#1224 Jaime Leverton | Bitcoin Miners Are Perfectly Positioned For Artificial Intelligence

Jaime Leverton is the CEO of Hut8 Mining, one of North America’s largest innovation-focused digital asset mining pioneers and high-performance computing infrastructure providers. In this conversation, we cover their diversified approach to mining, capital allocation, geographic approach, regulation, & more. ======================= Backed by world-class investors, including Google's AI Fund, Range has redesigned wealth management from the ground up. Range delivers a tech-first experience that provides fast, high-quality, transparent wealth management services making it simple to optimize and grow your wealth. With Range, you get comprehensive services like tax optimization, investment management, and estate planning with no hidden fees. That means no AUM fees. Get started today with code POMP15 for 15% off any quarterly plan for your first year at range.com/pomp ======================= Pomp writes a daily letter to over 250,000+ investors about business, technology, and finance. He breaks down complex topics into easy-to-understand language while sharing opinions on various aspects of each industry. You can subscribe at https://pomp.substack.com/

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• 0:02Anthony Pompliano?

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• 0:30Speaker 01

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• 0:54Anthony Pompliano?

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• 2:10Anthony Pompliano?

  Okay, next up, we have CEO of Hut8, Jamie Leaverton. I'm very excited to talk to her. So let's bring Jamie up on stage. Jamie, I thought a great place for us to start this conversation is in the differentiation you all have with many other miners. Most miners are Bitcoin and Bitcoin only, and they're just focused on go mine as much Bitcoin as you can and survive the bear markets. You all have this diversified approach where you are Bitcoin miners, but you also have a lot of high computing power, computing performance that you're looked at as well. Can you help understand what is the difference between just being Bitcoin only versus some of the, you know, high computational power that you all have? And then what are the advantages to having more of a diversified strategy?

• 2:50Speaker 02

  Yeah, I'm happy to jump right in. So I'll take a step back a little bit. Hudday was one of the first publicly traded Bitcoin miners. We went public in early 2018, originally on the Toronto Venture Exchange, and then over time moved up to the Toronto Stock Exchange, and then were the first Canadian public to duelist onto the NASDAQ in June of 21. I was brought in by the board in December of 2020, after Hutt had gone through a particularly difficult time during the bear market. I mean, all miners had a rough go in that bear market, and those that survived were people like Hutt who had Bitcoin on balance sheet, and we were able to use that Bitcoin to help kind of weather the dog days of that bear

• 3:35Speaker 02

  market. Others survived because they were mining other coins that had different economics, and that was able to carry them through. And when the board looked to bring on a new CEO, one of the things that they were focused on was somebody that had a background in more traditional compute or technology, that had done transformation work in the past, that loved Bitcoin, and could start to think about how to diversify the company to kind of avoid that going through that type of a bear market experience again. So I came in, first thing we did was really focused on the balance sheet. We cleaned up the balance

• 4:16Speaker 02

  sheet. As I say, we duelisted onto the NASDAQ just to drive better capital markets access, more liquidity. And then we we started growing the the mining side of our business. But also, we're looking at ways to to bring in fiat-based revenue streams that were uncorrelated that could kind of help dampen some of the volatility of Bitcoin mining economics. Because there's so many, so much of Bitcoin mining economics are out of our control. We obviously don't don't control the price of Bitcoin. We don't control the global network cash rate. And we also had the additional complexity of an of an energy crisis, and energy is our largest input cost.

• 4:56Speaker 02

  And so we so we looked, we looked at the industry and made the decision to purchase our high-performance computing business from another Canadian public company. So we we bought it as an already established cash-flowing business. We have two data centers in Toronto, two in Vancouver, one in Northern B C. And they come with a diversified customer base, a variety of products, cloud colocation managed services, which is obviously getting a lot of headlines today as we see an insatiable demand for for GPU-based compute, driven by the explosion of A I and all of the excitement in in that community, tons of new startups in that space.

• 5:40Speaker 02

  And and really for for GPU clustered compute, unlike Bitcoin mining compute, which is done by ASICs, and they really have to be in a traditional data center environment. You need, and of course, we're interacting with customers on that side of the business. So you need a billing team and a sales support team and a network operations center. And all of all of those things that that go into giving a great customer experience, which doesn't exist in a Bitcoin mining world, where predominantly, we actually don't have end customers. When we're prop mining, we are really just putting the compute power to to the Bitcoin blockchain and receiving Bitcoin in return. So it's a very, very different kind of go-to-market motion. And but we, my background is almost entirely from the traditional tech side.

• 6:25Speaker 02

  I spent 22 years in trad tech before coming over to Hut. And a lot of it in data center and infrastructure. So I really see a world where over time, the type of computing that we do in a Bitcoin mine, which is really, really a lot of power, tons of density, but we don't worry about excessive security controls or redundancy. It's all just single feed power and it's really built to be a flexible workload. So the Bitcoin mine will power up and down on minutes notice based on power pricing or the peak demands of the local grid, depending on how we're working with local operators.

• 7:09Speaker 02

  Whereas a traditional data center workload, including GPU clusters, it's a net taker. You need a stable base load. You need to, that data center needs to be up and running 24 hours a day, seven days a week. And there's a ton of complexity that goes into how we ensure those data centers don't go down. Dual power feeds, multiple generators, UPS, things that we don't need to have in a Bitcoin mine, where it's a flexible workload and ultimately it's not customer data that's being protected at the end of the day. It's just pure horsepower being applied to the algorithms.

• 7:45Anthony Pompliano?

  When you start looking at that high-performance computing, it's obvious how the Bitcoin mining is very kind of straightforward. And as you described, a bunch of advantages to it. Are there things that you're actually able to, in the future, potentially put these together? Can Bitcoin mines perform better or benefit from actually going into some of these, you know, kind of redundant type facilities? Or is there an advantage to keeping them separate facilities and actually using what is kind of unique to Bitcoin and the mining process and not trying to co-mingle these?

• 8:17Speaker 02

  So ASIC compute does not play well with other types of compute. Just the pure, the heat, the environmentals, you don't mix. There were a lot of experiments to actually bring ASIC compute into traditional data center environments during the 1718 bull run. And it was just proven out that it creates all kinds of environmental imbalances within a traditional data center environment. And frankly, the cost is too high. Because if you think about to build the infrastructure to support a Bitcoin mine, you're looking at Anywhere between kind of 300 and 800,000 dollars per megawatt, depending how you build

• 8:59Speaker 02

  it out. Whereas in a traditional data center environment, because of all the security and redundancy you need, you're looking at, you know, could be anywhere between eight and 13 million US dollars per megawatt. So really, really massive difference in approach and that is is difficult to intermingle. And again, primary differentiator is a traditional data center is a is a net taker. They're always taking the power. Whereas the the benefit and beauty of a Bitcoin mine is that it is a flexible load and can work in conjunction with the grid in a way a traditional data center can't. And I do think we're going to see parts of these worlds converge a little bit more over time. And but it's still very much early days.

• 9:43Anthony Pompliano?

  We just talked about the differences, but the similarities are pretty obvious in the sense of you're running servers or computers and it's hardware. You got to plug them in, you got to take power and then you got to do different things with them.

• 9:55Speaker 02

  That's right.

• 9:55Anthony Pompliano?

  Talk a little bit as to kind of the story, right, for public markets. So much of public market investing is about the narrative, is about the story of a company and being able to say, look, it is two different things and there are differences in those things. But also there is this commonality that positions you all at kind of the forefront or the tip of the spear of computing for this next generation of all of these different applications. How do you think about what that story really is and the power of being able to share that versus just being, you know, kind of a single focus Bitcoin miner?

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• 10:55Speaker 02

  Yeah, I think really the power comes in our ability to flex as market demand and economics evolve. We also can drive synergies from things like a network operations center that is monitoring, is there to monitor our data center sites 24/7. There are things that they can do to help on the Bitcoin mining side as well, which are also running 24/7, but with a different type of manpower outlay. And of course, you always have synergies when you're looking at the corporate structure. So from all of the corporate functions that support our Bitcoin mining side of the business can equally support our data center side of the business.

• 11:38Speaker 02

  And again, I do think we're going to see an increased world of convergence. And there's all kinds of innovation happening behind the scenes on, you know, can potentially GPUs go into a container type of environment and take advantage of some of the lower cost power available at Bitcoin mining sites? How do we handle some of the network connectivity issues for those types of applications? But that's certainly work that's being done. And I think we're in the infancy of it. But over the next, you know, two to four, three to five years, we'll continue to see products and offerings and potentially even hardware

• 12:19Speaker 02

  that starts to bridge these worlds in a more meaningful way than we've seen to date.

• 12:25Anthony Pompliano?

  When you start thinking about capital allocation decisions, obviously you have a dollar to spend. How do you think about the return or the risk that you take by diverting it to either side of the business? It's kind of this fascinating exercise where maybe there's not just one answer and there's some variables there. But how do you think about that capital allocation?

• 12:42Speaker 02

  Yeah, it's in the Bitcoin mining side of the world. When we think about allocating capital, how we look at it, you have to run massive sensitivity analysis where you're really guessing on where the price of Bitcoin and global hash rate are going to be at any given point in time in that return profile that you're building for the investment in the mining hardware in particular. And that's why. So we're actually in the middle of a merger that's pending, pending final approvals with a private Bitcoin mining company called USBTC. And one of the things that we love about the USBTC model, they're diversified in a, just like HUT is, but rather than being diversified

• 13:24Speaker 02

  into HPC, and USBTC is diversified into they do prop mining, but then they also do hosting for other miners and they have a managed infrastructure operations business, which is really just, think about it almost as professional services. They bring their, their bodies and their purpose-built software in to manage mines for, for other people. And all three of those businesses have a much, much different capital profile. The most intensive business across both HUT and USBTC's operations is prop mining. Prop mining, highly, highly, highly capital intensive, a ton of variables that you're really just kind of running sensitivity

• 14:07Speaker 02

  analysis and, and making your best guess on where, where the returns will go over a period of time. And whereas hosting, much less capital requirement because the, the client brings the mining equipment. And then in the case of MIR, really no, no capital investment at all. And then, as I said, on the HUT side, prop mining, we also have a repair center and then the HPC side. So it gives us a lot of flexibility based on what we're seeing in the macro environment, either on traditional HPC or on the Bitcoin mining side. And we can kind of flex between the different, the different lines when we think about what's the best allocation of capital, obviously in a go-forward state, assuming we're successful in our merger.

• 14:51Anthony Pompliano?

  So obviously you've got this kind of capital allocation decision, but there's also M and A, which is another form of kind of capital allocation. You all seem to be one of the more aggressive companies in the public markets that have Bitcoin mining, but also are pursuing M and A strategy, whether it's with other public companies or private companies. Talk a little bit about, you know, kind of the advantages you see there, maybe the opportunity set in terms of choosing not to do this once, but it seems like now this is becoming somewhat of a strategy. So what are you seeing there?

• 15:21Speaker 02

  Yeah, I think, I mean, I come from a bit of a unique background where I've got a lot of experience in transformation and with distressed. And the strategy we took in the bull market was to really focus on shoring up the balance sheet. We have a large stack of Bitcoins. We've got over 9,000 Bitcoin on our balance sheet that's unencumbered, very, very, very little leverage in the business. And my thesis was the Bitcoin cycle has always repeated in a very similar fashion. And so I was taking the view that the last bull market would eventually end and we would roll into a bear market, which is obviously what we saw.

• 16:03Speaker 02

  In this case, the bear market for miners in particular, especially challenging on the back of the energy crisis as well as lower Bitcoin prices and a global hash rate that just continues to grow. So kind of the perfect storm for miners. And in our case, because we had shored up the balance sheet, we had already successfully done our first M and A transaction, being the HPC business. That was integrated. And I really, when looking at kind of what was happening in the market and the opportunities available, it felt to me like your dollars were going to go further in, through investing in inorganic growth than organic, particularly with the challenges we've seen in the supply

• 16:48Speaker 02

  chain. So just really, really high prices across the board, long lead times. Whereas in the inorganic space, opportunities to do pickups that give you kind of an immediate benefit without exposing you to the challenges on the inorganic side.

• 17:05Anthony Pompliano?

  And then when you start thinking about those M and A opportunities, obviously being a Canadian-based business, you've done some stuff in Canada, now you're doing some stuff in the United States, are there other geographic regions that you're focused on or think could be strategic for you?

• 17:18Speaker 02

  Yeah, I've spent a lot of time looking at assets in various regions. I think it's really, it's really important to look at geopolitical risk, not just, not just short term, but long term. And that can be a challenge. We also, kind of markets that I, that I really liked, ended up not faring well in the energy crisis. So that kind of changed the perspective there. I think some of the technology we're seeing continue to advance in immersion. The economics are starting to get more attractive. That opens up hotter climate markets. And I think the UAE in particular has done an incredible job of really attracting some of the best and

• 18:03Speaker 02

  brightest in, in digital assets from across the globe and certainly have a very open, easy to navigate regulatory environment. But it remains to be seen from a mining perspective, what, what might make the most sense. But certainly open to it. And I, and I like the jurisdiction.

• 18:26Anthony Pompliano?

  Yeah, that makes sense. When you think of regulation, you talk about the jurisdiction there. But what about in the United States or in Canada? How has that affected decision making for you?

• 18:35Speaker 02

  Yeah, I think we're, we've got the fortunate position of really just being focused on Bitcoin. It's only Bitcoin we hold in our balance sheet. We really are just infrastructure as far as, as far as the, the markets are concerned. We don't interact directly with, with retail consumers or any, any other kind of token. And I think really the focus in the US right now from a regulatory perspective is more, is more focused on exchanges and other types of securities, or seems to be broad consensus that Bitcoin is a commodity. And certainly, that's, that's what we feel as well. One of the challenges we're seeing on both sides

• 19:15Speaker 02

  of the border in, in Canada and certain jurisdictions in the US is really, some, in some cases, a lack of understanding about how Bitcoin mining really works and how it can benefit local grids and local communities. And so in an absence of understanding, we've seen unfortunately some mining moratoriums or mining bans. So it's really

• 19:37Speaker 02

  It's really a jurisdiction by jurisdiction in Canada, province by province, the US state by state. And as to, as to how, how mining is being perceived and, and that I think as an industry, one of the areas that, that we really need to be focused on is education. And really kind of breaking down a lot of the misunderstanding that, that surrounds Bitcoin mining and, and drive more conversations that lead to kind of thoughtful regulation and, and us being able to really partner with grids and communities in a way that benefits all parties, which I think is the unique beauty of this type of load. And there is no other industrial scale, um, power consumer like Bitcoin mining that can, that can work seamlessly with and to help support the grid.

• 20:23Speaker 02

  But also to stabilize them and help monetize without the need for government subsidies or intervention.

• 20:28Anthony Pompliano?

  My last question is that you are not a Bitcoin ludite. You didn't necessarily, you know, uh, kind of come to Bitcoin and be like, oh my God, the government's going to fail and I'm going to get rich because of this. You've had a, a very impressive career. Uh, maybe what are some of the surprises as you've gotten deeper and deeper into the Bitcoin market, into kind of the culture of Bitcoin, into the mining process? Is there anything that kind of sticks out to you that was either, uh, kind of an assumption that ended up not being true, or maybe something that was a surprise, uh, as you kind of built all this out?

• 20:58Speaker 02

  Certainly the biggest surprise was how supportive and collaborative the entire community is. I mean, coming from traditional technology, all, mostly all of my career was in large, in large public companies. And I did a stint in, in one of the banks in capital markets and, and there's certainly, there isn't the level of collaboration, kind of this spirit of community that permeates the, our space. And that, that was the biggest surprise and it, and it continues to be. We, um, all of the, all of the companies really in our space know each other.

• 21:35Speaker 02

  We're broadly trying to do what's in the best interest of the industry when, when we think about, um, you know, we, we created the Bitcoin Mining Council a couple of years ago, really to help bring. A unified opportunity for us to speak and speak out in defense of some of the the misunderstanding and the FUD that was permeating the headlines often about the energy use. And so I think really just doing as much work as we can as an industry to educate, again, critically important, but biggest surprise for me is just the the amount of positivity. And really, at the end of the day, everybody wants the industry to be successful and and is are supporting the participants in order to ultimately get us to the place that we think this industry deserves to go.

• 22:20Anthony Pompliano?

  Jamie, where can we send people to find you on the internet or find out more about HAD8?

• 22:24Speaker 02

  I have the great benefit of a name that doesn't exist on anyone else on the planet. So at Jamie Leverton, the way I spell it, if you Google it, assuming you don't find one of my imposters, it's literally at Jamie Leverton on Twitter, on LinkedIn. I'm super, super easy to find, as is HAD8. Our website's HAD8.io. And really, just super thrilled to be here.

• 22:46Anthony Pompliano?

  Awesome. Thank you so much for doing this. We'll definitely do it again in the future.

• 22:49Speaker 02

  That would be great. Thanks, Paul.