the wallet and is moving coins. Both of which would be major news events in the world of Bitcoin.

Raymond Hawkins: Gotcha.

Fred Thiel: It would be splashed all over the place. But when you look at the really active trading on a daily basis, it is 20,000 Bitcoin across all the exchanges that are traded on average a day. That’s not a lot of Bitcoin.

Raymond Hawkins: You brought up a comment there when you talked about Satoshi’s wallet. So I’ve been in the technology business my whole life. I got in the business in the late ’80s accidentally, and you hear the conversations around digital security and the concept of a CISO. When I started in technology, nobody knew what a security officer was, much less a chief information security officer. And I think there’s a phrase that gets said in the security space that nothing is unhackable. At some point, somebody can figure out how to break into something digital. As I think about the digital currency, because it’s transparent and visible in the blockchain, is there some level of inherent security? Because I think about, “If I have tens of millions of dollars in a digital currency, how secure certain can I be that that wallet in those keys are secure?”

Fred Thiel: Well, a brute force attack on a Bitcoin wallet is really difficult unless you have some information that would help you figure out what the seed phrase for the keys to that wallet are. And so people who specialize in helping people try and recover their keys, and there are a few success stories. They had enough knowledge that allowed them to generate enough of the seed phrase that they were able to because obviously, the owner of the wallet was a willing participant. They were able to figure it out in the end of the day.

Fred Thiel: But if you’re doing just a pure brute force attack, it would take so much compute power today. And the minute something moved from that wallet, alarm bells would go off. So it’s very hard… It’s actually much easier, by the way, to hack into a banking system to hack somebody’s phone or hack into a mobile app and take money out of somebody’s bank account than it is to hack a Bitcoin wallet. And so most hackers focus on that because it’s easier than hack trying to hack the Bitcoin blockchain or somebody’s wallet. But there are some people who through social engineering, use very simple seed phrases. And if somebody spends enough time looking over your Facebook page and your social media posting and things like that, they may be able to get data that helps in doing that. But it’s still really, really difficult.

Fred Thiel: The bigger issue is more, somebody has a phishing attack and I know people who, for example, have gotten emails from an exchange saying, “Hey, we’re upgrading you to the pro service. Move your coins from this wallet to this wallet and you’ll get preferred service.” Excuse me. And all of a sudden that’s actually a hacker who is now taking their coins. And because of finality, once you send coins, you can’t get them back very easily. And that aspect of finality is a detriment if you’re a novice or you don’t really feel safe in moving money from one wallet to another. And that’s why a lot of people like to custody their Bitcoin on an exchange because it’s easier. You can call, “Hey, I want to do this, how do I do this?” And you can get help just like the stock market.

Fred Thiel: And it’s only really people who are very concerned about security and being able to have their own sovereignty over their assets or sovereignty over their assets who will move their coins to a proprietary wallet and keep them off-chain. But for most people, it’s all about making the trading and the use of cryptocurrencies easier. And as you do that, it reduces the friction and more people will adopt it and more people will start using it.

Fred Thiel: But Bitcoin is essentially, today, a store of value, and over time it’ll continue to spread amongst institutional holders. More and more of the big banks are starting to offer Bitcoin custody and trading services. You’re starting to see more commerce opportunities for it. eBay has been saying that they’re potentially going to allow crypto to be used for paying things. You’re starting to see states adopt the ability or offer the ability, “Hey, pay your taxes in crypto.”

Fred Thiel: Now, they’re not going to custody hold that crypto, they’re going to sell it right away as soon as they get it. But as more and more of those types of transactions start happening, you’ll start seeing crypto coming more and more into the mainstream, and you’ll eventually start seeing easier wallets and easier tools for people to use. And that in itself will drive more and more adoption.

Fred Thiel: Again, go back to the internet in 1997 and 1998, you had this thing called a Netscape browser, and you can go look at a few websites and where are we today? We do everything. When you think about these devices like a smartphone. It’s a ubiquitous human-machine interface, and if it wasn’t for the smartphone, Facebook wouldn’t be anywhere near as large as it is because people do 70% of their postings, et cetera, on Facebook using their smartphone. They don’t do it at a computer typically.

Fred Thiel: Instagram is pretty unusable at a computer. You have to have a smartphone to use Instagram. And the world of crypto is moving in that direction very, very rapidly. And people were afraid that the White House was going to try and mandate the ban of crypto, and instead, they’re embracing it in a very big way, even to the extent that it looks like they’re being very embracive of a central bank digital currency issued by the Fed. So this is going to be very interesting over the next six to 12 months as the execution of the executive order happens, which essentially mandated a bunch of studies to be done. Look at security, look at environmental impact, look at central bank, and facilitating faster trading and more innovation. It very much appears that the White House is embracing crypto and trying to direct the Federal Government and its various branches to really educate itself and not just have knee-jerk reactions, and then craft legislation that really allows the US to remain sort of a dominant position as an innovator in this space, and adopter of this technology.

Raymond Hawkins: Fred, you mentioned the executive order and the government issuing a digital currency. One of the things and I’m not nearly immersed in it as you are, but I think of fiat currency and central banking. I think of the global economic system built on those two pillars. There are central banks and there is fiat, then they issue fiat currency, and the Bitcoin or all digital currency residing outside of that system. If a central bank starts to issue its own digital currency, that seems to me like an odd melding of two worlds. How do you think about that? How do you think… Let me rephrase. How does the digital community feel about that and how do you think that that will work when the idea… I think one of the ideas at least behind digital currency is, “Let’s get outside of the central banking system.”

Fred Thiel: The central bank digital currencies are more a technology innovation to facilitate more rapid and immediate payment than the traditional Fedwire SWIFT system. The SWIFT system was invented in the ’70s and is essentially a messaging service that allows a bank to say, “Hey, one of my clients wants to send one of your client’s money. So deduct from my bank account, the central bank, deduct in my bank account X number of dollars and put them in your client’s bank account, and I’ll deduct it from my client’s bank account and put it in the central bank account.” And it’s a cumbersome way, and that’s why wires can take multiple days to get through, and it’s just a complex process. The idea with a central bank digital currency is not so much for consumers to use it as a replacement for dollars because let’s face it, every time you pay for something on a mobile app, you’re essentially paying with digital dollars.

Fred Thiel: Whenever you use your credit card, you’re essentially using digital dollars. It’s just a ledger entry at the bank that’s moving around. So central bank digital currencies are really more about the wholesale aspect, bank-to-bank transactions.

Raymond Hawkins: Gotcha.

Fred Thiel: Facilitating that. It’s like in the stock market, when you buy and sell stocks, it typically takes two days to settle, two to three days to settle. And now they want to move to immediate settlement. Well, the only way to do that is if it’s done on some form of blockchain or some form of a digital system without lots of intermediaries which are required today. So you’re going to start seeing CBDCs, the central bank digital currencies are called. They’re going to focus much more on alleviating all of the friction that exists in the plumbing of our financial system. And they’re not meant to necessarily compete with Bitcoin or other cryptocurrencies who are more focused on self-sovereignty of your assets and the ability to be outside of the system and have an asset that has a value that operates hopefully independently of fiat currencies. Because if the US government issues a CBDC, they can debase that CBDC the same way they debase the dollar because it will be dollars, they’ll just be digital dollars. They’re not going to create a separate currency that’ll trade differently.

Raymond Hawkins: Got it. So as I sit here and think about, you walked us through, there’s 21 million forever, by the time we’re done. They’re never going to be more than that. If this digital currency thing makes it and continues to be a thing, and I know people can laugh at me, it’s 13 years in, and of course, it’s going to make it. But if it continues to go this direction, what would be an event that would drive the currency the other direction? Because the notion of scarcity is already there. It’s already built-in. We know there’s a finite number. And when I think about the central banking system, it’s one of the things that frustrates me about the central banking system, and I think frustrates a lot of people in America right now with 7,8, 9% inflation, is that there’s no guarantee of the value of my dollar.

Raymond Hawkins: And as a matter of fact, there’s pretty much a guarantee it’s only going one direction and that it’s getting diluted. Certainly, it’s been nothing but diluted in my 54 years, dollars rarely appreciate long-term. I don’t understand. As I look at a digital currency, what would cause a significant deflationary event in a digital currency? Isn’t it only going to increase in value? And I know I’m kind of teeing up a softball there, but I’m just trying to wrap my mind around, what would cause a deflationary event in a digital currency with a finite supply.

Fred Thiel: Well, at the end of the day, its supply and demand dynamics are going to drive the drop in the price of a digital currency. So if all of a sudden, in the case of Bitcoin, for example, which has achieved amazing success over these 13 years, but it’s still less than 10% of the scale of gold, for example. And by the way, gold only has value because we attribute value to gold.

Raymond Hawkins: Same with diamonds.

Fred Thiel: It’s certainly the rarest metal on the planet.

Raymond Hawkins: Right. Right.

Fred Thiel: Exactly. And diamonds, even more so, because they’re manipulated by an oligopoly, that consists of De Beers and a handful of other, including the Russians, companies that manage that marketplace and limit supply. But what’s going to drive a decrease in people’s faith in Bitcoin as an asset are going to be, if the blockchain is hacked, for example, that would definitely drive a loss of faith in the Bitcoin and the value of Bitcoin as this asset that can’t be seized.

Fred Thiel: Anything that changes people’s perception of the trust they have in Bitcoin is going to affect it just like any other asset, no different. The value of a company on the stock market is theoretically based on the book value of the company. But at the end of the day, look at GameStop. This was a perfect example where you get a bunch of people who think it’s going to be worth something more, they’ll pump up the price, and then it can crash just as quickly back down, Dogecoin has gone through some of those cycles. You’ve certainly seen it in other places.

Fred Thiel: The one thing I think that Bitcoin has going for it is that because it’s so decentralized, there isn’t one group of people, one organization, that decides and makes decisions that can have those kind of negative impacts. In the world of Ethereum, for example, Ethereum is essentially controlled by the Ethereum Foundation and the large holders of Ether. And there are 70 holders of Ether who hold the vast majority of the Ether out there. And so just look at how frequently Ether forks and how they do these changes in the marketplace today. That’s all because it’s more centrally controlled than Bitcoin, which is fully decentralized. There is no body. There is no person who can make any decisions about Bitcoin. It requires consensus of all the minors in the pools, et cetera, to get together and do that.

Fred Thiel: And back in 2017, with the Sedgwick wars, you had nearly 90% of the minors in the Bitcoin blockchain who tried to get a change through and they couldn’t get it through. So that shows the imperviousness, the change that it has. What does that mean? It means that innovation happens at a potentially slower pace in Bitcoin, but at a very steady pace. And the same analogy can be viewed if you look at the Lightning Network.

Fred Thiel: The Lightning Network is continuing to grow slowly but surely, it just continues to grow as more and more people use it for creating payment channels. And I think over time these layer two payment systems built on top of the Bitcoin blockchain are going to dominate the marketplace because the Bitcoin blockchain offers ultimate security and finality for transactions. And then these layer twos provide very high velocity, very low-cost transaction processing that then settles on the Bitcoin blockchain. And we’re now also starting to see back to the proof of state proof of work discussion, we’re now starting to see also proof of stake networks that in order to avoid the inherent conflict of interest that stakeholders have for validation, that essentially, a proof of stake network will use the Bitcoin network and its proof of work to write blocks, essentially encode data on the Bitcoin blockchain such that nobody can go back and change a transaction on the proof of stake network.

Fred Thiel: And now, you’re starting to see a really interesting hybrid. So, if I were to put my wizard hat on and look in my crystal ball, I think what you’re going to see is the Bitcoin blockchain and proof of work will remain and become the basis for security amongst many of these upcoming proof of stake networks providing this essentially unchangeable blockchain where you’ll always be able to go back and audit that the proof of state network is in the proper state if you would.

Fred Thiel: And so I think you’re going to see that. You’ll see a lot of these proof of state networks come and go. Most of the new networks are trying to compete with Ethereum. Ethereum has some drawbacks, very high gas fees, a limited amount of transactions that can be processed. And you’re seeing Solana and all of these other Cardana, and all of these other competitive blockchains that are really trying to solve for those issues and you’re giving Ethereum a real run for its money, I think. But at the end of the day, it’s going to be the Bitcoin blockchain and then a bunch of other things.

Raymond Hawkins: In closing, would you be willing to give us a Marathon Digital Holdings commercial? How are you guys doing? How’s the business? Why should my friends listening go out and buy your stock? What’s going on at Marathon?

Fred Thiel: Well, obviously, I’m not going to go out and tell people you have to go buy our stock. That wouldn’t be appropriate. But listen, we are very much focused on growing to be one of the largest Bitcoin miners out there. We’re obviously huge proponents of the Bitcoin blockchain as a secure network and as the network upon the layer one on which many of identity healthcare and other applications are going to get built in the future. So we’re busy scaling to 23X a hash from… We ended last year at about 3X a hash. We’ll scale up to 23X a hash, which for context, 23X a hash, at the end, this time next year will be about 6% of the global blockchain. It was probably based on the global hash rate growing by almost a hundred percent this year. And so we’re really busy deploying. We’ve had some fits and starts getting miners deployed due to the method we use, which is behind the meter at renewable plants.

Fred Thiel: And there’s some special permitting that goes on. There’s some issues related to getting the grid electricity coming into the power generator versus going out from the power generator. But I think we’ve resolved all of that and we’re moving a lot of the… There’s a lot of earth being moved, a lot of containers being put in place, and we have a lot of miners sitting on the ground that we’re getting ready to plug in. And we expect to be deploying at a very fast rate here through the end of this quarter and into Q2. And by the end of Q2, be fully caught up with our growth plan.

Raymond Hawkins: Awesome. Well, Fred, thank you for telling us a little bit about Marathon. I always think that we learn a bunch listening to you, on top of the fact that you got a great radio voice. So if things don’t work out in the digital space, you can get some voice-over work, I’m sure of that. And we really, really appreciate you educating us on the blockchain and on digital currencies, and also on what’s going on at Marathon. So thank you so much for joining us.