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In this episode of TFTC Marty was joined by Harry Sudock to discuss a variety of topics around Bitcoin, Bitcoin mining, and the broader energy sector, providing valuable insights into the current state and future of these industries.

Public Markets and Bitcoin Ideology

The conversation started with the recent event of Griid (a Bitcoin mining company) going public and how that aligns with Bitcoin's ideology. The public market offers the ability to put shares into many people's hands, which helps decentralize Bitcoin ownership. It also provides access to capital, which is crucial in a capital-intensive business like mining.

Bitcoin Mining's Maturation

The mining industry has matured significantly, with home mining and "citadel mining" becoming more prevalent. There's a focus on integrating mining with other use cases like process heat and establishing it as a key player in the energy sector.

Energy Sector Engagement

Key figures in the energy sector are actively engaging with Bitcoin mining, recognizing its potential to act as a catalyst for change and maturation of the electric system. The flexibility that Bitcoin mining offers is becoming very clear to energy professionals.

Hash Rate and Network Security

Bitcoin's installed hash rate base has reached a level that signifies a strong security model and the increasing utility and value of Bitcoin as a network.

Mining Industry Trends:

There's a significant focus on technology that allows mining in harsh environments (like immersion cooling), increasing efficiency, and making more energy sources viable for mining operations.

ASIC Manufacturers and Competition

The duopoly of ASIC manufacturers (Bitmain and MicroBT) is strong, but there's room for innovation and new entrants in the market. The conversation touched on the potential for commodification and what that could mean for the industry.

Bitcoin Halving and Business Preparedness

As the next Bitcoin halving approaches, miners are focusing on efficiency and cost-consciousness to ensure resilience. The halving is a testament to Bitcoin's predictable monetary policy.

Impact of Bitcoin ETFs

The emergence of Bitcoin ETFs has shifted the market dynamics for companies like MicroStrategy and public mining companies, pushing them to differentiate themselves more as businesses rather than just Bitcoin holding entities.

Geopolitical and Environmental Considerations

The conversation touched on the geopolitical risks surrounding ASIC manufacturing and the need for energy policies that support stable and sustainable power sources, like nuclear energy.

The Role of Venture Capital in Bitcoin:

Marty's and Harry's work at Ten31 focuses on supporting the growth of Bitcoin and its ecosystem by investing in companies that build critical infrastructure and by providing guidance to entrepreneurs in the space.

Sponsors

Best Quotes

"Bitcoin demonetizes the political class and remonetizes the productive class." - Harry

• This quote highlights the underlying ethos of Bitcoin as an empowering tool for the productive members of society and its potential impact on traditional power structures.

"You can't virtue signal your way out of physics." - Harry

• Harry used this quote to emphasize the practical limitations of transitioning to renewable energy sources without considering the actual energy needs and the role that stable sources like nuclear energy play.

"Bitcoin is the longest game we've ever gotten to play." - Harry

• This quote reflects the long-term vision and commitment required to be part of the Bitcoin ecosystem, acknowledging the ongoing journey toward broader adoption and integration into the financial system.

"The future won't build itself." - Harry

• Harry emphasized the proactive effort required from the Bitcoin community to continue building and innovating within the space, ensuring the network's growth and resilience.

"Being a founder or co-founder of an early-stage company can be extremely isolating. And so having some folks in the 'been there, done that' club who can sit alongside you and hold your hand when you're facing the toughest pieces, that's so exciting to me." - Harry

• Harry discusses the value of mentorship and support within the startup community, particularly in the challenging and fast-paced Bitcoin industry.

Conclusion

This podcast episode provided a deep dive into the world of Bitcoin mining and its interaction with the energy sector, as well as the role of venture capital in supporting the growth of the Bitcoin ecosystem. The discussion covered a wide range of topics, from the specifics of mining technology to the broader implications of Bitcoin's monetary policy and the market dynamics influenced by new financial products like ETFs.

The overarching message was clear: the Bitcoin mining industry is at a pivotal stage of growth and professionalization, with a strong focus on energy efficiency, technological innovation, and integration with the energy sector. This growth comes with challenges, including regulatory and geopolitical concerns, but also presents tremendous opportunities for those willing to engage with the complexities of this nascent industry.

As we look to the future, the insights and reflections from this episode offer a roadmap for entrepreneurs, investors, and enthusiasts who are part of the Bitcoin journey. The potential for Bitcoin to reshape our understanding of money and energy is immense, and the continued dedication and innovation from the community will be critical in realizing this vision.

Timestamps

0:00 - Intro
7:26 - Big week for Griid
11:21 - State of the mining industry
15:46 - Industrial adoption
19:43 - Demand response
23:46 - Energy FUD from the parasitic class
31:44 - Future of mining
36:06 - Technical innovation
37:27 - ASIC manufacturers
45:02 - Halvening
51:59 - Political influence and pencil making
58:27 - ETF and stocks
1:02:54 - Ten31 advisor
1:08:56 - Wrapping up

Transcript

00:00:01:26 - 00:00:03:14
Harry
I'm good for, like, 90.

00:00:03:17 - 00:00:26:00
Marty
All right. You going for 90? Now, the freaks know that we have 90 minutes. We're recording. Harry. We were just trying to determine how long it's been since we last sat down here on TFT to have a discussion for for this audience. Obviously, we've had many conversations outside of TFT between now and the last number recorded here.

00:00:26:00 - 00:00:30:05
Harry
But but until it really happen, if the freaks can't hear it.

00:00:30:08 - 00:00:35:06
Marty
I don't know. I don't know. Well, luckily.

00:00:35:09 - 00:00:41:20
Harry
I have a puppy. There's pepper. Pepper here. We can get a little. Oh.

00:00:41:22 - 00:00:44:00
Marty
It's a pepper. You look warm.

00:00:44:03 - 00:00:49:13
Harry
Yeah. Not a winter dog needs a winter outfit. Yeah.

00:00:49:15 - 00:01:11:07
Marty
So a lot has happened. Big week. I mean, maybe we should start there. It's been a big week. Big seven day week, Big, powerful, big last couple of months. Grid getting through the SPAC process. Finally, life in the public markets. We announced last week that you joined 1031 as an advisor and again, a lot has happened since last time we reported.

00:01:11:07 - 00:01:19:01
Marty
And today I guess let's start there. What is the week been like and what was the the build up.

00:01:19:04 - 00:01:58:05
Harry
To the last. Yeah, I mean the, the, you know, it's the, it's the old saying like, you know, there are weeks when a decade happens and decades when when a week happens and you know for us you know, we didn't we didn't start the business expecting to be a public company in 2018. But that's kind of the road that we ended up on for a lot of reasons and, you know, the reasons why we felt that the public market was the right place for us was was really just, you know, around sort of our Bitcoin ideology and goals, which is that being able to put shares into lots of people's hands and make them available

00:01:58:07 - 00:02:22:15
Harry
serves as another vector around getting you know, Bitcoin and hashrate decentralized on an ownership basis. And also it's obviously a high capital intensive business and and where better to do that than in the American public markets? So we're thrilled to be on the other side of the deal. We're thrilled to be Nasdaq listed. And, you know, more than anything on my mind is let's get back to work.

00:02:22:17 - 00:02:24:22
Harry
We've got a business to grow.

00:02:24:25 - 00:02:39:20
Marty
Yeah, yeah, we all do. It's in the it feels like the timing's perfect a few months before that thing to the winds of a potential bull market seem to be blowing in the distance. Getting closer.

00:02:39:22 - 00:02:59:06
Harry
I wake up every day and Bitcoin is more useful than it was the day before. You know, other people are catching on. You know, Pete McCormick and I talked about this a bunch, but like, we're sort of at the you know, the end of the beginning feels like ETF land took us to the end of the beginning or maybe the beginning of the middle.

00:02:59:08 - 00:03:20:18
Harry
And that kind of makes sense, right? Like the Internet 15 years end was at the end of the beginning. The big killer apps hadn't sort of emerged. You know, we weren't on 3 billion smartphones yet, but you know, but all of that was sort of yet to come. And I think, you know, in our Bitcoin journey, we're at a similar point where, you know, it's not niche and early anymore.

00:03:20:21 - 00:03:43:10
Harry
It might be early in terms of price, but it's not early in terms of of mindshare. You know, Bitcoin is a household name and it's a word that everybody recognizes at this point, you know, for good or for bad, they might have their own, you know, positive or negative association with it. But, you know, but we're not a shadowy corner of the Internet anymore, and that's exciting.

00:03:43:13 - 00:04:10:06
Marty
Yeah, it really is. And we just had the Energy and Mining Summit in Nashville and which was hyperfocus on the mining industry, where it is in its maturation phase and where it may be going in the future. And since we have you on in your deep knowledge of the mining sector, particularly here in the United States, I think maybe not to talk about Bitcoin too broadly this, but hone in on Bitcoin mining as an industry.

00:04:10:12 - 00:04:21:00
Marty
What has happened over the last two years since we last spoke, where are we now? Where may, may we be going in the next 2 to 3 years?

00:04:21:02 - 00:04:42:01
Harry
Yeah, I mean the the, the really great part about what's happened in Bitcoin mining is that the business model, the size and the scale, all of those types of dynamics have gone through maybe an even more aggressive maturation process than Bitcoin has. You know, we're seeing, you know, home miners are doing all sorts of new kinds of things.

00:04:42:01 - 00:05:05:03
Harry
We had a panel about, you know, what we call Citadel Mining, which is, you know, everything from one miner in the garage to, you know, one to Steve Barber's hash huts on your property. You know, anything anything that is sort of a homesteading version of mining. And that panel was was fascinating. A ton of discussion around process heat and other sort of integrated use cases.

00:05:05:05 - 00:05:37:04
Harry
You know, we've seen, you know, the senator from Tennessee, both senator from Tennessee, actually have engaged really aggressively on Bitcoin and Bitcoin mining. We had the CEO of TVA at the event giving what I found to be, you know, truly a profound discussion of where he thinks energy is going and immediately understood that the role of a flexible consumer and the role of the miner is really a catalyst for change and towards the maturation of our electric system.

00:05:37:06 - 00:06:01:21
Harry
You know, that's not a static thing, right? We didn't we didn't wake up with the grid that we had 90 years ago. We've been iterating and improving components of that system all along the way. And so seeing the translation layer between some of them, you know, most senior business experts on the energy side rocking Bitcoin, you know, basically at face value now getting him in a room with miners.

00:06:01:21 - 00:06:34:01
Harry
There's a ton of his customers in that room. You know, Grid is one of them, but there are many others. And seeing the clarity that incredible energy professionals are viewing the mining sector with was hugely refreshing. So, you know, all of that is is super, super encouraging. You know, I think the the other macro topic that needs acknowledgment is just that, you know, bitcoin's, you know, installed hash rate base has gotten escape velocity, right?

00:06:34:01 - 00:07:06:02
Harry
The whole Bitcoin network is running, you know, somewhere between 15 and 20 gigawatts. It's running 0 to 500 index a hash. You know, we're probably sniffing 600 at this point. The ability for the network to go up, you know, 10% on a difficulty or a hash rate basis from here. You know the the base that we're building off of is now so large that each of these incremental components of growth, you know, we're just talking really big numbers and that's exciting.

00:07:06:02 - 00:07:32:10
Harry
It means that the security model for Bitcoin is incredibly strong. It means that the value proposition for sound money that can be transacted on a permissionless and censorship resistant basis is stronger than ever. And the level of professionalism that I get to see you know, both within our company but also across our peers is just really high. I'm really I'm really proud to call them, you know, members of the same you know, the same business community.

00:07:32:10 - 00:07:40:05
Harry
So I think all of those things are significantly more mature than they were even the last time we had a conversation on the show.

00:07:40:07 - 00:08:11:03
Marty
Yeah. And it was extremely refreshing. The Energy and Mining Summit, the president, CEO of the TVA coming really I was extremely impressed by him. Kids about specifics of what was said. But I will say that his presentation and his earnest curiosity was refreshing from somebody in a position of that type of power where you'd expect them just to be a politician like figurehead of his business and just read the script.

00:08:11:05 - 00:08:32:28
Marty
Essentially. He was very engaging and again, genuinely curious, which I was extremely encouraged to find. And then another thing, this whole theme that we're talking about here, it's like one of the questions we get at 1031 quite a bit from prospective investors is we're like, Nobody's adopting Bitcoin. Like, when are people going to start spending it at the store?

00:08:32:28 - 00:08:58:02
Marty
When What am I going to be able to go and buy groceries with Bitcoin? And you have to answer that. Yeah. Obviously it's not there that everybody has bitcoin, but I think it's important to realize different types of adoption and the order of operation through which we'll get to bitcoins and state of full success, which is yes, not everybody is able to spend and receive Bitcoin at the grocery store.

00:08:58:02 - 00:09:23:01
Marty
However, on the earlier side of the order of operations is this this mining, the distribution of hash rate, this growth of hash rate and integration with the energy sector and the energy sector, I believe has reached a critical tipping point of adoption that is not recognized by the people who just view Bitcoin adoption as where can I spend it, who's accepting it?

00:09:23:03 - 00:09:45:19
Harry
Yeah, I think, you know, Bitcoin the currency is it's like saying, where can I spend a barrel of oil or where can I spend a T-bill? Right. Like, that's not the metric that I think is meaningful today. I think all of those, you know, transaction based numbers, you know, numbers and graphs like all of that matters over a longer time scale for sure.

00:09:45:21 - 00:10:14:15
Harry
But at the point where we are today, you know, it's about getting Bitcoin onto balance sheets, whether that's household balance sheets or corporate balance sheets or state and government balance sheets. You know, that's the first beachhead that Bitcoin really is is crossing. And I think, you know, we we we got a little bit sort of twisted up in the weeds of it all, you know, earlier on in, you know, in this great shared history of ours.

00:10:14:15 - 00:10:54:27
Harry
But, you know, the ability to spend Bitcoin is not the same as the ability to send Bitcoin. And those are different ideas. And so I think we're climbing the store of value adoption curve incredibly constructively. And so it's it's great for us to be able to see that. And I think you're exactly right. The market penetration that Bitcoin mining, you know, is accomplishing today, you know along the lowest sort of strata of energy cost sources, you know, whether that's here in the U.S. or it's abroad, you know, the penetration at those low cost, high opportunity points is enormous.

00:10:54:29 - 00:11:17:13
Harry
You know, if you're if you're not thinking about where does Bitcoin mining represent value accrual, if you're, you know, an intermittent generator or if you're a steady baseload generator that needs to manage uptime, anybody who cares about power and uptime should be having a conversation with a Bitcoin miner or be thinking about how do I design a rate class that gets Bitcoin miners?

00:11:17:13 - 00:11:45:13
Harry
The prices that they need which are, you know, transparently the bottom of the barrel. But the tradeoff there is that, you know, my father, a lifelong CFO, would always tell me that in any any negotiation you have to pick between price and terms. And I can tell you that on the mining side, we're very firmly in the camp of picking price and taking terms, and that's reared its head in in the demand response adoption that we've represented already.

00:11:45:13 - 00:12:18:10
Harry
You know, we do it in the TVA version of that reality. The folks in ERCOT are doing that, and the folks in every power market in the U.S. that has programs that offer, you know, a demand response, compensation kind of rate, class or tariff, you know, everybody wants that. So, you know, the the really interesting thing is to see the ability to deliver on the technical requirements of an actual demand response program and then the desire to expand those programs to increase reliability and lower costs for the average user.

00:12:18:12 - 00:12:51:02
Marty
Yeah, just digging into this demand response use case in and of itself, you can already see Bitcoin miners beginning to effect change across different sort of power providers across the country. ERCOT obviously here in Texas, very advanced from the pricing signal perspective, there's API's that are connecting to mining firmware, that mining firmware is reading the pricing signals and adjusting hash rate with those pricing signals almost immediately.

00:12:51:02 - 00:13:15:04
Marty
Whereas if you zoom up to the Tier two VA, it's a bit more manual. You get a call from the TVA a day or two before they expect you to turn down during peaks or peaks of demand where they need electricity sent back to the grid and you have somebody go and turn down the operation or do that from a back end software solution.

00:13:15:07 - 00:13:30:16
Marty
You could see they're like, you imagine the TVA's looking at ERCOT. You're like, Oh man, look at all that's this demand response system is with all these pricing signals. Maybe if we could build an API pricing service like that for the miners up here, we could be much more efficient.

00:13:30:18 - 00:13:52:18
Harry
Yeah, efficiency is the name of the game, right? Like these are these are assets that are already bought and paid for. All the transmission lines are bought and paid for, all the substations are bought and paid for. And so now that the CapEx is out the door for all of these electric systems, how do we get to a place where utilization is able to climb even just a few percentage points?

00:13:52:21 - 00:14:15:00
Harry
You know, because at the end of the day, if you think about the you know, I think of sort of the world in terms of a nexus of contracts, there is a contract that your power provider signs with you. The rate payer. I'm sitting in my house like I use Nashville Electric. And, you know, their commitment to me is really around power availability.

00:14:15:00 - 00:14:51:20
Harry
So let's say the system gets super stressed and they've got to import power from meso those megawatt hours are incredibly, incredibly expensive and the price of those megawatt hours would be better, you know, as a as a rebate to their flexible load customers rather than a forced import during the time when things are tightest. And so there's a really compelling economic case around why demand response is accretive, you know, both to the power provider as well as to the individual ratepayers at the household level, as well as to the demand response program participants at the industrial scale level.

00:14:51:20 - 00:15:26:28
Harry
That's a that's found money for everybody involved, right? The power providers lowering their cost. The ratepayer at the household level is raising their uptime and potentially lowering their cost. And the flexible customer is able to lower their costs as well. So it's this incredible, you know, three party positive sum equation that the power providers are able to offer once they've had the introduction of a truly innovative business model, which all the the mining community believes and rightly so, that they represent with this flexible load type of profile.

00:15:27:00 - 00:15:51:20
Harry
And in addition to that, it's better for the generating assets. You don't want to turn those things up and down. You know, as much as you might have to. And so, you know, there's there's this other net benefit over the longer term as you continue into the useful life for some of these plants, which is that operating in an environment with a flexible customer is actually better for all of the hard assets that are being used to generate the electricity in the first place.

00:15:51:20 - 00:16:20:15
Harry
So we're in this in incredible virtuous cycle as as symbiotic partners being the power provider, the bitcoin miner, and then the households and businesses that that power provider serves outside of the flexible customer. So I'm incredibly motivated to keep working on what it means to reinvigorate some of these electric systems in a way that that really benefits the entire kind of, you know, nexus of parties.

00:16:20:17 - 00:16:29:17
Marty
Harry Versus systemic risk to the system. Did you're not here what the Department of Energy in the EIA I have to say last week.

00:16:29:20 - 00:16:56:12
Harry
I understand that that was an interpretation that was floated to the community. I happen to strongly disagree with that interpretation. You know, I think I think that, you know, there's there's sort of a I said this many years ago, but, you know, Bitcoin, you know, demonetized the political class and intact, as is the productive class. And you know, in in keeping with that theme, you know, the the engineers will inherit the earth.

00:16:56:14 - 00:17:15:23
Harry
And so that means the power engineers that work on these systems, the people with their boots on the ground. You know, there's I just found this out. I looked at like, what are some of the highest compensated roles that you could have in America? Because I was just I was just curious. One of the weird ones I don't know about that, that maybe I should have kind of to school for.

00:17:15:26 - 00:17:39:02
Harry
One of them is there's a guy whose job it is or woman whose job is to hang out of a helicopter on, you know, basically a tether with a chainsaw to manage trees on the high voltage lines, super high up in the air. They make like 400 grand a year. And so those are the people who I think we're building, you know, Bitcoin mining for because we make all of those roles easier.

00:17:39:04 - 00:18:06:22
Harry
You know, if that takes an education process in Washington in order to make that value proposition clear, you know, so be it. But I think that, you know, once you once you put the hard data, you know, to these folks, I think the case for Bitcoin is really quite an obvious one. You know, the ideological challenge that we might face is the the sort of baseline assumption, which is that, you know, nobody likes our pet rock.

00:18:06:25 - 00:18:13:16
Harry
And I think we're really facing more of that perspective than any sort of legitimate concern around electric reliability.

00:18:13:18 - 00:18:19:27
Marty
Yeah, Bitcoin has no no value. It's just a Ponzi scheme, a pet rock. If you will. I don't know. Not helping.

00:18:19:29 - 00:18:24:21
Harry
Seems like a lot of market participants who are willing to pay $43,000 a coin right now.

00:18:24:23 - 00:18:49:17
Marty
Yeah, it think they think it's valuable. Their parting dollars to get parting with dollars to get bitcoin. But it is like a we discussed this too on our panel the first day of the summit. But it is like you said, we have this sort of pull between the productive class and the unproductive class. The parasitic class probably more descriptive what they actually are right now.

00:18:49:17 - 00:19:21:12
Marty
And it's not just specific to Bitcoin. I mean, we zoom out and focus on energy more broadly. Like we talked about the example of this wasn't on our panels, the what Bitcoin Did episode, the live episode on day one in Germany, it's like over 20 years they decommissioned, I think 20 gigawatts worth of nuclear power generation more than doubled their overall capacity generation capacity over the first 20 years of the century, but they doubled their capacity with wind and solar predominantly.

00:19:21:19 - 00:19:57:13
Marty
Turns out the sun doesn't shine that much in Germany and the wind doesn't blow as much as they like it to. And so you had a situation in 2002 where nuclear, coal, natural gas were a 86% of the overall generation capacity. Today it's something like 34%. And Germany's got a systemic energy crisis because they don't have reliable power, because they refuse to, for some reason or another, lean into reliable energy sources and say what you will about coal and natural gas and whether or not you think hydrocarbons are here to stay or on the way out.

00:19:57:13 - 00:20:08:14
Marty
I mean, nuclear is a very obvious answer to a lot of these energy stability problems that the governments of the world seem to be neglecting for some reason or another.

00:20:08:15 - 00:20:30:08
Harry
You can't you can't virtue signal your way out of physics, Right? It just you can't. And and, you know, that's that's just you know, for the climate folks out there, like that's the that's the bitter pill. Right. You're not going to you're not going to build enough wind and solar to solve this in any kind of meaningful way.

00:20:30:14 - 00:20:53:20
Harry
And and, you know, the the cohort that drives me kind of the craziest are the ones who are who are staunch climate supporters who believe in the decommissioning of nuclear plants. Right. The these are assets that are fully bought and paid for. They're operating really, really well. They have an incredible safety track record. It's an American technology, nonetheless, that that we were able to innovate on.

00:20:53:22 - 00:21:20:09
Harry
And and, you know, the willing the willing sort of voluntary shut off of of these plants, it's just it's despicable. You know, there's there's really there's really no argument for it. So, you know, the playbook that we expect to see and I'm thrilled to say that the Canadian the Canadian folks have are committing to extending useful life at some of their plants.

00:21:20:12 - 00:21:40:10
Harry
There's folks at OPG who are committed to building a similar ours, and they're going to do that in TVA. That's public knowledge. So, you know, we are seeing, you know, in California, we were able to avoid, you know, the shutdown of their nuke that's in the in the Los Angeles area. You know, so we're we're starting to turn this tide a little bit.

00:21:40:10 - 00:22:02:27
Harry
But, you know, any time you got to turn an aircraft carrier, which is, you know, really the nuclear Regulatory Commission, you know, it's it's a it's a challenge. But but, you know, by gosh, we're going to do it. So I think there is some daylight and some hope on this. But, you know, the the argument that we should shutter nuclear plants is like the single most asinine policy perspective I can think of.

00:22:03:00 - 00:22:14:01
Marty
That's literally suicidal, especially if you're going to virtue signal about transitioning away from hydrocarbons and at the same time decommissioning.

00:22:14:01 - 00:22:39:02
Harry
Which too, to be fair, like we're we're in favor of building a positive sun electric system. For us, that's meant a huge allocation to hydroelectric assets and raising the revenue profile that they're able to offer. It's it's a huge focus on nuclear, which we love. And and, you know, and there's there's really a you can do well and do good at the same time.

00:22:39:09 - 00:22:56:28
Harry
You don't have to you don't have to not have it both ways. But unless you're invest ing in the baseload profile of the electric system, you know you're going to create instability and tail risk that that really will that really will be, you know, significantly detrimental at some point down the road.

00:22:57:00 - 00:23:10:27
Marty
Yes. Oh, God, I'm getting triggered. Just thinking of the the LNG export ban or new contract construction of a new LNG export facility ban that came out a couple of weeks ago.

00:23:10:28 - 00:23:34:11
Harry
It's well and and you know, and let's let's put our let's put our carbon accounting hats on. Right. If you're if you're replacing a coal asset with a natural gas asset, your carbon intensity of that transition and is incredibly positive, it just happens to run on another hydrocarbon, but a much better one from the carbon accounting perspective. So I think, you know, we we need to be very, very realistic about the physics.

00:23:34:16 - 00:23:56:22
Harry
We need to create the demand for these types of flexible load consumers, which means innovating on the contract structure in many of the jurisdictions that are, you know, that are currently not set up to compensate flexible loads as fully as maybe they should be, you know, but these are these are the tough the tough questions and the hard steps that have to be taken.

00:23:56:24 - 00:24:15:00
Harry
And, you know, environmental stewardship and strong business performance are not at odds with each other. We just need, you know, sane, cool engineering heads to come together and design solutions that are that are as future proof as possible and shuttering nuclear reactors is the lowest thing you could possibly do on that list. Yeah.

00:24:15:02 - 00:24:49:10
Marty
Yeah. Very Malthusian when you think about it. But on this trip, I mean, we had this discussion and it was really interesting to see people from different parts of the world come to Nashville to talk about the future of mining and where it may proliferate moving forward. What are your views like? Obviously, the United States, Texas, Tennessee, TVA in Kentucky, other parts, Georgia have really benefited from the Chinese mining exodus that happened a few years ago, two and a half years ago.

00:24:49:10 - 00:25:14:19
Marty
Now, at this point, Rackspace is tight. It seems that Bitcoin in the minds of institutions is now go. You got the black rocks of the world saying it's a good thing. And what I've been able to glean is that there are people in other parts of the world that are looking at Bitcoin mining specifically and saying, All right, it's time for us to develop a strategy, deploy some capital and get some hashrate spending up within our borders.

00:25:14:19 - 00:25:22:17
Marty
How do you see this international competition for hashrate playing out moving forward?

00:25:22:19 - 00:25:42:12
Harry
Yeah, I think, you know, to to win in the mining business, you need to have a structural defensible advantage and that that can come in many forms. I think in America we've got two great structural advantages, one of which are our capital markets, which are the best in the world. The other is that our energy assets are also world class.

00:25:42:15 - 00:26:02:04
Harry
And so what are the two key ingredients to a great mining business as well? Capitalized access to energy and so I think the U.S. has has taken a leadership role on the heels of the China the China ban, you know, several years ago. I don't expect us to slow down, you know, maybe on a percentage share basis we're going to lose ground.

00:26:02:04 - 00:26:23:27
Harry
But I don't think we're going to you know, I don't think we're going to slow whatsoever. You know, I'm very curious to see what's going to happen in some of these, you know, really sort of oil state wealth environments where there's obviously huge amount of capital available to them because they they've made so much money over the past years and they're starting to look down this diversity path for their portfolios.

00:26:24:00 - 00:26:51:07
Harry
And, you know, additionally, they've got access to a huge amount of of incredibly cost effective generation. You know, the US is turning on nuclear reactors and a multi gigawatt solar plant co-located with them. So that's a huge you know, that's a huge opportunity to monetize via the deployment of hashrate. We've seen what Marathon's doing over there. Obviously we've heard the news out of Oman, we've heard the news, you know, in, you know, Dubai and elsewhere.

00:26:51:09 - 00:27:13:27
Harry
So, you know, I think then none of that's to say anything about South America which has been involved in this, both, you know, above board and below board. There's sort of a gray market environment. You know, historically in Venezuela, we're seeing large scaled operators operating out of Paraguay. Now we're seeing the Africa trend that grid loss is really spearheading take root.

00:27:13:27 - 00:27:40:22
Harry
So I think, you know, the exciting part is that the decentralization of mining, you know, that narrative is very strong because there are structural opportunities to monetize energy in each of these regions. There's an opportunity to, you know, to deploy capital in each of these regions. And there's going to be companies and individuals with a very broad range of risk appetite and operating model appetite to deploy across all of this.

00:27:40:22 - 00:27:46:09
Harry
And so, you know, all of it all of it means that, you know, we're probably going to see hash rate go up over time.

00:27:46:11 - 00:28:11:14
Marty
Yeah. Then you combine this with the fact that you have hydro boxes and liquid cooling immersion systems becoming more advanced and you have the ability for the first time at scale to deploy hashrate in areas of the world like the Middle East where it was simply impossible due to the physical environment, the heat, specifically even down here in Texas to some extent, like obviously we have a.

00:28:11:16 - 00:28:12:02
Harry
Does a.

00:28:12:02 - 00:28:34:00
Marty
Lot of hash rate here and a lot of salt, a lot of dust. But the the industry, the picks and shovels, part of the industry building these facilities that allow you to mine in harsh environments has reached a point of maturation as well, where it's really going to open up markets that were previously inaccessible, inaccessible.

00:28:34:02 - 00:28:49:01
Harry
Totally. Yeah. There's there's a technology trend that sits underneath all of this. And, you know, on the one hand, it's the efficiency

00:30:30:28 - 00:30:53:00
Marty
So little audio troubles. They're back at it. What were we're talking about?

00:30:53:00 - 00:31:16:08
Harry
Yes, there's. There's two layers of technical innovation that are happening that I think are going to facilitate broader availability of deployment environments. One of them is that the chips are getting more efficient. And so that just means the units of energy per unit of of hash rate produced over time, you're able to produce, produce more hashes per unit of energy.

00:31:16:10 - 00:31:43:21
Harry
The second is all of the technology that's wrapped around that, which includes things like immersion and things like hydro and, and you know, filtration and all the different tools that are available to a mining operator in order to deploy in a harsher environment makes, you know, more sources of generation and more environments available. It means that there's more, you know, economic viability of places that weren't from an operational perspective, but maybe were from a power cost perspective.

00:31:43:21 - 00:32:03:15
Harry
Historically. So all of this kind of rolls into the idea that I think is is the tailwind that we're all riding, you know, across Bitcoin, which is more decentralization is likely because, you know, more remote operations are viable. But then secondarily, just the gross hash rate securing the network is going to go up as well.

00:32:03:18 - 00:32:37:15
Marty
Yeah, let's let's lean into the ac-dc manufacturers. What are your thoughts on the duopoly, the dominated duopoly by Bitmain? Obviously they've got the S21 series coming to market. They're pricing out of the gate with those machines was very aggressive, many so-called as an attempt to leverage their economies of scale to box potential competitors out of the market. Micro T is it just obviously the second largest player in the market and they have a lot of happy customers.

00:32:37:16 - 00:32:57:04
Marty
How do you see this playing out moving into the future? Is Bitmain just using their economies of scale to box people out as micro bitty, beginning to make inroads with larger customers to be seen? Intel come back to the market. Avalon Do any of these companies have a chance of competing?

00:32:57:07 - 00:33:16:26
Harry
Look, I think I think that we're still early days. I think that, you know, the manufacturing landscape could change dramatically over time. You know, I think right now Bitmain is sort of winning the day, as they have been for the last couple of years. I think MakerBot is doing a great job. The micro units, you know, are awesome.

00:33:16:28 - 00:33:41:16
Harry
They continue to double down on reliability and performance at the cost of some nominal efficiency, which I think has been, you know, a great strategy from them. You know, you've obviously seen riot roll into market with a huge amount of future order. And so I think that, you know, my committee is certainly earning their scale volumes as well.

00:33:41:19 - 00:34:03:16
Harry
You know, do I think the duopoly is going to break in the next year? Not particularly. Do I hope that more competitive players enter the market always right. I always want a more competitive market to be able to look at when I think about, you know, capital allocation and hash allocation. But I think that, you know, right now things are, you know, reasonably healthy and competitive.

00:34:03:18 - 00:34:24:28
Harry
You know, what we're not seeing this cycle is kind of the price blowout that we saw in 2021 with units trading, you know, significantly ahead of kind of, you know, the future revenue profile. So I think, you know, we're certainly healthier than we were a few years ago, but I'd always love to see additional players enter. Yeah.

00:34:25:00 - 00:34:54:29
Marty
Yeah, I would agree there. Yeah, it is crazy how efficient these machines are getting talent and think through my mind like the whole concept of a commodification. Like is that simply a natural catalyst for more competition? When you get to a level where you can make an investment, a capital outlay in building an asset because you're confident that it's not going to make a step function efficiency improvement like the A6 have in the past?

00:34:54:29 - 00:35:01:29
Marty
Or does that simply allow the incumbents to just really dominate the market? Um, yet to be seen.

00:35:01:29 - 00:35:28:14
Harry
But yeah, yeah, I think, you know, the good news is they don't let me program any of the chips but at least at least not yet. And if they do we have real problems. So you know I think I think there's I think there's sort of the mad scientist and deep technical experts that are working on it. You know, I got to spend some time with Scott from from oh, good Lord, I've lost the name of his project.

00:35:28:16 - 00:35:33:14
Harry
But he's doing the open source basic project now.

00:35:33:14 - 00:35:37:06
Marty
Future but future. Not that they're not open source.

00:35:37:08 - 00:36:01:23
Harry
Hold on. I can find this. He Yeah. So he's working on some open source pieces. You know, I don't think transparently that it's that it is any bit ax I apologize. Scott You know, it's just cool to see people working on stuff and tinkering and innovating along this. You know, we aren't at the mature phase for this industry.

00:36:01:23 - 00:36:23:15
Harry
You know, we don't have the you know, we don't have the the, you know, the intel chip or that or the HP. You know, you know, Chip is an intel chip that's in all of those units. But we haven't reached the full commodification layer. We might be at what I view as a long local maximum, which is really sort of the duopoly continuing to innovate.

00:36:23:17 - 00:36:44:27
Harry
But we may see, you know, another really interesting breakthrough from a market dynamics perspective that attracts additional folks who want to build down this development path. You know, but unlike software, you don't get to put a software release out every two weeks. You know, it's really, you know, six, 12, 18 month type of time scale to be able to innovate on hardware.

00:36:45:00 - 00:36:51:16
Harry
And so, you know, I'm very curious to see what emerges, you know, really over the coming decade, if I'm being honest about timeline.

00:36:51:18 - 00:36:55:07
Marty
Yeah, the hash wars are upon us. Who knows?

00:36:55:09 - 00:36:57:14
Harry
This could be always has been.

00:36:57:17 - 00:37:26:01
Marty
They have been since January 3rd, 2009. Then you have just external factors, geopolitical risk. Who knows what happens in Taiwan with TSMC? Can they spin up foundry here in the United States fast enough to deter any systemic political risks that would come if China were to do something there? Then even then, many people are like TSMC is one of the greatest revenue drivers within Taiwan's.

00:37:26:01 - 00:37:50:22
Marty
So to think that China would just come or prevent that company from accruing tax revenues by selling their goods to market is a bit crazy as well. But these are unknowns that that can affect the market. It's crazy to think the range of effects. While we were in Nashville, the weather was affecting Bitcoin rate. Yeah, weather down south produced a -4%.

00:37:50:22 - 00:38:14:24
Marty
Difficulty adjustment 3.9% due to everybody engaging demand response. And that's why I mean, I'm sure I know that you feel this way too. It's just I don't think there's a more exciting industry to be in than Bitcoin mining right now because of all these different variables you have to think about. It's certainly very masochistic as well, but it's never boring.

00:38:14:26 - 00:38:38:17
Harry
And it's honest, right? Like what I love most about mining is that, you know, I can't make my terror hash our, you know, you know, I'm not going to do I'm not going to outsell my, you know, competitor for the next software sales deal and, you know, sell $9 a seat for, you know, you know, for 12 months, you know, because I've got a better, you know, CRM product in market, right?

00:38:38:17 - 00:39:05:03
Harry
Like, no, it's a it's a pure, honest capitalist endeavor to be able to generate hashes more efficiently than the next person. And that's that's a really refreshing environment to build a company into because you can see on a daily basis, if you're doing it the right way, you get a report card, you know, on a very, very frequent basis, which is fun and is very, very motivating.

00:39:05:05 - 00:39:22:05
Harry
So I love that part of it. I agree with you there. You know, there's no sector that, you know, I'd be more excited to be working in. It'll be my five year anniversary at Grid next week. Official start date anniversary. I was wrapping a consulting agreement before I joined, so I really started, you know, three or four months before that.

00:39:22:05 - 00:39:35:13
Harry
But, you know, but, you know, this is what I've chosen to dedicate my life to, to building, you know, within within a proof of work system and really couldn't be couldn't be happier to get to work on this every day.

00:39:35:15 - 00:39:59:11
Marty
Yeah. Got as many wraps. I want to take this on, I guess, since this is a mining focused podcast obviously the having it's about 75 days away which is not that much time. What should miners be doing? What are miners doing to prepare for the having how may it affect mining businesses?

00:39:59:13 - 00:40:30:23
Harry
Well, you know, the the the known effect is that the block subsidy is going to get cut in half. I you know, it's bittersweet, right? Like on the one hand, you know we're going to earn less bitcoin as miners unless fees do something quite dramatic than we did the day before. The having happens or the or the block before the having happens is the case really is, you know, but that's the better that the suite is that bitcoins monetary policy gets proven every four years.

00:40:30:26 - 00:41:10:02
Harry
So every 210,000 blocks. You know the the the Bitcoin Fed meets and agrees on a new issuance decision and that issuance decision happens programmatically. And so being able to watch the monetary policy happen in real time and with and with, you know, near absolute certainty is one of the most high impact pieces of how Bitcoin works. And getting to see it work in real time is is, you know, is a powerful and meaningful thing that, you know, that's my that's my ideological answer.

00:41:10:02 - 00:41:33:19
Harry
But, you know, tactically, I think we've seen a lot of miners across the industry start to roll into higher efficiency machines. I think that's one way to sort of having proof your, you know, your operation is to continue to to invest into the fleets efficiency. Beyond that, you know, we we at least think all the time about, you know, the best way to be prepared for the having is to be cost conscious.

00:41:33:21 - 00:42:07:10
Harry
And that starts with the power cost. It really rolls across everything that business spends money on. And so being, you know, laser focused on downside risk and cost is the best tool, you know, available in conjunction with with, you know, managing the fleets efficiency in order to be resilient across a reduction in potential revenue. Now, the purchasing power under the last epoch was greater from a mining revenue perspective than, you know, the purchasing power in the 12.5 Bitcoin block epoch.

00:42:07:13 - 00:42:46:27
Harry
And so, you know, we may see a similar dynamic play out across the four years after 75 days from now. So, you know, I think there's there's still a lot of, you know, dynamic components of the market. We haven't even gotten into the expected fee revenues that we might see with additional adoption or additional JPEG degeneracy. However, however you however you might however you might think of it, but at the end of the day, block space is scarce and Bitcoin is an incredible asset to move from point A to point B, And so the fees that folks are willing to pay to move their UTX so I think is a place where, you know, a

00:42:46:27 - 00:43:12:11
Harry
huge amount of value is provided by miners securing the movement and the availability of that scarce block space. So, you know, it's a it's a it's a simple topic because the monetary policy is dead simple thanks to Satoshi Knott-craig and and it's also a very complex business operating environment because there's a bunch of moving variables. So it really is a three body problem between fees.

00:43:12:13 - 00:43:28:20
Harry
Bitcoin price and network hash rate. So you're you're you're managing a lot of uncertainty around that period of time. But, you know, we pride ourselves to sort of always be having and so, you know we'll start preparing for the having after this one the moment this one happens.

00:43:28:23 - 00:43:59:08
Marty
Always be having sage advice That is the environment leading up to this having is different than the two that I've been a part of since I've been following Bitcoin because you have this fee pressure from the JPEGs and all that and it's nothing too crazy right now, but it they get crazier. Oh, that a little under a year ago and at times throughout the last year did provide significant revenues to mining operations.

00:43:59:08 - 00:44:40:13
Marty
The price is up 150% since January of last year and it seems like we're hovering in the low forties. The g BTC bleeding seems to be coming to a slow and the ETFs seem to be net buyers of Bitcoin right now potentially into the future. Like is there a situation where fees are pumping, the price is doing really well, they have incomes and you know the situation where it's not as I think cataclysmic is the right word, but it's not a it's not an event that's detrimental to as many operations as it has been in the past.

00:44:40:20 - 00:44:43:27
Marty
Something people should be thinking about.

00:44:43:29 - 00:45:16:04
Harry
Yeah, I mean, look, like we had we basically had to having last time because we saw price go from whatever, 6500 to 3500 a month and a half before that. And then we bounced back up and then we have so, you know, you can, you can kind of get to having economics multiple different ways. And so if you're not built to be resilient across those different cycles, it's going to be challenging regardless of if it means price getting cut in half or block subsidy getting it cut in half, you know, it's kind of all the same, you know, the same net net from the miners perspective.

00:45:16:04 - 00:45:48:06
Harry
So, you know, it's it's going to be dynamic. It's going to be interesting. There's going to be a lot of conversation around it. It's critical to remember that it is beautiful to watch Bitcoin's monetary policy happen algorithmically without you know, without a central, you know, central planner involved. And, you know, and and it's about it's about, you know, survival and putting yourself in a position to be able to thrive, you know, during periods of really constructive mining economics.

00:45:48:09 - 00:45:54:10
Marty
First, having where Bitcoin stock to flow would be higher than gold. I wonder if that's some emetic for red.

00:45:54:10 - 00:45:57:09
Harry
Dot blue dot green dot.

00:45:57:11 - 00:46:00:24
Marty
Is that the is that the ones that they're like oh.

00:46:00:24 - 00:46:03:22
Harry
People plan B it's the plan B dots.

00:46:03:25 - 00:46:06:11
Marty
Yes we're going all the way up to orange.

00:46:06:13 - 00:46:08:11
Harry
And red dot.

00:46:08:13 - 00:46:28:29
Marty
Now it is this something as simple as oh people are like wait a second, Bitcoin is now officially more scarce. Some gold from a supply inflation rate that people are like, Oh man, maybe I should get this is 2024 is an interesting year. Another beautiful thing of the halvings they line up perfectly with U.S. presidential election cycles and this one for now.

00:46:29:05 - 00:46:36:07
Harry
Unless we have a lot of accelerating or decelerating difficulty adjustments, we could fall of whack. But I don't think we are likely to.

00:46:36:09 - 00:47:06:03
Marty
Know that this will be. I mean, we don't like to get political too much on this show, but this seems like it could be a pivotal election for the Bitcoin industry broadly, but specifically the mining industry. It seems like, again, the actions from the EIA last week were dictated down from Elizabeth Warren in a certain capacity, and it seems like this current administration really does not like Bitcoin.

00:47:06:05 - 00:47:27:19
Marty
And I think that's what a lot of people are asking themselves behind closed doors is Dan like, do we need a new administration to just let this industry run then? Do you think back to Trump's first term, if it does turn out to be Trump first byte in which it seems like that is the case? I mean, he wasn't really supportive of Bitcoin either.

00:47:27:19 - 00:47:56:20
Marty
Yet Steve mentioned, as is Treasury secretary, you hated Bitcoin. Trump explicitly said that Bitcoin was a threat to the US dollar reserve system. And so even though we don't like having to deal with the political part of life here in the United States as an industry, I think it is becoming abundantly clear that we do have to play the game to some extent just so that they will leave us alone as much as possible.

00:47:56:22 - 00:48:19:00
Harry
My Yeah, I'm with you. You know, politics is definitely not my bag, but, you know, the the the goal that I have, I'm always happy to engage with anyone and everyone on this stuff, you know? And and all I want to do is, is, you know, tell them, don't ask me the questions. Ask the people we buy the power from.

00:48:19:02 - 00:48:44:02
Harry
What do we do for the community? Are we good? Are we net benefit or you know, are we an asset. I'll never forget the you know, we had a quote from one of the CEOs of the local utility that we, you know, have an operation at. And it was right when inflation was was peaking at 10%. And he called us and he said, you know, when this kind of stuff happens, I'm really left with a couple of choices.

00:48:44:04 - 00:49:12:17
Harry
I can sell bonds raised that I can raise rates, I can lower quality of service, or I can go find a Bitcoin miner to bring to my area. Those are the only ways that he had in his mind to fight inflation. And he said of those four options, he would vastly, vastly prefer option four, where there's a differentiated customer that he can recruit to sell power to.

00:49:12:19 - 00:49:37:25
Harry
And so it's telling stories like that as many times as we need to to make people understand that, you know, we're not parasites that are that are, you know, suckling on the lifeblood of the American electric system in the economy. We're an asset that pays revenue and that generates, you know, flexible, sustainable load that is an asset to every electric system that we enter so long as the contracts are structured the right way.

00:49:38:03 - 00:50:10:05
Harry
And so what that means for us is we just want more flexibility and more credit, both financial and social and political, for the flexibility that we offer. And I don't think that's an unreasonable perspective to take. And we're definitely seeing, you know, a lot of of serious consideration around that value proposition taken up by the technocrats who the actual, you know, generation transmission and delivery services that keep all of our lights on.

00:50:10:07 - 00:50:12:24
Harry
Yeah.

00:50:12:27 - 00:50:18:10
Marty
Sometimes they have to take a step back because it's so obvious to us. It's like, how do you know? Do you want to see this?

00:50:18:10 - 00:50:23:19
Harry
Well, Marty, how do you manufacture a pencil?

00:50:23:21 - 00:50:25:18
Marty
It takes many moving parts.

00:50:25:21 - 00:50:45:28
Harry
No idea. I've no idea. When I go pick up a pencil, I have no idea how that was made. I assume that the vast majority of people I will ever talk to have the same level of understanding of how the manufacturing process for a pencil works that I that that they do with what happens when you turn the light switch on.

00:50:46:00 - 00:51:15:09
Harry
Yeah, right. It's a it's an unknown thing, you know. No, you know I, you know, my, my dad believes that he's reducing, you know, the carbon intensity of our household by turning the thermostat down a degree or two in the summer or in the winter. Right. So like the level of understanding and the level of, of, you know, transparency, you know, he doesn't think that way anymore because I've, you know, locked him in a room and yelled about it long enough.

00:51:15:11 - 00:51:37:29
Harry
But, you know, but these are these are topics that are not taught to us as young people. They're they're topics that are wildly esoteric for the vast majority of people, you know, certainly in America, not on planet Earth, nobody knows what happens or why their light switch works. And so that's the that's the fight that I that I'm excited to take on, which is I don't believe that.

00:51:38:02 - 00:52:04:27
Harry
Look, I didn't go to school for electrical engineering. I went to school for Keynesian economics. And I somehow shook loose of that of that horrible fate. And and so if I can learn how the electric system works, I have no technical background whatsoever. But I read a bunch of books and asked a lot of dumb questions and and arrived at something approximating a level one understanding of how electricity works in America.

00:52:05:00 - 00:52:07:06
Harry
It isn't that hard.

00:52:07:08 - 00:52:29:01
Marty
Now that I seriously been thinking about this reason, like we need in terms of curriculum, like people should know money works and people should know how energy works. Like that should be high school classes mandatory, know how your money works, know how your energy systems work because they are the best base layer of the economy. They're going to go out in the world and try to be productive in.

00:52:29:03 - 00:52:30:07
Marty
And the fact that I.

00:52:30:11 - 00:52:38:13
Harry
I swear I didn't set you up for this, but but Grid's mission statement is to to build a generational company at the intersection of energy and money.

00:52:38:15 - 00:52:39:15
Marty
Yeah.

00:52:39:18 - 00:52:49:12
Harry
It's that's our goal. Our goal is to build a company that sits right on that street corner. Energy going this way, money going that way. Right on the corner is grid and Bitcoin mining.

00:52:49:15 - 00:52:53:17
Marty
Yeah, it's happening. It's going to be a long journey. Not for grid.

00:52:53:18 - 00:52:54:03
Harry
For young man.

00:52:54:03 - 00:52:54:20
Marty
All of us.

00:52:54:20 - 00:52:56:12
Harry
For young men.

00:52:56:14 - 00:53:00:09
Marty
And you see this airline, it's it's not getting any it's not.

00:53:00:09 - 00:53:01:09
Harry
Coming back LeBron to.

00:53:01:09 - 00:53:25:21
Marty
My eyebrows that's true. It's true. Um, one other topic I want to talk about with the emergence of the ETFs, how do you think that affects stocks like MicroStrategy and public mining stocks that have historically been used as a way to get exposure to Bitcoin without direct exposure via public markets?

00:53:25:24 - 00:53:58:15
Harry
I mean, look, I think that I think that we saw we have evidence now, right? We saw the ETF come out and we saw a bunch of those stocks, especially MicroStrategy, go down. I think MicroStrategy was viewed basically as a holding company for Bitcoin. Now they deserve some premium because they're able to lever into some bitcoin. You know, I love I forget who did this analysis on on XCOM, but they basically looked at the you know, the SATs per share that you own if you own, you know, stock in MicroStrategy.

00:53:58:15 - 00:54:22:01
Harry
And that number actually goes up based on the way that that they've issued new stock and bought Bitcoin with it. So I think there's there's some interesting sort of deeper fundamental analysis that's going to go into the decision to own, you know, a stock like MicroStrategy versus a share of of what we'll talk about the bitwise folks we like that be and we like, you know, the ark folks and have relationships across there.

00:54:22:01 - 00:54:43:21
Harry
But I love that they're funding developers out of those management fees. And, you know, I think we've seen you know, we've seen the premium come out of microstrategy's to a large degree and enter, you know, ETF land. I Think the miners are a more interesting case and I just look at them broadly but I think it's an opposite it's an opportunity for differentiation.

00:54:43:28 - 00:55:03:11
Harry
Right. You're taking sort of some of the market data into a different vehicle, but maybe that means there's more room for the market alpha for a differentiated operator to, you know, to really show their chops or many of them to show different chops. You know, there's a lot of different kind of operating models across the different pub codes that are out there.

00:55:03:13 - 00:55:26:23
Harry
But yeah, I mean, it's it's an opportunity to demonstrate differentiation and, you know, attract people to those names or explain to people why, you know, being able to generate revenue in Bitcoin terms and, and do so on a profitable or highly profitable basis is a compelling equity investment. And so maybe they can get looked at more like companies and less like Bitcoin, you know, holding companies.

00:55:26:25 - 00:56:04:20
Marty
Yes, I completely agree. Which is good for the market too. That particularly the differentiation that's going to be necessary to set your self apart in the world of public markets, you under clocking strategies that getting more ingrained with demand response systems, becoming energy providers, maybe getting acquired by an energy provider, becoming part of that stack, people are going to get creative, which should be a forcing function for a more efficient mining industry and a more healthy Bitcoin overall at the end of the day.

00:56:04:22 - 00:56:28:01
Harry
And and a more and a more fulfilled investment community. Right. Like, you know, I think there's a lot of sort of well, as the ETF like bad for bitcoin I'm like I don't know I like when people have access to more choices right at the end of the day, like I don't know somebody's personal situation and maybe the ETF is the most, you know, obvious and greatest thing in the world for them.

00:56:28:04 - 00:56:46:07
Harry
It's not how I would choose to get exposure to Bitcoin, you know, for me, because I can't, you know, engage in and, you know, the self-sovereign component of it. But, you know, but I'm sure there's lots of people out there who that's a much more constructive product and they want the price exposure to Bitcoin and that's really meaningful for them and that's great.

00:56:46:09 - 00:57:06:15
Harry
So I think any time that that, you know, the market's able to make better, more informed and broader choices across, you know, a broader range of vehicles, like I think that's net positive and is in keeping with sort of the the, you know, the libertarian on my shoulder which says that, you know, people deserve more choices and more freedom to choose and that's positive.

00:57:06:15 - 00:57:28:10
Harry
And then ultimately the market over time will will, you know, move away from being a voting machine and moving back towards a weighing machine. And and you know that. And that's where sort of the truth gets to be, you know, litigated which is which is in the market for ideas first in the market for, you know, for financial outcomes second.

00:57:28:13 - 00:57:43:05
Marty
Yeah. Which is a perfect segue way into how well we can end it on, which is the fact that you joined 1031 as an advisor as well. We've been talking behind the scenes for, gosh feels like years now, but it's official.

00:57:43:05 - 00:57:46:12
Harry
It has been years and confirm.

00:57:46:15 - 00:58:09:23
Marty
It's official now. And that is our our goal, our aim, our mission is to go out and find the entrepreneurs that are building out the critical Bitcoin infrastructure that will lead us to a Bitcoin standard, make it easier for people to access Bitcoin, to use Bitcoin to leverage Bitcoin to mine Bitcoin, whatever it may be, and to give the market more options.

00:58:09:23 - 00:58:37:07
Marty
At the end of the day. And we're extremely excited to officially have you on board. And I think the opportunity that lays before us at 1031 specifically is extremely exciting as well. I said mining is the most exciting industry and I truly believe that. But having the luxury of getting a view into every other sector of the Bitcoin economy is extremely rewarding as well.

00:58:37:07 - 00:58:41:22
Marty
And I couldn't be happier to have you on board to advise.

00:58:41:22 - 00:59:08:17
Harry
I couldn't be happier. I couldn't be happier. No, I think, you know, any any time you get to work with a market leader, you take it right. You guys have done have done so much hard work, you know, John. Jonathan Grant You know. O'Dell And you obviously as well as as well as all the LP's, you know, have just done a phenomenal job putting together a really thoughtful and mature, you know, investment platform.

00:59:08:17 - 00:59:34:18
Harry
Obviously, that's skewed significantly towards venture thus far because I think, you know, Bitcoin is still in in venture land where, you know, the biggest companies are being built are yet to be built. They haven't you know, they haven't reached maturation by any stretch, you know, thrilled to obviously be a portfolio company at GRID. But but for me, like what's most exciting is getting to work with it's used to work with founders, right?

00:59:34:18 - 01:00:00:19
Harry
The startup journey is not like any you know, nobody nobody could have told me what it was going to be like on the way in. And we're not done yet by any stretch, obviously. So getting to share, you know, the hard lessons, the good lessons, you know, what did we do right? What did we do wrong from along the way with other founders and being able to kind of take the the you know, the the the long the long, dark night of the soul type of call.

01:00:00:21 - 01:00:21:03
Harry
You know, that's what was really exciting to me because it's really hard. And, you know, being a founder or a co-founder of an early stage company can be extremely isolating. And so having some, you know, folks in the been there done that club who can sit alongside you and hold your hand when when you're facing kind of the toughest pieces.

01:00:21:05 - 01:00:43:28
Harry
That's so, so exciting to me getting to work with you guys on, you know, on fundraising and on and on allocations like all of that kind of stuff is something that, you know, that I'm tremendously passionate about, along with, you know, working directly with founders. So, you know, couldn't couldn't be happier, couldn't be a more symbiotic relationship between Grid and 1031 and between me and 1031.

01:00:43:28 - 01:00:46:03
Harry
So thrilled to be here.

01:00:46:06 - 01:01:13:20
Marty
Yeah, I that's another thing that is really unique about the position that we're in. This is Bitcoiners more broadly, but 1031 specifically, yes, we're a venture fund, the portfolio, the portfolio of companies that we've allocated to. But in your incumbent venture space, it's usually spray and pray across many different verticals, many different subsectors of companies doing wildly different things.

01:01:13:20 - 01:01:52:18
Marty
But with the focus that we have a 1031 on Bitcoin specifically, it enables us to sort of enable the portfolio companies to help each other out where they can and to give that advice obviously very small industry right now. But you have a very large goal and very similar problems. I mean last year to Bear Claw portfolio retreat, I mean the topic of the year was banking relationships and that's something that Bitcoin companies have been targeted, Whether it's explicit or implicit is for for others to determine.

01:01:52:18 - 01:02:13:10
Marty
But wasn't isn't easy. Still, for many companies to get banking or banking relationships in the space and just having a focus and being able to have this cross-pollination of ideas and experiences among portfolio companies is something that I think is unique to what we're doing here.

01:02:13:13 - 01:02:42:11
Harry
And this is catchy, but I'll say it anyway, which is like Bitcoin is a social hack where when I meet other Bitcoiners, I'm like 90% of the way towards friends. When I meet other Bitcoin entrepreneurs, I'm like 97% of the way towards friends. So, you know, being, you know, being able to kind of self-select into a group of people who are convicted enough to be, you know, to be bitcoiners in the first place, but then convicted and asked to build companies around Bitcoin.

01:02:42:13 - 01:03:00:02
Harry
It's just rarefied air, whether you're a portfolio company of 1031 or not. I just think, you know, the founders and employees at Bitcoin companies are a pretty special breed and and it's just it's just the most the most gratifying thing to get to be around those kinds of people all the time.

01:03:00:04 - 01:03:05:11
Marty
You got to be a little crazy. Just get I like crazy. It's a.

01:03:05:13 - 01:03:06:28
Harry
You know. Yeah.

01:03:07:03 - 01:03:12:07
Marty
Oh yeah, yeah. You can tell that is this was this.

01:03:12:07 - 01:03:14:16
Harry
Was a Marty Jones free episode.

01:03:14:19 - 01:03:16:27
Marty
I I've got the white collared shirt on.

01:03:16:28 - 01:03:18:10
Harry
You got the button down on.

01:03:18:12 - 01:03:29:15
Marty
I've got the button down on. I've got two buttons unbuttoned here and a little loose. But that's it. It's Monday morning. It's Monday afternoon now. The morning flew by yesterday.

01:03:29:15 - 01:03:30:07
Harry
Ran away.

01:03:30:10 - 01:03:44:12
Marty
Keeping Marty Jones in the cage for this one. Uh, what haven't we talked about? That's on top of your mind. I think maybe we should cover it. Doesn't have to be mining related. Could be Bitcoin related.

01:03:44:14 - 01:04:14:20
Harry
I mean, I think, you know, I think this is this is a good kind of time to remember that, you know, lower your time preference. Bitcoin comes at you super fast and so cherish these days of like quiet in the markets, you know, you know, it's great to be bouncing between 38 K and 45 K or you know, 42 and 43 like these are these are calm waters that we're in right now and they won't stay calm forever.

01:04:14:22 - 01:04:26:05
Harry
So, you know, cherish the cherish the peace of mind that you got, you know, on these kinds of days. And and, you know, remember that Bitcoin is the longest game we've ever gotten to play.

01:04:26:07 - 01:04:31:00
Marty
Yeah, it gets crazy when the price starts having.

01:04:31:02 - 01:04:33:12
Harry
Focused productivity down, price up.

01:04:33:14 - 01:05:03:26
Marty
Well, anybody out there building a company, humbly stacking sets, just prepare for the distractions. Mentally prepare, especially if you're running a company. Let your employees know that your team. Now things are going to get crazy. You're going to get the pull of distraction, pulling you day in and day out. So we're getting large green candles, large red candles up into the right, buckle down and try to focus.

01:05:03:28 - 01:05:08:15
Harry
Anticipating exactly when.

01:05:08:15 - 01:05:11:27
Marty
It comes, because we got we've got a lot to build.

01:05:12:00 - 01:05:16:13
Harry
We've got a lot to build. Harry future on build itself.

01:05:16:16 - 01:05:19:29
Marty
It's not takes individuals like you.

01:05:20:02 - 01:05:20:25
Harry
And you.

01:05:20:27 - 01:05:36:08
Marty
Many other people out there. We're doing it though. We're winning. Yeah. People working out here in the Commons working hard. You're in Nashville. The park is full partner, not there. But I was on a call with somebody earlier at the park and I saw it was full. We're doing it.

01:05:36:14 - 01:05:54:05
Harry
I went in there. I went in there. I had I had to do a little bit of stuff last night. I got I got to the park at like 8:00 and there were like six cars there and there were like two conference rooms lit up. People were working. Like the state of our network is strong. This is what winning looks like.

01:05:54:08 - 01:06:09:05
Harry
It's Bitcoiners who can't sleep on a Sunday and have to grind on their next, whether it's their next release or their next slide deck prep or whatever. Like they're grinding and our enemies aren't. And so we're going out working.

01:06:09:08 - 01:06:13:05
Marty
The momentum is building. It's going to be a good year.

01:06:13:07 - 01:06:14:17
Harry
Harry. Good year.

01:06:14:20 - 01:06:20:23
Marty
Thank you for joining me. We can't wait two years for the next episode. That is to answer.

01:06:20:25 - 01:06:24:09
Harry
Well, we'll put it on the calendar. Less than two years.

01:06:24:11 - 01:06:28:19
Marty
Yes, less than two years. You heard it here first. That's all we got today for X peace, love.

Read original post

• GRIID is a uniquely positioned, vertically integrated bitcoin mining and energy infrastructure company and one of the first pure-play bitcoin miners to achieve public listing
• GRIID Chief Strategy Officer Harry Sudock to join Ten31 as Advisor
• Launch of Ten31 Fund III, which has already secured several anchor commitments and strengthens Ten31’s position as the world’s leading bitcoin technology investor
• Launch of Ten31 Tactical Fund, which provides access to individual accredited investors
• Ten31 also announced a grant to independent bitcoin developer calle for bitcoin powered Chaumian ecash

NASHVILLE, January 30, 2024 – Ten31 announced that its portfolio company GRIID Infrastructure has completed its listing on the Nasdaq Global Market stock exchange, representing the first public listing for any bitcoin-focused investment fund’s portfolio company. Ten31 served as GRIID’s exclusive institutional capital partner ahead of its public trading debut, investing in GRIID out of its second institutional venture fund, Low Time Preference Fund II. Ten31 is the world’s leading bitcoin technology investor, having deployed over $100 million through its prior two fund vehicles. Over five years of deploying capital, Ten31 has built an industry-leading portfolio of 36 companies focused on bitcoin and freedom technologies and served as lead investor or exclusive partner in 25 of its investments, including Pre-Seed, Seed, Series A, Series B, and pre-IPO rounds. 

Public Listing Milestone

GRIID’s listing is a notable milestone for the bitcoin mining company, which first announced its intention to go public via a SPAC transaction reported in November 2021. After having successfully navigated a long SEC and regulatory review process, the Nasdaq listing represents not just the first significant liquidity event for any bitcoin-focused venture investor but also the first major equity liquidity event in several years for the greater “crypto” venture landscape, marking a major accomplishment for GRIID, Ten31, and the bitcoin ecosystem as a whole. 

“As a vertically integrated operator, purpose-built for bitcoin mining from day one, GRIID is uniquely positioned to become one of the leading bitcoin mining companies in the world,” said Trey Kelly, Founder and CEO of GRIID. “We believe that listing on Nasdaq will enhance our visibility, liquidity, and broaden our investor base as we continue to strengthen our market position and reinforce our commitment to delivering shareholder value. Ten31’s capital support and strategic guidance were invaluable in helping us reach this milestone. We feel strongly that there is no better partner or investor in the bitcoin space than Ten31, and we look forward to continuing our close partnership.”

Harry Sudock Joining Ten31 as Advisor

In conjunction with GRIID’s Nasdaq listing, Ten31 also announced that Harry Sudock, Chief Strategy Officer at GRIID and a leading voice in bitcoin mining and energy infrastructure, will join Ten31 as an Advisor while maintaining his role at GRIID. “After many years building a bitcoin company, I know firsthand the crucial value of capital partners that both share our understanding of bitcoin and offer proven institutional investment expertise. They embody bitcoin’s proof of work ethos in everything they do,” said Sudock. “I expect GRIID to be the first of many success stories to emerge from the Ten31 portfolio, and I’m excited to help support Ten31 as it invests in the best companies in the rapidly evolving bitcoin ecosystem while serving as a resource to both portfolio companies and their founders.”

Ten31 Building on Its Success with Two New Funds and Continuing Contributions to Open Source Development

Ten31’s major milestone with GRIID coincides with the launch of Ten31’s third institutional fund, Low Time Preference Fund III, which has already secured anchor commitments and established an initial portfolio of investments, as well as the Ten31 Tactical Fund, which provides access to individual accredited investors. As the world’s leading bitcoin technology investor, Ten31 has unmatched reach and expertise across the breadth of the bitcoin ecosystem, driving a leading position in all verticals and all funding stages. Ten31’s investments include leading Strike’s $80 million Series B round in September 2022, leading exclusive Series A rounds for companies such as Coinkite and Upstream Data, as well as leading Pre-Seed and Seed investments in companies such as Mutiny, Primal and Mempool. 

Ten31 has also renewed its commitment to supporting open source development in the bitcoin ecosystem by providing a grant to independent bitcoin developer calle for his work on bitcoin powered Chaumian ecash. Ten31 is the most active investor in open source businesses in the bitcoin ecosystem and is the only investor in the industry which contributes a portion of its management fees to open source development. Ten31 was a founding contributor to OpenSats in 2021 and has supported a variety of open source efforts on a no-strings-attached basis, including making an early grant to Fedimint, a protocol for federated Chaumian ecash. Ten31’s early support of Fedimint, along with contributions from Ten31 Managing Partners Matt Odell and Marty Bent, were instrumental in catalyzing the formation of Ten31 portfolio company Fedi. 

About Ten31

Ten31 is the world’s leading bitcoin technology investor. With a footprint in Nashville and Austin, Ten31 seeks to support the ecosystem's most promising founders and companies, leveraging its deep understanding of bitcoin, extensive experience, and broad reach to create value for its partners. Since the fund's inception, Ten31 has directed more than $100 million in equity to companies focused on bitcoin and freedom technologies. For more information, visit www.ten31.vc/funds. 

About GRIID Infrastructure Inc.

GRIID is a purpose-built bitcoin mining company, founded in 2018, that has operated mining facilities since 2019. GRIID has built long-term power relationships securing affordable, reliable, environmentally responsible power, enabling a vertically integrated self-mining business model with significant growth opportunity. Headquartered in Cincinnati, Ohio, GRIID operates a R&D center in Austin, Texas and a development, deployment and equipment repair center in Rutledge, Tennessee. GRIID currently maintains mining facilities in Watertown, New York; Limestone, Maynardville and Lenoir City, Tennessee. To learn more, please visit www.griid.com.

Contact

ir@ten31.vc

Disclaimer: The information contained herein is provided for informational and discussion purposes only and is not, and may not be relied on in any manner as, legal, tax, or investment advice or as an offer to sell or a solicitation of an offer to buy an interest in any fund managed or sponsored by Ten31 or its affiliates (the “Fund”), or an offer or invitation to purchase or acquire assets, shares, partnership interests or other securities or interests in this regard. A private offering of interests in the Fund will only be made pursuant to offering documentation, including the Fund’s subscription documents (the “Offering Documentation”), which will be furnished to qualified investors on a confidential basis at their request for their consideration in connection with such offering. The information contained herein will be qualified in its entirety by reference to the Offering Documentation, which contains additional information about the investment objective, terms and conditions of an investment in any Fund and also contains tax information and risk disclosures that are important to any investment decision. No person has been authorized to make any statement concerning the Fund other than as set forth in the Offering Documentation and any such statements, if made, may not be relied upon. This communication has not been approved or disapproved by the Securities and Exchange Commission or by the securities regulatory authority of any state or of any other jurisdiction, nor have any of the foregoing authorities passed upon or endorsed the merits, accuracy or adequacy of the information contained herein. Any representation to the contrary is a criminal offense.

Read original post

Key Takeaways

The conversation with John Arnold from Ten31 highlights the vast economic opportunity that bitcoin and its infrastructure present to the world. Bitcoin, being superior money, is expected to be adopted universally, and this adoption will drive demand for companies building applications and services around it. The discussion delves into the potential of bitcoin to disrupt various industries, from financial services to energy, and the role of venture capital in fostering this transformation. The key takeaways from this dialogue are:

1. The bitcoin ecosystem is maturing rapidly, with more companies emerging to innovate and build upon its infrastructure.
2. Bitcoin's superior monetary properties, such as absolute scarcity, permissionless access, and global transferability, make it the best form of money and a catalyst for widespread economic change.
3. The total addressable market (TAM) for bitcoin-related companies is immense, potentially reaching or exceeding the size of the enterprise SaaS market.
4. Traditional industries, from payments to energy, will need to integrate bitcoin to remain competitive, leading to a broad spectrum of investment opportunities.
5. Specialization and focus in venture capital, as demonstrated by 1031, offer significant advantages in understanding and capturing the value within the bitcoin space.
6. The venture capital industry has been slow to recognize the potential of bitcoin due to distractions from other crypto assets and a lack of understanding of bitcoin's fundamental principles.

Links

Follow John on Twitter

Check out Ten31

Check out Bitcoin is Eating the World:

[

Bitcoin Is Eating the World

An Investor’s Case for the Biggest TAM on Earth.

TFTC – Truth for the CommonerJohn Arnold

](https://tftc.io/bitcoin-is-eating-the-world/)

Sponsors

Best Quotes

1. "Bitcoin is superior money. And there is no way that any self-interested economic actor will be able to ignore indefinitely the consequences of what that means and will be able to indefinitely not adopt and use bitcoin in some way." – John Arnold
2. "Free markets are ruthless about excess margin and inefficiency. If there's a way to take costs out of the system, if there's a way to do something that serves end users better and that an entrepreneur can profit from doing, the market will do that." – John Arnold
3. "Every company will have to become a bitcoin company to survive." – John Arnold
4. "Focus is a highly powerful lever to driving investment returns, and that's a big part of what we do, focus." – John Arnold
5. "We're just getting started, and there's a lot of work to do." – John Arnold

Conclusion

The conversation with John Arnold underscores the transformative potential of bitcoin and its underlying technology. As bitcoin continues to demonstrate its superiority as a form of money, its adoption is expected to reshape industries and create new economic opportunities. The venture capital space, particularly funds like Ten31, are poised to play a pivotal role in nurturing the growth of bitcoin-focused companies. Through specialization and a deep understanding of bitcoin's attributes, these funds are well-positioned to capitalize on the burgeoning market. The future of bitcoin is not only promising for investors and companies within the ecosystem but also for the broader economy as it embraces a more efficient, secure, and decentralized monetary system.

Timestamps

0:00 - Intro
7:06 - The real John Arnold
10:26 - John’s background
23:10 - Total addressable market
29:31 - Tech stock returns
34:42 - Best time to jump in
44:04 - Why Bitcoin is eating the world
52:01 - Financial services
1:03:06 - Consumer applications
1:09:06 - Replacing the incumbent system
1:21:48 - Venture capital not recognizing
1:29:57 - Ten31 network
1:35:07 - Bitcoin is fun
1:40:45 - Wrapping up

Transcript

00:00:02:16 - 00:00:05:03
Marty
John Arnold.

00:00:05:05 - 00:00:07:22
John
Mary Beth. It's an honor.

00:00:07:24 - 00:00:12:25
Marty
It's a long time coming, sir. Working together for, what, two years now?

00:00:12:25 - 00:00:16:12
John
Almost close to two years. Yeah.

00:00:16:15 - 00:00:25:04
Marty
We're very lucky to have you on our team at 1031. I just want to say that up front, I.

00:00:25:06 - 00:00:33:19
John
The feeling is mutual. Very, very bullish on what we're doing. I think it's very unique and we're just getting started. So I'm excited.

00:00:33:21 - 00:00:51:11
Marty
Yeah. Before we jump into what we're here to talk about, which is the fact that Bitcoin is eating the world. You wrote an incredible piece laying out the case for Bitcoin being the largest total addressable market on the planet. But before we do that, are you the real John? John Arnold? That's the question I think we need to.

00:00:51:13 - 00:01:19:02
John
My parents. My parents would say yes, but there is a slightly more famous and just slightly wealthier John Arnold out there who happens to be a billionaire. And I guess this quick background on me, I am a traditional finance refugee, starting an investment banking around a college, then went to work at the hedge fund Citadel for several years.

00:01:19:02 - 00:01:44:15
John
And while I was there, I got an email from another another billionaire by the name of Ken Griffin asking to to talk to me right away. And obviously assumed, as we're all trained, to assume that that's, you know, some kind of spams in a phishing attempt. But when I referred it to our I.T. department, I was assured know it's the real Ken Griffin and you better give him a call.

00:01:44:17 - 00:02:22:19
John
So I gave him a ring, and I believe he was trying to get my opinion on some gala or charity event. And I was unfortunately unable to provide any useful information to him and hung up the phone, assuming surely I'm about to be fired, checked in with his secretary to find out that he was actually looking for the John Arnold the the real one, the billionaire with whom he presumably has some kind of relationship and not the underlying John Arnold, who was, you know, a first year analyst at his firm.

00:02:22:22 - 00:02:28:27
John
So that's my claim to fame at this point as being the the second John Arnold in the world.

00:02:29:00 - 00:02:37:07
Marty
Well, the second John Arnold. But for a secondary like oh, Ken, Ken's like in my my work as an analyst, my pressing him.

00:02:37:09 - 00:02:58:02
John
You know, generally when you're like 23, 24 and the billionaire CEO of your company wants to talk to you, it typically isn't a good thing. So my first my my first response was not positive, but turned out to be turned out to just be a mistake, an innocent mistake. So we live to fight another day.

00:02:58:05 - 00:03:20:19
Marty
Yeah, that's one of the funnier stories that you have in your belt. You have a few of them. That's one of my favorites, but it's a good level setting for the context of this conversation. Obviously, you're with us at 1031. You've come full throttle into the Bitcoin ecosystem, helping back the companies that are building out the infrastructure for Bitcoin standard.

00:03:20:19 - 00:03:32:24
Marty
Before we jump into the article and all that. Let's talk a little bit more about your background, what you're doing at Citadel, what you're doing before that, what you were focused on and how that applies to what you're doing now. 1031.

00:03:32:26 - 00:04:02:26
John
Yeah, for sure. Post-college, like I said, I started in investment banking at Goldman. For those that don't know, that's a lot of Excel modeling, building PowerPoint decks, turning comments from, you know, senior members of your team at 4 a.m. and just trying to survive and learn, you know, the basics of kind of corporate finance. I knew I wanted to be an investor likely in the public markets.

00:04:02:26 - 00:04:40:00
John
And so recruited for positions at hedge funds landed at Citadel, which had me doing a lot of investment analysis publicly traded companies. I was on health care desks focused even more specifically on medical technology and the model of a lot of those modern kind of hedge fund businesses. The big shots is to have kind of an army of people who are inch wide, mile deep, focused on very particular subsectors and trying to be the acts in those subsectors and just kind of know them better than anyone else in the market.

00:04:40:03 - 00:05:05:18
John
That'll be relevant to kind of the story of what we're doing at 1031 in a second. But I did that kind of was a junior analyst working out to some extent, worked on a couple of different desks, always focused on medical technology, providing a lot of the underlying analysis for investment decisions that our desk would make for positions usually on very lean teams.

00:05:05:18 - 00:05:35:16
John
So only a few people typically worked for kind of just one person above me, providing input, analytical inputs, meeting with management teams, doing channel checks and just kind of learning as much as I could about the companies in our portfolio. And so kind of built up what I think is a pretty strong muscle on just basic blocking and tackling of corporate finance and investment analysis in a public markets context.

00:05:35:19 - 00:06:11:16
John
But I had always been kind of a big supporter of Austrian economics, even from high school onward. You know, you've you've talked at length. You just had the episode of Parker Lewis out about how you guys were kind of both formed by the financial crisis in a way. I was also kind of in high school at the time, right around the same age as you, and that caught my attention and made me interested in finance in a big way for the first time, but also interested in kind of what the causes of that debt crisis were and why suddenly all the smartest guys in the room seemed to not know what was going on and

00:06:11:16 - 00:06:44:16
John
why we needed to take out untold levels of debt and print untold levels of money on hold for that time to bail out the system. And so that naturally led me down. The Federal Reserve rabbit hole and into kind of Austrian economics and the thesis Institute and, you know, became a big Ron Paul supporter. And so I always kind of had that vein running through kind of my intellectual life here while I was working in finance jobs.

00:06:44:19 - 00:07:11:24
John
Obviously, as you would imagine, a lot of those principles are not you know, they're not orthodoxy on your your traditional finance desks typically. So didn't necessarily have a lot of opportunity to put those into practice. But, you know, over time, kind of working in those jobs, you sense like especially if you come to those jobs with the priors of Austrian economics, you can kind of sense that there there's something a little wrong, at least to say the least.

00:07:11:26 - 00:07:56:00
John
There are kind of strange like short term games being played and there's kind of less and less focus on fundamental analysis and attention, less and less attention paid to what's a fundamentally justifiable valuation for a company. A lot more focus on just short termism, quarterly earnings reports or even, you know, weekly monthly moves in a stock position, focus on others positioning and kind of just increasingly trading all stocks, as you know, more or less like shit coins, just like tickers on a screen that have maybe some tenuous link to real economic realities, but like, not really that you only have that you have to like, pay attention to.

00:07:56:03 - 00:08:22:05
John
So I kind of went through that career progression with those priors in mind, and you would think that that would have led me to fully grok Bitcoin much sooner. But I heard about it for the first time in 2013 in college. I think around the time that Malcolm X blew up, I knew it was kind of a it was popular among libertarians, but it seemed, you know, esoteric and scammy.

00:08:22:05 - 00:08:48:08
John
And I thought my science project got probably never going to work. Then I my next touchpoint was while I was working in finance in the 2017 Bull run, got a little more interested then, but still just didn't have the conviction to fully take the plunge. And you know, obviously you're drinking from a firehose on finance desks and you have a lot of time to to drill into something that takes 100 plus hours of work to to start to get.

00:08:48:08 - 00:09:19:13
John
So that didn't work either. But finally, you know, spring 2020 happened and that forced me down the rabbit hole. And after a week or two of some real diligent work, it finally clicked that this was indeed the fulfillment of the principles that I had learned from economics. This was Hayek's sly roundabout way to change the system, the monetary system for the better, in a totally peaceful, voluntary way.

00:09:19:15 - 00:09:40:06
John
And so from then on I was hooked. I continue to work my hedge fund jobs for, you know, other year plus just kind of learning as much as I could about Bitcoin being in the space as much as I could, you know, much too much of my wife's chagrin, as I'm sure a lot of you know, Bitcoiners can can attest, it becomes kind of the only thing you can talk about or think about.

00:09:40:06 - 00:10:22:13
John
So I went through that period, but to your point about coming from investing background around summer 2021, so after being in Bitcoin for a little over a year, kind of just started to have the intuition that if Bitcoin was going to do what I thought it was going to do and what most of people listening to this probably think it's going to do, there will be a massive kind of wave of demand behind that for companies building applications to make Bitcoin easier to use to extend its utility to both those retail users and enterprises.

00:10:22:15 - 00:10:43:24
John
And because Bitcoin is money, then there's no industry that it's not going to touch and we'll get into that more. But that by itself was kind of this intuition that made me start thinking about investing in Bitcoin companies and trying to figure out a way to do that. And right around that time, 1031 popped under my radar, kind of came out of stealth.

00:10:43:26 - 00:11:19:23
John
And, you know, I saw that very honest, combining traditional finance experience, you know, some of the two co-founders have experience in private equity and hedge funds. And then they were bringing, you know, you and Matt O'Dell on and, you know, you guys were formative in my orange building experience, my going down the rabbit hole. And so it just seemed like the perfect kind of shop to go try to build and stud a totally unique opportunity combining the two things you would need to be a successful investor, right?

00:11:19:23 - 00:11:52:11
John
In the Bitcoin space, which is some traditional finance investing experience and deep, deep Bitcoin knowledge in Bitcoin focus. So I think I slid into Grant's DMS, you know, in like summer or fall 21 and just kind of wouldn't let up until we got on the phone. He and I started talking and I started doing some work with you guys when it, when I had a chance on the side and one thing led to another and yeah, spring of 22, I think the day that Terra Luna blew up at full time.

00:11:52:14 - 00:11:53:27
Marty
Baptism by fire, maybe.

00:11:54:04 - 00:12:21:02
John
Yeah, exactly. Exactly. But it was validating, too, right? I mean, it's exactly the kind of thing where, you know, a couple of years before I'd been looking at all the investment in the crypto space broadly and thinking these things look like perpetual motion machines. You know, it's there's a ton of noise. Everyone's missing the signal of remaking money of kind of digital buried value that's absolutely scarce.

00:12:21:04 - 00:12:46:05
John
And, you know, that was one of the things that pulled me to 1031 with, you know, the concern and viewpoint that you guys were taking. And so I think it was appropriate that basically the day that I joined, we were kind of like vindicated in a very big way. You know, unfortunately, when one of the probably the perpetual motion machine of crypto par excellence totally blew up par excellence.

00:12:46:07 - 00:13:14:21
Marty
That's again, four level setting for this conversation. It's so true. I mean, I had a very short stint in traditional finance about three years, which included two years of college, whereas working full time and taking night classes. But it was different side of traditional finance with Men's Futures Fund, your fund of funds index, commodity trading advisors. So it wasn't like a long short equity portfolio where we're diving into individual companies and looking at valuations and trying to place bets that way.

00:13:14:21 - 00:13:40:04
Marty
It was more of a macro theme looking at commodities markets, and I had similar experience where I would sit there with the chief investment officers of these large commodity trading advisors, and this was in 2012, 2013, right around when Janet Yellen was taking over the helm and we were coming out of QE twist and into QE two. And I was simply asking them, like, you guys worried about all this monetary base expansion.

00:13:40:04 - 00:14:12:15
Marty
They're like, No, the Fed doesn't really control markets. And I think the amount of complacency that I witness at a young age at that level of high finance, if you will, for lack of a better term, was was eye opening for me. It was like, oh, all the quote unquote, smartest people in the room really don't care about something, which I'm pretty sure we'll have an immense impact on global markets everywhere, whether it's equity, equities or commodities and other financial assets like treasuries.

00:14:12:18 - 00:14:35:11
Marty
And that was really radicalizing for me in a way where I was like, wow, these nobody knows what's going on. And that's same time falling down the Bitcoin rabbit hole and really realizing, Oh, this is solution to solve all this insanity in the world, all this mispricing, we need to fix the pricing mechanism, which is the money. And that dovetails into what we're going to talk about.

00:14:35:15 - 00:15:07:16
Marty
I would argue that over the last 15 years, six years now post 2008, the ability to actually go in and properly value companies has been completely distorted. Look at a p e ratio of some companies like NVIDIA above 200, which is insane. Obviously the amount of monetary base expansion and debt expansion has flown into financial assets and yes, and P at all time highs or it hit all time highs in the last week.

00:15:07:16 - 00:15:27:22
Marty
I'm not sure where it is today and and check yesterday and people view that as the stock market being a barometer of the economy like oh everything's well and good but if you look at the dislocation that exist out there in terms of the quality of life that individuals have and the amount of economic pressure that your average Joe is feeling right now just does not compute with what's going on.

00:15:27:22 - 00:15:57:14
Marty
So there's a dislocation. Bitcoin, hopefully some money standard will get us back to a proper pricing mechanism that will allow us to then go allocate capital efficiently and properly to to do productive things, to increase the quality of life of everybody. And then what we're doing is sort of a layer above that, like we're going to fix the money, then to do that, we have to build out infrastructure that gives people access to that money and provides them utility to do things with that money.

00:15:57:14 - 00:16:22:13
Marty
So that's what we're trying to do at 1031, investing in in private company is building out this infrastructure. But before we dive into the nitty gritty of what we're doing, I think it would be a good place, a good place to start would be to just dive into the heuristic of total addressable market versus other heuristics, which you you up in the piece with these frameworks that investors use to sort of make their decisions.

00:16:22:13 - 00:16:32:16
Marty
It could be value based, could be team based. But the one that unites all that you put in the piece is total addressable market. What is the opportunity we have to get a return on our capital?

00:16:32:19 - 00:16:58:21
John
Yeah, absolutely. And I would say the various kind of pure risks that investors use to private investments are not mutually exclusive, right? So probably you should be evaluating a variety of things, including, you know, you have to even a great investment can actually you know a great company can't be a great investment if it's like very poorly priced.

00:16:58:21 - 00:17:23:12
John
Right. So if you get in at a level that is dramatically overextended relative to kind of the free cash flow that the company can actually generate over a reasonable holding period, then even if they are indeed like a good team in a good market with a good product and, you know, competitive moats, etc., you know, the pricing of the investment can completely throw your returns out of whack.

00:17:23:12 - 00:17:54:08
John
Right? So valuation is important and it's one of the things that I saw not really being kind of respected during my time at Rural Finance. So that's an important heuristic that I think will return to more and more as Bitcoin hopefully kind of resets our monetary framework. And you know, there are various other kind of ways that you can shop up and look at whether a company is an attractive investment and you should do all those different things.

00:17:54:10 - 00:18:41:17
John
But the point that I make in the beginning of the piece, as you point out, is pretty much every investor kind of regardless of whether they're just trying to buy, you know, the cheapest things possible and hope that they can kind of get a pop in a relatively short time, just as valuations. Correct. Or whether they're hyper focused on growth and in the most cutting edge technology that they can find or, you know, anything else everyone needs to and has to inevitably pay attention to TAM, as you say, total addressable market, because for a given probability of success of the investment and for a given quality of a team and for a given level of

00:18:41:17 - 00:19:06:01
John
scalability of a company using unit economics, the huge lever that will differentiate between all of those pulling them all kind of equal is just how big is the prize that they're actually targeting, right? You can think of it on one extreme, one extreme end of, you know, a local kind of, you know, contractor doing work around like his hometown.

00:19:06:03 - 00:19:36:08
John
That may be like an absolutely great business. And probably we need like a lot more of those. We need more skilled tradespeople and electricians than we have in this country for reasons that you talk about in other episodes of this podcast. But there's naturally kind of a ceiling on how much revenue that business is going to generate and thus also, you know, how much cash flow it can it can generate, which is ultimately what you have to care about when making an assessment on whether you're going to make an investment or not.

00:19:36:10 - 00:20:08:07
John
And so as you ramp up the the addressable market, the shots on goal, the the size of the customer base that a company is selling into you, you've lever up and you ratchet up the impact of the team and the impact of scalability and you know, the impact of the profitability for a given business with a 20% profit margin that can max out at, you know, $1,000,000 of revenue right?

00:20:08:10 - 00:20:30:27
John
Okay. Well, you get $200,000 of profit off that. If you can scale those same economics with that same team to, you know, $100 Billion market, just by having just by addressing a bigger opportunity, you've already you've dramatically levered up and scaled up the price that you can pay for the investment to make sense and the amount of free cash flow that it can generate.

00:20:30:29 - 00:20:51:14
John
And so as I point out in the piece, like TAM is not the only thing that matters by any means. And in fact, certainly there are kind of more traditional VC early stage investors that have gotten way too focused on kind of like pie in the sky tam numbers and said, I can pay pretty much any multiple that that I want.

00:20:51:14 - 00:21:10:06
John
I can I don't have to care about, you know, time to revenue generation or time to profitability because it's just this company is addressing $1,000,000,000,000 market, $100 trillion market. And so you can throw out these wild numbers and even at a very low probability of success, you can convince yourself that, you know, something is maybe a great investment.

00:21:10:14 - 00:21:38:07
John
So that's not the way that we need to go. And again, I think as capital gets more expensive, as easy money goes away, that kind of thinking will go away. But there's still significant value as you differentiate between investments in looking at how big is the actual opportunity set, because that's going to, at the end of the day, you know, to bring it back to kind of like, you know, Boomer Warren Buffett language like your margin of safety goes up.

00:21:38:10 - 00:22:02:16
John
Yes. You're addressing a much, much bigger market than someone else. You just have more shots on goal to drive revenue, more potential customers and a bigger total pie that you can sell into and maybe, you know, take share up. Right. You know, would you rather have 10% of $1,000,000,000,000 market or, you know, 50% of $100 million market rate?

00:22:02:19 - 00:22:27:06
John
So the just gaming that ratio in your favor by addressing the biggest markets possible is, I think, a major lever of investment success that pretty much any investor, regardless of kind of their stripe and what they focus on in terms of methodology, needs to pay attention to. And you know what every investor out there who's paying cash, Pashtu.

00:22:27:09 - 00:22:56:29
Marty
Yeah, in this piece Bitcoin is even the world was obviously a play on software. Is he in the world? I mean you mentioned explicitly in the piece by Marc Andreessen from A16z Anderson Horowitz. And I think to set the context for the Bitcoin conversation and it is important to go back and look at the last wave of innovation that led to insane returns for investors, which is obviously the transition to digital age and the companies that really capitalized on that.

00:22:56:29 - 00:23:11:04
Marty
So you have a great chart here of the investment returns of the core for Apple, Microsoft, Google, Amazon, juxtapose the S&P gold in long bonds over a 20 year time horizon. And it is pretty insane when you look at it.

00:23:11:06 - 00:23:31:29
John
Yeah, absolutely. I mean, this is you know, I kind of acknowledge in the piece like this is not going to be surprising to anyone who looks at it. I think if you've been paying even the slightest amount of attention to if you have, you know, a retirement account, if you have any kind of like portfolio and, you know, increasingly, you know, no one has been able to really save and just in dollars in a bank account.

00:23:32:02 - 00:24:05:02
John
So we've all had to kind of pay more attention to this right over the last ten, 20, 30 years. I think everyone intuitively knows this is the case, right, That FAANG stocks broadly, these massive tech leaders, what are now being called like the Magnificent Seven, are really holding up a lot of a lot of the S&P and are explaining a lot of, you know, overall stock market returns because and part of that is because of, you know, monetary base expansion, that it's kind of deleterious consequences and forcing people to apply more premium to them.

00:24:05:09 - 00:24:44:21
John
But there's also there's also real dramatic economic value that's been generated by the right like there's a reason that these companies are in the position that they're in. It's because one of the main reasons is because they were leading infrastructure providers at the forefront of a radical secular shift in the way that commerce operates. Right. The materialization of communication and information storage and transfer through Internet enabled software was, you know, the highest leverage are among the highest leverage innovations and inventions in human history.

00:24:44:29 - 00:25:18:25
John
And people obviously needed tools and applications and services to fully avail themselves of the benefit of that. Right. And so the companies that you see on that chart, Apple, Microsoft, Google, Amazon and several others that we can think of, one by positioning themselves as market leaders, providing those services. And, you know, obviously the the path to get here is is is strewn with, you know, some corpses of companies that were once their competitors that that didn't quite make it.

00:25:18:25 - 00:25:49:11
John
And some of those companies just got bought by the few companies that you see on that chart. But nevertheless there was very clearly tremendous value generated even before the crazy kind of multiple expansion of the last 5 to 10 years by the bellwether companies that enabled mass, both retail and enterprise use the primitives of the Internet protocol stack and of, you know, consumer software, right.

00:25:49:14 - 00:26:16:17
John
And so, you know, Andriessen, as you referenced, wrote his piece in 2011, software is eating the world to kind of encapsulate that point, that exact point, that this is a massive secular shift. And the companies that were driving it were set to even in 2011, there were still a lot of low hanging fruit to be collected. The companies that were picking that low hanging fruit were set to drive massive returns for investors.

00:26:16:19 - 00:26:41:06
John
And that did right. The difference, I would say, with his piece versus kind of where we are right now with Bitcoin is in 2011, right like the iPhone had been around for years. Android followed shortly after Facebook had been around, I think seven years. I think hundreds of millions of users. At that point, Netflix was already doing streaming and that was clearly picking up steam.

00:26:41:08 - 00:27:05:27
John
Amazon had like pretty much already already, you know, signed the death warrant for, you know, physical bookstores and a lot of physical retail. So he wasn't really saying anything like highly controversial. Yeah, maybe like, you know, capital allocators weren't fully paying attention and maybe they were still somewhat underweight tech. But in reality, like your grandma was already on Facebook in 2011, right?

00:27:05:27 - 00:27:27:12
John
Like it was becoming a fairly consensus viewpoint, but we're said it where we're seeing that Bitcoin today is, you know, we're 15 years ahead, probably 15, 20 years ahead of where Andriessen was when that piece was written. The theme is just as powerful and I would argue even more powerful, but it is far less consensus at this point.

00:27:27:15 - 00:27:37:22
John
And that means that the asymmetric upside is orders of magnitude greater. So that's a reason to be excited, I think, about what we're doing.

00:27:37:24 - 00:28:05:09
Marty
Yeah, I mean, when you were going through that, the the fact that the competitors came, when it went throughout time in the tech sector, I couldn't help but think I always thought that Jeeves was going to is going to make it and compete with with Google. But I guess I mean I completely agree we're much earlier in Bitcoin's lifecycle compared to when Andriessen wrote his piece in 2011 where the tech cycle was then.

00:28:05:12 - 00:28:11:08
Marty
And I guess that gets into the question of timing. Can you be too early in this?

00:28:11:11 - 00:28:35:21
John
Yeah, I mean, that's that's a key like lesson to learn in investing is that, you know, being being early is tantamount to being wrong. So there are definitely situations where in my own career I've been kind of right on the investment thesis over like a 12 to 24 month period, but you very wrong in like a three month period.

00:28:35:23 - 00:28:56:01
John
It's a timing is very important. What I would say though is I think what we discovered over the couple of years, I guess four years now since the drone was launched, a couple of years since I joined is, you know, we people always say in Bitcoin that, you know, the the best time to buy Bitcoin was yesterday. The second best time is today.

00:28:56:03 - 00:29:21:02
John
I actually think the flipside is true for bitcoin infrastructure. You know a few years ago even Bitcoin still had not gone through as many stress tests as it has today. Lightning was still, you know, even more immature than it is today. And certainly I think it's still quite early for lightning, but there were very few companies even really building on it at scale.

00:29:21:04 - 00:29:52:06
John
And we multisig was still fairly new, Unchained was still having to really beat the drum on just even using collaborative custody at all. Now you can see like some real indications that those things have shifted significantly. We've had a lot more stress tests since, you know, five or six years ago. Blocksize wars tax, the China mining ban and a variety of other things.

00:29:52:06 - 00:30:17:14
John
You know, yet another 80% plus price drawdown. I think that's for now in Bitcoin's history, maybe 35. And so we're at a point now where there's a greater degree of maturity in the ecosystem, in the builders, in the ecosystem. And in just the last couple of years, we can say, you know, anecdotally and I think we might have actually put out some data on this in a prior piece that we wrote.

00:30:17:14 - 00:30:49:01
John
But the number of companies coming to market with really interesting solutions is inflecting. I don't have the numbers off top of my head, but there have been far more Bitcoin deal, Bitcoin only deals done in the last few years, even amidst kind of the carnage of the VC, carnage of 22 and 23 than the last couple of years probably, you know, combined the deals that we've that we've seen in the market overall that vastly outstrips the total deals done in the ten years prior.

00:30:49:01 - 00:31:25:28
John
Right. So I think we're entering the stage where the technology stack the ecosystem, the companies and the quality of companies are mature enough and have progressed to the point where you would have been to early like five years ago probably. I don't think we're too early anymore. I think we're at exactly the right time to lean into this thesis, especially heading into a period of the next famine coming up, and 11 major criminal finance institutions now having put their imprimatur on Bitcoin being an investable asset for institutions.

00:31:26:01 - 00:31:46:00
John
You and I might not care about that that much. And I know I will not be owning the ETFs and I highly recommend everyone listening to this choose a collaborative custody option like what Unchained offers or, you know, another option like that where you can actually own real underlying Bitcoin while also not having to take on the complexity of key management.

00:31:46:07 - 00:32:05:26
John
But that said, it's still very meaningful that the biggest asset manager in the world has now filed for this ETF. And Larry Fink, the head of that asset manager, has changed his tune in just a few years time from Bitcoin is a tool for criminals, is an index of money laundering. It has no intrinsic value it makes no sense to.

00:32:05:27 - 00:32:30:28
John
It's a tool. It protects you. It's it's there in case your your government tries to censor you or it's there to protect you against monetary debasement. You know, suddenly he sounds like, you know, Ron Paul like ten or 15 years ago. Right. He's kind of parroting those same lines. And I don't I think we shouldn't understate what that means for institutional awareness of and acceptance of an adoption of Bitcoin and what it will mean over the next 5 to 10 years.

00:32:30:28 - 00:32:54:13
John
And so I look at all that and I say, okay, no, we are not too early. Like this is just the right time where the asymmetry is still there, the alpha is still there, people still don't fully get why Bitcoin is differentiated and why these opportunities are exciting, but they're starting to wake up. The ecosystem is significantly more mature than it was even just a few years ago.

00:32:54:20 - 00:33:05:04
John
And so we're at a really good kind of balancing point where we're not too early, we're not too late. And I think it's exactly the right time to be leaning into investing in these companies.

00:33:05:06 - 00:33:36:29
Marty
I completely agree. Having been around Bitcoin for ten years, the maturity of the space over the last five years particularly has been amazing to see. And you couple that with the macroeconomic tailwinds that are coming our way, not only is the fiscal situation here in the United States utterly dire, it seems that the banking crisis that we experienced last year is probably just a Band-Aid over and lurking right under the surface, ready to pop up at any time.

00:33:36:29 - 00:34:04:03
Marty
And then you have the culmination of geopolitical events that have happened over the last few years where the U.S. has weaponized the dollar system, seized Treasury assets, and you have other large players in the geopolitical realm beginning to form alliances that that seem like they could attempt to erode the sanctity of the U.S. dollar as a global reserve asset.

00:34:04:03 - 00:34:28:10
Marty
And you mentioned the ETFs getting approved. And I think another thing socially, I mentioned earlier, like people really feeling the pressures of inflation in their everyday lives is beginning to stoke that that question in the common man's mind, like why is this happening? Why can't I live a higher quality of life like I was just able to five, six years ago.

00:34:28:13 - 00:35:03:02
Marty
And naturally that that question will will lead them to the solution which is Bitcoin. And once they come to understand it, which I think that's another part of the thesis here, is that think as it stands today in 2024, there's never been more of a wealth of a knowledge base built out for people to easily learn what Bitcoin is, why it's important, and you have different educational materials for the different types of archetypes of people in the way in which they learn.

00:35:03:08 - 00:35:45:09
Marty
So I think timing is perfect. We've got another having coming up. We were just in Nashville last week and I think that is I mean, obviously I've been hyper focused on mining for the last six years, but I do think that is one of the first big dominoes to falls once the energy sector really notices and leans into the benefits that Bitcoin mining as a an alternative revenue stream, a grid balancer, or in a way to be more efficient with your your stranded assets once that light bulb goes off in the energy sector and they lean in heavy, I think that's a massive domino that begins to spread and make it obvious that Bitcoin is

00:35:45:09 - 00:36:11:06
Marty
here to stay. It's it's a net benefit for humanity and there's going to be a lot of activity. Companies spun up people saving in Bitcoin. It's going to get really cool. And I think I've never been more excited. It is daunting. Ten years, many cycles, as you can see on my face. And look, I'm only 32. I probably look like I'm 42.

00:36:11:08 - 00:36:13:02
Marty
I've seen a lot, but.

00:36:13:05 - 00:36:15:03
John
I would I wouldn't have put you into over 28.

00:36:15:05 - 00:36:42:11
Marty
Oh, thank you. Thank you. Um, but not the timing feels feels good. And I think the fact that that Bitcoin has survived these waves and it just really reinforced the value prop of the network, the peer to peer distributed cash system, the hard supply, and the fact that hashrate has gotten to the level that it is and been distributed geographically as it has over time, I think it's you.

00:36:42:12 - 00:36:58:19
Marty
You'd be an idiot not to recognize that there's something here. But the fallback to sort of the the underlining first principles of why this is important like wise Bitcoin eating the world like in your mind.

00:36:58:22 - 00:37:37:27
John
Yeah, for sure. The the simplest answer is bitcoin is superior money and there is no way that any self-interested economic actor will be able to ignore indefinitely the consequences of what that means and will not be, and will be able to indefinitely not adopt and use Bitcoin in some way. The I go through kind of the properties that make Bitcoin secure money in the piece and like a little table, it's probably something that, you know, if you've been in this space for a little while and you've seen a version of it, if you're newer to the conversation, you know, we can walk through it together.

00:37:37:27 - 00:38:00:03
John
It is right there. I highly recommend just kind of taking a second to step through it, informed by people who have been in the space for a while, as well as just offering economics and kind of principles there. But these various properties kind of lead you to the inevitable conclusion that Bitcoin is the best money we've ever had.

00:38:00:05 - 00:38:24:27
John
And as 1031 advisor Parker Lewis famously, at least famously, for those who are in the Bitcoin space, wrote in the piece on Bitcoin obsolete all our other money. Money converges to one, right? You don't want to hold ten monies where your money A is like your best one. We also hold some of money which isn't quite as good and it doesn't hold value as well.

00:38:24:27 - 00:38:45:12
John
And it's not as liquid and salable, but still okay. And when we see etc. like no, you will always trade the inferior monies. You always tend to trade the inferior monies as much as possible for the superior money. Even in the world that we live in today, you can look around and say, well, every sovereign nation has, you know, just about every sovereign nation has its own currency.

00:38:45:14 - 00:39:06:02
John
And we're kind of in this world that topical, you know, partial barter between these currencies, which is like reintroduce the double coincidence of once the problem money was introduced to solve. And so you could say, well, you know, we haven't converged to one, you know, in the last 50 years since the start of the Fiat regime, like is it really true that one, convert it to one?

00:39:06:09 - 00:39:44:22
John
But the reality is that the world settlement asset is the dollar, right? You can have, you know, these little fiefdoms that have their own currencies that they've made up that they kind of manage. But at the end of the day, the dollar has the dominant network effect. And if given the choice and you see it around the world right now with the emerging stablecoins, especially people right now want dollars thanks to the petrodollar system which you've talked about on this podcast, a good amount and we have reason to believe is is crumbling partially for the reasons that you pointed out, which is that the US has really shown in the last few years that it

00:39:44:22 - 00:40:04:15
John
will debase and seize your dollar denominated assets and your U.S. Treasuries at will if it if it wants to. And that's just one of the reasons that that system is kind of crumbling. But for now, the dollar is the big dog. There are not ten big dogs. There are not ten major kind of reserve assets for the world that people want.

00:40:04:15 - 00:40:33:22
John
Above all else. There's one and it's a dollar. Our thesis is that that will inevitably change over who knows what the time frame is ten years, 20 or 50 years. But it will shift to being Bitcoin for the reasons that we outlined this piece about Bitcoin spare monetary properties. Bitcoin is absolutely scarce, so it will be the best store of value over time.

00:40:33:25 - 00:41:07:21
John
That's enforced by a decentralized consensus of self-interested actors that cannot be easily gamed. It's permissionless to interact with its digitally native barer value that can be sent globally 24 seven very, very difficult, if not impossible to censor, at least for any meaningful amount of time. And capital controls are not effective against it. And so everyone, as knowledge distributes, every person on the earth will want to increasingly get more Bitcoin.

00:41:07:24 - 00:41:33:23
John
We've seen that in history with kind of the emergence of gold as the global reserve asset up until the point at which gold no longer scale for global commerce. It naturally, spontaneously evolved as the world reserve asset and sell an asset across a bunch of different highly diverse societies around the world and at different points in history because everyone wanted the best money.

00:41:33:26 - 00:41:56:14
John
Gold was for a long time, the best money were now living in this fiat experiment that has for about 50 years disrupted that, and the seeds of that were sown by gold's failures and its spatial limitations and its inherent ability and its difficulty to take custody and move around. But that experiment, as you've referenced, is is probably not long for the world.

00:41:56:16 - 00:42:26:19
John
It's creating significant instability and political pushback in different pockets of the world in different ways. And it will be ultimately impossible for any corporation or any government to force people to value the dollar or any fiat currency more than they value Bitcoin. They might be able to for a time mandate usage. They might be able to enact certain laws that make using Bitcoin more burdensome.

00:42:26:21 - 00:42:51:17
John
But, you know, as MI6 points out, in theory of money and credit, they can't make people subjectively value a currency, right? So the properties that make Bitcoin superior will inexorably pull people around the world to use it until to use it and store wealth. It until the point at which everyone in the world is using Bitcoin as their reserve asset.

00:42:51:19 - 00:43:18:18
John
And oh, I can, I can stop there. But I would say there are two major implications of that that I think people who are even constructive on that thesis, people who even already own Bitcoin, whether you're an institutional allocator and you have some allocation of Bitcoin or you're just a pleb on Twitter, your stack SATs every day, both of those types of investors, both those types of savers will kind of only go that far and then stop.

00:43:18:20 - 00:43:51:02
John
But if that's true, then it has two big implications, one of which is the picks and shovels, if you want, that will enable people to acquire Bitcoin, use it, store it safely, put it into lightning channels, spend it, ensure it, distribute it's custody, you know, whatever you want, all these different kind of applications that we can get into will naturally be booted up and will be required ultimately for that distribution process to take place.

00:43:51:02 - 00:44:23:24
John
So for everyone, if everyone in the world is ultimately going to own and use Bitcoin, they will be doing that partially with the help of applications and service providers and tools developed by companies that are providing UX that allow them to do that with a ten x, 100 x better user experience. Some of that will be certainly free open source software that people can just download and run without any sort of connection to a company.

00:44:23:26 - 00:44:44:23
John
But there will also be corporate service providers like Unchained or Anchor Watch or Strike or any other company that you see in our portfolio that can provide that can and will provide a better experience that will be demanded by the market as people look for ways to acquire and use Bitcoin. So they kind of go hand in hand, right?

00:44:44:29 - 00:44:58:02
John
If you're bullish on Bitcoin's adoption, then you necessarily have to be bullish on it's picks and shovels too. So that's implication one, we can maybe unpack that or however you want to take it. We could have an application to maybe a second.

00:44:58:04 - 00:45:18:04
Marty
Yeah, it's digging in. Implication one. I mean, you mentioned many of the different companies that are providing these tools and services to be able to reap the utility and the benefits of Bitcoin. But let's get a little more granular and better define the subsectors and the verticals that you think are addressing these different needs.

00:45:18:07 - 00:45:42:05
John
Yeah, So I'll give you the way that we kind of cut it out, a temporary one, but this is not the only way to think about this space. And there's also obviously overlap between a lot of these. But the first most obvious one is, you know, to go back to Parker Lewis, you know, if Bitcoin is money, I think he wrote this in some piece ready to talk.

00:45:42:05 - 00:46:25:28
John
But Bitcoin is money. The first order of product of money is financial services, right? So that's kind of the if you think about the addressable verticals in like concentric circles expanding out, one of the first center, the concentric circles is financial services products that allow you to save in Bitcoin effectively to custody it, to have obviously to to buy it as well, to buy it and treat it as necessary to take out loans against it and do anything else that involves interacting with the traditional fiat system and doing those interactions between traditional fiat system and Bitcoin.

00:46:25:28 - 00:46:52:06
John
And so, you know, a few examples of a company like that would be obviously Unchained is one. They provide a lot of those services and we're kind of the forerunner in building kind of those services. It helped building out collaborative custody to allow a user to benefit from a, let's say, the benefit of a custodian without actually surrendering to custodial permission.

00:46:52:06 - 00:47:32:07
John
So in a two of three multisig I as a retail or I as a company can hold two keys on chain, can hold one, and thereby eliminate the risk of eliminate or greatly reduce the risk of catastrophic loss. If my private keys, if my harbor walls are compromised. Right. They also provide kind of intuitive trading and lending services on top of that on one interface so that I can interact with my Bitcoin more in the way that I would be kind of used to doing if I'm coming from the traditional finance or fiat world, which ultimately like definitionally everyone is right, everyone's kind of coming from that world.

00:47:32:13 - 00:48:12:21
John
And so a company that can provide a way to much more safely custody the Bitcoin and then also use it in these different ways that people are familiar with is highly valuable and very necessary to. Right. It's it's necessary for most people to have something like that to bridge from, you know, not just buying Bitcoin and leaving it on Coinbase, you know, having their Coinbase IOU or having their ETF IOU as as will increasingly be the case for for many people as their first kind of touchpoint in Bitcoin, but also not have to immediately make the leap to, you know, holding generational wealth on a hardware wallet in their desk or bearing in the ground

00:48:12:21 - 00:48:54:27
John
somewhere right? Those are those are two ends of the spectrum that people are naturally uncomfortable with when they come to Bitcoin. And so having a collaborative custody option that also gives them the ability to interact with Bitcoin in ways that they're familiar with from a finance perspective is highly valuable and very important. And now we're also seeing, you know, you've bang the drum on this a lot over the last year or so, Multi-institutional Multisig So not just not even only having a relationship with Unchained, but having a two of three relationship with Unchained or on ramp or Egg Watch or various other kind of custody providers that we can talk about who form a quorum

00:48:54:27 - 00:49:25:01
John
for you and allow you to interact with Bitcoin without ever actually having to touch private key material, which is necessary for a lot of institutions and enterprises that might want to use Bitcoin as a Treasury asset, but have fiduciary responsibilities that prevent them from being allowed to have the discretion over private material. Obviously, there's more of a trust tradeoff there, but it's trust distributed across three institutions rather than just a single point of failure.

00:49:25:04 - 00:49:49:04
John
And for those who are listening, I would highly recommend reading Dhruv Bansal's piece from Unchained on building a network of keys, a network of designers. And I think that that principle will become very important to real institutional adoption of Bitcoin. And to our point earlier, that's an example of something that was not even on anyone's roadmap 3 to 4 years ago, right?

00:49:49:06 - 00:50:11:26
John
It's only come about because of advances in Multisig and understanding of Multisig and getting more institutions kind of on board for that. And so that's an example of how a lot can really happen in a very short time. And a lot has happened to put Bitcoin and Bitcoin companies in a position to really bring mature offerings to market.

00:50:11:26 - 00:50:18:21
John
So that's a lot. Just financial services. And I would you quickly run. Yeah.

00:50:18:23 - 00:50:47:28
Marty
Well I was going to I was going to say I would add with Unchained particularly, not only do they have the technical expertise to manage and create the software to manage these these multi-site quorum, so they also understand the asset as well and the financial side and the cyclical nature of Bitcoin's price history. And on their lending products specifically, I think this really shines through where they have extremely low LTV, which most people look at and like, Oh my God, that's pretty insane.

00:50:47:28 - 00:51:21:09
Marty
But they understand the asset, the team understands the asset and they know that they're going to be a lot of volatility. So they have a low LTV to reduce the amount of liquidity and they never had a loan loss throughout their five plus years of offering this product. And when you juxtapose that like leaning into two to the 1031 horn here, a disclaimer for this episode, obviously 1031 is invested in a lot of the companies we're talking about, but I think Unchained shines through because we were getting made fun of four for quote unquote missing the Blockfi wait wave a few years ago.

00:51:21:09 - 00:51:53:24
Marty
They hit a $4 billion valuation at the peak of the 2021 or 2022, and we made the conscious decision like, we don't trust the way that they're they're running their their lending product. It doesn't make any sense to us. And that proved to be a wise decision at the end of the day to allocate towards Unchained, which was much more conservative, having a fine understanding of the asset and the volatility that comes with the Bitcoin price and blockfi, which tried to apply this fiat model to the Bitcoin standard.

00:51:53:24 - 00:52:00:03
Marty
And there's no lender of last resort in Bitcoin and if you lend it out, somebody lose it. You're not getting it back.

00:52:00:05 - 00:52:26:28
John
Yeah, absolutely. It's a great point. Not having any loan losses on a product like that through two bear markets and the carnage that we saw in 2022 multiple times with and then blockfi then at the end of the year. Right. Like to, to make it through all of that with no loan losses. It's just really testament to what they built and also testament to just focus on Bitcoin and the importance of that.

00:52:27:00 - 00:53:09:01
John
That's true for all the companies in our portfolio right? It's not just an ideological theme where we're we're Bitcoin maxes and so we only want to invest in people who are ideologically aligned. You could say that's like there's relevance to that. And I think that's a it says something about you as a founder. If you have kind of made the jump to understanding why Bitcoin is a sphere of money that will obsolete all of the money, but even more importantly just from an investing perspective, there's significant edge in understanding the asset that you're dealing with and the things that can go wrong with the volatility that Bitcoin experiences.

00:53:09:08 - 00:53:35:15
John
If products like Bitcoin backed loan product is not structured well in terms of conservative LTVs and non rehab application of the underlying collateral, right? So that's just a feather in the cap, not just for Unchained, but for every business that is exclusively focused on Bitcoin because that is, that drives a real commercial edge and real sustainability to the business that I as an investor care about.

00:53:35:15 - 00:54:03:08
John
Even independently of some sort of ideological viewpoint on Bitcoin versus any other cryptocurrency. But to to just quickly round out on your other question about the verticals that we look at, the others would be that are major ones would be kind of lightning and layer two. That's something like a strike or mutiny wallet, very different kinds of the spectrum of what they provide that those are leveraging lightning to do really innovative things.

00:54:03:10 - 00:54:27:27
John
I would say also it's not even our focus is not even so much on lightning as such, although that's the only real like layer to protocol that is battle tested and has existed for, you know, five plus years. So we've done a lot in lightning, but I think I say lightning slash layer two because we are open to the idea of new protocols coming along that could also have commercial viability and commercial use cases.

00:54:28:04 - 00:54:51:03
John
You might call, you know, it's like controversial perhaps what you might call experiment protocol, right? Like a layer two in some way. I know, again, like there's some disagreement on if that's the right way to approach that. But it is kind of an additional protocol that, you know, only really came about in the last couple of years that extends Bitcoin's utility and provides kind of new ways to interact with Bitcoin.

00:54:51:03 - 00:55:15:01
John
And you're seeing that with what fairly is spinning up. And, you know, famously kind of you and Odell were the ones that spoke very into into existence. And I let you speak on that a little but if you want but also now muni wallet, like I mentioned on the lightning side, also doing a lot with the payment protocol to kind of carve out their own use cases in their own niches.

00:55:15:01 - 00:55:37:18
John
And so that that also speaks to what you were asking earlier about whether it's too early or not. Like Ferryman is a great example of that, of just the vibrancy that we're seeing in the ecosystem over the last couple of years. And because these are open source protocols, a lightning company can very easily kind of integrate very many capabilities in some way or financial services company.

00:55:37:18 - 00:55:58:26
John
You can integrate lightning or, you know, you can have all these kind of cross vertical pollination in a way that you really can't in closed source tech stacks or kind of more broadly diversified VC portfolios where you're investing in fintech and insurer tech and health tech and all these different kind of things that don't really talk to each other, play with each other.

00:55:58:26 - 00:56:29:17
John
So, you know, that's kind of the second major vertical. Again, I said A round it out quickly and I failed to do that. But take your time. I'll just say quickly, you know, consumer applications are maybe the next one. So something like primal or fold or, you know, Bitcoin gaming plays, all of those are kind of using Bitcoin in ways that talk to and, you know, make sense with existing consumer use cases.

00:56:29:20 - 00:56:58:28
John
They're not necessarily about Bitcoin, but they're more akin to using Bitcoin as a means to an end to drive consumer engagement and establish consumer behaviors. So social does you know, rewards. Obviously rewards is I don't have the number stuff in my head, but a massive category that merchants spend billions of dollars on every year and fall is focused on using Bitcoin to create interoperable rewards much more valuable to consumers.

00:56:59:01 - 00:57:23:13
John
You've got Primal, which is obviously a noster client. Noster is itself not just an utter client, but a master client and tech stack. But Noster itself is, you know, another kind of protocol which some have maybe call it a layer three. I don't really like that classification, but whatever. But it's one of these other kind of edge protocols that can naturally directly interact with Bitcoin.

00:57:23:13 - 00:58:00:19
John
As you know, it's an open source communications protocol interacting with an open source money protocol. Right. And so that's that's another good example of like replication. And then you also the last two would be kind of mining infrastructure. And so that's prop mining plays like actual companies that are doing self mining grid being an example of that, and then also just picks and shovels around mining value added services and technology to allow miners to gain advantage or to power themselves off power sources that would otherwise be inaccessible.

00:58:00:21 - 00:58:22:08
John
So upstream data is an example of that. Also Giga Energy, but both of whom are really seeing a lot of great uptake among oil and gas producers, something that you've talked about a lot on the show and we think is going to be a huge theme, which maybe we can talk about a little more as it relates to the way that Bitcoin was slowly kind of spread out and hit the world and get these other industries.

00:58:22:10 - 00:58:47:24
John
And then, you know, last vertical, I would say would be security infrastructure. So that's any hardware or software that enables either a single user or institution to securely and or privately interact with Bitcoin. The most obvious example of that being coin tight and, you know, the gold card, the taps or the various products they have to make that accessible for everyone.

00:58:47:24 - 00:59:14:27
John
And that's another good example of, you know, five years ago those products were substantially less advanced than they are now. Taps on or didn't exist. Gold Card was several iterations earlier, and they've made a variety of improvements since then that have kind of turned that product into the gold standard for for interacting with Bitcoin securely and privately in a way that any random web can go access.

00:59:15:00 - 00:59:45:18
John
So yet another example that we're exactly at the right point to start investing aggressively in these companies, we're hitting the point at which to or to paraphrase Andresen in his software piece, he said, we're finally at the point where all of this technology can be delivered to consumers at scale around the world, where we're maybe not exactly like right there at that spot yet with Bitcoin, but we're very close and want to be investing in these companies.

00:59:45:18 - 01:00:06:29
John
When you can see the contours of that taking shape, not when it's already happened and you're kind of just saying what everyone's already right. So there's still a lot of alpha to be generated in investing in these types of companies. It's a long winded response, but that's the general kind of heuristic I guess I would use to carve up the overall infrastructure.

01:00:07:01 - 01:00:40:07
Marty
Yeah, as there's a lot to go down. That's why I love about the team we've assembled at 1031 because obviously I have experience on the mining side of things. That's heavily focused on privacy, lightning, Napster, freedom, tech, more broadly yourself. Grant Jonathan, really understand the financial services side of things, and I think we complement each other extremely well, which allows us to go do a lot of these interesting deals and explore the full breadth of the industry as it's forming.

01:00:40:07 - 01:01:07:04
Marty
And the going back to the mining stuff like that is again, coming off the tails of the Energy mining summit in Nashville. The one thing that interests me about the mining place specifically is it's somewhat of a proxy play on energy more broadly, which I think is going to be a massive theme over the next decade as it's becoming abundantly clear that we've completely bought the energy systems of the world to a certain extent, it needs to be fixed.

01:01:07:04 - 01:01:31:17
Marty
There's going to be a lack of supply in a lot of areas, which is naturally going to drive up prices, and these companies are going to be looking to create efficiencies and off grid mining on grid mining for that matter as well. Both provide alternate revenue streams are just going to be desperately needed by these energy companies. But then going on that too, like the rewards play with fold just makes sense.

01:01:31:21 - 01:01:51:07
Marty
Why would you lock somebody into some company ship token? We can just give them bitcoin rewards. They can spend that anywhere. Financial services. I think they're going to get more robust as people begin to hold more Bitcoin for longer periods of time and you have it in the piece, yet the hodl waves that prove that that is happening.

01:01:51:10 - 01:02:00:10
Marty
So yeah, I think the timing is ripe and now we just spent like 30 minutes on the application. One What's application to do you remember. Yeah.

01:02:00:12 - 01:02:25:27
John
Yeah. And I, I, I got it. Yeah. I mean putting a pen, an application one, it's basically, there's probably $1,000,000,000,000, I'm throwing out a number but I think it's something like that, $1,000,000,000,000 of revenue opportunity just in the picks and shovels, if you want to call it that, of the enabling technologies that will see tremendous demand on the back of growing Bitcoin adoption.

01:02:25:29 - 01:02:58:15
John
And it's it's both just the companies that exist today with the capabilities Bitcoin already has. But it's also, you know, the companies that will emerge on top of this current generation of, you know, innovators. Right. I think I think about something like I put in the piece like a Shopify, $100 billion plus market cap business or, you know, Salesforce or ServiceNow or you can think of a bunch of different kind of tech businesses are not in like the Magnificent Seven but are still like very, very valuable and do billions of dollars of revenue.

01:02:58:17 - 01:03:41:13
John
Those couldn't have existed like 20 years ago. You needed prior advancements in bandwidth and networking and server architecture as well as just like the distribution of like high speed Internet and the growth of like consumer computing devices to enable something like e-commerce. Right? But once you have all of those things in place and you have the capability for e-commerce, then now you can build a business like Shopify and there will be more businesses coming down the pipe just in kind of the picks and shovels category of Bitcoin companies that couldn't have existed without work being done by like the current innovators that we're seeing today.

01:03:41:21 - 01:04:02:16
John
So that will continue to be, you know, it's not just like what's the opportunity right now for the companies that exist today. It's also a question of what are the companies today going to enable that will allow for some totally, you know, a possible use case use case that's impossible today, but will be very mainstream within kind of Bitcoin picks and shovels in ten years.

01:04:02:16 - 01:04:28:25
John
Right. So that'll compound of that. That'll be in our community kind of by itself over the next couple of decades. That's implication one generally the picks and shovels are going to do great. I think application too is what we like to say at 31 is just like every company had to be an Internet company had become an Internet company over the course of the last 20 years to survive and to stay relevant and to thrive.

01:04:28:27 - 01:05:05:24
John
So every company will have to become a Bitcoin company to survive. The kind of reasons for that and the drivers for that are multifold. You No. One is that as those Bitcoin picks and shovel providers start to gain traction, start to build real businesses, the ones that are touching those kind of inner parts of the concentric circles of Bitcoin verticals will start to naturally disrupt things like payments, infrastructure, right, and financial services, which we just talked about and asset management.

01:05:05:26 - 01:05:38:14
John
And you know, I think it shouldn't be understated how revolutionary digital buried value that's absolutely scarce that can be instantly settled anywhere around the world at any time. How radical how radical of a paradigm shift that is relative to the Rube Goldberg machine of the chain of, you know, credits and IOUs and counterparty risks that are required to make, you know, a single transaction at a supermarket work right?

01:05:38:22 - 01:06:08:25
John
There's so much fixed cost built into that. There's significant delays in settlement. There's armies of accountants and technicians and lawyers kind of holding that all together with duct tape. And that's how, you know, the traditional payment system is built. And over time, you know, the history of economic development, I guess the arc of history bends toward technological innovation, winning.

01:06:08:28 - 01:06:38:22
John
Now the arc of history bends toward, as Jeff Bezos said, you know, your margin being my opportunity. Free markets such as we have them, maybe they're not as robust as we as we would like in the US today, but they're still still operating to some extent. Free markets are ruthless about excess margin and inefficiency. And if there's a way to take costs out of the system, if there's a way to do something that serves end users better and that an entrepreneur can profit from doing, the market will do that.

01:06:38:24 - 01:07:03:29
John
It's just a question of what it takes. And, you know, payments, infrastructure and financial services are kind of like the first industry in the crosshairs of Bitcoin picks and shovels, companies that will develop and start to kind of encroach on their territory, right, Because they're providing end users a better, more cost effective, more secure way to make payments to custody assets, etc..

01:07:04:01 - 01:07:30:15
John
And so when you think about an application, that's kind of the first way it plays out is incumbents look at that growing trend, which is an inexorable trend. If you believe that Bitcoin adoption is is inexorable and it will grow to everyone in the world, they'll look at that trend and say we need to either integrate Bitcoin in some way, we need to, you know, develop capabilities on our own or we need to buy some of these companies.

01:07:30:15 - 01:07:58:28
John
Right. We think, you know, at 1031 that the option that a lot of incumbents will choose is to be strategic acquirers to avoid kind of being the victims of the melting ice cube of watching their businesses evaporate. But there will also be, you know, forward thinking companies, forward thinking blue chips that you know, maybe do have the ability to kind of develop in-house.

01:07:59:01 - 01:08:26:03
John
But either way, what you will effectively see is more incumbents of traditional industries needing to integrate Bitcoin in some way and becoming Bitcoin companies. And so that expands the service area for what you can invest in as as an investor focused on Bitcoin infrastructure. The the other thing to consider is I guess I would say just to put a little more detail on that, it's not just speculation, right?

01:08:26:03 - 01:08:57:06
John
Like we're already seeing it with a variety of companies, even outside of you're seeing it in payments, you're seeing it in your services. But even expanding outside of that to some of these further the rings that are further out in the concentric circles right. Oil and gas, power, utilities, like you mentioned, Bitcoin mining is getting substantially more integrated into those industries in a way that, you know, was very much on display as as you mentioned in at the National Energy and Mining Summit last week.

01:08:57:09 - 01:09:46:02
John
There are senators that are kind of seeing that connection. There are major energy executives on both the grid utility side and also on the regulatory side and the oil and gas side that are seeing that the synergy between Bitcoin mining and what they do and trying to leverage it. So that's already playing out and it's not surprising because it's exactly what we saw happen, you know, with the Internet, logistics companies, manufacturing companies, medical device companies, you know, all had to start leveraging Internet capabilities if they wanted to compete with both upstarts, you know, start ups that were kind of doing something interesting with Internet enabled software in their industries and also their more forward thinking

01:09:46:02 - 01:10:16:05
John
incumbent competitors that were either buying those companies or trying to develop similar solutions in-house. Right. And so if Bitcoin is just as or more influential to global commerce as the Internet, then you would expect to see the exact same with companies in every industry. And, you know, like I said, we're already seeing at some of the points in the portfolio and maybe the most kind of exciting implication.

01:10:16:07 - 01:10:48:07
John
So the implication of that, I guess for us as investors is when we see companies like Stat News, we have an A portfolio, a non Bitcoin company see the power of Bitcoin and what it might be able to do for their business over the long term and come to us to invest in them and to give them some guidance on their Bitcoin strategy and to have us on the cap table because we're aligned with seeing the way that the world is going to go with Bitcoin adoption.

01:10:48:10 - 01:11:30:25
John
And so that's an example of, you know, an early example of something that I think we'll see a lot more over the next ten years is nine Bitcoin companies of various different sizes kind of, you know, pre-seed stage startups and Series B series C companies that are about to go public looking at this trend and deciding they need to find ways to integrate Bitcoin in some way, whether that's lightning micropayments for like a consumer application or whether that's, you know, heavy industry companies looking at ways to they're going to use bitcoin mining like you've referenced, we you know that will dramatically open up service or even further for investors who are focused on on the

01:11:30:25 - 01:11:37:08
John
space. And you know, I put some numbers around it at the end of the piece. It's it's virtually impossible to call that up.

01:11:37:08 - 01:11:38:07
Marty
Well.

01:11:38:10 - 01:12:09:23
John
Yes. You know, it's a little I don't want it to be, you know, moon math or kind of pie in the sky thinking. But if everything that I've just said is right, is Bitcoin adoption is going to do what we think it's going to do, if it's going to lead to, you know, $1,000,000,000,000 plus of new value created by picks and shovels, providers and is itself also that's going to lead incumbents to look for ways to integrate Bitcoin in their own industries, All of which I think is kind of, you know, follows from just being superior money.

01:12:09:26 - 01:12:39:10
John
If that's the case, then Bitcoin infrastructure will capture some percentage of the revenue generated by all those industries that need to start integrating Bitcoin. It'll enter their value stack in some way or they'll just be disrupted and the revenue streams will be replaced by companies that are leveraging Bitcoin. And so with just all the just the set of industries that I talk about specifically in the piece, obviously this is not even, you know, all the industries in the world.

01:12:39:10 - 01:13:13:21
John
These are just the ones that are kind of the most obviously impacted by Bitcoin. You know, with 1% revenue penetration, you can get to like, you know, $100 billion in category revenue for kind of Bitcoin companies. This is a very like high level rough heuristic way to kind of think about the opportunity. But it gets at the intuition that because Bitcoin is money and monetary technology will affect every industry in some way, there is no commerce at any scale that can avoid tapping into and being touched by monetary technology.

01:13:13:24 - 01:13:32:17
John
Bitcoin will have a role somewhere in the value stack of all those industries and even more. And so once you start to take that seriously, you have to ask yourself, even at very low penetration of those revenue streams. And to be clear, like in financial services and payments in oil and gas, like I think the penetration is going to be a lot higher than 1%.

01:13:32:20 - 01:13:54:04
John
What does that mean for the available revenue? What does that mean, like the TAM? Right. To go back to the beginning of our conversation of this category of companies and, you know, it puts them even at a conservative estimate, you know, around like the size of enterprise SAS Enterprise SAS is like a 200 to $300 billion revenue category annually.

01:13:54:08 - 01:14:15:01
John
And so at fairly penetration of even just a select few of the most obvious industries that should be disrupted by Bitcoin or should be affected by Bitcoin in some way, you're basically asking a process level because Bitcoin gets to play across all of these different verticals because it's money, because this is monetary technology that everyone needs in some way.

01:14:15:03 - 01:14:21:27
John
So as you know, as Andreasen says, that's the big opportunity. That's where we're putting our money.

01:14:21:29 - 01:14:32:20
Marty
I mean, I thought I was bullish after helping you edit read the piece then read again after you published, but hearing you articulate it in person just got me even more bullish. It's pretty insane.

01:14:32:22 - 01:14:37:10
John
Yeah. I mean, no one is bullish enough, right? But it's also.

01:14:37:13 - 01:15:07:29
Marty
And so I think with all that in mind, like we've talked about the trend of incumbent companies adopting a Bitcoin strategy, why do you think the incumbent venture capital space has not seen this? And why do you think even within the broader crypto venture capital space, this thesis hasn't been recognized and there's a relatively small pool that we're playing in at 1031?

01:15:08:02 - 01:15:37:09
John
Yeah, absolutely. I think it's a couple of things up until 20 to 22 when you finally had the wash out of a lot of the froth of zero the and observe and a lot of which was in kind of the altcoin industry. Part of the reason, I think, was because venture capitalists, you know, looked at altcoins as this unprecedented opportunity to get quick liquidity.

01:15:37:09 - 01:15:59:04
John
Right. You can in the market where literally every asset that's not tied down is just constantly going up in value. And you can always underwrite like someone's going to come pay me two X or five x or ten x multiple for, you know, this round that I'm doing right now. Someone's going to come work me up or, you know, there's just money sloshing around and I can I can find a buyer somewhere.

01:15:59:06 - 01:16:24:13
John
There's, you know, there's, first of all, minimal incentive to diligence in the long term viability of any project because it's it's all kind of a greater fool game. But I think specifically with crypto in DC, there was this unprecedented opportunity to pull forward liquidity events, right? Normally in venture capital, you know, when you're making an investment, it's it's a liquid.

01:16:24:15 - 01:16:43:10
John
You know, your investment timeline could be anywhere from three years to five years to seven years to like ten years. Right. And, you know, ideally, if you make good investment selection, you're compensated at least on a few of those investments with, you know, outsized ten x 20, 600,000 X type returns. But it takes a long time to get there.

01:16:43:13 - 01:17:11:10
John
And there's there's kind of like the purest form of VC is like the ultimate low time preference game where it should be. But in the last few years, again, up until the the wash out of 2022, you had a lot of VCs able to get, you know, liquidity in like six months by funding some token project and taking a big allocation of a pre mined or just an allocation of, you know, founder tokens, right.

01:17:11:13 - 01:17:39:04
John
And then listing those publicly somewhere on some exchange and hiding it, spending some amount of money to hype them up, having a good marketing team and you know, selling those I'll say to to retail aggressively and for some retail investors that maybe out a little bit if you timed it exactly right. But for most that was probably not a good trade, but it was generally a great trade for for the VCs that had the pre mines.

01:17:39:04 - 01:18:09:13
John
Right. And you know, it allowed them to operate with to have kind of the return profile of a venture capital fund with the time horizon of a hedge fund, which is a compelling argument. If all you care about is kind of very short term fiat gains and not kind of building a long term business and, you know, investing for where the world is going, not just kind of where it is right now, kind of right at the tail end of observer, Right.

01:18:09:16 - 01:18:43:12
John
So that was one of the big things that I think led to substantial distraction in DC space, which just like you can't do that with Bitcoin right this time I'm at 21 million Bitcoin. You there's no way to game a bitcoin company such that you can, you know, go sell a bunch of pre-made tokens to do retail. And so if you're going to invest in a company that's building on Bitcoin, you have to be willing to invest for at least a few years, right?

01:18:43:15 - 01:19:29:12
John
I do think we will have some exits in our portfolio within the next like 3 to 5 years, but there will be some that take longer. And in any case, like we will be unlikely to have, you know, 5000 next market event in the next month from, you know, a pre mine that we kind of drove. And so if if that's what you're optimizing for I can see why you would only focus on kind of you know crypto schemes as we saw you know as we predicted at 1031 and, you know, as we structured ARC an investment thesis to express this theme, but that all ultimately blew up to significant kind of reputational damage to

01:19:29:14 - 01:19:48:27
John
some of the investors were involved me, the founders who were involved. And you know, also beyond reputational damage, like if, if you were not the winner of the musical chairs game, then you're sitting there with a really big markdown and a lot of zeros to take back to your lips. So that worked out ultimately, kind of as we thought it would.

01:19:48:27 - 01:20:08:04
John
It was, as I said, like a musical chairs game that could be played for a little while but was not ultimately sustainable. But it was, I think, a huge distraction and a huge source of noise for any crypto. We see that otherwise it might have taken the time to look at where the space is actually going over the next ten years.

01:20:08:04 - 01:20:43:26
John
Right now. So that's the first big thing. The other thing I think is Bitcoin is a big paradigm shift in thinking for anyone who comes from a traditional finance background. We referenced this a little at the beginning, but yeah, you generally like when you're operating in kind of a fairly short termist, Keynesian influenced mindset and that's how you've been taught in college and all of your colleagues around you think the same way and that's how you have to play the, the game that you're in professionally.

01:20:43:28 - 01:21:08:09
John
It actually it's like it's not profitable for you on a day to day basis to step back and ask yourself the question of what is money right? That's like a huge distraction. It takes 100 plus hours to even start to kind of grok the underlying problems that money is trying to solve. And then another thousand hours to understand like why Bitcoin is money and how it works and everything.

01:21:08:12 - 01:21:33:28
John
If you're from a background where 2% inflation is good because because economists say so, and that's the sign of a growing economy. And that's just like an axiom that you take for granted. It's very difficult for you to kind of step back and evaluate what would actually make good money and where Why actually does money need to lose value progressively over time?

01:21:34:00 - 01:22:10:06
John
And why why do we have a central bank issuing money ex nihilo to greater and greater degrees every every year? Right. So I think part of it is just there's a need to step back and do work that traditional finance roles don't necessarily incentivize you to do so for the people who are early to that process and take the time and get pulled down the rabbit hole early, you know, there's there's alpha to be generated.

01:22:10:06 - 01:22:48:23
John
There's there's an asymmetry in kind of being first to that to the conclusions that would follow from asking those questions. Just like there's a symmetry to, you know, just owning Bitcoin initially, you know, before before the rest of the world catches on. So there is also asymmetry to owning equity in Bitcoin companies. Before most crypto investors or traditional VCs understand the implications of Bitcoin being money and what it means for their investments in, you know, other crypto projects and what it also means for their lack of exposure to Bitcoin infrastructure companies.

01:22:48:26 - 01:23:15:19
Marty
Yeah, extremely well put. And I think beyond that, like I think what we're doing a 1031 to, to pump a pump around chest here I think again since we're bitcoin I think that's a it's becoming clear in the broader VC market as if you have a thematic fund focused on a very niche market. It's probably more advantageous for you.

01:23:15:21 - 01:23:43:27
Marty
But I really like what we've done with Grant, Jonathan, Matt, myself, you have done to really imbue the nature and the ethos of Bitcoin on what we're doing with our with our tribe events, really trying to communicate, hyper communicate with LPs to let them know what's going on in the portfolio and then getting the portfolio companies themselves to speak with each other, to do some knowledge share to figure out how they can work with each other, because that's another unique.

01:23:43:27 - 01:24:06:01
Marty
Part of what we're doing at 1031, the portfolio that we've developed is a lot of the companies you didn't even mention explicitly, but you're talking about Unchained. They work with Code Card, They work with them pulled out space to an extent as their block Explorer. There's many other synergies across the portfolio that the can materialize because you're building on this open source protocol.

01:24:06:03 - 01:24:16:29
Marty
It's so early and so investing in one company, you can help out another company in the portfolio as they can collaborate and sort of raise each other's boats.

01:24:17:02 - 01:24:42:04
John
Yeah, absolutely. And like I said, you know, I referenced this earlier, I think a little bit, but you don't get that opportunity to benefit from those synergies if you are like a broad, diversified investor, you know, early stage investor, ABC Investing in pretty much every vertical out there and kind of taking a spray and pray approach to not just every vertical, but also the many companies populating those verticals right.

01:24:42:06 - 01:25:23:04
John
And so I think that's you know, I reference this earlier, it's kind of the very beginning, but like there's there are huge returns to specialization and focus, even if you're a capital allocator out there, kind of hearing this message and thinking, you know, being somewhat skeptical of some of our conclusions about money or about Bitcoin as money, you know, there's no denying, I think that, like I mentioned earlier, the citadels, the millenniums, values and etc., of the world that have kind of gone to this highly focused multi-manager framework where you have very smart investors going into wide mile deep on very particular sectors, you know, has generated outsized returns for those strategies.

01:25:23:10 - 01:25:56:01
John
And I think it's no different here. You can't overstate the power of being highly hyper focused on one very particular theme, which for us is Bitcoin and Bitcoin infrastructure, both because it makes you understand that the companies building on that better than anyone else. So you can identify what looks promising and what doesn't, where the weak points might be, where the opportunities might be better and faster than anyone else, but also because it gives you just the best network that you could possibly have.

01:25:56:04 - 01:26:25:19
John
Many of the companies in our portfolio, you know, are exclusive to us because you and Matt and Grant, Jonathan, have just developed relationships with some of the founders over years and years. And when, you know, smart developers finally just kind of wanted to put pen to paper and build out an idea into a company, like they came to us and said like, Hey, I want you to be the only investor on cap table because I know you and I learned a lot from you In the case of you and Matt.

01:26:25:21 - 01:26:57:08
John
And I know we're aligned and I've gotten a ton of advice from you in the past, and so let's just do it. You guys will be the only one of the cap table. You don't get that by being highly diversified, right? You don't get by having, you know, a sleeve that invests in Solana and a sleeve that focuses on the Ethereum ecosystem and a sleeve that you know does some other random like tech vertical integrated with them, like a $100 billion portfolio that's invested in some other things.

01:26:57:08 - 01:27:28:06
John
Right? You get that by being hyper focused and on the ground all the time with the the smartest people who are pushing the space forward. So again, as I just think about like, you know, whether you care about the Federal Reserve, whether you care about, you know, Bitcoin as money or not, you know, I would just consider, as you're looking at the space you know, ask yourself who's best positioned to if we're right about this to benefit the most from it and to make the best investment selections within.

01:27:28:06 - 01:27:56:04
John
This theme is it someone who spends 1% of their time per year kind of casually thinking about the space and trying to arrange some calls with founders whenever he can? Or is it someone who is entirely obsessively focused on this and lives and breathes it every single day? You know, 24 hours, seven a week? Basically, I think that the questions to kind of answer itself focus is a highly powerful lever to driving investment returns.

01:27:56:04 - 01:27:58:28
John
And that's a big part of what we do focus.

01:27:58:28 - 01:28:07:06
Marty
It's important. It's important for us, the companies. It's beautiful thing, It's fun. Are you having fun, John?

01:28:07:08 - 01:28:14:18
John
I am having fun. It's it's a great time waking up and doing Bitcoin stuff all day is a dream come true. It's a ton of fun.

01:28:14:21 - 01:28:39:17
Marty
Well, there's a big leap of faith for, you coming from Citadel. You could have rode that train pretty far. Uh, came to a somewhat upstart venture fund in the Bitcoin space in 1031 at a time when the market was blowing up. What's the first two years working full time in the space been like? Reflecting right now or introspection?

01:28:39:19 - 01:29:12:04
John
Yeah, I mean, it should tell you a lot about my conviction, right? Like, yeah, you know, just I wouldn't just of jump for any opportunity. I really do think temporary one's very unique. I think you know if you look at what we've done just in the last two years, deploying over $100 million, the space the biggest portfolio in the space, like I mentioned, a ton of our investments are exclusive because of the relationships we built up over the last ten plus years with with you and Matt and the Grant Jonathan as well.

01:29:12:07 - 01:29:37:26
John
And I think it's just fully validated. The last two years have fully kind of why I made the decision I made and made me even more kind of bullish about the opportunity that I see out of us. The ecosystem is, like you mentioned, even more vibrant than I expected it to be, kind of when I was, you know, on the outside looking in, paying attention as much as I could to companies and the builders in the space.

01:29:37:28 - 01:29:57:10
John
You know, that was not enough to help me fully appreciate how much development and how much innovation there actually is and how quickly it's moving. When you're focusing on it every day, you really see that, you know, front and center. And so that's all been very validating. But yeah, I, I think, you know, the proof is in the pudding.

01:29:57:10 - 01:30:12:15
John
Our work speaks for itself. And, you know, I think there's $1,000,000,000 plus of deployment opportunity out there in just the next few years in the space that we can go tackle and that we plan to tackle. So excited.

01:30:12:18 - 01:30:53:05
Marty
Yeah. What excites me to like this morning we sent out that letter to FinCEN and cosigned by a lot of the companies in our portfolio. And that's that's one thing that gives me incredible joy. Obviously working with people like you, Matt Grant and Jonathan is incredible, but then obviously continuing to develop relationships with the people, the builders, for lack of a better term, creating the infrastructure that is going to lead us to a Bitcoin standard has been extremely rewarding and to add to that, like I do think the people that are building out this infrastructure right now are in it to win it, number one, but get it as well.

01:30:53:07 - 01:31:20:04
Marty
I think the cosigning of that letter to FinCEN was indicative of that, that people understand the gravity of the situation that exists in our world right now, that things are terribly broken. We need to to fix them. And people have formed companies and are building tools to go fix the world. And it there's obviously a large enormous economic opportunity as you laid out in Bitcoin is eating the world.

01:31:20:04 - 01:31:42:10
Marty
But that's the other thing when you can marry that economic opportunity with a a drive for virtue in the world, which I believe all the companies in our portfolio are doing, it's just a very special thing. And I feel very fortunate to be on this journey with you, with everybody else at 1031 and everybody else in the portfolio.

01:31:42:12 - 01:32:27:18
John
Yeah, no, no doubt. Yeah. I would be remiss if I didn't mention, you know, when I as I as I said, kind of at the start of this conversation, you know, growing up 15, 16, 17 year old kid into Ron Paul and into ending the Fed and preserving, you know, civil liberties in the US and kind of returning the country to some of the principles on which, you know, I think it was founded I was really disillusioned with the prospects for that over kind of my time going to college and then going into internal finance roles, not necessarily because there's anyone particularly I mean, certainly I think there are executives in the space and some

01:32:27:18 - 01:32:56:28
John
of those companies that are actively working against all of those principles. But more than anything, I just you know, you kind of encounter like a degree of apathy about any of that. And, you know, I think it's been very invigorating to see both my coworkers. 1031 you guys, but also, like you said, all the founders that I work with that we work with are also very driven by, in most cases, those principles.

01:32:56:28 - 01:33:24:17
John
And and sometimes in some cases, certainly we disagree. There's not, you know, ideological homogeneity among the portfolio by any means, but where it matters and where it counts, the people that we invest in are very, very highly principled. And yeah, I shouldn't understate how unique that is. And frankly, I also think on the long term, on a long term basis, that that drives investment returns too.

01:33:24:21 - 01:33:37:21
John
So it's a it's a double edged benefit for us both the financial case long term of the winning in the world and also just what it means for the types of founders that we get to interact with.

01:33:37:24 - 01:34:02:28
Marty
Yeah It's a beautiful thing. John. This piece was incredible. If you haven't read it yet, you're listening to this. Go read, go read it. We'll link to it in the show notes if you want to find out anything more, we're doing it. 1031 Find us at 1031 dot V.C. Before we wrap up here, is there anything we didn't cover or mention that you think we should get out to the freaks before we wrap up here?

01:34:03:01 - 01:34:33:13
John
Yeah. You know, the last thing I'll say is, just like, I think we all see a temporary one. Like, there's a degree of humility required in being, like, an investor. Like, none of us know exactly where the space is going to go over the next couple of years. I don't think, like, you know, Freddie, that we mentioned earlier like that as much as you and that we're kind of on the forefront of kind of speaking that whole project into reality and really marketing it and getting the right people in the right rooms to, you know, bring it forth.

01:34:33:15 - 01:34:52:20
John
You know, none of us necessarily saw that coming like only a couple of years ago. And there will be things like that in the next couple of years where we're like, you know, things develop in a certain way a lot faster than maybe we expected or, you know, a new like scaling initiative happens, you know, in terms of like a soft fork or a new layer to protocol.

01:34:52:20 - 01:35:12:13
John
It's that opens up really interesting new possibilities. Like all those things are possible. And I think, you know, the I guess the sign of a good investor is someone who has like strong convictions, weakly held. You know, we have the ability to kind of look at the landscape and see it evolving and have the humility to know, like we can't plot out like exactly way that everything is going to go.

01:35:12:17 - 01:35:42:04
John
We certainly have some opinions, and I think many of our convictions will be proven correct over the next ten years or so. But what I would say is I'm just really excited to be in a position where we have a unique position to see those changes kind of as they unfold like we're on the ground at the King Park and the Bitcoin commons, you know, with the founders and the devs and the really intelligent people who are making those changes and pushing things forward and innovating.

01:35:42:07 - 01:36:00:22
John
And so, you know, we have humility, the humility to know that we don't exactly know everything's going. But I think we are uniquely positioned to kind of be there when those inflection points happened and kind of see the big changes. But before almost anyone else is looking at the space. So, yeah, that's what I close with.

01:36:00:25 - 01:36:08:08
Marty
Yeah, it's perfect. Close with John. It's been a pleasure. We're going to do this quite often moving forward, you know?

01:36:08:13 - 01:36:09:12
John
Yeah. I mean.

01:36:09:14 - 01:36:28:04
Marty
We need to break you out from what we've been. We've been hiding, John. Like in a corner. Not in a corner, but like, Hey, this guy's got too much alpha, but it's a it's been a pleasure working with you. The way you approach what we're doing at 1031, your consummate professional, I think you really accelerate what we what we're trying to do here.

01:36:28:04 - 01:36:40:02
Marty
And it's I feel very fortunate to be able to work side by side with you and meet up in different cities around the country, around the world, even just yeah, go push Bitcoin forward.

01:36:40:05 - 01:36:46:16
John
Appreciate it, man. Totally, totally agree. Still, he's mutual and there's a lot of work to do, so we're just getting started.

01:36:46:18 - 01:36:49:09
Marty
Yeah, that's what we got today for this piece of love You.

Read original post

We submitted a legal response to the U.S. Department of the Treasury and FinCEN’s proposed rules that would seriously harm privacy by effectively prohibiting basic bitcoin best practices such as not reusing addresses and collaborative bitcoin transactions.

Below is an exact reproduction of the letter we have submitted to Treasury and FinCEN as part of the public request for comment period.

We are proud to have 26 bitcoin companies sign this letter to FinCEN in agreement with this position. They are listed individually at the bottom of this page.

You can download a PDF of the letter here:

[

Section-311-Mixing-Transactions-Designation-NPRM-Comment-Letter

Section-311-Mixing-Transactions-Designation-NPRM-Comment-Letter.pdf

608 KB

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](https://tftc.io/content/files/2024/01/Section-311-Mixing-Transactions-Designation-NPRM-Comment-Letter.pdf "Download")

Here it is in it's entirety:

Andrea Gacki January 22, 2024
Director
Financial Crimes Enforcement Network
U.S. Department of the Treasury
P.O. Box 39
Vienna, VA 22183

SUBMITTED ELECTRONICALLY

Re: Docket Number FINCEN–2023–0016 – Proposal of Special Measure Regarding Convertible Virtual Currency Mixing as a Class of Transactions of Primary Money Laundering Concern

Dear Director Gacki:

We appreciate the opportunity to comment on Docket Number FINCEN-2023-0016 (the "Mixing Transaction NPRM"), released by the Financial Crimes Enforcement Network ("FinCEN") on October 22, 2023.[1] We are a variety of unaffiliated companies that rely on important cybersecurity safeguards and privacy-enabling software to protect our businesses and our users. The extreme breadth of the rules proposed by the Mixing Transaction NPRM would overly burden our use of such technologies in ways that would not assist FinCEN in achieving its mandate of preventing money laundering and other illicit use of money. As a result, we write to express our grave concerns regarding the novelty and scope of the Proposed Special Measures and the inadequate definitions contained therein.[2]

The Proposed Special Measures would unreasonably infringe upon the legitimate financial privacy interests of cryptocurrency users, and would apply to a variety of digital techniques that are not mixing transactions at all, but rather simply represent good cybersecurity practices. Moreover, the Proposed Special Measures are unnecessary to achieve FinCEN's aim, and we encourage FinCEN to either withdraw the Mixing Transaction NPRM altogether or to pursue a less invasive, less restrictive, and more effective approach—the same approach it has used since its first enforcement activities in the cryptocurrency space in 2013—to enforcement against specific bad actors.

1. FinCEN should exercise caution and either withdraw entirely or narrowly tailor the Mixing Transaction NPRM because if adopted, the Mixing Transaction NPRM would not only represent the first time FinCEN used its Section 311 powers against a class of transactions, but also the first time FinCEN has ever imposed Special Measure 1.

Historically, FinCEN has exercised caution in making designations under Section 311 and implementing Special Measures. Section 311 (31 U.S.C. 5318A), authorizes the U.S. Department of Treasury ("Treasury") to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of "primary money laundering concern" and impose one or more of five possible "special measures." Treasury delegated that authority to FinCEN, which has used its power quite sparingly since Section 311's enactment. The first Section 311 action instituted by FinCEN in the virtual currency space occurred in 2013, when FinCEN instituted special measures against Liberty Reserve. Prior to that time, between 2002 and 2013, FinCEN had only ever implemented special measures against just four jurisdictions and 13 financial institutions. After a protracted legal battle regarding a Section 311 action between 2015-2017, FinCEN seemed reluctant to use its Section 311 powers widely. [3] The creation of the Global Investigations Division (GID) in 2019 [4] and the enactment of the Anti-Money Laundering Act of 2020, which increased FinCEN's authority "to prohibit or impose conditions upon certain transmittals of funds (to be defined by the Secretary) by any domestic financial institution or domestic financial agency," [5] coincided with an uptick in the use of Section 311 powers and a broadening of FinCEN's attention to all 5 available Special Measures.

Importantly, throughout its use of Section 311, FinCEN traditionally imposes Special Measure Number 5 to isolate a specific foreign financial institution and prevent it from accessing the U.S. financial system. Until this Mixing Transaction NPRM, FinCEN has only used Special Measure Number 1 one other time—in 2012 against JSC CredexBank ("Credex").[6] FinCEN later withdrew that proposed rule in 2016. [7] If adopted, the Mixing Transaction NPRM would constitute the first time FinCEN has imposed Special Measure Number 1 in exercising its Section 311 Powers. Moreover, this Mixing Transaction NPRM represents the very first time FinCEN has sought to designate an entire class of transactions as a primary money laundering concern. We encourage FinCEN to exercise extreme caution in the exercise of its Section 311 powers in such a novel way—the first-ever designation of a class of transactions and the first-ever imposition of Special Measure 1.

Exercising caution in Section 311 powers reflects the seriousness of Treasury's policy purposes for invoking its powers to make primary money laundering concern designations and impose special measures—namely, to act as a signal to the world that FinCEN is "serious about ensuring that the international financial system is safeguarded against the threat of money laundering." [8] As Treasury explained in the press release announcing the very first use of its Section 311 powers in 2002, when FinCEN uses Section 311, "[FinCEN] tell[s] the world clearly that these jurisdictions [or entities or transactions] are bad for business and that their financial controls cannot be trusted." [9] For the reasons further explained below, FinCEN's targeting of convertible virtual currency ("CVC") [10] purported "mixing" transactions does not achieve these aims. Rather than target transactions that are "bad for business," the Mixing Transaction NPRM targets an overly broad range of technical approaches used as best practices both by businesses and individuals for ensuring the security of CVC and impinges on privacy rights of legitimate users of CVC. In an attempt to exercise authority it has never used before (class of transactions) through a special measure it has never previously imposed successfully (special measure 1), FinCEN created a proposed rule fraught with misunderstandings and overreach. We urge FinCEN to withdraw the rule and reconsider its approach to this novel use of its authority.

2. The Mixing Transaction NPRM proposes a rule that is an improper and overbroad application of Section 311 measures to achieve transaction surveillance and suppression that FinCEN does not otherwise have a lawful basis to undertake.

Although the Mixing Transaction NPRM ostensibly designates a class of transactions as being of Primary Money Laundering Concern, its real goal is to uncover an alternative method for collecting information about and suppressing the use of digital currency in general. The Mixing Transaction NPRM is an improper and overbroad application of Section 311 measures for that purpose. Indeed, although the Mixing Transaction NPRM allegedly sanctions a class of transactions, it inconsistently throughout refers to "CVC mixers," "CVC mixing" and "CVC mixing services" by reference to specific business entities [11] and as a type of business model more generally.[12] If FinCEN has reason to believe specific entities conduct illicit activities, FinCEN could use the Section 311 powers it has traditionally and successfully used to target specific entities as financial institutions of primary money laundering concern. Such an approach offers a more targeted way to address actual money laundering while protecting legitimate users of legitimate privacy-enhancing tools.

Notably, Treasury has separately sanctioned what it refers to as CVC mixing transactions through its Office of Foreign Asset Control (OFAC) authority to designate people or property who conduct transactions with specifically designated foreign jurisdictions identified through executive order as posing terrorist threats. [13] Treasury is currently facing legal challenges to, and has been widely criticized for, its attempt to sanction the Tornado Cash open source software as property of a non-existent entity Treasury alleges is called "the Tornado Cash DAO entity." [14] Although we agree with the many arguments as to why Treasury's OFAC action with regard to Tornado Cash software is an example of agency overreach, we wish to make a different but related point here. To justify its OFAC sanctions against the Tornado Cash software, Treasury had to designate the software as property of an entity. [15] OFAC officially explained as part of defending its sanction to a judge that the Tornado Cash software was property under Treasury's regulations because it fell within the broad reach of "any contract whatsoever." [16] Although the definition of "transaction" under the BSA regulations is quite broad, it does not encompass "any contract whatsoever" but rather centers on monetary transfers and specific services offered by financial institutions, and provides a catch-all for "any other payment, transfer, or delivery by, through or to a financial institution, by whatever means effected." [17] No part of the definition applicable to CVC mixing is also a contract.[18]

In other words, in proposing the Mixing Transaction NPRM, one arm of Treasury is classifying CVC mixing as a transaction type while another arm of Treasury argues that mixing is a contract for services. Under the regulations governing both enforcement actions, mixing activity cannot be both a transaction type and a contract for service simultaneously. Treasury's attempt to designate mixing software as both a type of transaction and a contract is evidence of the arbitrary and capricious nature of its attempt to regulate open-source software that enhances the digital privacy of legitimate CVC users. To the extent that FinCEN really wants to target non-custodial, open-source software that individuals can use on their own accounts, FinCEN exceeds its statutory authority.

Indeed, tools that enhance digital privacy in CVC transactions simply seek to enable a form of digital cash. As a result, in its rush to find a way to suppress CVC mixing transactions, by whichever means, even if inconsistent amongst different internal branches of its own agency, FinCEN's Mixing Transaction NPRM amounts to an attempt to sanction "all transactions conducted in cash," which is both impossible and an unreasonable over-extension of its rulemaking authority.

3. The Mixing Transaction NPRM should be withdrawn because the proposed definition of "CVC mixing" is overbroad and targets lawful activity in a way that makes the agency's proposed action arbitrary and capricious.

Setting aside FinCEN's own apparent confusion about whether CVC mixing is a transaction, a service, a business, or a specific business entity, when FinCEN does attempt to define the "class" of transactions that it considers to be CVC mixing, the Mixing Transaction NPRM's definition of "mixing" is extremely broad and includes numerous activities routinely conducted by legitimate users as a matter of routine safety precautions in online transacting in CVC. Specifically, the Mixing Transaction NPRM provides:

The term "CVC mixing" means the facilitation of CVC transactions in a manner that obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used, such as: (1) pooling or aggregating CVC from multiple persons, wallets, addresses or accounts; (2) using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction; (3) splitting CVC for transmittal and transmitting the CVC through a series of independent transactions; (4) creating and using single-use wallets, addresses, or accounts, and sending CVC through such wallets, addresses, or accounts through a series of independent transactions; (5) exchanging between types of CVC or other digital assets; [19] or (6) facilitating user-initiated delays in transactional activity. [20]

Indeed, most of the activities captured by the proposed definition of CVC mixing are considered established best practices within the industry for the use and safekeeping of CVC. Specifically, the proposed definition encompasses lightning transactions, single-use wallets, atomic swaps, decentralized finance protocols, privacy coin features, and multi-signature wallets, among other things. The main commonality among this broad range of software tools is that they enhance digital privacy and offer basic cyber-security techniques to owners or custodians of CVC. Employing these techniques to safeguard valuable digital assets is as routine and mundane and free of illicit purpose as using two-factor authentication to secure a digital wallet containing payment card information or an X (formerly Twitter) account to prevent an unauthorized announcement.[21]

4. The Mixing Transaction NPRM should be withdrawn because its inaccurate depiction of standard security practices as "mixing" impermissibly restricts the capacity of users to protect their property so that FinCEN can conduct a fishing expedition.

The proposed rule describes as red flags such everyday practices as "creating and using single address wallets" and "splitting CVC for transmittal." [22] The standard practice among cryptocurrency users is to change addresses with every transaction. For example, Coinbase Exchange describes to their users that: "[w]e automatically generate a new address for you after every transaction you make or when funds are moved between your wallet and our storage system. This is done to protect your privacy, so a third party cannot view all other transactions associated with your account simply by using a blockchain explorer." [23]

The fact that a small subset of users, who may be criminals, engage in the same operational security practices as ordinary users does not make those operational security practices suspect. The fact that criminals may use two-factor authentication to protect the security of their online applications does not mean that the use of two-factor authentication is itself an indicator or facilitator of criminal activity. In exactly the same way, the fact that users do not reuse Bitcoin addresses is merely indicative of basic operational security.

In an apparent recognition of the fact that these tools legitimately enable important cyber-security precautions, FinCEN exempts financial institutions from reporting on any of their own mixing transactions that they may conduct in the course of providing services to the public.[24] By exempting financial institutions from the rule, FinCEN creates a regime where financial institutions can take proper cyber-security measures for using CVC, but regular people cannot.

Perhaps even more problematic, throughout the Mixing Transaction NPRM, FinCEN justifies the proposed rule as necessary to enable law enforcement and the agency to better understand the transactions and the extent to which illicit activity occurs through CVC mixing. [25] The extraordinary and never before successfully invoked Section 311 power to designate a class of transactions and implement special measure 1 is not appropriate for use in a fact-finding mission. Employing such overly broad definitions as proposed in the Mixing Transaction NPRM for the purpose of authorizing an invasive fact-finding mission represents an arbitrary and capricious use of FinCEN's delegated rulemaking authority because FinCEN's justification for the rule lies outside of the statutory criteria for determining a class of transactions is of primary money laundering concern.

Specifically, FinCEN is statutorily required to consider the following factors when determining that a class of transactions is of primary money laundering concern: (1) the extent to which the class of transactions is used to facilitate or promote money laundering in or through a jurisdiction outside of the United States, including money laundering activity with connections to international terrorism, organized crime, and proliferation of WMDs and missiles; (2) the extent to which a class of transactions is used for legitimate business purposes; and (3) the extent to which action by FinCEN would guard against international money laundering and other financial crimes." [26] Throughout the Mixing Transaction NPRM, FinCEN acknowledges that due to a lack of data and a lack of understanding of CVC mixers, it cannot sufficiently assess the extent to which CVC mixing and the proposed rule measures up under any of these three criteria. [27] FinCEN's assessment ultimately boils down to: FinCEN does not have sufficient information to properly assess the statutory criteria required to justify the proposed rule, so the proposed rule is justified because, in FinCEN's own words, it "is necessary to better understand the illicit finance risk posed by CVC mixing." [28] Using a sanction to obtain the information necessary to justify imposing the sanction even when the agency knows that doing so will likely impose a high burden on legitimate uses and financial institutions is the definition of arbitrary and capricious regulatory action.

5. The Mixing Transaction NPRM should be withdrawn or significantly narrowed in scope because FinCEN's required statutory analysis fails to adequately value the legitimate uses of CVC mixing services and unduly burdens legitimate users and financial institutions.

FinCEN admits that public blockchains "make it possible to know someone's entire financial history on the blockchain" [29] and that it "recognizes that there are legitimate reasons why responsible actors might want to conduct financial transactions in a secure and private manner given the amount of information available on public blockchains." [30] Yet, in the same document, alleges that the Mixing Transaction NPRM is necessary because CVC "is not without its risks and, in particular, the use of CVC to anonymize illicit activity undermines the legitimate and innovative uses of CVC." [31] These two propositions cannot be simultaneously accurate.

As a matter of technical reality, FinCEN's assertion that public blockchains expose a user's entire financial history on the blockchain to the public for everyone to see and inspect is correct. [32] Indeed, that creates the fundamental need for legitimate CVC users to conduct CVC mixing transactions—to reintroduce the same level of financial privacy that they enjoy in the traditional financial system [33] to their transactions via CVC (for example, the traditional financial system does not expose a consumer's entire credit card history to the public, and indeed, federal law requires that financial institutions protect such information from being exposed to the public [34]). [35]

Ensuring their CVC transactions enjoy the same level of privacy as transactions in traditional finance reduces the potential danger of personal harm to legitimate users and enables legitimate users to avoid waiving their constitutional right to privacy. When the identity of a legitimate CVC user is known and connected to the wallets holding CVC assets, the user becomes a target for kidnap, robbery, extortion, and hacking schemes. [36] Further, because of this inherent transparency by design of public blockchains, the Fifth Circuit recently ruled that no expectation of privacy exists for users of permissionless public blockchains who take no additional action to privacy-protect their transactions. [37] Legitimate users employ privacy-enhancing software when transacting in CVC in order to avoid inadvertently waiving their constitutionally protected privacy rights.

Ultimately, FinCEN has completely failed in its obligation to adequately account for the impact on legitimate users as required by its rulemaking authority. In defending its selection of special measure 1 over 2 through 5, FinCEN emphasizes, without explanation, that special measure 1—additional record keeping—allows legitimate users to continue using privacy-enhancing software without interruption. [38] This is false, as covered entities must report on any transaction that may have involved CVC mixing and a foreign jurisdiction. Indeed, read broadly, it is possible that the rules proposed by the Mixing Transaction NPRM require reporting on transactions that involve CVC that were transacted through mixing software at any point in the asset's transaction history. Such reporting directly impedes the reasons for which legitimate users employ mixing software (to enhance financial privacy) by requiring the elimination of financial privacy (it is not a private transaction if an intermediary must surveil and report on the transaction). Software tools like mixers that enhance digital financial privacy provide a true electronic equivalent to cash. Notably, transactions in cash are not subject to rules such as those proposed in the Mixing Transaction NPRM. In an apparent acknowledgment of this deep and inherent conflict between the rules proposed by the Mixing Transaction NPRM and the legitimate uses to which legitimate users put CVC mixing software, FinCEN itself predicts that the rule will chill the use of CVC mixers.

6. The Mixing Transaction NPRM should be withdrawn because it requires covered financial institutions to perform law enforcement's function to accomplish FinCEN's AML goals, which FinCEN, DOJ, and law enforcement can achieve using existing tools when they have a proper legal basis to employ those tools.

Like the definitions of CVC mixing and CVC mixer, the Mixing Transaction NPRM's information reporting requirements demonstrate a deep lack of technological understanding. Notably, all of the transaction information that the Mixing Transaction NPRM proposes to include in required reports by covered financial institutions involves data that, in most circumstances, FinCEN can just as easily obtain itself through blockchain data analytics. Similarly, the customer information that FinCEN would require covered financial institutions to report includes the same kinds of information such institutions must already report if a transaction raises sufficient red flags to trigger the filing of a Suspicious Activity Report (SAR). Nevertheless, the Mixing Transaction NPRM seeks to require covered financial institutions to file such reports on every single transaction for which the CVC involved may have ever been transacted through the extremely broad set of software that FinCEN's proposed rule defines as CVC mixing software. In other words, because law enforcement investigations into activity involving CVC are sometimes more difficult, FinCEN seeks to impose broad surveillance of individuals without cause through covered financial institutions. Covered financial institutions should not have to become de facto law enforcement officers to make investigations easier for FinCEN.

FinCEN, the Department of Justice, and law enforcement have previously and successfully employed the very tools FinCEN asks financial institutions to use for reporting compliance under the Mixing Transaction NPRM to target specific illicit actors. FinCEN has demonstrated that it knows how to properly investigate and enforce against specific custodial CVC mixing service providers that are not complying with the regulations to which they are subject. Specifically targeting illicit actors about which FinCEN and law enforcement have built a clear, strong case using the available blockchain data analytics tools better balances the need to combat illicit CVC mixing with the legitimate use of CVC mixing by individuals seeking to protect their legitimate, constitutionally and statutorily protected privacy interests.

For all of the reasons discussed above, we urge FinCEN to withdraw the Mixing Transaction NPRM altogether.

Thank you for your consideration.

If you have any questions or would like additional information, please see the contact information below:

Rafael Yakobi, Esq.
Managing Partner
The Crypto Lawyers, PLLC.
rafael@thecryptolawyers.com
(619) 317-0722

Sincerely,

Samourai Wallet, Ten31, River, Strike, RoninDojo, Swan Bitcoin, Primal, GRIID, Zaprite, Peach, Mempool Space, Upstream Data, Stakwork, Vida Global, Voltage, Coinkite, Mutiny Wallet, Standard Bitcoin Company, Satoshi Energy, Cathedra Bitcoin, AnchorWatch, Bitnob, Oshi, Battery Finance,Fold, Start9

1. FinCEN, Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions
   of Primary Money Laundering Concern, Dkt. FINCEN-2023-0016 (Oct. 22, 2023) https://www.fincen.gov/sites/default/files/federal_register_notices/2023-10-19/FinCEN_311MixingNPRM_FINAL.pdf [hereinafter Mixing Transaction NPRM”] ↩︎
2. In this regard, we intend this letter to specifically respond to FinCEN’s request for comments A(1)-(8), B(2)-(3), C(1), D(2), and D(11) as listed in the Mixing Transaction NPRM. ↩︎
3. See FBME Bank Ltd. v. Lew, 125 F. Supp. 3d 109 (D.D.C. 2015); FBME Bank Ltd. v. Lew, 142 F.Supp.3d 70 (D.D.C. 2015); FBME Bank Ltd. v. Lew, 209 F.Supp.3d 299 (D.D.C. 2016); FBME Bank Ltd. v. Munchin, 249 F. Supp.3d 215 (D.D.C. 2017). ↩︎
4. FinCEN, Press Release, New FinCEN Division Focuses on Identifying Primary Foreign Money Laundering Threats (Aug. 28, 2019),https://www.fincen.gov/news/news-releases/new-fincen-division-focuses-identifying-primary-foreign-money-laundering-threats. We note with some alarm that the timing of GID’s creation coincided with the release of FinCEN’s 2019 CVC guidance, indicating that perhaps the two were coordinated and greater targeting of CVC users has been underway for some time. ↩︎
5. 2021 NDAA, Section 9714, https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf. ↩︎
6. 77 Fed. Reg. 31,794 (Mar. 30, 2012). ↩︎
7. 81 Fed. Reg. 14,408 (Mar. 17, 2016). ↩︎
8. U.S. Dept. Treas., Press Release, Fact Sheet Regarding the Treasury Department’s Use of Sanctions: Authorized Under Section 311 of the USA PATRIOT ACT (Dec. 20, 2002), https://home.treasury.gov/news/press-releases/po3711. ↩︎
9. Id. ↩︎
10. We note that we dislike the term convertible virtual currency, as it does not fit industry understanding of the technical realities of cryptocurrencies and their many uses. We use the term in this letter only because it is the language that FinCEN has adopted for the implementation of its regulations. As an aside, we would encourage FinCEN to adopt more technically accurate vocabulary for implementing its regulations, as doing so would help FinCEN avoid proposing unworkable and overbroad regulations such as the Mixing Transaction NPRM. ↩︎
11. See, e.g., Mixing Transaction NPRM, supra note 1, at 15 (“ChipMixer, a darknet CVC ‘mixing’ service”); 16 (referring to Bestmixer.io as a CVC mixing transaction); 20 (referring to enforcement against “Bitcoin Fog”). ↩︎
12. See, e.g., id. at 5 (“persons who facilitate…CVC mixing transactions”); 18 (“RAILGUN falls under the umbrella of CVC mixing…because it uses its privacy protocol to manipulate the structure of the transaction to appear as being sent from the RAILGUN contract address, thus obscuring the true originator.”); 20 (“CVC mixing services often deliberately operate opaquely…”.) ↩︎
13. U.S. Dpt. Treas., Press Release, U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916. ↩︎
14. See, e.g., Van Loon et. al., v. OFAC, No. 23-506669 (5th Cir. 2023) (notably, a variety of amici intervened with arguments critiquing the OFAC sanction at both the District Court and 5th Circuit Court of Appeals); Peter Van Valkenburgh, New Tornado Cash Indictments Seem to Run Counter to FinCEN Guidance, CoinCenter (Aug. 23, 2023), https://www.coincenter.org/new-tornado-cash-indictments-seem-to-run-counter-to-fincen-guidance/. ↩︎
15. OFAC, FAQ 1095, https://ofac.treasury.gov/faqs/1095 (“OFAC designated the entity known as Tornado Cash, which is a “partnership, association, joint venture, corporation, group, subgroup, or other organization” that may be designated pursuant to the IEEPA.”). ↩︎
16. See, Order, Van Loon et. al. v. Dpt. Treas., 1:23-CV-312-RP at 18 (W.D. Tx. Aug. 17, 2023). ↩︎
17. 31 CFR 1010.100(bbb)(1). “Except as provided in paragraph (bbb)(2) of this section, transaction means a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, security, contract of sale of a commodity for future delivery, option on any contract of sale of a commodity for future delivery, option on a commodity, purchase or redemption of any money order, payment or order for any money remittance or transfer, purchase or redemption of casino chips or tokens, or other gaming instruments or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected.” ↩︎
18. Notably, in the Mixing Transaction NPRM, FinCEN refers to Tornado Cash as a “CVC mixer,” not as a CVC mixing transaction. Is mixing a transaction? Is mixing a contract? Is mixing a type of business? The fact that FinCEN cannot decide belies the inappropriateness of using its Section 311 sanctions as proposed. ↩︎
19. We note that the Mixing Transaction NPRM does not include a definition of “other digital assets” anywhere. Further, we are unaware of any definition of “digital assets” in FinCEN’s regulations or guidance. Finally, it is not clear to us how FinCEN has authority to impose regulatory reporting requirements upon exchanges of CVC for digital assets that are not CVC. See FinCEN, Application of FinCEN’s Regulations to Persons Administering, Exchanging or Using Virtual Currencies, FIN-2013-G001 (Mar. 18, 2013) (the phrase “digital assets” appears nowhere in the 2013 Guidance); FinCEN, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (May 9, 2019) (the only time that the phrase “digital assets” appears in the 2019 Guidance is in footnote 75 in reference to the title of the SEC “Framework for Investment Contract Analysis of Digital Assets”). This is just another small but notable way in which FinCEN seeks to overreach its authority through the Mixing Transaction NPRM. ↩︎
20. Mixing Transaction NPRM, supra note 1, at 30-31. ↩︎
21. True Tamplin, How to Protect Your Digital Wallet from Cyber Threats, Forbes (Dec. 19, 2023, 2:00 pm EST), https://www.forbes.com/sites/truetamplin/2023/12/19/how-to-protect-your-digital-wallet-from-cyber-threats/?sh=1e9146825981 (noting the importance of 2FA for securing digital wallets). ↩︎
22. Mixing Transaction NPRM, supra note 1, at 30-31. ↩︎
23. See https://help.coinbase.com/en/exchange/managing-my-account/crypto-address-change ↩︎
24. Mixing Transaction NPRM, supra note 1, at 31. ↩︎
25. See, e.g., id. at 24 (“Furthermore, the information generated by this special measure would support investigations into illicit activities by actors who make use of CVC mixing to launder their ill-gotten CVC by law enforcement. At present, there is no similar or equivalent mechanism possessed by law enforcement to readily collect such information, depriving investigators of the information necessary to more effectively understand, investigate and hold illicit actors accountable.”). ↩︎
26. 31 U.S.C. 5318A(a)(1). ↩︎
27. See Mixing Transaction NPRM, supra note 1, at 19 (not enough data to know how much CVC mixing is used in money laundering); 22 (not enough “available transactional information” for FinCEN to “fully assess the extent to which or quantity thereof CVC mixing activity is attributed to legitimate purposes”); 22 (essentially claiming that FinCEN’s lack of information itself is reason enough to show that getting more information would guard against international money laundering). ↩︎
28. Id. at 23. ↩︎
29. Id. at 7. ↩︎
30. Id. at 21. ↩︎
31. Id. at 6-7. ↩︎
32. Matthias Nadler & Fabian Schar, Tornado Cash and Blockchain Privacy: A Primer for Economists and Policymakers, 105 Fed Res. Bk. St. Louis Rev. 122 (2023); Vitalik Buterin, et. al., Blockchain Privacy and Regulatory Compliance; Towards a Practical Equilibrium (Sept. 9, 2023) (unpublished manuscript), ↩︎
33. See, e.g., 12 U.S.C. §§ 3401-3423 (the Right to Financial Privacy Act of 1978 (RFPA), which protects the confidentiality of personal financial records by creating a statutory fourth amendment protection for bank accounts). ↩︎
34. 16 C.F.R. Part 314, 67 Fed. Reg. 36484 (May 23, 2002) (FTC rule addressing the requirement that covered financial institutions safeguard non-public information”) ↩︎
35. Matthias & Schar, supra note 32. ↩︎
36. For a documented timeline of physical attacks on Bitcoin users, see Known Physical Bitcoin Attacks, GitHub
    https://github.com/jlopp/physical-bitcoin-attacks/blob/master/README.md (last visited Jan. 22, 2024). ↩︎
37. See United States v. Gratowski, No. 19-50492 (5th Cir. 2020). ↩︎
38. Mixing Transaction NPRM, supra note 1, at 25 (special measure 1 is the only special measure that will preserve “legitimate actors’ ability to continue conducting secure and private financial transactions.”). ↩︎

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We submitted a legal response to the U.S. Department of the Treasury and FinCEN’s proposed rules that would seriously harm privacy by effectively prohibiting basic bitcoin best practices such as not reusing addresses and collaborative bitcoin transactions.

Below is an exact reproduction of the letter we have submitted to Treasury and FinCEN as part of the public request for comment period.

We are proud to have 26 bitcoin companies sign this letter to FinCEN in agreement with this position. They are listed individually at the bottom of this page.

You can download a PDF of the letter here:

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Section-311-Mixing-Transactions-Designation-NPRM-Comment-Letter

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Here it is in it's entirety:

Andrea Gacki January 22, 2024
Director
Financial Crimes Enforcement Network
U.S. Department of the Treasury
P.O. Box 39
Vienna, VA 22183

SUBMITTED ELECTRONICALLY

Re: Docket Number FINCEN–2023–0016 – Proposal of Special Measure Regarding Convertible Virtual Currency Mixing as a Class of Transactions of Primary Money Laundering Concern

Dear Director Gacki:

We appreciate the opportunity to comment on Docket Number FINCEN-2023-0016 (the "Mixing Transaction NPRM"), released by the Financial Crimes Enforcement Network ("FinCEN") on October 22, 2023.[1] We are a variety of unaffiliated companies that rely on important cybersecurity safeguards and privacy-enabling software to protect our businesses and our users. The extreme breadth of the rules proposed by the Mixing Transaction NPRM would overly burden our use of such technologies in ways that would not assist FinCEN in achieving its mandate of preventing money laundering and other illicit use of money. As a result, we write to express our grave concerns regarding the novelty and scope of the Proposed Special Measures and the inadequate definitions contained therein.[2]

The Proposed Special Measures would unreasonably infringe upon the legitimate financial privacy interests of cryptocurrency users, and would apply to a variety of digital techniques that are not mixing transactions at all, but rather simply represent good cybersecurity practices. Moreover, the Proposed Special Measures are unnecessary to achieve FinCEN's aim, and we encourage FinCEN to either withdraw the Mixing Transaction NPRM altogether or to pursue a less invasive, less restrictive, and more effective approach—the same approach it has used since its first enforcement activities in the cryptocurrency space in 2013—to enforcement against specific bad actors.

1. FinCEN should exercise caution and either withdraw entirely or narrowly tailor the Mixing Transaction NPRM because if adopted, the Mixing Transaction NPRM would not only represent the first time FinCEN used its Section 311 powers against a class of transactions, but also the first time FinCEN has ever imposed Special Measure 1.

Historically, FinCEN has exercised caution in making designations under Section 311 and implementing Special Measures. Section 311 (31 U.S.C. 5318A), authorizes the U.S. Department of Treasury ("Treasury") to designate a foreign jurisdiction, financial institution, class of transactions, or type of account as being of "primary money laundering concern" and impose one or more of five possible "special measures." Treasury delegated that authority to FinCEN, which has used its power quite sparingly since Section 311's enactment. The first Section 311 action instituted by FinCEN in the virtual currency space occurred in 2013, when FinCEN instituted special measures against Liberty Reserve. Prior to that time, between 2002 and 2013, FinCEN had only ever implemented special measures against just four jurisdictions and 13 financial institutions. After a protracted legal battle regarding a Section 311 action between 2015-2017, FinCEN seemed reluctant to use its Section 311 powers widely. [3] The creation of the Global Investigations Division (GID) in 2019 [4] and the enactment of the Anti-Money Laundering Act of 2020, which increased FinCEN's authority "to prohibit or impose conditions upon certain transmittals of funds (to be defined by the Secretary) by any domestic financial institution or domestic financial agency," [5] coincided with an uptick in the use of Section 311 powers and a broadening of FinCEN's attention to all 5 available Special Measures.

Importantly, throughout its use of Section 311, FinCEN traditionally imposes Special Measure Number 5 to isolate a specific foreign financial institution and prevent it from accessing the U.S. financial system. Until this Mixing Transaction NPRM, FinCEN has only used Special Measure Number 1 one other time—in 2012 against JSC CredexBank ("Credex").[6] FinCEN later withdrew that proposed rule in 2016. [7] If adopted, the Mixing Transaction NPRM would constitute the first time FinCEN has imposed Special Measure Number 1 in exercising its Section 311 Powers. Moreover, this Mixing Transaction NPRM represents the very first time FinCEN has sought to designate an entire class of transactions as a primary money laundering concern. We encourage FinCEN to exercise extreme caution in the exercise of its Section 311 powers in such a novel way—the first-ever designation of a class of transactions and the first-ever imposition of Special Measure 1.

Exercising caution in Section 311 powers reflects the seriousness of Treasury's policy purposes for invoking its powers to make primary money laundering concern designations and impose special measures—namely, to act as a signal to the world that FinCEN is "serious about ensuring that the international financial system is safeguarded against the threat of money laundering." [8] As Treasury explained in the press release announcing the very first use of its Section 311 powers in 2002, when FinCEN uses Section 311, "[FinCEN] tell[s] the world clearly that these jurisdictions [or entities or transactions] are bad for business and that their financial controls cannot be trusted." [9] For the reasons further explained below, FinCEN's targeting of convertible virtual currency ("CVC") [10] purported "mixing" transactions does not achieve these aims. Rather than target transactions that are "bad for business," the Mixing Transaction NPRM targets an overly broad range of technical approaches used as best practices both by businesses and individuals for ensuring the security of CVC and impinges on privacy rights of legitimate users of CVC. In an attempt to exercise authority it has never used before (class of transactions) through a special measure it has never previously imposed successfully (special measure 1), FinCEN created a proposed rule fraught with misunderstandings and overreach. We urge FinCEN to withdraw the rule and reconsider its approach to this novel use of its authority.

2. The Mixing Transaction NPRM proposes a rule that is an improper and overbroad application of Section 311 measures to achieve transaction surveillance and suppression that FinCEN does not otherwise have a lawful basis to undertake.

Although the Mixing Transaction NPRM ostensibly designates a class of transactions as being of Primary Money Laundering Concern, its real goal is to uncover an alternative method for collecting information about and suppressing the use of digital currency in general. The Mixing Transaction NPRM is an improper and overbroad application of Section 311 measures for that purpose. Indeed, although the Mixing Transaction NPRM allegedly sanctions a class of transactions, it inconsistently throughout refers to "CVC mixers," "CVC mixing" and "CVC mixing services" by reference to specific business entities [11] and as a type of business model more generally.[12] If FinCEN has reason to believe specific entities conduct illicit activities, FinCEN could use the Section 311 powers it has traditionally and successfully used to target specific entities as financial institutions of primary money laundering concern. Such an approach offers a more targeted way to address actual money laundering while protecting legitimate users of legitimate privacy-enhancing tools.

Notably, Treasury has separately sanctioned what it refers to as CVC mixing transactions through its Office of Foreign Asset Control (OFAC) authority to designate people or property who conduct transactions with specifically designated foreign jurisdictions identified through executive order as posing terrorist threats. [13] Treasury is currently facing legal challenges to, and has been widely criticized for, its attempt to sanction the Tornado Cash open source software as property of a non-existent entity Treasury alleges is called "the Tornado Cash DAO entity." [14] Although we agree with the many arguments as to why Treasury's OFAC action with regard to Tornado Cash software is an example of agency overreach, we wish to make a different but related point here. To justify its OFAC sanctions against the Tornado Cash software, Treasury had to designate the software as property of an entity. [15] OFAC officially explained as part of defending its sanction to a judge that the Tornado Cash software was property under Treasury's regulations because it fell within the broad reach of "any contract whatsoever." [16] Although the definition of "transaction" under the BSA regulations is quite broad, it does not encompass "any contract whatsoever" but rather centers on monetary transfers and specific services offered by financial institutions, and provides a catch-all for "any other payment, transfer, or delivery by, through or to a financial institution, by whatever means effected." [17] No part of the definition applicable to CVC mixing is also a contract.[18]

In other words, in proposing the Mixing Transaction NPRM, one arm of Treasury is classifying CVC mixing as a transaction type while another arm of Treasury argues that mixing is a contract for services. Under the regulations governing both enforcement actions, mixing activity cannot be both a transaction type and a contract for service simultaneously. Treasury's attempt to designate mixing software as both a type of transaction and a contract is evidence of the arbitrary and capricious nature of its attempt to regulate open-source software that enhances the digital privacy of legitimate CVC users. To the extent that FinCEN really wants to target non-custodial, open-source software that individuals can use on their own accounts, FinCEN exceeds its statutory authority.

Indeed, tools that enhance digital privacy in CVC transactions simply seek to enable a form of digital cash. As a result, in its rush to find a way to suppress CVC mixing transactions, by whichever means, even if inconsistent amongst different internal branches of its own agency, FinCEN's Mixing Transaction NPRM amounts to an attempt to sanction "all transactions conducted in cash," which is both impossible and an unreasonable over-extension of its rulemaking authority.

3. The Mixing Transaction NPRM should be withdrawn because the proposed definition of "CVC mixing" is overbroad and targets lawful activity in a way that makes the agency's proposed action arbitrary and capricious.

Setting aside FinCEN's own apparent confusion about whether CVC mixing is a transaction, a service, a business, or a specific business entity, when FinCEN does attempt to define the "class" of transactions that it considers to be CVC mixing, the Mixing Transaction NPRM's definition of "mixing" is extremely broad and includes numerous activities routinely conducted by legitimate users as a matter of routine safety precautions in online transacting in CVC. Specifically, the Mixing Transaction NPRM provides:

The term "CVC mixing" means the facilitation of CVC transactions in a manner that obfuscates the source, destination, or amount involved in one or more transactions, regardless of the type of protocol or service used, such as: (1) pooling or aggregating CVC from multiple persons, wallets, addresses or accounts; (2) using programmatic or algorithmic code to coordinate, manage, or manipulate the structure of a transaction; (3) splitting CVC for transmittal and transmitting the CVC through a series of independent transactions; (4) creating and using single-use wallets, addresses, or accounts, and sending CVC through such wallets, addresses, or accounts through a series of independent transactions; (5) exchanging between types of CVC or other digital assets; [19] or (6) facilitating user-initiated delays in transactional activity. [20]

Indeed, most of the activities captured by the proposed definition of CVC mixing are considered established best practices within the industry for the use and safekeeping of CVC. Specifically, the proposed definition encompasses lightning transactions, single-use wallets, atomic swaps, decentralized finance protocols, privacy coin features, and multi-signature wallets, among other things. The main commonality among this broad range of software tools is that they enhance digital privacy and offer basic cyber-security techniques to owners or custodians of CVC. Employing these techniques to safeguard valuable digital assets is as routine and mundane and free of illicit purpose as using two-factor authentication to secure a digital wallet containing payment card information or an X (formerly Twitter) account to prevent an unauthorized announcement.[21]

4. The Mixing Transaction NPRM should be withdrawn because its inaccurate depiction of standard security practices as "mixing" impermissibly restricts the capacity of users to protect their property so that FinCEN can conduct a fishing expedition.

The proposed rule describes as red flags such everyday practices as "creating and using single address wallets" and "splitting CVC for transmittal." [22] The standard practice among cryptocurrency users is to change addresses with every transaction. For example, Coinbase Exchange describes to their users that: "[w]e automatically generate a new address for you after every transaction you make or when funds are moved between your wallet and our storage system. This is done to protect your privacy, so a third party cannot view all other transactions associated with your account simply by using a blockchain explorer." [23]

The fact that a small subset of users, who may be criminals, engage in the same operational security practices as ordinary users does not make those operational security practices suspect. The fact that criminals may use two-factor authentication to protect the security of their online applications does not mean that the use of two-factor authentication is itself an indicator or facilitator of criminal activity. In exactly the same way, the fact that users do not reuse Bitcoin addresses is merely indicative of basic operational security.

In an apparent recognition of the fact that these tools legitimately enable important cyber-security precautions, FinCEN exempts financial institutions from reporting on any of their own mixing transactions that they may conduct in the course of providing services to the public.[24] By exempting financial institutions from the rule, FinCEN creates a regime where financial institutions can take proper cyber-security measures for using CVC, but regular people cannot.

Perhaps even more problematic, throughout the Mixing Transaction NPRM, FinCEN justifies the proposed rule as necessary to enable law enforcement and the agency to better understand the transactions and the extent to which illicit activity occurs through CVC mixing. [25] The extraordinary and never before successfully invoked Section 311 power to designate a class of transactions and implement special measure 1 is not appropriate for use in a fact-finding mission. Employing such overly broad definitions as proposed in the Mixing Transaction NPRM for the purpose of authorizing an invasive fact-finding mission represents an arbitrary and capricious use of FinCEN's delegated rulemaking authority because FinCEN's justification for the rule lies outside of the statutory criteria for determining a class of transactions is of primary money laundering concern.

Specifically, FinCEN is statutorily required to consider the following factors when determining that a class of transactions is of primary money laundering concern: (1) the extent to which the class of transactions is used to facilitate or promote money laundering in or through a jurisdiction outside of the United States, including money laundering activity with connections to international terrorism, organized crime, and proliferation of WMDs and missiles; (2) the extent to which a class of transactions is used for legitimate business purposes; and (3) the extent to which action by FinCEN would guard against international money laundering and other financial crimes." [26] Throughout the Mixing Transaction NPRM, FinCEN acknowledges that due to a lack of data and a lack of understanding of CVC mixers, it cannot sufficiently assess the extent to which CVC mixing and the proposed rule measures up under any of these three criteria. [27] FinCEN's assessment ultimately boils down to: FinCEN does not have sufficient information to properly assess the statutory criteria required to justify the proposed rule, so the proposed rule is justified because, in FinCEN's own words, it "is necessary to better understand the illicit finance risk posed by CVC mixing." [28] Using a sanction to obtain the information necessary to justify imposing the sanction even when the agency knows that doing so will likely impose a high burden on legitimate uses and financial institutions is the definition of arbitrary and capricious regulatory action.

5. The Mixing Transaction NPRM should be withdrawn or significantly narrowed in scope because FinCEN's required statutory analysis fails to adequately value the legitimate uses of CVC mixing services and unduly burdens legitimate users and financial institutions.

FinCEN admits that public blockchains "make it possible to know someone's entire financial history on the blockchain" [29] and that it "recognizes that there are legitimate reasons why responsible actors might want to conduct financial transactions in a secure and private manner given the amount of information available on public blockchains." [30] Yet, in the same document, alleges that the Mixing Transaction NPRM is necessary because CVC "is not without its risks and, in particular, the use of CVC to anonymize illicit activity undermines the legitimate and innovative uses of CVC." [31] These two propositions cannot be simultaneously accurate.

As a matter of technical reality, FinCEN's assertion that public blockchains expose a user's entire financial history on the blockchain to the public for everyone to see and inspect is correct. [32] Indeed, that creates the fundamental need for legitimate CVC users to conduct CVC mixing transactions—to reintroduce the same level of financial privacy that they enjoy in the traditional financial system [33] to their transactions via CVC (for example, the traditional financial system does not expose a consumer's entire credit card history to the public, and indeed, federal law requires that financial institutions protect such information from being exposed to the public [34]). [35]

Ensuring their CVC transactions enjoy the same level of privacy as transactions in traditional finance reduces the potential danger of personal harm to legitimate users and enables legitimate users to avoid waiving their constitutional right to privacy. When the identity of a legitimate CVC user is known and connected to the wallets holding CVC assets, the user becomes a target for kidnap, robbery, extortion, and hacking schemes. [36] Further, because of this inherent transparency by design of public blockchains, the Fifth Circuit recently ruled that no expectation of privacy exists for users of permissionless public blockchains who take no additional action to privacy-protect their transactions. [37] Legitimate users employ privacy-enhancing software when transacting in CVC in order to avoid inadvertently waiving their constitutionally protected privacy rights.

Ultimately, FinCEN has completely failed in its obligation to adequately account for the impact on legitimate users as required by its rulemaking authority. In defending its selection of special measure 1 over 2 through 5, FinCEN emphasizes, without explanation, that special measure 1—additional record keeping—allows legitimate users to continue using privacy-enhancing software without interruption. [38] This is false, as covered entities must report on any transaction that may have involved CVC mixing and a foreign jurisdiction. Indeed, read broadly, it is possible that the rules proposed by the Mixing Transaction NPRM require reporting on transactions that involve CVC that were transacted through mixing software at any point in the asset's transaction history. Such reporting directly impedes the reasons for which legitimate users employ mixing software (to enhance financial privacy) by requiring the elimination of financial privacy (it is not a private transaction if an intermediary must surveil and report on the transaction). Software tools like mixers that enhance digital financial privacy provide a true electronic equivalent to cash. Notably, transactions in cash are not subject to rules such as those proposed in the Mixing Transaction NPRM. In an apparent acknowledgment of this deep and inherent conflict between the rules proposed by the Mixing Transaction NPRM and the legitimate uses to which legitimate users put CVC mixing software, FinCEN itself predicts that the rule will chill the use of CVC mixers.

6. The Mixing Transaction NPRM should be withdrawn because it requires covered financial institutions to perform law enforcement's function to accomplish FinCEN's AML goals, which FinCEN, DOJ, and law enforcement can achieve using existing tools when they have a proper legal basis to employ those tools.

Like the definitions of CVC mixing and CVC mixer, the Mixing Transaction NPRM's information reporting requirements demonstrate a deep lack of technological understanding. Notably, all of the transaction information that the Mixing Transaction NPRM proposes to include in required reports by covered financial institutions involves data that, in most circumstances, FinCEN can just as easily obtain itself through blockchain data analytics. Similarly, the customer information that FinCEN would require covered financial institutions to report includes the same kinds of information such institutions must already report if a transaction raises sufficient red flags to trigger the filing of a Suspicious Activity Report (SAR). Nevertheless, the Mixing Transaction NPRM seeks to require covered financial institutions to file such reports on every single transaction for which the CVC involved may have ever been transacted through the extremely broad set of software that FinCEN's proposed rule defines as CVC mixing software. In other words, because law enforcement investigations into activity involving CVC are sometimes more difficult, FinCEN seeks to impose broad surveillance of individuals without cause through covered financial institutions. Covered financial institutions should not have to become de facto law enforcement officers to make investigations easier for FinCEN.

FinCEN, the Department of Justice, and law enforcement have previously and successfully employed the very tools FinCEN asks financial institutions to use for reporting compliance under the Mixing Transaction NPRM to target specific illicit actors. FinCEN has demonstrated that it knows how to properly investigate and enforce against specific custodial CVC mixing service providers that are not complying with the regulations to which they are subject. Specifically targeting illicit actors about which FinCEN and law enforcement have built a clear, strong case using the available blockchain data analytics tools better balances the need to combat illicit CVC mixing with the legitimate use of CVC mixing by individuals seeking to protect their legitimate, constitutionally and statutorily protected privacy interests.

For all of the reasons discussed above, we urge FinCEN to withdraw the Mixing Transaction NPRM altogether.

Thank you for your consideration.

If you have any questions or would like additional information, please see the contact information below:

Rafael Yakobi, Esq.
Managing Partner
The Crypto Lawyers, PLLC.
rafael@thecryptolawyers.com
(619) 317-0722

Sincerely,

Samourai Wallet, Ten31, River, Strike, RoninDojo, Swan Bitcoin, Primal, GRIID, Zaprite, Peach, Mempool Space, Upstream Data, Stakwork, Vida Global, Voltage, Coinkite, Mutiny Wallet, Standard Bitcoin Company, Satoshi Energy, Cathedra Bitcoin, AnchorWatch, Bitnob, Oshi, Battery Finance,Fold, Start9

1. FinCEN, Proposal of Special Measure Regarding Convertible Virtual Currency Mixing, as a Class of Transactions
   of Primary Money Laundering Concern, Dkt. FINCEN-2023-0016 (Oct. 22, 2023) https://www.fincen.gov/sites/default/files/federal_register_notices/2023-10-19/FinCEN_311MixingNPRM_FINAL.pdf [hereinafter Mixing Transaction NPRM”] ↩︎
2. In this regard, we intend this letter to specifically respond to FinCEN’s request for comments A(1)-(8), B(2)-(3), C(1), D(2), and D(11) as listed in the Mixing Transaction NPRM. ↩︎
3. See FBME Bank Ltd. v. Lew, 125 F. Supp. 3d 109 (D.D.C. 2015); FBME Bank Ltd. v. Lew, 142 F.Supp.3d 70 (D.D.C. 2015); FBME Bank Ltd. v. Lew, 209 F.Supp.3d 299 (D.D.C. 2016); FBME Bank Ltd. v. Munchin, 249 F. Supp.3d 215 (D.D.C. 2017). ↩︎
4. FinCEN, Press Release, New FinCEN Division Focuses on Identifying Primary Foreign Money Laundering Threats (Aug. 28, 2019),https://www.fincen.gov/news/news-releases/new-fincen-division-focuses-identifying-primary-foreign-money-laundering-threats. We note with some alarm that the timing of GID’s creation coincided with the release of FinCEN’s 2019 CVC guidance, indicating that perhaps the two were coordinated and greater targeting of CVC users has been underway for some time. ↩︎
5. 2021 NDAA, Section 9714, https://www.congress.gov/116/bills/hr6395/BILLS-116hr6395enr.pdf. ↩︎
6. 77 Fed. Reg. 31,794 (Mar. 30, 2012). ↩︎
7. 81 Fed. Reg. 14,408 (Mar. 17, 2016). ↩︎
8. U.S. Dept. Treas., Press Release, Fact Sheet Regarding the Treasury Department’s Use of Sanctions: Authorized Under Section 311 of the USA PATRIOT ACT (Dec. 20, 2002), https://home.treasury.gov/news/press-releases/po3711. ↩︎
9. Id. ↩︎
10. We note that we dislike the term convertible virtual currency, as it does not fit industry understanding of the technical realities of cryptocurrencies and their many uses. We use the term in this letter only because it is the language that FinCEN has adopted for the implementation of its regulations. As an aside, we would encourage FinCEN to adopt more technically accurate vocabulary for implementing its regulations, as doing so would help FinCEN avoid proposing unworkable and overbroad regulations such as the Mixing Transaction NPRM. ↩︎
11. See, e.g., Mixing Transaction NPRM, supra note 1, at 15 (“ChipMixer, a darknet CVC ‘mixing’ service”); 16 (referring to Bestmixer.io as a CVC mixing transaction); 20 (referring to enforcement against “Bitcoin Fog”). ↩︎
12. See, e.g., id. at 5 (“persons who facilitate…CVC mixing transactions”); 18 (“RAILGUN falls under the umbrella of CVC mixing…because it uses its privacy protocol to manipulate the structure of the transaction to appear as being sent from the RAILGUN contract address, thus obscuring the true originator.”); 20 (“CVC mixing services often deliberately operate opaquely…”.) ↩︎
13. U.S. Dpt. Treas., Press Release, U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916. ↩︎
14. See, e.g., Van Loon et. al., v. OFAC, No. 23-506669 (5th Cir. 2023) (notably, a variety of amici intervened with arguments critiquing the OFAC sanction at both the District Court and 5th Circuit Court of Appeals); Peter Van Valkenburgh, New Tornado Cash Indictments Seem to Run Counter to FinCEN Guidance, CoinCenter (Aug. 23, 2023), https://www.coincenter.org/new-tornado-cash-indictments-seem-to-run-counter-to-fincen-guidance/. ↩︎
15. OFAC, FAQ 1095, https://ofac.treasury.gov/faqs/1095 (“OFAC designated the entity known as Tornado Cash, which is a “partnership, association, joint venture, corporation, group, subgroup, or other organization” that may be designated pursuant to the IEEPA.”). ↩︎
16. See, Order, Van Loon et. al. v. Dpt. Treas., 1:23-CV-312-RP at 18 (W.D. Tx. Aug. 17, 2023). ↩︎
17. 31 CFR 1010.100(bbb)(1). “Except as provided in paragraph (bbb)(2) of this section, transaction means a purchase, sale, loan, pledge, gift, transfer, delivery, or other disposition, and with respect to a financial institution includes a deposit, withdrawal, transfer between accounts, exchange of currency, loan, extension of credit, purchase or sale of any stock, bond, certificate of deposit, or other monetary instrument, security, contract of sale of a commodity for future delivery, option on any contract of sale of a commodity for future delivery, option on a commodity, purchase or redemption of any money order, payment or order for any money remittance or transfer, purchase or redemption of casino chips or tokens, or other gaming instruments or any other payment, transfer, or delivery by, through, or to a financial institution, by whatever means effected.” ↩︎
18. Notably, in the Mixing Transaction NPRM, FinCEN refers to Tornado Cash as a “CVC mixer,” not as a CVC mixing transaction. Is mixing a transaction? Is mixing a contract? Is mixing a type of business? The fact that FinCEN cannot decide belies the inappropriateness of using its Section 311 sanctions as proposed. ↩︎
19. We note that the Mixing Transaction NPRM does not include a definition of “other digital assets” anywhere. Further, we are unaware of any definition of “digital assets” in FinCEN’s regulations or guidance. Finally, it is not clear to us how FinCEN has authority to impose regulatory reporting requirements upon exchanges of CVC for digital assets that are not CVC. See FinCEN, Application of FinCEN’s Regulations to Persons Administering, Exchanging or Using Virtual Currencies, FIN-2013-G001 (Mar. 18, 2013) (the phrase “digital assets” appears nowhere in the 2013 Guidance); FinCEN, Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies (May 9, 2019) (the only time that the phrase “digital assets” appears in the 2019 Guidance is in footnote 75 in reference to the title of the SEC “Framework for Investment Contract Analysis of Digital Assets”). This is just another small but notable way in which FinCEN seeks to overreach its authority through the Mixing Transaction NPRM. ↩︎
20. Mixing Transaction NPRM, supra note 1, at 30-31. ↩︎
21. True Tamplin, How to Protect Your Digital Wallet from Cyber Threats, Forbes (Dec. 19, 2023, 2:00 pm EST), https://www.forbes.com/sites/truetamplin/2023/12/19/how-to-protect-your-digital-wallet-from-cyber-threats/?sh=1e9146825981 (noting the importance of 2FA for securing digital wallets). ↩︎
22. Mixing Transaction NPRM, supra note 1, at 30-31. ↩︎
23. See https://help.coinbase.com/en/exchange/managing-my-account/crypto-address-change ↩︎
24. Mixing Transaction NPRM, supra note 1, at 31. ↩︎
25. See, e.g., id. at 24 (“Furthermore, the information generated by this special measure would support investigations into illicit activities by actors who make use of CVC mixing to launder their ill-gotten CVC by law enforcement. At present, there is no similar or equivalent mechanism possessed by law enforcement to readily collect such information, depriving investigators of the information necessary to more effectively understand, investigate and hold illicit actors accountable.”). ↩︎
26. 31 U.S.C. 5318A(a)(1). ↩︎
27. See Mixing Transaction NPRM, supra note 1, at 19 (not enough data to know how much CVC mixing is used in money laundering); 22 (not enough “available transactional information” for FinCEN to “fully assess the extent to which or quantity thereof CVC mixing activity is attributed to legitimate purposes”); 22 (essentially claiming that FinCEN’s lack of information itself is reason enough to show that getting more information would guard against international money laundering). ↩︎
28. Id. at 23. ↩︎
29. Id. at 7. ↩︎
30. Id. at 21. ↩︎
31. Id. at 6-7. ↩︎
32. Matthias Nadler & Fabian Schar, Tornado Cash and Blockchain Privacy: A Primer for Economists and Policymakers, 105 Fed Res. Bk. St. Louis Rev. 122 (2023); Vitalik Buterin, et. al., Blockchain Privacy and Regulatory Compliance; Towards a Practical Equilibrium (Sept. 9, 2023) (unpublished manuscript), ↩︎
33. See, e.g., 12 U.S.C. §§ 3401-3423 (the Right to Financial Privacy Act of 1978 (RFPA), which protects the confidentiality of personal financial records by creating a statutory fourth amendment protection for bank accounts). ↩︎
34. 16 C.F.R. Part 314, 67 Fed. Reg. 36484 (May 23, 2002) (FTC rule addressing the requirement that covered financial institutions safeguard non-public information”) ↩︎
35. Matthias & Schar, supra note 32. ↩︎
36. For a documented timeline of physical attacks on Bitcoin users, see Known Physical Bitcoin Attacks, GitHub
    https://github.com/jlopp/physical-bitcoin-attacks/blob/master/README.md (last visited Jan. 22, 2024). ↩︎
37. See United States v. Gratowski, No. 19-50492 (5th Cir. 2020). ↩︎
38. Mixing Transaction NPRM, supra note 1, at 25 (special measure 1 is the only special measure that will preserve “legitimate actors’ ability to continue conducting secure and private financial transactions.”). ↩︎

Read original post

After months of hype and several highly entertaining false starts, the SEC finally approved 11 spot bitcoin ETFs on Wednesday of this week – exactly 15 years after Hal Finney’s iconic “running bitcoin” tweet – with trading commencing the following day. While the dust has yet to settle on exactly how early flows will shake out and the market’s hysterics leading up to the approval were undoubtedly a sideshow, we do expect these vehicles will make it easier for traditional pools of capital to flow into bitcoin, with positive implications for bitcoin’s price over time. More importantly, though, these ETFs represent the latest piece of clear evidence of Ten31’s thesis that bitcoin is eating the world. After years of deriding bitcoin as not just uninteresting but even outright harmful, the leaders of the legacy financial system just spent the last several weeks in a sprint to not only secure approval for their bitcoin ETFs but also to outdo each other in extolling bitcoin’s unique virtues on mainstream news appearances. Most notably, Larry Fink, who just a few years ago called bitcoin an “index of money laundering,” took to multiple broadcasts to promote bitcoin as an “asset that protects you.” 

[

Bitcoin is Eating the World

An Investor’s Case for the Biggest TAM on Earth.

TFTC – Truth for the CommonerJohn Arnold

](https://tftc.io/bitcoin-is-eating-the-world/)

While Larry clearly still doesn’t fully get it, this diametric shift in tone is emblematic of the fact that, sooner or later, every self-interested economic actor will have to embrace bitcoin. We expanded on the derivative implications of this reality in a longform piece out this week titled Bitcoin is Eating the World, where we walk through what growing mainstream acceptance of and interest in bitcoin means for the still highly underappreciated bitcoin infrastructure ecosystem. The ETFs are certainly a bullish milestone and signpost, but they are still just a very early indication of the wave of mainstream adoption we see coming over the next decade, and this wave will have seismic implications for early investors in bitcoin’s enabling technologies. 

Portfolio Company Spotlight

Unchained, Strike, Coinkite, Mempool.space, and AnchorWatch are all great examples of products and services that allow anyone to easily buy, protect, and use bitcoin in a native and optimally secure way. Strike and Unchained provide intuitive and high quality on-ramps for both small and large purchases of verifiable, on-chain bitcoin; Coinkite offers the most secure, battle-tested way to protect bitcoin without the layers of counterparty risk inherent in an ETF and offers product for users of all skill levels; Mempool.space gives users unmatched data to make smart decisions about their bitcoin transactions; and platforms like Unchained and AnchorWatch allow for additional layers of abstraction that combine minimized counterparty risk with an easy, hands-off experience for clients. The technology supporting native use of bitcoin is still in its early days, but many companies in the Ten31 portfolio have already rolled out offerings that can collectively provide the same easy UX of ETF ownership with substantially better security guarantees. 

Selected Portfolio News

Unchained offered an update on its 2024 roadmap:

Unchained also announced a new institutional lending program:

Media

Strike Founder and CEO Jack Mallers appeared on Bloomberg TV to discuss the impact of the bitcoin ETF approvals. 

Parker Lewis, Ten31 Advisor and Zaprite Head of Business Development, joined the Bitcoin Frontier podcast to discuss some of his recent work. 

Market Updates

After ten years since the first filing, months of speculation in 2H 2023, and countless Twitter Spaces discussions by newly-minted ETF experts, the SEC finally approved 11 spot bitcoin ETFs (after an errant tweet fiasco from its account, which apparently did not have 2FA). 

All filings from major issuers including BlackRock, Fidelity, Ark, Bitwise, and more were approved, and those institutions issued late-breaking filings early in the week to reduce fees to near-zero levels, presumably indicating expectations for substantial flows over time. BlackRock and Fidelity lowered their fees to 25bps, and most issuers are offering no fees for the first 3-6 months. 

As expected, the products broke records for day one ETF launches, with total volume across the vehicles exceeding $4.6 billion (and ~$2.5 billion net of GBTC activity). 

Multiple legacy finance executives took to mainstream airwaves to promote bitcoin, with Larry Fink calling it “an asset that protects you” and WisdomTree CEO Jonathan Steinberg noting its 15-year track record is “superior to every other asset class.”

The week also saw a few notable updates on the macro front, as the CPI reading for December 2023 came in above expectations, potentially complicating the recently growing consensus around near-term Fed rate cuts. 

That said, New York Fed President John Williams indicated earlier in the week that, in the Fed’s view, rates are now sufficiently high to get price inflation back to the central bank’s ostensible 2% target. 

In the latest negative headline for commercial real estate, vacancy in US offices hit a new record of nearly 20% last year, the highest level on record since 1979. 

Banks’ use of the Fed’s BTFP Facility – allegedly set to expire in March – soared to another high this week, as banks continue to arbitrage the spread between BTFP borrowing costs and interest paid on reserves at the Fed.

Regulatory Update

In its latest effort to make itself as irrelevant to global finance as possible, the UK’s Financial Conduct Authority (FCA) enacted new regulations that will require retail investors to pass a series of certifications and tests before being able to use centralized cryptocurrency exchanges. 

Noteworthy

BitWise, issuer of the BITB spot bitcoin ETF, announced it would donate 10% of its profits from ETF fees to OpenSats for the next 10 years to help fund bitcoin and open source software development. VanEck, issuer of the HODL ETF, announced a similar 5% donation to Bitcoin Core development through Brink. 

Multiple new Nostr-based media hosting applications have been released over the past several weeks, including an image hosting service and a video-sharing and directory application called Flare.

While BlackRock executives were busy pumping their bitcoin ETF this week, the Financial Times noted its various ESG initiatives have experienced a “catastrophic” decline in support among asset managers. 

Travel

• Nashville BitDevs and Bitcoin Meetup, January 16-17
• Nashville Energy and Mining Summit, January 18-19
• Austin BitDevs, February 15

Learn more about Ten31, our investment thesis, portfolio companies, and funds by visiting our website.

Read original post

In the few centuries since the inception of the joint-stock company, equity investors have developed a toolbox of intermittently useful frameworks and heuristics for evaluating potential investments. Some focus on valuation, guided by the mantra that there’s always a price at which any investment can become attractive. Others anchor to market leadership, arguing that more often than not, you’ll succeed just by backing the best of the best. But one theme that unites virtually all investors is the search for large total addressable markets (or “TAM”). Explicitly or implicitly underpinning all discussions of valuation, competitive analysis, and projected run-rate profitability is this basic question of TAM: at the end of the day, how big is the prize? 

This obsession with TAM, especially prevalent among earlier-stage investors, stems from a simple expected value calculation any investor naturally has to make when deploying capital. For a given probability of success and holding all else equal, a larger addressable market translates to a greater revenue opportunity and a higher probability-adjusted return on investment. TAM is far from the only factor that explains investment returns, but it is a very powerful lever – it is almost always better to be a decent company in a fantastic market than a fantastic company in a middling market, as operational efficiency and defensible share will only get you so far if your market has reached its natural ceiling. 

A few decades ago, internet-enabled software began, in the memorable phrasing of Marc Andreessen, “eating the world.” Said another way, its TAM exploded. Internet-enabled software’s addressable market became one of the largest of any industry because its dematerialization of previously physical products and services collapsed the marginal cost of information storage and transfer, opening up new ways of producing and consuming that would eventually impact every business and consumer in the world. This became the foundation for arguably the most successful investing theme of all time: riding the software wave up.

By now, this is a decidedly consensus view among investors, but what remains highly underappreciated by virtually all market participants is that we currently stand on the precipice of another even more disruptive theme: today, bitcoin is eating the world. Just as software and the internet dematerialized information and communication, bitcoin has dematerialized the most fundamental primitive of economic interaction – money itself – and consequently opened up step-function improvements and entirely new applications across industries. And since money is half of every transaction and commerce at virtually every scale is dependent on and downstream from it, bitcoin’s addressable user base will ultimately extend, like the internet before it, to every person on the planet. 

As software ate the world, the greatest economic beneficiaries were the companies that carved out durable market positions as providers of software infrastructure and software-powered services, as well as the incumbents that moved first to adapt to this sea change. As bitcoin eats the world, the same will be true of innovative startups and forward-thinking blue chips that embrace bitcoin and leverage its unique capabilities. Internet-enabled software’s TAM is massive, but if bitcoin follows a similar adoption curve, then bitcoin infrastructure will become the biggest TAM on earth, and equity in the ecosystem’s bellwether companies will become the next generational investing theme. Crucially, though, few investors have yet to fully realize what’s about to happen – unlike in August 2011, when Marc Andreessen wrote his famous piece and many could already see the writing on the wall, this thesis is currently well outside consensus, meaning the asymmetric upside opportunity for those investing in bitcoin infrastructure today will be orders of magnitude greater. 

Why is bitcoin eating the world?

We acknowledge this will sound like a bold claim to many investors, but we believe it is also set to become an increasingly consensus view over the next decade. If we’re right about bitcoin’s ultimate fate, the rest of our thesis at Ten31 falls neatly into place, as we’ll show below. So why do we believe bitcoin will eat the world?

Most simply, bitcoin is superior monetary technology, and as knowledge of it distributes over time, there is no self-interested economic actor in the world that will be able to ignore it. 

As (i) parabolically growing global debt necessitates accelerating debasement of even the most stable fiat currencies, (ii) price inflation across both essentials and durable assets marches higher, and (iii) more governments and banks around the world move to seize deposits and censor payments, the value of the properties above will become abundantly clear to billions (in most cases this will be an instinctive realization rather than an academic one). Even if these trends were all to reverse tomorrow, the superiority of bitcoin’s monetary properties would still tend to push its adoption forward, as economic actors will always prefer to store more rather than less wealth over time and will converge on using and saving in the currency that best facilitates that goal (at the expense of both fiat currencies and “altcoins” that fail to effectively compete with bitcoin as money). 

Fifteen years in, bitcoin has now withstood a barrage of stress tests that have both demonstrated and increased its resilience, an incomplete list of which includes: four 80%+ price drawdowns; massive exchange hacks, bankruptcies, and rugpulls; “bans” by large sovereigns like China; and contentious hard forks of its code. These stressors help illustrate bitcoin’s antifragility, and each shock it survives boosts confidence in the network and the likelihood that bitcoin will continue to survive, thus drawing in more users and further increasing resilience in a virtuous cycle (the “Lindy effect”). This phenomenon can be directly observed in bitcoin’s on-chain data through “HODL Waves,” which illustrate a consistently growing proportion of bitcoin buyers turning into long-term holders:

Like the internet, bitcoin has dematerialized a fundamental pillar of economic interaction – in this case, monetary bearer value itself – and the two technologies’ adoption curves look remarkably similar. But while the benefits of the internet’s early incarnations were more abstract, bitcoin comes with a powerful adoption incentive baked in: the opportunity for rapid and unmatched accrual of purchasing power over time (or more colloquially, “Number Go Up”). Early adopters will reap outsized and compounding rewards from this trend (i.e. a greater share of finite available bitcoin) at the expense of laggards, incentivizing a self-perpetuating rush to move first. Inherent in bitcoin’s design, then, is its own engine of adoption growth. The only winning move is to play.

A comprehensive case for bitcoin’s monetization is beyond the scope of our current focus, but we encourage interested readers to dive deeper in the suggested reading highlighted at the end of this piece. Suffice to say that the investment case for bitcoin’s continued adoption and monetization is highly compelling, and we therefore expect its ultimate user base to be virtually everyone in the world. 

If bitcoin’s addressable user base is this large, then there will be a titanic wave of demand for new services increasing bitcoin’s ease of use and utility (the “picks and shovels”), giving rise to a generation of new innovators.

Bitcoin’s design makes a set of trade-offs that collectively enable the best monetary technology in history, but as with any emerging, paradigm-shifting technology, accessing and using it effectively are not always intuitive for newcomers. Anyone first coming to bitcoin, even if they’re constructive on its potential as a store of value or permissionless means of payment, likely confronts a series of questions right away: What exactly is this thing? How does it work? How can I get some? How do I store it safely and send it cost-effectively? What else could I do with it? 

Bitcoin today is in a similar phase of its life cycle as the internet in the early 1990s, when the befuddled hosts of the Today Show famously asked “What is internet?” By that point, at least 10-20 million people were already using the internet, yet it remained a totally inscrutable tool to most mainstream observers. To take a bearish view on this technology because it was difficult for casual users would have been a terrible trade – the right question was just how long it would take for developers and innovative businesses to build approachable tooling and applications on top of the fundamental primitives of the internet protocol stack. That work would be carried out over the following decade with the proliferation of browsers (Netscape, Internet Explorer) built on easy, point and click graphical user interfaces (Windows, MacOS) offering access to applications and websites enabling previously inconceivable modes of interaction and commerce (Google, Amazon, Netflix, Facebook, thousands more). Less than 15 years after that Today Show clip, most Americans would have a miniature internet-enabled computer with them at all times. 

If bitcoin’s superior monetary properties continue to drive its growing adoption along a curve that looks roughly like the internet’s, then demand for acquiring, securing, and using bitcoin will naturally support demand for tooling, applications, and infrastructure to make all of that easy and practical for consumers and enterprises. This opens up significant opportunities for innovators to build businesses catering to this demand, with early movers like the companies in the Ten31 portfolio set to reap outsized rewards as they amass reputation, brand power, and network effects. In essence, this is the classic “picks and shovels” play, whereby investment in the enabling technologies supporting a major secular shift can provide levered returns on the underlying theme, like selling equipment to gold miners during a gold rush, oilfield services businesses that enabled the early days of oil and gas extraction, or modern tech titans that built the user-friendly tools anyone reading this takes for granted today. 

Moreover, just as with software, the addressable verticals available to bitcoin infrastructure investors will also proliferate and compound as adoption grows and the application ecosystem becomes more sophisticated. Use cases and business models that are inconceivable today will become multi-billion dollar opportunities in short order in the same way that cloud computing  – which depended on prior advancements in server architecture, network connectivity, and more – went from a ~$10 billion market to a half-trillion dollar revenue category over the past decade. Similarly, businesses like ServiceNow, Salesforce, and Shopify (all worth more than $100 billion) didn’t even exist at the turn of the century and couldn’t have gotten off the ground without work done by earlier innovators. 

We’re already seeing many examples of these dynamics within the nascent bitcoin infrastructure market and in our own portfolio. Products like Strike’s Global Wallet, Coinkite’s Tapsigner, and Fedimint applications being built by Fedi and Mutiny are making bitcoin and the lightning network intuitive and accessible for billions of consumers, often in ways that require little direct interaction with bitcoin. Similarly, Unchained’s collaborative custody network and AnchorWatch’s bitcoin insurance platform bypass the technical burdens and black-box counterparty risks that have plagued bitcoin custody for much of its short history, laying the foundation for widespread institutional and enterprise adoption of bitcoin as a treasury asset. Few of these applications were on anyone’s radar as commercial use cases even five years ago, but the outlines of the value they will generate over the next decade are already coming into view. 

Back in 2011, Marc Andreessen noted that internet-enabled software was taking off partially because “all the technology finally work[ed]” and could be “widely delivered at global scale.” We’re not quite there yet with all of bitcoin’s enabling technology, but the products above are clear evidence we’re getting much closer, and the companies building the infrastructure to make that a reality are in position to become behemoths. The first-order opportunity of this theme alone is likely in the trillions as bitcoin adoption advances parabolically upward, carrying bitcoin-native technology companies with it. 

If this wave of new innovators emerges on the back of exploding adoption, then incumbents across industries will have to adapt, eventually becoming “bitcoin companies” themselves.

The “picks and shovels” thesis will prove to be a rich investing theme by itself, but it’s only the tip of the iceberg. Money is half of every transaction, so if bitcoin adoption proceeds as we expect, it will eventually touch virtually all economic activity in the world directly or indirectly. This tectonic shift in monetary technology is a trend that no commercial entity will be able to ignore indefinitely. Just as every company effectively had to become an “internet company” over the past few decades to both leverage the new capabilities offered by internet-enabled software and to keep pace with upstart competitors doing the same, so too will every business have to become a “bitcoin company” in some way to remain relevant. This will drive trillions of dollars of disruption to existing business models and open up massive new surface area for forward-thinking investors in bitcoin infrastructure. 

The most obvious industries that will need to adapt include:

• Payments infrastructure: In contrast to legacy fiat payments systems’ reliance on the transfer of credit obligations to facilitate transactions, bitcoin allows for the nearly instant transfer of digital bearer value anywhere in the world, bringing the settlement finality of physical cash transactions into the digital world. Bitcoin over lightning – pushed forward by innovators like Strike and IBEX – eliminates the need for credit transfers and delayed settlement, which will have stark implications for the vast array of middlemen and counterparties that have sprung up in the past century to manage those credit flows. In general, any business that sells immediately consumed resources (from bandwidth to telecom services to GPU compute) but only receives final settlement for those resources well after the fact will be transformed by instantly settled bearer value.   
• International remittances and FX: Bitcoin’s global, borderless value transfer network – which operates 24/7/365 and has achieved 99.99% uptime since inception – offers users an unprecedented settlement rail for international transactions. Cross-border payments drive over $150 trillion of annual transaction volume, but final settlement can cost as much as 5-10% and take weeks in some cases. Bitcoin infrastructure companies like Strike, IBEX, and Bitnob can facilitate the same types of transactions for a tiny fraction of the cost while providing final settlement in minutes or less, complete with local currency conversion at both endpoints, a massive challenge to the financial intermediaries that currently dominate cross-border payment flows. 
• Asset management and custody: Bitcoin’s purely digital, cryptographically secured properties mean that, unlike any other asset in the world, its custody can be both distributed and permissionless. Unlike gold or real estate, it doesn’t have to be “located” in any one place; and unlike stocks, bank deposits or other financial contracts, it can benefit from custodial support without surrendering to custodial permissions thanks to multisignature quora and miniscript. As bitcoin’s adoption and purchasing power increase, all financial service providers catering to high net worth individuals or institutional treasuries will need to add bitcoin to their clients’ portfolios, and they will need to find ways to offer the unique benefits of proper bitcoin custody via service providers like Unchained and AnchorWatch.
• Credit and lending: Bitcoin’s fungibility, global 24/7 liquidity, instant settlement capabilities, and customizable ownership schemes make it pristine collateral. Bitcoin can be held in multi-party custody with tiered permissions, simultaneously allowing a borrower to verify their collateral is safe and a lender to quickly liquidate that collateral in a margin call. Unchained and Debifi are pioneering this lending model, and Unchained’s lack of loan losses despite bitcoin’s substantial volatility through the company’s 5+ year history speaks to the power of this offering for traditional lending businesses. Bitcoin’s substantial expected price upside (inevitable if adoption proceeds as we expect) also paves the way for compelling return profiles for creative lenders like Battery Finance.

The second-order implications for industries well outside the sphere of payments and finance are just as substantial, and the effects are already becoming evident in markets as diverse as:

• Oil and gas: Energy producers, including oil majors like Exxon and ConocoPhillips, are increasingly recognizing bitcoin mining’s potential to monetize otherwise wasted resources like vented or flared gas, and we expect this convergence to accelerate over the coming decade since mining represents a unique and unprecedented source of revenue for the energy industry, and oil & gas producers are naturally positioned as the lowest-cost power sources for the hyper-competitive business of mining. Companies like Upstream Data and Giga Energy are well positioned to capitalize on this trend as more of the traditional oil & gas industry gravitates toward bitcoin. 
• Utilities and power: Power grids have become progressively more intertwined with bitcoin mining over the past few years, as mining represents a unique flexible power load that – unlike traditional data centers – can be switched off and back on almost instantly to accommodate a grid’s unpredictable needs (a process known as “load balancing”). Some publicly traded miners like Riot Platforms have made headlines through their participation in these flexible load programs, and emerging players like GRIID and Standard Bitcoin are ramping up this strategy with utilities throughout the US as well. We expect the success of these programs to drive an increasing convergence of bitcoin mining and electrical utilities both domestically and internationally. 
• Consumer applications: A wide variety of new ways for consumers to interact with bitcoin have come to market just since the last halving. The bitcoin-gaming convergence (exemplified by platforms like Zebedee and THNDR) is becoming much more widespread, as are consumer loyalty applications like Fold’s that pay out rewards points denominated in bitcoin, a concept Fold is set to scale up with a white-label enterprise SaaS product in the near term. Meanwhile, Primal, Vida, and a host of Podcasting 2.0 platforms are using bitcoin to allow content creators and brands to instantly earn and pay for content and attention through micro-transactions that are not possible over traditional fiat rails. Importantly, most of these use cases require no prior knowledge of bitcoin to get started, but rather leverage bitcoin’s properties as a means to an end. Brands, content creators, game developers and more will be progressively drawn to using internet-native money to drive customer acquisition and engagement over the coming decade.

And even these verticals are still just scratching the surface. As we’ve addressed extensively elsewhere, the rapidly growing ecosystem of generative artificial intelligence technologies will converge with bitcoin and lightning in the near future thanks to bitcoin’s digitally native instant settlement assurances and high divisibility, which differentiate it from both fiat and altcoins and make it the ideal way to pay for AI compute resources. The last year has shown many early examples of that convergence, including the release of the L402 toolkit to help developers unlock the unique properties of lightning payments for AI applications, as well as the emergence of Nostr Data Vending Machines, a technique using lightning and nostr to outsource data processing requests to competing AI agents. Companies already expressing this theme in the Ten31 portfolio include StatMuse, which pioneered the use of Natural Language Processing (NLP) for sports data search and plans to integrate generative AI tools and bitcoin micropayments into upcoming products, and Stakwork, which has been combining AI training workflows with instantly-settled lightning payments for several years. As the internet-native money of the future, bitcoin will be instrumental in powering the machine-payable web and the emerging economy of autonomous agents – if you’re bullish on AI, you should be just as bullish on bitcoin infrastructure. 

The key intuition uniting all of these examples is that providing instant settlement of borderless bearer value is a unique and unprecedented phenomenon with derivative implications for every industry, and it will inexorably pull businesses that currently have nothing to do with bitcoin into bitcoin’s orbit. And as all these examples illustrate, this is not just speculation — we are watching it play out in real time across our portfolio. Bitcoin’s influence on a growing list of industries will lead to acquisitions of today’s foremost bitcoin companies, in addition to expanded addressable markets for bitcoin infrastructure investors as regular companies integrate bitcoin around the edges in their legacy businesses. To paraphrase Andreessen again: companies in every industry need to assume that a bitcoin revolution is coming. 

If bitcoin both creates new categories worth trillions and forces all legacy industries to adopt it in some way, then bitcoin infrastructure will become the biggest TAM on earth.

What might this bitcoin revolution look like in practice for the companies pushing it forward? As a very rough, incomplete guidepost for the kind of value capture this secular shift could generate, it might be instructive to look at the revenue generated by all the industries discussed above. If bitcoin infrastructure captures even 1% of the annual revenue of those massive industries, whether through establishing a place in their value chains or outright displacing legacy business models, it will be well on its way to becoming one of the biggest categories in the world.

Unlike any of these individual industries, bitcoin companies can capture a cross-section of all these disparate verticals thanks to monetary technology’s universal influence on all commerce. Even if bitcoin infrastructure captures only a minimal fraction of its most immediately addressable revenue pools – putting aside longer-term revenue opportunities like AI or telecommunications – it would still rival the size of the ~$200 billion SaaS market. Meanwhile, there’s a compelling case that bitcoin infrastructure should capture quite a bit more value in many of these categories, particularly those related to financial services. 

But even that still only tells part of the story. Crucially, most of the applications we’ve discussed in this piece were fundamentally impossible before the advent of instantly settled, highly divisible, globally liquid, digitally native bearer money. This means that bitcoin infrastructure won’t just capture some portion of the existing pools of value discussed here, but also – like the internet before it – create totally new ones, which in turn means that despite the massive opportunity already at hand, many of the largest “bitcoin industries” of the future have yet to emerge. We might compare this dynamic to Netflix’s displacement of Blockbuster, which didn’t just siphon off the incumbent’s revenue base but dramatically expanded it through technology that was previously unavailable, or to the launch of the iPhone, which not only kicked off parabolic growth in the smartphone market but also laid the foundation for the more than $1 trillion of revenue built on previously nonexistent mobile app stores. 

Taken together, bitcoin’s “picks and shovel” opportunities, its inevitable permeation into virtually all existing businesses, and the totally new industries its unique properties can enable will make bitcoin infrastructure the biggest TAM on earth over the coming decades. To return to the framework established earlier, this means equity investors focused on bitcoin infrastructure benefit from a massive advantage that should drive superior risk-adjusted returns – the prize is simply bigger here than anywhere else. 

Finally and importantly for any investor evaluating these claims: the market still has yet to fully appreciate the implications of this thesis. Given that only a few hundred million dollars have been deployed into companies focused on bitcoin, whereas well over $25 billion have been channeled to the broader “crypto” ecosystem, it is safe to say virtually every capital allocator around the world is substantially underweight bitcoin infrastructure. Those that recognize the opportunity now will not only have access to some of the most compelling investments of the coming decade, but will compound their returns by front-running the flood of capital that will eventually arrive as this theme becomes more obvious. Even if there’s only a 1% chance our view is correct, the potential asymmetric upside of moving first is too great for any responsible capital allocator to ignore. At Ten31, we have already deployed over $100 million into this thesis, and we are just getting started.

To quote Andreessen one last time: That’s the big opportunity. I know where I’m putting my money. 

Suggested Further Reading

• The Bullish Case for Bitcoin by Vijay Boyapati
• Gradually, Then Suddenly series by Ten31 Advisor Parker Lewis
• The Bitcoin Standard by Saifedean Ammous
• Layered Money by Nik Bhatia
• Bitcoin First by Fidelity Digital Assets
• Shelling Out: The Origins of Money by Nick Szabo
• Bitcoin is Worse is Better by Gwern

Find out more about Ten31, our investment thesis, portfolio companies, and funds by visiting our website.

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Most companies do not hold enough bitcoin

There is a saying you often hear in bitcoin circles that “you can never have enough bitcoin.” This is typically expressed by those who have spent the time to both understand bitcoin’s unique and superior monetary properties and also to appreciate why those properties are protected from any attempted malicious interference. Bitcoin’s finite supply, protected by cryptography, game theory, and a decentralized computing network rooted in proof-of-work, was the 0 to 1 innovation. 

Once one develops conviction in the long term prospects of bitcoin, regardless of what near term volatility may ensue due to resistance from regulatory bodies, political parties, or interest groups elsewhere (these are simply blips on the road to long-term global adoption), one also realizes that most people still do not yet understand or appreciate the value of bitcoin. Fifteen years in, there is still tremendous informational asymmetry in bitcoin, and that is why one often hears many repeat “we are still so early.” 

The path to understanding bitcoin is long and arduous, requires humility, persistence, and an open mind, and the journey truly never ends. Most have simply not put in the work to go through this process, and therefore the knowledge of bitcoin has not yet been widely distributed. For that reason there is still tremendous economic upside in the purchasing power of bitcoin to be gained by those who hold it now as the understanding and appreciation of bitcoin spreads more widely over time. Therefore, for believers in bitcoin, no matter how much bitcoin they manage to accumulate, there is always a desire to acquire more. The opportunity is just too great, and the outcome is obvious.

Despite this belief, many of the same bitcoiners who cannot get enough personally often do not apply that strategy to their corporate balance sheets. With rare exception, most bitcoin companies (those who should clearly understand bitcoin more than others) do not hold much bitcoin. Their holdings are too conservative and incongruent with their personal beliefs about bitcoin and their companies’ positive operating leverage to the long-term success and adoption of bitcoin. It is not that they do not want to hold more bitcoin on their corporate balance sheets (they do), but they have deliberately (or implicitly) decided not to do so. I would encourage and challenge companies to consider holding more.

The conventional wisdom (or instinctual pushback) is that holding more bitcoin (relative to cash) in reserves is too risky and/or irresponsible for a company and that they cannot afford to stomach the volatility of bitcoin when their reserves are limited and precious (especially for early stage companies). I will not dwell on the fact that this sounds a lot like the argument of many bitcoin detractors, and instead I will acknowledge this is a tricky topic, and undoubtedly the consequences are significant. Making a strategic misstep with the company’s coffers could strike a fatal blow to a young company if adequate downside contingencies have not been planned for; but on the flip side, I would argue not being positioned to capture equity value appreciation from bitcoin on the balance sheet is actually taking on increased corporate risk of leaving value on the table as well in the form of foregone upside, the opportunity cost of being overly conservative. It is therefore every company’s fiduciary duty to consider a meaningful bitcoin position for their corporate balance sheet.

The fiduciary case for a meaningful bitcoin position

Most think of fiduciary duty primarily as managing risk and protecting the downside, but fiduciary duty goes both ways, encompassing both protecting against downside risks and pursuing opportunities for growth in equity value. In the context of a company, fiduciary duty includes both the executive leadership team and the company’s board of directors. The board of directors is responsible for overseeing the company’s management, setting its strategic direction, and ensuring the company is run in the best interests of shareholders, which includes corporate governance, appointing and incentivizing the management team, setting the strategic priorities of the business, and executing major financial transactions. The executive leadership team are responsible for day-to-day operations, executing the strategic plan set by the board, making operational decisions that impact the company’s financial health and performance, and managing the company’s assets, resources, and operations in a manner that maximizes shareholder value. Based on my descriptions above, I would assert evaluating the bitcoin treasury position is a responsibility of both the board and the executive team. 

If bitcoin companies are building products and services for holders of bitcoin based on expected secular growth in bitcoin users globally, then they have already come to the view that the benefits to pursuing their business plan both justify the resource commitments (time and capital) required to achieve their objectives and outweigh the downside risks of bitcoin actually not being adopted at the pace or to the extent expected. From a fiduciary perspective, if the companies have already gotten comfortable with this “bitcoin risk”, why are they not as comfortable with that same risk on their balance sheet? 

If it turns out there is some critical flaw discovered in bitcoin software or some catastrophic exogenous factor that suddenly makes bitcoin irrelevant, then it’s probably a safe bet there will be no need for the companies building products and services for the bitcoin ecosystem. As such, a bitcoin company’s fate is already inevitably linked to the lack of bitcoin adoption on the downside. On the other hand, if the adoption of bitcoin continues in the coming decades (as believers in bitcoin have conviction it will), then bitcoin companies are positively skewed to benefit from this growth operationally. While building products and services in the growing bitcoin ecosystem will not ensure success (this will depend on achieving product-market fit, developing a sustainable business model, and successful execution), a company’s proclivity for success is inevitably correlated to bitcoin’s upside. 

Considering a company’s balance sheet, if bitcoin turns out to be a failure, the amount of bitcoin a company decides to hold in its treasury will not be the deciding factor in the trajectory of its equity value… the company will be destined to fail alongside bitcoin. On the other hand, if bitcoin adoption continues and the value (and purchasing power) of bitcoin rises consequently, then the benefit and equity value appreciation to come from a company’s decision to hold bitcoin on its balance sheet will be directly proportional to the bitcoin position they accumulated and held in their treasury over time. 

To be sure, a company’s balance sheet should not become purely a speculation platform for the expected appreciation of bitcoin. However, as described above, to some extent bitcoin companies’ success is already dependent on the expected appreciation given these companies can be thought of as “derivatives” of bitcoin, and therefore it makes sense to consider whether a company’s liquidity is appropriately weighted between cash and bitcoin. 

Bitcoin treasury as a lever to equity value growth

As I have described previously, a company’s equity value appreciation over a defined time period can traditionally be thought of as being driven by three primary factors: (I) company growth over the period (typically revenue or profit growth, multiplied by some constant valuation multiple), (II) cash flow generation (and more importantly going forward, sats flow generation), and (III) any change in valuation multiple of the business relative to financial performance (increase or decrease in valuation multiple, multiplied by current revenue or profits). I believe the incorporation of bitcoin in the corporate treasury allows companies to capitalize on a “fourth lever” of equity growth, simply defined by the appreciation of value in the company’s balance sheet over the same time period (apart from net cash flow), which benefits the earliest adopters of bitcoin most and diminishes over time as bitcoin’s value appreciates.

Based on the above, how should companies think about sizing bitcoin as a treasury asset and a lever for equity growth, given their business prospects are already tied to bitcoin’s long-term success as an asset? As one might expect, there is not a one-size-fits-all answer to prescribe for each company; however, I do think there is a framework each company can use for thinking through the near-, medium-, and long-term factors at play in their own financial planning decisions to find a sweet spot that can not only offer some protection against potential downside risks and unknowns but also offer a sufficient level of balance sheet upside through bitcoin’s long-term appreciation (thereby appropriately fulfilling their fiduciary duties of managing risks while pursuing equity value growth). 

At Ten31 we have had a front row seat partnering with and advising more bitcoin companies than any other group, and our thinking on bitcoin treasury has evolved over time, particularly over the last twelve months. Our latest advice can be summarized as follows, with three big buckets I believe are important for including in a company’s treasury policy and goals: 

• Near term working capital needs (first priority): As we’ve seen with many banking insolvencies in 2023 (SVB, Signature, Silvergate, Credit Suisse, among others), the banking landscape is fragile, and available funds can disappear at a moment’s notice when the next “rare” black swan surfaces from within an over leveraged financial system. Combined with the additional risks of being de-banked at the whims of politicians and bureaucrats who target the out-of-favor industries du jour, in this day and age one can never be sure assets in a bank account are actually theirs or can be accessed at will (hence, one of the key value propositions of bitcoin…). With that backdrop, it is critical that every company should maintain a minimum of 3 months of working capital needs in bitcoin in case there is a disruption of access to dollar reserves (which hopefully is only temporary). This will provide some flexibility to meet near term liabilities such as payroll using bitcoin as a fallback option. 
• Medium term liquidity reserves (first priority): If a company is not already operating profitably or cash flow positive (which should be one of the top strategic priorities of any company), it should maintain enough reserves on its balance sheet to comfortably sustain itself until its next capital injection (i.e. a company needs to have enough capital to keep the lights on for the foreseeable future while it continues to build and invest resources behind its growth). For early stage companies, the requisite amounts can vary, but for example, this might typically amount to two years of runway in between sequential fundraising cycles. Ultimately, this will depend on what milestones a company may be targeting or what may be required by investors before the next fundraising “check point”. Given most companies’ obligations are still in legacy USD or international fiat equivalents, the medium term liquidity reserves would typically be held in cash or cash equivalents (to match the liabilities), though they could alternatively be held in a mix of cash and bitcoin, or 100% in bitcoin, provided there is additional cushion built into the reserves to account for the potential risks of drawdowns in the purchasing power of bitcoin over any near-term period. It is not unusual for bitcoin’s price to face 50-80% declines over shorter durations (despite an average four-year CAGR of 100% since the 2012 halving), so this must be taken into account if holding some medium-term reserves in bitcoin. Examples: (i) minimum 2 years runway if reserves held strictly in cash, (ii) 18 months runway in cash and 12-18 months runway in bitcoin (2.5-3 years total runway), or (iii) 3-4+ years runway if reserves held predominantly in bitcoin. These are suggested minimum starting points at the culmination of any successful fundraising cycle. A properly managed bitcoin position in the treasury can also be a non-dilutive way to extend a company's medium-term runway if executed correctly (e.g. we saw this with certain companies in our portfolio which allocated some portion of a fresh raise to bitcoin during 2H22 / 1H23). Given bitcoin’s volatility, the best strategy here so as not to purely speculate on market timing is a simple dollar cost averaging approach, planned in advance and accumulated over an extended period. In this way the long-term value appreciation of bitcoin on the balance sheet can be a lifeline for some companies and reduce the degree of potential future equity dilution. 
• Long term balance sheet position (secondary priority / stretch objective): When a company’s near-term working capital and medium-term liquidity needs have been satisfied with adequate reserves as laid out above, the ideal end state is to also accumulate a long-term bitcoin position which is meaningful enough to positively influence the company’s equity value trajectory as bitcoin appreciates, since the success of the company is already inextricably linked to the success of bitcoin as an asset. 
  As alluded to above, when doing a back-testing of bitcoin’s price appreciation over every possible four-year holding period since the 2012 halving, the average appreciation of bitcoin has been roughly 100% annually (worst four-year return: 25% CAGR; 95th percentile: 165% CAGR). When assessing performance metrics of investments into private companies, most benchmarks would suggest top quartile performance in venture and private equity funds typically achieves at least 20%+ annual equity growth. With this as hopefully a lower bound of what should be achievable in the bitcoin ecosystem (where there is higher volatility, but also higher growth and exponential upside), then a sizable enough bitcoin position to have a meaningful impact on a company’s total equity growth is likely 10% of a company’s total equity value. For example, if a company is valued at $10 million, it would target $1 million in long-term bitcoin reserves; a $500 million company would target $50 million in long-term bitcoin reserves. Under this framework, if bitcoin delivers average appreciation of 50-100% per annum (below the performance of the last 12 years as specified above), a 10% position in bitcoin relative to equity value could contribute 25-50% of the growth required to hit top quartile benchmarks, before accounting for any equity upside delivered by company growth and financial performance (i.e. bitcoin would contribute 500-1,000 bps in annual equity appreciation).

A few notes to the idea above: first, this assumes a company has sufficient provisions to hold long-term reserves as just that, i.e. is willing and able to hold for at least 4 years (beyond assumed fundraising cycles which may be required if not yet cash flow positive). Second, I am aware there may be corporate finance rebuttals to the above, arguing a company holding excess assets in bitcoin may imply they have no better use of capital to achieve outsized returns in their own business and that this liquidity should instead be distributed to shareholders who can decide how to invest that capital at their discretion (including deciding whether to hold bitcoin themselves). Third, I acknowledge a 10% bitcoin target relative to equity value may be ambitious, especially given most early stage companies typically raise equity representing 10-20% dilution in each fundraising round just to provide them enough capital to hopefully successfully make it to the next capital injection (i.e. establishing a sizable long-term treasury position may not be feasible or practical in the context of just one fundraising cycle). As such, perhaps the 10% position becomes a stretch target to be achieved over time, either over multiple fundraisings, or by generating profits / sats flows which can accumulate as bitcoin on the balance sheet, or by allowing a smaller bitcoin position to grow into that level over time as it appreciates. For further context, I have shown balance sheet positions of several selected public companies below. A 10% target may be challenging, but I believe it is a worthwhile and achievable goal, particularly with the appreciation potential of bitcoin relative to traditional cash and marketable securities.

Conclusion

Successful implementation of the above strategy can extend a company’s runway as bitcoin appreciates (thereby minimizing potential future dilution), deliver a strengthened balance sheet over time, and even potentially position a company for the proverbial “last raise ever”. Further, accumulating a meaningful bitcoin position early enough can allow challenger companies to establish a solid foundation relative to incumbent legacy companies who may not decide to begin accumulating bitcoin until much later after the value has appreciated demonstrably (at which point their fiat cash flows will earn them considerably less bitcoin than would be available to them today). 

Finally, as a thought exercise, imagine the scenario where a company has raised equity over a series of fundraising rounds, has accumulated a large bitcoin position over that time which has appreciated in value, and by the time it seeks its next round of fundraising the then-current value of its balance sheet has exceeded the cumulative amount of equity raised up to that point (including potentially reaching profitability and positive sats flow generation by that time). This would be the holy grail of building a sustainable bitcoin business to endure generations, and would likely require new ways of thinking about valuing businesses going forward. 

I believe the end result is a return to a focus on profitability and sats flows. It is my hope and expectation that more companies in the space will begin thinking about these topics in a similar way and begin to accumulate a larger amount of bitcoin in their treasury. Those that do will be best positioned to survive and drive equity value creation over the long-term.

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Bitcoin celebrated 15 years since the mining of its genesis block this week – a period during which the permissionless, open source, distributed network has achieved 99.99% uptime – by breaking the $45,000 price level for the first time since April 2022 (a level last seen before the implosion of TerraLuna and the cascade of crypto collapses it triggered). Poetically, the US national debt also broke the $34 trillion mark this week, adding another $1 trillion in under three months and highlighting the accelerating fiscal instability that motivated bitcoin’s creation 15 years ago. This anniversary week was also marked by the filing of near-final documents for the launch of many long-awaited spot bitcoin ETFs, which could open up substantial new capital flows to bitcoin (a dynamic we expect to benefit our whole portfolio). 

As the traditional finance world continues its slow but inevitable process of capitulation to the next global reserve asset, the underlying ecosystem continues to push out exciting and innovative new developments, several of which were on display this week in the form of a stable MVP release of the Fedimint open source project (which several Ten31 companies are leveraging to great effect) and a code-complete testing version of Mercury Layer, an implementation of blinded statechains that could offer an interesting scaling mechanism for bitcoin transactions. While we believe potential ETF approvals will drive tailwinds to bitcoin’s price over time, we remain most excited about innovations like these and the overall pace of permissionless development we see in the bitcoin ecosystem, a phenomenon few market participants – even many of those who are bullish on the ETF – have yet understood. 

Portfolio Company Spotlight

Fedi is an innovative platform leveraging the Fedimint protocol to provide a custody solution that aims to support mass adoption and trust-minimized, censorship-resistant use of bitcoin by balancing privacy with usability for less technical users. Fedi's intuitive, user-friendly app uses the Fedimint protocol to offer the privacy of Chaumian eCash alongside a "federation" approach that distributes trust across a variety of parties (who will often be friends and family of end users rather than remote, inaccessible corporations) and eliminates single points of failure while providing a simple UX for users of all technical capabilities. The platform is designed to empower local communities, particularly those in emerging markets, to easily use bitcoin without deep technical understanding or reliance on unaccountable third parties.

Selected Portfolio News

Unspent capacity in Samourai Whirlpool recorded another all-time high, surpassing 10,000 bitcoin for the first time:

Mutiny and Fedi rolled out new updates incorporating the latest feature-complete version of the Fedimint open source project:

Fold added new category rewards boosts for membership clubs like gyms, golf courses, and more:

Media

Ten31 Managing Partner Matt Odell joined the new Final Settlement podcast to discuss the power of open source ecosystems. 

Market Updates

The US national debt eclipsed $34 trillion for the first time this week, an increase of $1 trillion in under 3 months. 

While the federal government continues to borrow and spend at GDP-adjusted levels seen only during the Great Depression, World War II, and Great Financial Crisis, the veneer of a strong economy was bolstered this week with non-farm payrolls data that came in well above expectations. 

Of course, many of the usual caveats apply here, as full-time workers declined by 1.5 million M/M to their lowest level in a year, while multiple jobholders hit another all-time high. It also bears mentioning that 10 of the last 11 NFP reports have subsequently been revised down. 

In similar news, the latest ISM Manufacturing PMI printed at 47.4 for the month of December, the 14th consecutive month of contractionary readings and the longest such streak since 2000.

Minutes from the latest Federal Reserve Open Market Committee confirmed the now-consensus view that rates will come down sometime this year, but committee members were mixed as to the pace of that decline. 

Meanwhile, use of the Fed’s BTFP facility – which is ostensibly set to expire in ~2 months – continued to grow rapidly, and the reverse repo facility – the recent decline of which has been a likely source of increased liquidity in US markets – fell below $700 billion for the first time since early 2021.

On Friday afternoon, the SEC signaled it had “no more feedback” on several spot bitcoin ETF filings, and most issuers filed updated forms shortly thereafter. 

Following on the heels of JP Morgan being named an authorized participant for BlackRock’s ETF, new reports this week indicated Goldman Sachs is also seeking a role as an AP. 

Additionally, a startup founded by Citigroup alumni announced a plan to offer bitcoin depositary receipts to investors, a vehicle that wouldn’t need SEC approval. While we take no view on the probability of success for either Goldman or these new DRs, both developments offer further evidence of institutional capital’s growing demand for bitcoin exposure. 

Regulatory Update

A new tax provision affecting cryptocurrency transactions came into effect to little fanfare this week. The new rules, instituted under the “Infrastructure and Jobs Act” of 2021, require additional disclosures for any transaction exceeding $10,000 in value. 

A member of the Missouri House of Representatives introduced a new bill that would codify legal protections for bitcoin self-custody, transactions, mining, and more. 

Noteworthy

The Fedimint project released a stable, feature-complete MVP that lays the foundation for significant additional development. 

Mercury Layer, another project seeking to scale bitcoin custody by leveraging statechains, also announced a code-complete version available for testing. 

Travel

• Nashville BitDevs and Bitcoin Meetup, January 16-17
• Nashville Energy and Mining Summit, January 18-19
• Austin BitDevs, February 15