The Crypto and Carbon Emissions Debate

In this Greatest Hits episode of The Money Movement, we revisit a discussion from just over a year ago where Jeremy was joined by Nic Carter and Meltem Demirors to discuss the crypto carbon emissions debate.

Here is the original episode description, originally published March 31, 2021:

With exploding interest and adoption of crypto, once again the debate over "Crypto's Carbon Footprint" has returned, with critics sharing wild assertions about the energy footprint of Proof-of-Work network security. We will break down the facts, the research, and a view into not just how crypto is driving renewable energy innovation, but also examine the carbon footprint of security infrastructure backing the U.S. Dollar.

In this episode of The Money Movement, Jeremy is joined by Nic Carter, General Partner at Castle Island Ventures* and Meltem Demirors, Chief Strategy Officer at CoinShares*.

* Castle Island Ventures and Coinshares are Circle customers

Jeremy: This is going to be a fun topic. Obviously, read your piece from- I don't know, it was like two days ago or very recent, so obviously super topical across the board. I just want to give it a sec here while people filter in as well. Maybe just a quick question for you, how's the reaction been to your most recent piece?

Nick: Well, it was actually really just designed to be a rebuttal to Noah Smith's blog about [inaudible 00:00:51] emissions, and it blew up more than I expected. I think people liked that I pulled in real data on China's grid, which I hadn't seen before.

Jeremy: Yes, that was incredible.

Nick: I was trawling through the archives of Chinese grid data, which was on a province-by-province basis, which was pretty hard to find. Yes, people liked it for the most part. Of course, you'll get the mixed reactions, but anything you produce will get criticism and so on.

Jeremy: Hey, Melton. Welcome.

Melton: Hey, guys. It's good to be here. It's my favorite [inaudible 00:01:35] least favorite discussion.

Jeremy: I think it's-- Yes, go ahead.

Melton: I've never actually worked in the energy industry. To Nick's point, when he talked about in his article and something I shared in a session I did Real Vision last Monday, I don't think people realize the issue we're talking about here isn't the use of energy. We use energy for a lot of different things. A lot of different things. The issue isn't the fact that we use energy.

The issue is sources of energy. Bitcoin as one, arguably, very small industry does not dictate how energy is produced. Policy dictates how energy is produced. I think today is actually a really timely day to be having this conversation because the Biden administration just rolled out their absolutely insane infrastructure spending plan.

If we want to talk about moving towards decarbonization and a less carbon-intensive energy grid, we need to talk about investing in renewables, and the fact of the matter is that in the last year alone in 2020, China added more renewable generation to their grid than all other countries in the world combined.

Jeremy: That's an incredible scale.

Melton: Yes. The fact of the matter is 20% of China's energy grid comes from renewables. Add more renewable production in the United States, the US is at about 9% renewables on the energy grid. China's at about 20% as of 2020. The other thing is, China has invested very heavily in the manufacturing of solar panels, of solar inverters, battery technology, and now, I think there's this massive, massive, really interesting political battle underway where Western nations who want to decarbonize and add renewables to their grid have to procure parts and equipment from China.

The issue is extremely nuanced and extremely complex, but what I think is absolutely fucking preposterous, and I'm going to go ahead and be incendiary because I can on this forum is this, in the United States of America, the CAFE standards, which dictate the fuel efficiency of cars-- cars are one of the largest sources of carbon emissions in the United States America, the CAFE standards have not really changed since 1997. 1997.

Yet we have a group of people in Washington DC and elsewhere, who all of a sudden, have a tremendous issue with the fact that they can't use this energy. I feel we're living in a clown world. There are so many places where we can begin to decarbonize, and I think it's apparently like most of the current mining trends towards renewable energy and other very low-cost sources of standard energy. But we're talking about the wrong thing, and that's really the issue I have.

If we want to talk about decarbonization, we have to talk about sources of energy, which requires better policy. I'll just pause there, but I'll like to have your position.

Jeremy: Yes. Honestly, it's a great framing, and I want to explore that because what are the macro policy issues and what's the relative focus that people should have in different dimensions of energy usage and so on.

I want to frame a couple of things here at the top, too. Obviously, we have this phenomenon of incredible growth in crypto, in crypto adoption. We have this phenomenon of, obviously, very significant growth in the monetized value of Bitcoin's outstanding-- Obviously, it's an enormous industry, and the industry of operators that provide the infrastructure to secure that network is also growing enormously, and so there's a lot of attention on this. I think people are looking for various forms of policy perspectives on this.

I'm bringing you guys on here because I think you both bring very detailed and nuanced perspectives on the reality here. Most people just take for granted popular press, they take for granted someone, the kind of throwaway comments and FUD and other things. As we know, it's significantly more detailed, and we're going to get into some of those details because there's amazing work that's been done on this, including from both of you.

I want to share a little tidbit, which is a little-known fact about Circle. When Sean and I were starting Circle in early 2013, we looked at a bunch of different businesses. We had a theory that yes, you might actually want to run mining operations if you're going to run a payment infrastructure around this. We actually almost started operating a kind of industrial-scale mining infrastructure. I think the real noteworthy thing is back then, a lot of people who were thinking about this were thinking about energy efficiency, and so, like a bunch of folks, we were speccing out data centers near the North Pole, we were looking at renewable energy sources, geothermal sources, we were looking at cooling solutions that would allow this to be essentially as energy efficient as possible because the conclusion I had reached very early on was that as Bitcoin achieved mass-market scale, and as it became a really significant reserve currency status asset, that naturally, the process of mining it would tend towards the most energy-efficient form that it could find in the world.

There's almost this frontier of thermodynamics that would converge with the securing of this asset. It's interesting to see what has transpired since, right? We ended up punting on that, but we didn't do it. Actually, a part of me--

Melton: Jeremy, it's never too late. It's never too late.

Jeremy: No, clearly. I mean, people are financing these things with SPACs. I mean, why not? Clearly, it's still a very, very large commercial opportunity for a lot of people, but my point here is just I always felt that the long-term destiny of Bitcoin and of similar proof-of-work infrastructures was towards, would actually lead to probably many of the most important breakthroughs in energy efficiency in the world, and that there is a long term ultimate industrial convergence between the growth of this network and energy efficiency.

Most people, when I would say this, would look at me like, "You're out of your mind. What you're talking about? There's all these coal-fired plants in China. You're just out of your mind." Really, that FUD started then, and now, as Bitcoin takes on a greater role and as proof-of-work networks themselves just continue to scale, there's even more being thrown at this, and these are really immediate issues

Melton: Jeremy, though. Can we make just a quick distinction now? You keep referring to proof-of-work. Is the implication here that other forms of consensus don't have the same issues?

Jeremy: No, not at all.

Melton: Okay.

Jeremy: I think we should explore that tonight because I clearly think so.

Melton: Yes, I'd like to discuss that. I think, again, some of what you articulated, if I could just draw a slight parallel, which I think is an interesting one, is we get into other types of consensus. I'm just [inaudible 00:09:48] connectivity more broadly, and if we look at how the internet sharing space and data center space started, people used to run their own bare metal. Then companies like Equinix, which is now a $70 billion company, started to provide enterprises with large-scale hosting services and helping them find colocation services and host equipment and build enterprise grade redundant infrastructure to host and run and manage their footprint in a more efficient and streamlined way.

Then that industry started to grow and you saw the emergence of data center giants and a huge market for cloud computing and cloud-based services. Now you see many large corporates not only consuming tremendous amounts of compute, and it being one of their largest line items, it's actually going to be one of the largest line items for the defense industry as well, which I think's really interesting. Just today it was announced the US military procured $22 billion in VR equipment from Microsoft, last year they awarded over $18 billion in cloud compute contracts via two large RQs, but also corporates started buying carbon offsets to offset the footprint of their usage. I don't think the trend of us using compute services goes away.

Jeremy: Not at all. No, clearly, clearly. It's enormous. I think you touched on something that I think Nick has written about as well and is one of the things that I always included in the concept and description here that I want to talk about, too, which is, when we think about an economic system, and we think about a currency, and what secures the value of that currency, there's a lot there. We're not just talking about like, what do the pipes cost?

I think everyone fundamentally understands that at the end of World War Two, there was a geopolitical situation and that geopolitical situation had to do with control over energy reserves, and there was a carving up of energy reserves, and the US was the winner and the US was able to dictate an economic system that was the dollar-based economic system, and ultimately, on the fundamental global economic liquidity was based on dollar-priced oil, and then the securing of the oil reserves in the Middle East.

This is obvious, they very well understood, but the underpinning [inaudible 00:12:22] infrastructure that has been there supporting it. We should be thinking about what is the energy cost of that. Nick, I know you've written about this, I'd love to hear you share at a high-level. It's a little bit of geopolitical macro thesis on this, but it's actually real and very important, that when we think about the energy footprint of a currency or an economic system, it's deeper than just what the types of people are using it.

Nick: Totally. [inaudible 00:12:57] about the petrodollar system, but it's just a fact, really.

Jeremy: Yes, there's no conspiracy in place. Obviously, just the world order has been from the top.

Nick: It sounds conspiratorial to say the US provides military support to the Saudis against Saudi enemies, including the Houthis, those are Raytheon missiles, and in exchange, the Saudis agree to sell oil exclusively for dollars and recycle those profits into US Treasuries and thus backstopping the value of the dollar and providing a buyer a debt. That sounds like a conspiracy, but it's true.

When we had the Nixon shock, and we needed to find a way to stabilize the value of the dollar after the '70s, that was the system we settled on [inaudible 00:13:54] that tried to sell their commodities for something that's not dollars, those individuals, their regimes were toppled. Gaddafi and Saddam, both of them tried to sell oil for something other than dollars and we invaded them.

The military order here is an inextricable part of the dollar system and of course, the US military is the single largest institutional consumer of energy on the planet. It's a little more diffuse, it's hard to say the dollar is literally backed by oil, but the global dollar infrastructure is certainly part of the reason that the US accounts for about 50% of global military spend. It's because we maintain that dollar system through soft and hard power and it takes a lot of resources to do that.

Jeremy: It is the trade settlement currency for a lot of different reasons, but a very significant one of those is the sort of nexus of the energy commodity pricing, and the privilege that that provides to the United States and obviously, a broader agenda that aligns with enforcing that.

It shouldn't be lost on anyone, this is just the fact of how our global [inaudible 00:15:30] given the economic system has worked largely since World War Two and very much since the '70s.

I don't want to go too long on this topic, because I think it is one component of the debate, but if we're doing an apples to apples when we think about what actually backs a currency system, what actually secures it, what actually allows it to hold its value and what is the energy footprint of that, we have to do that comparison. It's not reasonable not to.

Melton: If I might, Jeremy. If we just extend that analogy, or that narrative a bit further, my thesis, I left the energy in 2013 and in 2015, I joined the Bitcoin industry full-time, which was one of my best decisions, actually, probably the single best decision I've made in my life.

I think one of the really interesting trends that is now unfolding on the macro-stage that most people don't appreciate, is oil and petrochemicals are no longer going to define the shape of the world to come. What will define the shape of the world to come is semiconductors, compute and a new form of energy in the form of renewables, as renewables grow in terms of their share of the energy grid.

Again, what I think is really important to underscore here, and what you and Nick have both touched on with this idea of power and money, energy, and the military industrial complex all being tightly woven together, is in a world where petrochemicals no longer dominate and the war machine and physical violence no longer dominates, the current monetary system becomes less relevant, i.e. the US dollar becomes less relevant.

I think there's a larger narrative here. If we look at where semiconductor fab happens today, it's not the United States or Western Europe. If we look at where renewable energy generation happens en masse and where that hardware is produced, and where that intellectual property is largely being utilized, is not in the US, it's not in Western Europe. So I think from an investment perspective, we see now initiatives to invest in this type of infrastructure in the United States and to onshore it, but--

Jeremy: We've got an infrastructure bill that's aimed at parts of this, obviously. My question is, should the infrastructure bill include a strategic imperative for North America to be building the best possible crypto mining infrastructure in the world?

Melton: That's exactly what I want to lobby for, Jeremy. I think any infrastructure spending plan should include in year one incentives for more renewables capacity build and incentives for North American Bitcoin mining, to help bring those facilities online by making it economic in the near to mid-term for those facilities to be economically viable. It takes a long time for enough consumptive demand to get built around locations where this energy supply is. I actually think it's one of the better investments we could be making.

Now, will it happen? I don't know, but, again, I think there are a number of industry efforts underway that I'm excited to be working on, to try to highlight this opportunity and to try to ensure that any bill that incorporates Bitcoin as a potential industry, that can help accelerate the build out of energy infrastructure, as well as more resilient compute of this [inaudible 00:19:12].

Jeremy: [inaudible 00:19:14] different states and cities in different parts of the United States where there is an effective form of industrial policy that's being executed in a localized way to support the development of energy efficient infrastructure in the crypto mining space and so we have pockets of that, but it has not risen to the national level nor the national security level, but maybe we're on the cusp of that.

Melton: I think the best people to make it happen are probably in this clubhouse room. I think this industry, Jeremy, I've had the pleasure of working with you since 2015, I think the industry has always been very forward-thinking, has organized [inaudible 00:20:08] both existential threats and just narrative threats.

I think the first step will be the industry self-organizing. I think right now there are a number of really cool efforts under way to at least create a pledge or consensus amongst participants in the Bitcoin ecosystem to drive towards carbon neutral approaches by 2030 and to fully mitigate the carbon footprint of the industry in line with the Paris Climate Accord timeline, which is 2030.

I also think, look just like in the data center space, large corporates are purchasing carbon credits to offset their compute consumption. There's no reason that large corporates and endowments who are concerned about ESG mandates, can't also purchase carbon credits to offset any potential concerns they have about Bitcoin's carbon footprint. This is no different.

I find it very curious that the Bitcoin somehow gets a different moral treatment, which I think again goes back to, there's a difference between an argument about usage of energy versus sources of energy. The fact of the matter is there is no electricity police because energy economics and market pricing dictates how energy is consumed.

Jeremy: I want to turn to you, Nick, your piece that just came out, which was a rebuttal, but included some, I think incredible data. You're making a lot of points here but maybe just start [inaudible 00:21:36] about this specific [inaudible 00:21:40] of unused energy, the alignment of mining infrastructure with unused energy and actually what we understand from the actual data about that in this industry today and what we can infer from that. Maybe we'll just start there.

Nick: One thing I really tried to convey in that piece and it it's called it's pun basically, the title's Noah objectivity on Bitcoin mining I'm riffing on No Opinion, which is the title of Noah Smith's blog. If you want to look that up, that's on Medium. Basically the point I was really trying to make is that it's not a coincidence that A, a lot of Bitcoin is mined in China and B, a lot of Bitcoin is mined in four Chinese provinces, specifically. It wasn't [inaudible 00:22:34] Bitcoin in the regards to the map and said we're going to mine in Sichuan, Yunnan, Zhejiang and Inner Mongolia.

There was a very specific reason they chose to mine there and we know from the data that that's basically where the overwhelming majority of Chinese Bitcoins are mine is those four provinces. The reason is, and I went through and looked at the province level grid data. The reason is there is a massive overabundance of energy in each of those four provinces and those four provinces specifically, and not other Chinese provinces.

If you look at some of the maps I put together, it'll be extremely clear to you. The reason there's an overabundance is because China overbuilt their energy infrastructure. They built too much wind and solar and in the Southwest parts of China, there's tons of rivers and they built enormous amounts of dams. All these four provinces are really distant from the big population centers, which are mostly on the east coast of China.

They're thousands of miles away from those population centers. As we all all know, electricity, doesn't travel very well. Bitcoin emerged in 2016, 2017, it really emerged. Bitcoin mining became this big industry at a time-- 2016 was really the peak when the Chinese energy grid was the most unbalanced it's ever been because of China's energy investment, which was way over the top basically. They had this enormous problem with curtailment and this might be too much detail, but I really want to drive the point home.

Jeremy: That's really important.

Nick: You've got Bitcoin mining in two kind of provinces. Sichuan and Yunnan are one kind, basically almost exclusively hydropower and they just [inaudible 00:24:34] the water out of the dams because the dams can't accommodate all the water and there's just not enough power draw from the grid. There's really that many big cities in Sichuan or Yunnan. They can export the energy to a certain degree, but again doesn't [inaudible 00:24:48] Zhejiang and Inner Mongolia, lots of coal undeniably, but also 30 to 35% wind and solar. People don't know that. They also curtail a huge amount of energy.

In fact, China in 2016 curtailed something like a 100 terawatt hours of wind and solar alone with those provinces being the main ones. That's a big part of the reason why you had so much mining happening in those four provinces in China specifically as opposed to anywhere else on earth. It's also part of the reason you had other commodities that have high amounts of energy embodiment in them like aluminum smelting. A lot of it happens in Sichuan and Yunnan.

Bitcoin's not the only commodity that's produced that settles where the production settles in these places with abundant energy. There's others like Bitcoin. Bitcoin is a pure form of aluminum because it has an infinite energy to weight ratio. This is why Bitcoin ended up in this position and this is indicative of what I expect to happen.

Now China's actually fixing their grid. People don't know this, but they're building in long-distance transmission lines. They're trying to make the grid more balanced to match the supply to the demand. They're making it easier to export the energy from these provinces. At the same time, the local authorities also banned Bitcoin mining in Inner Mongolia, which is great news because that was a fairly coal-driven province.

The epic of Chinese Bitcoin mining is actually ending, believe it or not. It's not going to end overnight, but if you trace where the ASICs are being purchased, a lot of American buyers, there's a huge amount of firms in the US now that are engaged in mining, you're seeing Inner Mongolia close down the opportunity, you're seeing the grid become more balanced and as it does, there's going to be less curtailment and hence less opportunity and this arbitrage is going to go away.

Bitcoin hash power will just get routed to other locations around the globe where there aren't these local arbitrages and where this is abundant energy waiting to be monetized. It'll flow to the next location. I believe that a big share of that is the USA. That was another thing I tried to quantify in the article. There's a lot more work to be done on that. I'll take a breather and pause there.

Jeremy: It is fascinating and we're seeing various provinces in Canada, various states and locales in the United States where there is abundant energy sources, natural energy sources that-- essentially that there is this fundamental convergence to energy efficiency. The more energy efficient you are, the more successful you will be securing Bitcoin and this network. Again, that's played out over the last five years, all over the world.

There's these incredible stories of how that's taken place. I'm interested in other anecdotes on that topic. Where are those capital investments going? What are the energy storage, energy cooling, other technologies that are getting applied here to make this as energy efficient as possible?

Nick: Melton, you can hop in at any point. One I wanted to point to, and this might be a little controversial, is also something I covered in the piece, which is this what I call pipe to crypto, basically taking otherwise vented or flared natural gas, which is a byproduct of oil extraction and capturing that and putting it into a generator and using it to mine.

That in my view is not positive from a carbon perspective as long as you assume that oil extraction is going to happen. If the oil extraction is outlawed or stops, then you're not going to have that excess resource of natural gas, but that's a really interesting way. I've seen a ton of startups you financed to pursue this opportunity. There's a lot of supply in Texas for instance.

Melton: Let's be clear. The shale gas industry is an economic anomaly and that won't persist forever because the decline curve on a shale well is roughly two years. The issue we have is we have massive US energy companies that are heavily subsidized sitting. on massive CapEx assets i.e. 20- to 30-year mineral rights leases that they secured in the early 20 teens when gas was trading at $14 per million cubic feet, so they're sitting on economically unviable assets and attempting to minimize the damage of owning an economically unproductive asset.

I think the more interesting opportunity, in my view, and I bought my own no opinion piece about two months ago, I had tweeted Bitcoin is a money battery and in fact, I think Bitcoin is one of the most sophisticated batteries the world has ever seen. I got a lovely lambasting from Noah in his newsletter saying, "Oh, well, how do you take energy out of Bitcoin?" which is quite funny to me because money i.e. in the form of gold really right, that's the shiny rock, has been the primary means that humanity has had over the last four or five millennia to transmute energy into value which could be moved across vast distances in terms of both space and time, but what I think is really interesting, Nick, what I think you're alluding to is, we have to dispel the myth that energy is finite.

When I say that, I'm not talking about the laws of thermodynamics, no one's disagreeing with those. I certainly am not but there is a tremendous, tremendous amount of energy that is accessible, available, but not utilized and cannot be utilized. I think the interesting question is battery technology today is not capable of harnessing and moving that energy to consumption points where it can be utilized. But other forms of monetary energy, monetary value can allow us to move that energy from places where it's produced to places where it can be consumed and utilized in an economically productive way.

What I'd like to see more of is narrative around where Bitcoin mining can be used as a means to balance the energy grid. A great example I'll give, Jeremy, is recently when we had the ice storms in Texas, there was a large mining facility in Texas that had secured a large offtake agreement with a local utility. During that crisis, they were actually able to switch off their miners and direct energy back to the grid for a period of several days when energy was needed.

In this capacity, because Bitcoin miners can be switched on and off, they become very good tools at balancing energy grids particularly because baseload demand and peak load demand are often quite far apart, we build our energy grid around peak demand, yet most times we can only monetize the baseload demand.

I think Bitcoin miners you can switch them off in an instance, a combined cycle gas plant or coal-fired plant it takes you two to three days to power that up or down. You're not necessarily able to cycle it on or off. I think Bitcoin mining can be a great addition to the energy grid to help balance some of these peaks and troughs in demand.

That's a great example. The second example and that goes a bit beyond Bitcoin's energy use but goes a bit more into thermodynamics of Bitcoin is I just invested in a really cool company that is actually utilizing the heat generated by Bitcoin mining to fuel industrial processes and centralized heating grids.

Now, in many Nordic countries, the energy grid has this thing called district energy, which is centralized heating. For example, in Vancouver and places in Norway and other Nordic countries, there's a tremendous amount of electricity that's burned by the small-scale district energy plants that are one to two megawatts that generate centralized heat for a city or for an industrial process or for office buildings.

You're basically just burning electricity to produce heat as the output and what this company, MintGreen, has done is they've put Bitcoin miners inside of this immersion liquid keg, and what they're doing is thermodynamic exchange that has about 97% efficiency where they're actually able to capture the heat that's generated by Bitcoin mining and pipe it into the district energy grid meaning that they're able to actually effectively monetize Bitcoins heat-generating capacity.

In fact, in Norway, there's now a bill that's being contemplated for data centers which would require data centers to harvest the heat that is produced in these data centers and to pipe it back into the district energy grid and into the centralized heating grid. I think there are a lot of interesting ways that we could think about utilizing Bitcoin not just in isolation but in conjunction with other localized specific energy needs that just happen to also exist in places where there is a tremendous drive towards a zero-carbon footprint by year 2030. Those are just two examples.

Jeremy: I think those were fascinating. In fact, last week, I saw an announcement of a startup. I should have brought the name for the podcast here, but it's a startup that basically is building consumer space heaters that use the heat generated from mining for [inaudible 00:36:00] basically.

Melton: I think Jesse from Huddle Ranch has a hot tub powered by Bitcoin miners. He calls it Spot 256.

Jeremy: Spot 256. Nice. That's awesome. I want to talk about thermodynamics here for a second, because recently, obviously, Bill Gates has been very emphatically saying that we need to embrace nuclear power at scale as a critical component of the future of energy in the world and I think there are a lot of scientists who believe that nuclear power actually is critical alongside our investments in renewable energy sources.

From an energy efficiency perspective, nuclear power has a number of ramifications but at what point are we seeing nuclear powered Bitcoin mining?

Nick: Well, I'm a huge nuclear power ball. I think as Melton said at the beginning of the episode, the solution ultimately lies in policy choices. Unfortunately, nuclear has been de-emphasized from a policy perspective, not just in the US, but in places like Germany too, where they decommissioned a bunch of high-end nuclear plants after Fukushima, which really made very little sense. It was kind of a populist move and I think it was an absolute tragedy because their grid quality declined subsequently and the carbon intensity of their grid increased. They had to rely on more fossil fuels.

The interesting thing about nuclear is that it's incredibly predictable and static. Whereas, if you look at curtailed sources of energy like hydro or renewables, wind and solar are much less predictable.

They have this waxing and waning pattern that means that maybe Bitcoin could be there to mop up the access and act as that energy sponge.

That wouldn't be the case with nuclear but at maturity, perhaps the grid would just be far more nuclear and then we would have mining on-grid [crosstalk]. It does have to be part of the energy strategy. I don't see our grid functioning solely based on renewables. That doesn't seem that viable for me.

Melton: I'd just augment that as well. I think there are a number of interesting startups that are working in this space. I've done a few clubhouses as well as a recent real vision about with one of them called Oklo, which is building small-scale nuclear power generators that can be used in microgrid applications.

I think one of the more interesting trends that I'd like to see that I actually think Bitcoin lends itself well to is smaller scale grids helping make up more resilient energy infrastructure that is less dependent on really large but also really fragile energy infrastructure like pipelines, large transmission systems, et cetera.

I think as energy systems and energy grids grow in complexity and in scale, it becomes more and more challenging to have centralized coordination and we've seen this in a number of instances whenever a hurricane hits the Gulf Coast and shuts down Freeport, Louisiana, which is the primary hub for nat gas import and exports in the US, when it shuts down Henry Hub, which is the primary hub for nat gas in the US, nat gas transport, it has ripple effects throughout in US. I think what's interesting about nuclear solar in particular as a renewable and other forms of small scale generation, and being able to put those assets on the grid, and monetize putting them on the grid through Bitcoin mining, potentially, is it can help drive as towards-- We joke in Bitcoin about this idea of the Citadel, but I think as a high level concept, this idea of smaller units of organization are actually highly relevant, especially in our global energy infrastructure.

What I think is really interesting is Bitcoin starts to now intersect with a number of different sectors. My belief is Bitcoin and the energy sector should be best friends. I'm trying to make lots of friendships in the nuclear energy space because I actually think nuclear energy is, Nick alluded to, is a much-maligned and very misunderstood industry, much like ours.

Then, ultimately, I think, from a geopolitical perspective and a military-industrial perspective and a national security perspective, we actually have a great incentive to move towards localized, less centralized, more resilient energy infrastructure that isn't so dependent and so vulnerable to these potential threats, both natural threats, as well as threats from state and non-state actors.

I actually think there's a larger narrative here around decentralization and the energy grid that's really fascinating, especially when you start to get into small-scale nuclear generation capacity.

Jeremy: That's awesome. I've been tracking some of the same things. I think it is not often discussed and certainly needs to be, which may be as you talk about policy implications, we started off a little bit talking about this, from an infrastructure perspective, from an alignment of these different industries' perspective, from a strategic competitive perspective, you're the US Senate, you're the House of Representatives, you're the Biden administration, what does an infrastructure policy that actually embraces this at a national economic infrastructure perspective, from a national green energy perspective, from a national security perspective, what do the policies look like?

What should we be articulating as an industry in Washington right now?

Melton: I can take that one first, and then pass it to Nick. It's interesting, I've been speaking to a number of congressional staffers. As you know, staffers are really the ones that are educating our representatives and congressmen and women on different issues and topics. I think right now, the most important thing we need to do is help dispel the myth that Bitcoin is destroying the environment.

This particular administration is very sensitive to and has made several very public statements about its intent to focus on sustainability issues and ESG issues from a variety of perspectives, but especially in the corporate sector. I think number one is making it clear that our industry is not the enemy, but actually we can be a part of the solution.

Then, I think number two is ensuring that in any infrastructure spending bill that emerges, then we can start to create federal mandates to provide tax incentives to companies that are engaging in Bitcoin mining and encourage them to establish themselves in the United States.

I think it's really important for the security of the Bitcoin network, I think it's really important as more and more American corporations, American institutions, American insurance companies add Bitcoin to their balance [inaudible 00:44:22] personal investment portfolios. I think we really need to help show a path to Bitcoin mining and Bitcoin infrastructure being a core part of maintaining the security of the US's financial system. Bitcoin is becoming increasingly financialized, I think it would be a mistake to neglect that fact.

I think step one right now is to really defang some of the loudest critics because I do think there is consistent misperception out there and there are a lot of people who are intent on fearmongering or somehow pushing this narrative that Bitcoin needs to be banned or something needs to be done around Bitcoins energy usage. Step one is really defanging it. Then, step two is being in those conversations and showing where and how infrastructure investments can be made.

Jeremy: It seems like-- I agree with all that. It seems like a big piece of this is even you go up a level from talking about the alignment of interests on long-term energy efficiency and competitiveness of economic infrastructure. I think we're really at a moment right now, and this isn't just in the United States, this is with national governments all around the world, who are confronting the reality of a new form of global digital commodity money.

This is here, it's here to stay, it is scaling, it is monetizing, there will be many trillions of dollars of monetization as we go forward. I think there is a higher-order issue. I don't expect this to come from Jerome Powell or Janet Yellen, but there is a higher-level issue, which is having the leaders, not just the United States and other governments understand that non-sovereign digital commodity money is here, and it's not going away, and if it is here, and it's not going away, what role do individual governments want to have interacting with that?

There's the, "Put your head in the sand and just wish it goes away?" There's, "We're going to try and ban the internet, basically, and hopefully, it'll go away," but really, we're talking about a much broader level of understanding, comprehension and acceptance. If you can get to that level of understanding and acceptance, then I think the discussion shifts very quickly to, "Oh, what are we going to do to be competitive here? What are we going to do to be part of securing the infrastructure? What are we going to do to align infrastructure incentives for this new significant form of global economic activity?" I'd be interested in your reactions to that.

Nick: Well, I'll just add I'm not in contact with staffers on the Hill at all, frankly. What I would emphasize to them is that Bitcoin is a utility like any other, it's just dematerialized in terms of what it produces, it's not physical. That doesn't mean it's not real and it doesn't have genuine utility to millions of people and firms globally.

There's plenty of industries out there that consume a huge amount of energy, like the airline industry. Airlines buy carbon offsets. That's considered normal and that's an acceptable trade-off in society, you produce something useful, and you consume energy to produce that thing.

The other thing I would emphasize is that, as China bans mining, and my guess is they'll keep banning mining because they probably take exception to the grid power being used to mine Bitcoin, given that Bitcoin is probably ultimately disruptive to the Chinese state, the US has the opportunity to take the other side of that and become this underwriter or steward of this technology and the suite of technologies.

As it just so happens, a lot of the world's most influential crypto firms and developers and users are all US-based. The US has been handed this opportunity on a golden platter. I don't have the numbers, of course, but I think if you look to crypto wealth, a huge share of it would be here in the US and a lot of the custodians are here in the US, even here in Boston, frankly.

There's just such an enormous opportunity to be a neutral underwriter of this technology. I think the US doesn't have that much to fear from the free flow of capital, unlike other countries that have a managed exchange rate and that have capital controls. That's something that always puzzled me was the resistance to this asset. If the US is in a strong position, what do they have to fear from an asset that's one-tenth the size of gold ultimately?

Jeremy: Right. All right. We're going to wrap in about 10 minutes, but I wanted to see if there are some questions from folks. I saw someone raise your hand I'm going to add you up here Mustafa. Then anyone else who wants to jump in with a question, please feel free to come online. Oh, we lost you. All right, adding JP.

JP: Hey, Nick and how's it going? Appreciate the talk guys, it's been a great on the Bitcoin mining front. Definitely want to understand what your thoughts are on how we can help change the industry perspective that while Bitcoin mining is bad for the environment specifically here in the US, maybe how we can get capital partners behind it for advertising and PR campaigns to change that message.

Nick: Well, frankly I think the facts are in our favor, it's just that we need to do a better job of exposing the facts. There is a lot that mitigates the mining story. Certainly Bitcoin is mined with some coal and some fossil fuels, but there's just a lot of good that's happening in mining. I think the progressive change in mining, if you look at where hash power is migrating over the next 24 months, that is incredibly positive.

It's just a matter of time until those developments become clear, but the number one thing I'm trying to do right now is basically expose the facts surrounding mining and see about publishing more formal work. That's just from my perspective is engaging in education. I don't know. [crosstalk]

Jeremy: It seems like funding more fundamental research here obviously is important for society, it's important for this industry as well. Melton I'm sorry, you go ahead.

Melton: Yes, I think research is critical, so generating the data and the empirical evidence. We've been doing that at coinshares since 2017. Chris Bendixson on our research team was one of the first to actually put together formal research demonstrating that the majority of Bitcoin mining was happening with renewable energy. I think that's a big piece of it.

I think the second piece of it that's actually very important is, what's really interesting about Bitcoin that's so different from any other industry and that frankly makes Bitcoin a target is Bitcoin is very transparent about its energy usage in a manner that no other industry is, which inevitably makes it a target for attack. I do think it's important for people in the industry to focus on the facts. The fact is, yes the Bitcoin network does consume energy.

I think what we have to steer away from again is, this is not a conversation about the morality of energy usage and what I am dismayed often to see is so many of the conversations that are happening online and in various forums are about the morality of energy usage, which has never been the role of government, right, that's the role of energy markets and private industry.

I think it's very important to not get mired in arguments about the morality of energy, but to really focus on sources of energy and how better policy can shift sources of energy. Again, I think I would just encourage Bitcoiners, "Don't wrestle with a pig." Like, "A, you're going to get covered in mud and B, the pig likes it." I see a lot of people engaging in these arguments with people who frankly don't want to have their minds changed. I don't think that's a worthy exercise, I think again it needs to be really focused on facts.

The fact is like, "Yes, the Bitcoin network does consume energy.Yes, most of that energy does come from renewables and like, yes, we can build a future where Bitcoin and sustainability and ESG mandates are highly compatible. Again, I would encourage people to just stay away from the morality arguments because they're impossible to win.

Jeremy: Yes, that's a great great perspective Melton. Tom, thanks for joining, would love to hear your question.

Tom: Jez, thank you. This question is more geared towards Melton. In conversation for staffers, do you see them learning new information, gaining some insight about Bitcoin? Is the conversation progressing? I fully agree with you, I think ESG is really important for this administration. Right now I'm getting a little worried that a lot of the myths are going to keep increasing and even now we're starting to see investors not buy into Bitcoin because they're worried about ESG. I really do think that this is one of the biggest hurdles that right now our industry is facing.

Melton: Yes, so if I can start quickly. I will say my engagement with most staffers and frankly most of the three-letter agencies in the US, they are intellectually curious. They're engaging, they're trying to understand but at the same time there are a large number of other issues that they're dealing with including a global pandemic and massive amounts of debt, and money printing, so I think just in terms of prioritization it's sometimes challenging.

For us this feels like a really high priority but for them it's one of many important topics. In terms of the ESG narrative, I'm actually really, really optimistic that in the next few months we'll see some really cool new things coming to market that are going to help investors alleviate those concerns. Again, as we've discussed several times, there is already policy in place of corporates buying carbon offsets to offset their emissions and their footprint as well as consumers. When you fly, you can buy a carbon hospital to offset the emissions generated by your travel. We're working on bringing that to the Bitcoin industry.

I'll obviously share more on that when there's more to share but there are a number of companies that are really actively working on making that option available. At the end of the day, I think it's an individual choice. If you as an investor have a mandate to have a carbon-neutral investment policy, we as the industry can provide you with those options but the burden is not on us, right? It's really on the investor who wants to make those allocation decisions, and so I'm optimistic that again in the next few months we'll see investment vehicles emerge that couple Bitcoin with the appropriate amount of carbon offsets to give investors not just the comfort that they're complying with their ESG mandate, but also hard data around the hash rate that's utilized by the Bitcoin they own and an easy way to translate that into an offsetting carbon credit purchase.

More to come but again, this is a matter of economics and markets are fantastic at creating economic solutions to problems. The energy market is a great example of that. We literally created a multi-trillion dollar market to help manage the volatility of energy supply and energy crisis. There's no reason that Bitcoin won't have similar financial instruments and derivatives and offsets that will allow people to do the same.

Jeremy: Yes, it seems that's coming sooner than later. Just a shameless plug, we're trying to convene conversations like this to bring together thought leadership to help provide great education on these topics. This is going to be a podcast on Spotify and iTunes in-- I don't know. A few hours or sometime very quickly. Money Movement podcast, let people know about this episode, share it with people, share with folks who are not in this industry, share it with people who might have the classic FUD thrown around on this.

Maybe with that, I want to wrap up. This has been a really great conversation, Nick and Melton. Just deeply appreciate the breadth of knowledge that you guys bring on these subjects and many other subjects obviously. It's just a great pleasure to have you on and such an important discussion and looking forward to continuing the conversation as we go forward here.

Nick: Thanks Jeremy.

Melton: Yes, thanks Jeremy for hosting these discussions, and Nick I look forward to reading more of your research.

Nick: Yes, this is a coda-- I mean we don't-- To the audience, we don't actually have to be that optimistic, there's a lot of changes, structural ones underway in the North American mining market which are going to change this picture for the better, and I can absolutely attest to that. Yes, not all of it is public yet, but it's absolutely happening. The picture is getting much rosier by the month here.

Jeremy: Yes, it's super exciting, we'll be tweeting it out. Thank you guys and have an awesome night, thanks everyone for joining.

[music]

[00:59:43] [END OF AUDIO]

Jeremy Allaire
Co-Founder, CEO & Chairman at Circle
Nic Carter
General Partner, Castle Island Ventures
Meltem Demirors
Chief Strategy Officer, CoinShares

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