If you’ve ever wondered what cryptocurrency mining is all about, how it manages power, and how the business is evolving, you’re in luck. Ben Gagnon, Director of Mining and Information Systems at Bitfarms, spoke to Bitvo about his work and the industry.
Ben gives us an inside look into how miners think about their business and their vision of the changing market. You will also discover how miners are supporting energy systems in different areas of the world, and the new financial products on the horizon.
Ben is an experienced cryptocurrency and Bitcoin miner having run his own operations in Asia, before joining Bitfarms.
Bitfarms is a cryptocurrency mining company focused on Bitcoin mining. The company is listed for trading in Canada (TMX: BITF).
*The opinions expressed in the following interview are those of Bitfarms, and do not reflect those of Bitvo.
Tristram: Our special guest today is Ben Gagnon, Director of Mining and Information Systems at Bitfarms, a cryptocurrency mining firm in Canada. Ben, great to have you here.
Ben: It’s great to be here.
Tell me a little bit about your background and your journey into crypto.
Ben: Sure. I actually found out about Bitcoin and crypto in 2010 when I studied economics at the Kelley School of Business. I had a really good chance to buy into bitcoin at about 70 cents, and instead, I did what every college kid did, and I bought beer. So I’ve been kind of kicking myself for several years. I watched it go from 70 cents to over $1,000, and when it pulled back to $200 and $400, I got interested again. I tried buying mining equipment in 2013, but I got hooped by Butterfly Labs. They were one of the first ASICS manufacturers who came onto the market, and they were famous for not delivering their products, resulting in a big class-action lawsuit. So I again failed on my second opportunity getting to Bitcoin. I ended up buying it one year later, about $300 to $400. And a year after that, I quit my job as a developer to start my own Ethereum mining company. That seemed to be the hot thing at the time. Everyone thought it was the Bitcoin 2.0, and I said, I’m not going to miss out on the same opportunity that I had in college. So I quit my job set up my first mine in Taiwan at my girlfriend’s family home. That quickly grew too large, and we moved into China, and we set up our first facility there.
How did you end up getting connected with Bitfarms?
Ben: Starting about 2018, I was working in Alberta, selling Bitcoin mining to oil and gas companies. I did a lot of work developing new energy sources, new partners, promoting the industry and the market. And I ended up meeting the former CEO of Bitfarms several times at a couple of different conferences where we were both invited to speak. We hit it off again in September at another mining conference in Sichuan, China. I told him about the opportunities that were available in Alberta, and he brought me in to explore that for Bitfarms.
How did the people in the oil business respond to the concept of Bitcoin mining?
Ben: Not well. At least not at first. It was a lot of risk and required a lot of capital. For the most part, the oil and gas companies still, to this day, are not that interested in Bitcoin mining. They are, however, very interested in selling their gas. The political situation related to Alberta has limited the infrastructure build-out and their ability to reach markets outside the province. They’ve been cut off on that infrastructure supply line. This means that energy companies are producing gas as a byproduct of drilling for oil, and they have three options to deal with it. They either vent it off into the atmosphere, which is very bad for the environment, or they burn it through flaring, which is less bad for the environment. Or they can put it into a generator, and the generator provides some really interesting options. The problem there is just the cost. And Bitcoin mining provides that final piece of the puzzle where it allows them to monetize their excess energy.
What are the various elements that make up a successful crypto mining operation?
Ben: You know, the most important thing by far is going to be your choice of mining equipment and the price of electricity that you pay. Those two factors, along with access to capital, will determine 80% of your results. After that, some smaller choices need to be made in terms of operational software and facility design and everything else. But if you don’t have the cheap energy input to monetize, and you don’t have the right equipment the rest of that stuff is just a no go. So for our perspective, I’m always looking at what’s the cheapest source of energy. After I’ve developed or found a cheap source of energy, I’m trying to find the right piece of equipment to monetize it and drive the greatest returns.
So, for instance, in Alberta, where you can get power, or you can generate power for one and a half to two US cents per kilowatt-hour, you don’t want to buy the most expensive equipment. It’s going to take too long to get your payback on that. Instead, what you want to do is minimize your capital expense on the equipment and buy older equipment. And if you can buy older equipment, your capital outlay goes down significantly, and your time to get that money back also goes down significantly. So it’s not always intuitive as you’d think because you’d think everyone wants to have the most brand new, high-efficiency equipment all the time. It’s not the case. All the equipment has a value associated with it, which is basically what people expect to get in terms of profit over some future period. The present value discount of the next year of mining or two years of mining or whatever they’ve determined is worthwhile to them. So the old efficient equipment is heavily discounted, and it’s often a great buy for miners with cheaper power. For miners with expensive power, that’s where the more expensive equipment starts to make sense. So there’s that balance there.
For context, when you’re talking about the electricity price in Alberta, what is the range of energy prices that a miner might have to deal with? So from one or two cents a kilowatt-hour to what point would you be investing in a more efficient piece of equipment?
Ben: The standard thrown around the industry for the last couple of years is this six US cents per kilowatt-hour range. That is either historical legacy, or just not competitive anymore as the network has scaled so much. Right now, I’d say the competitive ranges are about three to four cents. And once you start getting down to the two cents range, that’s when you start wanting to buy old equipment. At two cents, your power cost is so low that it makes a lot more sense to monetize as much of it as cheaply as possible, as opposed to trying to make the most out of every kilowatt that you have.
In terms of competing to get blocks and rewards, is there a difference between old and new equipment other than efficiency?
Ben: There’s no difference in terms of which equipment has a better chance of solving the computation problem or not. They all are doing the same math, and they’re all doing the exact same computation. Some calculators are more powerful than other calculators, and some calculators are cheaper. So when we’re talking about higher efficiency miners, what we’re talking about is a lower cost to deliver that computation. It’s more efficient to deliver that same computation, but the computation is the same. It doesn’t matter if it comes from the newest equipment or an S5 from seven years ago.
How has crypto mining evolved and changed over the last few years?
Ben: We’ve gone through a dramatic professionalization and industrial process. It started in 2009 and 2010 as a bunch of hobbyists. These were people who were very interested in the technology. They were the technically savvy people that they could build and program their computers and their own software. They were the only people mining on it in the early years.
Starting in around 2010 or possibly 2011, you had to switch over to GPUs, and so the hardware that people were using changed. That opened up a lot more opportunities for people to build larger-scale mines. The following year, in 2012, they released what was called an FPGA miner, which is another more specific form of technology, which allowed another layer of sophistication and consolidation to come in. This allowed for greater and greater scale. And the year after that, we had our first ASICS. So, every year as the technology is improved, the amount of capital that’s been flowing into these industries and flowing into these markets is becoming a lot more professional. And it’s coming from a lot more institutional groups. So as an industry, we’re getting more professional. We’re growing in scale every single year. The sophistication of these mining operations is constantly growing.
And what we’ll see in the next year or two, we’ve just started to see it over the last year, is serious financialization of all these industries. So Bitfarms was one of the first companies to be listed on any public exchange. We are the first company to have a full long-form prospectus approved by a Securities Commission. We went through the full process with the Ontario Securities Exchange Commission, unlike most mining groups out there. And this is something that is a sign of the times to come. Mining companies are becoming a lot less scammy, becoming a lot less time-sensitive and going after larger and more professional pockets of capital. And they’re going to be continuously integrated into the energy grid and the energy utility industries, just like they are in Texas and Alberta; and like we are with the hydropower industry in Quebec. And when that happens, it will be more of a financial services industry.
That’s an interesting perspective. What would you say is the biggest innovation that’s taken place in the mining space? Or there may be more than one.
Ben: There have been many innovations recently, but when people think about technology and mining, they mostly think about the mining hardware, which has changed significantly in the last ten years since Bitcoin started. But I think what’s most interesting is how professional all these people have become. When this first started, everyone was trying to become a billionaire overnight. There was no time left to try and make money next year trying to build a big business because people were honestly concerned about whether or not Bitcoin would be around next year. I think as time has passed, we’ve had a lot of those concerns go away. And people have put a lot of development into thinking about what Bitcoin is and what mining does and how it serves a purpose.
Being integrated into the electrical utility grid itself is probably the most interesting innovation that’s happened. Because now, we are moving away from the perspective of Bitcoin as a wasteful industry. There are still those who believe it’s an industry that doesn’t need to consume the electricity that it does. These people don’t understand the economic incentives that drive Bitcoin mining and encourage Bitcoin mining to scale continuously. But what happens when we start integrating it into the electrical utility grids? Bitcoin mining can serve a beneficial function by absorbing and monetizing excess electricity that couldn’t be consumed on the grid. So that’s electricity that would already be wasted.
It has to be used, right?
Ben: It either has to be used, or it has to be put into the ground. A significant amount of energy is generated that isn’t consumed because it can’t be distributed efficiently or cost-effectively enough or timely enough to the markets that need it. Solutions like battery storage have come out, but the truth is that it’s too costly to do any large-scale battery storage. Bitcoin mining provides an alternative solution by addressing the same problem from a different angle. When excess power becomes available on the grid, what if we just try and monetize it? And when it’s not on the grid, we don’t monetize it so that power gets pushed out to prioritized communities. That would be schools, homes, hospitals, any traditional electrical consumer. And we can deliver the same functions in terms of stabilizing the grid and improving delivery and improving efficiencies in the system for a significantly lower cost than current alternatives. Bitcoin mining also has a much lower environmental impact because you don’t have to produce all these lithium-ion batteries. It’s a win-win for everybody.
I don’t think people realize how much energy goes into clearing trades and all of the elements that go into traditional financial transactions. People in numerous departments, technology, power, buildings and in some cases, transportation. All in, it represents a huge amount of energy as well. It seems strange to consider Bitcoin mining wasteful when comparing it to traditional financial clearing to me.
Ben: Absolutely. And the monetization of energy is, I think, what will drive Bitcoin mining in about ten years. In the future, most mining will happen by tapping into the grid through some sort of specialty program where they can be turned off if the electricity demand is high.
In terms of crypto mining, what are some other things that people might not know that they might find interesting?
Ben: One of the interesting things would be to know is that the vast majority of Bitcoin mining done in the world is done with energy that would be otherwise not used. A good example of this is the Sichuan flood season, which is famous in the Bitcoin mining world. There is a situation in China where the government has built up a vast network of small hydroelectric dams throughout the country. And not just in Sichuan, throughout all the provinces, but Sichuan is where they have a high density of these hydroelectric power plants. But they were built according to communist principles of providing equal opportunity and equal infrastructure to all without any sort of market planning or market understanding of what people actually need in terms of power generation in all these different areas. And so you have a situation where five to seven months out of the year, the province of Sichuan is generating gigawatts of extra power. This power can’t be consumed because there is no local industry to consume it, and they don’t have the long-distance transmission lines to send it to other Chinese provinces. So Bitcoin miners go in there every year, and they soak up all that excess electricity that would otherwise be wasted.
The same thing is happening in Texas and Alberta with excess natural gas where storage is limited. And in Quebec, we’re integrated into the grid at some of our facilities, which can be deprioritized or turned off if electricity demand is high. The rest of the time, we are just consuming electricity that no one else wants, but it’s continuously generated. And this situation applies to the vast majority of Bitcoin mining. When it comes to Bitcoin using excess coal-generated electricity on the grid, it’s minimal.
What is your current vision of the evolution of the crypto mining space?
Ben: I think we’re going to become heavily financialized. And I think everything’s going to be structured through contracts. We’re going to see a lot of derivatives come out of the mining industry. Mining is a perfect cash flow business for financial industries to start playing with and start creating interesting derivative products off of that, especially in a low or zero or negative interest rate world. Investors are looking for the kind of regular cash flow that Bitcoin mining can provide, especially if they are structured through a contract that strips away a lot of that risk. That is going to be the driving force in the next five to ten years. We’re just starting to see this now with the emergence of things like hash rate futures to address that need. Once those contracts are prevalent, there will be massive amounts of new capital that will become available that have been sitting on the sidelines.
Will these derivatives be on traditional exchanges, or will these be directed towards the newer crypto futures and options exchanges?
Ben: They’re all going to start on smaller crypto exchanges. As they prove successful, I think many of the crypto exchanges and derivative platforms will get bought up by some of the major traditional institutions that want to expand into the space.
Let’s spend some time talking about Bitfarms. Tell me about it.
Ben: Bitfarms is Canada’s first public crypto mining company that’s gone through the long-form prospectus with the Ontario Securities Exchange Commission. We are currently running on 100% renewable energy at five different sites in Quebec. We’ve grown tremendously over the last couple of years. Last year we increased our computing power over 270%. We’ve got a healthy pipeline of contracted energy in Quebec and opportunities in other provinces in Canada that we’re developing. So we have a platform for significant growth. We are a professionally managed Bitcoin mining company with a solid reputation. Compared to many of the facilities that I’ve personally been in mainland China, it’s just night and day versus our approach. They emphasize bare bones and low cost for short-term profit. Our Canadian facilities are built for long term profitability and meet or exceed all Canadian regulations.
Can you elaborate on that?
Ben: Sure. In terms of a Bitcoin mining company in China, they have a very low-cost environment, not just for power, but also for labour, facilities, new equipment, and that sort of thing. They’re also a dynamic market that likes to move around and chase the cheapest power rates in China wherever they are. So, they don’t tend to invest a lot in a facility for the next ten to fifteen years. They aren’t interested in making it the most efficient possible to generate the best returns. Their core motivation in China is the best return they can get over the next six months because, after that, everything could change. Maybe you’re on to a different facility, or maybe you sell off your equipment and start all over again with a different company. There’s a lot of turnover and excess waste in China.
Whereas in Canada, it takes a lot of time for us even to get through the regulatory requirements, get the approvals, make sure all the safety checks are done. We can’t build things for six months and call it quits. We have to build things that are more sustainable for the long term. And long term sustainability, instead of being a disadvantage, provides some significant advantages. We can build more energy-efficient facilities with lower hardware failure rates and lower operating maintenance costs. As a result, these advantages are reflected in the returns these facilities generate over time.
And it also creates investment opportunities that may not be available in China.
Ben: Absolutely. And there’s a risk advantage in terms of geopolitical risk as well. As a foreigner who has operated Bitcoin mining companies in mainland China, I am well acquainted with this particular risk. Foreign investors play a dangerous game in mainland China because you can always be subject to some sort of surprise regulatory pressure. The deal when you arrive is sweet to entice new investment into the area, but as soon as you’re established, the opportunity cost to leave or to move is revealed—the terms of your deal or arrangement change without prior notice or mechanism to challenge. By contrast, the advantages of Canada include geopolitically stability, contracts and the rule of law. Plus, we’re also mostly cold and dry here, providing a lot of natural cooling, which is crucial to an efficient mining operation or data center.
For those that aren’t aware of why cooling is essential, can you elaborate on that.
Ben: Cooling is one of the biggest challenges that any data center has to deal with. And if the computers get too hot, they just turn off or in the worst-case scenario, they can catch fire. So proper facility design is always important, and cooling is a major consideration. If you can manage power acquisition and cooling, Bitcoin mining isn’t difficult in terms of scalability.
Once these issues are addressed, it’s easy to scale linearly.
How do crypto miners make money?
Ben: So, as a crypto miner, we get paid for two things, finding a block and processing all the transactions in that block. So we have a block reward, and we have the sum of all the transaction fees in that block. Generally speaking, very few individuals are operating their own Bitcoin mining pool because you need at least one to two percent of the whole network to make that predictably viable. As a result, most individuals go through mining pools. These pools allow access to several competing coins because the computation power of that equipment can be redirected to other coins on a moment’s notice. That provides a self-balancing effect in terms of the decline in economics.
The metric most operations look at now is a USD per terahash value. So we have the 24 hour US dollar revenue for one unit of computation for 24 hours, and that’s the number that matters the most. The mining pool is aggregating all of those blocks using that computation, and they’re dividing the payouts accordingly. And there are different ways of accounting for the payouts. So if the Bitcoin price goes up from $10,000 to $11,000, generally speaking, the revenue per terahash is also going to go up a proportional amount, which is ten percent. In response, miners mining another version of Bitcoin, like Bitcoin Cash, or Bitcoin SV, might see that ten percent increase on Bitcoin and redirect some of their hashing power towards Bitcoin. This will equalize the revenue on a per terahash basis, which happens both for upward movements and downward movements in Bitcoin.
There are also several operations sitting with older equipment that’s not profitable to operate at lower Bitcoin prices and higher power prices. But if Bitcoin were to rally to $15,000 or $20,000, this equipment becomes profitable again, in which case they turn it back on. So for a mining operation, I’m not concerned about the transaction fees per block. I’m looking at my US dollar revenue in terms of my computation, which includes transaction fees. And I can also look at that in terms of a cost to produce that computational power. This approach takes away almost all the variance that comes with difficulty and price because that USD per terahash melds those two together into one variable, which becomes a lot easier to work with.
There were reports that mining fees for a transaction were around a buck US right now, but they vary. Where does that number come from?
Ben: That number would come from the total number of transaction fees in a block divided by the number of transactions in that block, so that number is going to vary. It’s quite a bit higher at times when every block is full of transactions. If your payments weren’t going through in the first block or the second block and all the blocks are full, fees will rise to get it into the next block. Getting transactions verified is as competitive as transaction fees. If they want to get their confirmation in the next ten minutes, they will pay a higher price. Now you’re not required to, but if you want to get to in the next ten minutes, you have to pay a higher price. Considering a Swift transfer cost you $30 and takes two days, Bitcoin transaction fees of a $1 is never really an issue. But as I said earlier, our focus as a business is on that USD per terahash number.
How will the recent Bitcoin halving shape the crypto market going forward other than a reduction in supply?
Ben: Well, I think it is a very bullish indicator because, for the next four years, we’ve got predictable Bitcoin economics again. This means that if you are going to deploy capital into mining, now is the time because you have the longest time for most revenue possible before the next halving occurs in four years. There was a lot of uncertainty about what would happen to the USD per terahash revenue during the halving, but it has balanced out so far. Now we’ve got a solid foundation for new capital. What we’ve seen out of a couple of different groups like Greyscale Trust, is that they have been buying more Bitcoin recently than all the Bitcoins mined in the same period. There was a report recently indicating that there are several larger-scale institutions and financial groups and investment groups who are also starting to look for opportunities to deploy capital into the space in a big way. Now that the risk from the halving is over, they’re all set to move forward.
What is different in terms of the attitude towards crypto between a place like Canada and China?
Ben: It’s interesting that in both territories, crypto was viewed very similarly at the beginning stages. So, for instance, if you’re looking at Bitcoin mining in China, the reason it became so prevalent in the first place is not that they believed in Bitcoin but because all these factories had suffered massive, massive downfalls in terms of orders after the 2007-2008 financial crisis. Several investors put in, five, ten, fifteen, twenty and up to fifty million dollars into their manufacturing facility in mainland China and then 2007-2008 happened. Their orders were slashed fifty percent year-over-year, and they didn’t recover, and by 2011-2012, these guys are looking for what they can do with this asset. So Bitcoin mining provided this great opportunity where they can write off Bitcoin mining equipment as an expense, incur higher operating costs for electricity and get a new revenue stream. And as a bonus, it’s not denoted or tracked in RMB, not subject to capital controls or tax. So many companies started redeploying the infrastructure and assets that they already had in this new space. The motivation was profit and skirting a lot of the regulations in the meantime.
In Canada, a lot of people were trying to get into Quebec in 2017-2018. The province had tremendous demand for new power applications on the scale of gigawatts of power from crypto miners. The only people mining at that time were in warehouses in Montreal, on subsidized rates, doing it under the table. But what’s happened over the last several years is that we’ve seen a massive professionalization of this industry. There were a lot of cowboys when things first got started, but if you want to get to scale in this industry, you have to attract higher and more sophisticated pockets of capital. And that means companies need to get a lot more sophisticated and start complying with regulations, which is where we at Bitfarms are focused.
For readers that may not be in Canada, one of the big advantages of Quebec, in particular, is their hydropower resources.
Ben: Correct.
Is there anything that we didn’t talk about that you wanted to talk about today?
Ben: The hardware manufacturers are also a really interesting space to speak about. It’s an area that has remained entirely under Chinese hands. This is not something I expect to last forever. Traditionally, the vast majority of the major tech companies, when you think about computing powerhouses, are based in the US or possibly Korea or Japan. As of right now, all of the manufacturing is done in mainland China. Now with a 27-28% tariff into the US, there’s huge room for a North American manufacturer to come in and upset the market. So in the next couple of years, I’m expecting a significant player like Micron or similar to be out with a competing product in North America.
How do you think that will change the market dynamics?
Ben: Well, quite a bit. Right now, we’ve got a severe limitation in terms of the hardware that reaches the market because only a few companies are manufacturing it. They do not have significant access to capital to scale up to similar production runs as a company like Intel or Nokia or Microsoft or Apple or something like that. They’re very much on a batch-based production schedule, and any other computing company in the world has got a certain number of chips that they’re getting per month. The Bitcoin mining equipment manufacturers have traditionally had a lot of financing problems, and keeping those production runs consistent. I don’t think that US-based companies will have those same problems. And if it’s a company like Micron or someone else, they’ll be able to tap into all these different financial tools and all these different financial systems. They’ll be able to provide that capital to the chip manufacturers like TSMC or Global Foundries, the kind of capital they need to secure long term production capacity and cost efficiencies. I think it would bring a lot of new production onto the market, and it would probably open up a lot of new clever financing mechanisms to pay for that equipment. Right now, very few US manufacturers or US companies will finance the equipment coming out of China because it’s seen as too high of a risk. If that was switched over to a US manufacturer, a US company, or US R&D team, the situation would be completely different.
What influence does professionalization of the industry have on regulation?
Ben: Well, I think it should help provide a lot of education and knowledge to legislators and regulators. Traditionally, this is an industry that people do not understand at all, especially when it comes to the people who are writing the laws and enforcing the laws. I think they’re always trying to play catch up with the new technology. At Bitfarms, we are transparent about our entire process, have provided extensive documentation, and work with a big four accounting firm. I believe we’re the only Bitcoin mining company that’s audited by a big four firm. These are all the things that regulators will probably want to see, and it’s the kind of information and the data access that they need to understand the business fully. When it was just a bunch of smaller cowboys running their own entrepreneur companies, they didn’t have access to any data. You didn’t have anyone working with the regulators, step by step, explaining, answering their questions, and debating with them about the meanings of different things. We went through all of that with the Ontario Securities and Exchange Commission. And now it’s going to be easier for someone else to do that because they’ve already had that experience of processing it through us. Today the regulators have a better understanding of the industry. The more we do, the better they’ll understand this industry, and well-crafted regulations will result.
Where can people find and connect with you and Bitfarms?
Ben: My only social media presence is on LinkedIn, or I can be reached on Telegram @hashoveride. The Bitfarms site address is www.bitfarms.com, and our symbol on the Toronto Stock Exchange is BITF.
Ben, thanks for your insights today.
Ben: My pleasure.
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