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- [00:00]
John Todaro
But I've always considered it somewhat of a danger zone when you're at your break even cost. But if you get, you know, in the 50s, low 60s, you know, you're putting that margin a little bit more under pressure and then you have to think what the next having is coming up that's starting to loom. Right. So then that's another thing these guys have to start considering there's not something.
- [00:20]
Zach Pandal
Wrong with, with bitcoin per se. You know, nothing has changed about the function of the network and all the particulars. And we can talk about all those things, but what changed was risk taking in markets.
- [00:35]
Steve Ehrlich
Hi, everyone. Welcome to another episode of Bits and the Interview. I'm your host Steve Ehrlich and we've got a lot to talk about today. But first I'd like to introduce my guest, John Todaro from Needham and Company. He is their point man in all things crypto equities and in particular, he has a unique expertise in mining. And we, and we're going to get into all of it. So, John, welcome.
- [00:58]
John Todaro
Thanks for having me on. Good to be back.
- [01:00]
Steve Ehrlich
Yeah. I mean, you are a repeat guest and I'm really interested to kind of see how the conversation is going to be different than it was a few months ago when all the bitcoin miners were kind of rerating as part of this whole AI HBC buzz, whose, I guess luster has worn off a little bit. But before we get to all that, just a quick disclaimer. Nothing that you guys see or hear today is financial or investment advice. For more disclosures, please see unchained.com bitsandbips and with that, one more thing before we really get started, we need to take a very quick break so we can hear from some of the sponsors who make this show possible.
- [01:40]
Sponsor/Announcer
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- [02:22]
Steve Ehrlich
Okay, so let's kind of get started. I mean, John, when you were on the show, a Few, I guess a few months ago or late last year, the whole conversation centered around the ways that analysts were completely rethinking how they were approaching bitcoin miners because of their power generation capacity, their hosting capacity and sort of the insatiable demand from AGI providers to sort of get as much capacity as, as possible. And in many ways this was a really welcome site because bitcoin miners, I've always had a bit of a soft spot for them because they're kind of the unsung workhorses of this entire, entire ecosystem. Yet their stocks always drag the price of bitcoin. They, they dragged DATs demands was siphoned away from them for ETFs and they were always sort of, none of this works without miners. But their stocks were always trailing the sort of like the base assets. That completely changed and we spoke about that. But today things are different. Bitcoin is struggling. I mean it's below 70,000. It dropped as low as 60,000 last week. That's creating some real dangerous economics for miners. And I want to get into all that and sort of the shine has come off of the AI boom. I mean, we've seen huge tech sell offs, especially in the last week or two. So I just want to start off by kind of asking what are you seeing right now and in how this environment is really impacting bitcoin miners?
- [03:48]
John Todaro
Yes. So the bitcoin miners are still very much going down the AI route. So providing data center capacity for AI workloads, that hasn't changed at all from our last conversation. If anything, they've gone more into that with the bitcoin weakness. I think it's kind of because you're also seeing hash price continue to go lower too. So I think that's confirmed for a lot of these bitcoin miners that the path they, they have chosen maybe six months or so ago is the path they ultimately want to be on. They want to be on the path for AI workloads. Now there are some specific impacts to kind of data center operators for AI right now, which is weighing on the stocks a little bit. And then there's also just a broader tech sell off that, that is kind of impacting names to an extent too. But I would say that they're very much going down that route of doing, supporting HPC AI workloads. We've gotten a few new leases late last year. So in December hut signed actually the best contract we have seen so far. So that kind of reaffirms to us that the demand is still very strong. And if anything has gotten better in the terms of actually improved for these bitcoin miners since earlier this year when, or sorry, earlier last year, around the summer when a lot of these, these deals got signed. So from that standpoint, you know, the terms have improved, the demand seems still very strong. You've seen those new CapEx guidance numbers from all the major hyperscalers. You know a lot of that's going towards AI, right. And so that, that actually beat expectations by quite a bit. So there served very much demand for that. What's that?
- [05:30]
Steve Ehrlich
I think I saw the number. It was like $660 billion or something. And that. Yeah. And that spooked markets. I mean that, that, that scared everyone last week. But what you're saying is that that's going to ultimately benefit the miners like the capacity providers in some shape or form?
- [05:48]
John Todaro
Yeah, I mean the spook is more. So are they spending too much on AI and could potentially put some of these companies in peril. From a bitcoin miner standpoint, you want the major hyperscalers to continue to spend money on data center, build out, sign leases, put more towards capex. So I think from that standpoint it's a positive signal for my miners that hey, companies aren't pulling back from spending on AI, they're doubling down. I think the market is viewing it a little bit longer term and going okay, you know, how much catbacks are we going to ultimately spend on this? What is the refresh cycle going to look like? And that's where things get a little bit more concerning. Why I also like my miners is they're doing a COLO lease for the most part. So they don't have this aggressive CAPEX treadmill like you see when you're, you're buying the GPUs in that infrastructure, it starts to look a little bit like a bitcoin mining capex refresh cycle which, which I didn't love, which is probably one of the reasons why bitcoin miners kind of always trailed bitcoin and some of those other assets you had mentioned earlier. So a lot of them are doing colo leases. So you, you're not on the same kind of aggressive capex cycle. There's still a ton of capex to build these data centers but you at least don't have that very real and significant depreciation on the GPUs. So I'm not worried about the, the CAPEX numbers. If anything, I kind of take that as a positive for my miners. There's still a lot of Demand for what they're offering.
- [07:12]
Steve Ehrlich
Okay, just a couple of follow up questions to what you just kind of walked us through. One you said hut 8 signed a very, I guess what's the word you used? Very lucrative, very attractive. Yeah, we're in the best deals. What does that mean specifically?
- [07:29]
John Todaro
Yes. So they got the full credit backstop from Google. So that allows you to build at and you can, you can get financing a little bit easier. So lower rates on your debt that you need to layer in and actually build the data center. So that was attractive. So that arrangement was done in it's with Fluid Stack directly and then Google is the credit backstopper. That was the first agreement we saw where Google extended credit over the entire length of the lease which if I recall it's 15 years. So the other ones you saw it was maybe five, six years. So it's over the full length of the lease. The economics in terms of kind of top line, the revenue per megawatt was a bit more attractive, a little bit in line with some of the other leases I would say higher than kind of your average one you saw when there is a major hyperscaler backstopping versus the ones over the summer. So I think that one came out to about 1.51 million per megawatt. In first year numbers there's 3% escalators. So the revenue you receive every year it goes up about 3% but it starts at one point a little over 1.5 million per megawatt. And then they also have longer to execute. So I believe they have 14 or 15 months for the RFS date the ready for service date on the, on that contract. And so that's a, that's a big piece now we're seeing too where if you're, if you're delayed and you have execution misses you do there's normally discounted rent that, that, that happens within that. So we do like that you're getting more time to execute so you're not up against the very aggressive date where you have to deliver the data center. And also a lot of these contracts become cancelable after 90 or 180 days past the that date I talked about. So if you're delayed 90 to 180 days past the RM date. Yeah that, that service date for the data center the contracts become cancellable with hot. That's not the case. They don't become cancelable.
- [09:24]
Steve Ehrlich
Okay.
- [09:25]
John Todaro
There's still going to be discounted rent likely. I'm sure there's some discounted rent but we do think they have a little bit more wiggle room on execution too. So, so what that indicates to us is hyperscalers are being a little bit more lenient with their, with these counterparties with the bitcoin miners. They're also looking to or willing to extend full credit over the entire length of the lease and make it easier to finance. So that all indicates kind of better terms that the miners have a little bit more negotiating power. They're not up against a super tight window and they're not getting credit backstopping. They are getting those then.
- [09:59]
Steve Ehrlich
So do you see these bitcoin miners as a bit of a more value play if such a thing exists within the tech sector because of the fact that they're getting these attractive terms and that that and sort of think there's a more of a bullish case to be made despite this sort of dreary feeling in markets at this point?
- [10:19]
John Todaro
I, I would argue yes. So most of these names we are buy rated on, we have, you know, we got price targets higher than than where current prices. It's a few different ways how you want to value it. And look at these stocks though, right? If you comp them to data, the large traditional data center REITs like Equinix or Digital Realty, these are trading at a discount. I think if you're able to execute on some of these contracts, I think you start to close that discount gap very quickly. And you also need to kind of continuously show that you can get access to more power. If you're just kind of one and done, then it's going to be very hard to go slap a data center reap multiple on these businesses. But if you can show you're able to continuously get power, they're signing better contracts than Equinix. The digital Realty gets, they're building bigger, more complicated data centers than those names are building the traditional data center REITs. In the hut example, that lease was a triple net lease. So very good margin. So I would say if you're able to kind of consistently do this, you should close the gap and maybe even trade at a premium to the data center reit. So from that standpoint, maybe they start to look value relative to those names. I think where the market has more concern is are you going to be able to continuously get power or are you going to be one and done? Because if you are one and done, how you should value these names, you shouldn't apply a data center multiple to them. You should more so just value the cash flows from the contracts they have signed. And when you do do that, we've done that, Matt. It does equate to about 40%, maybe 50% lower in the equity value than where the stock's trading today. So, you know, you do need to show that you can continuously get power. And that is a big question in the market right now, now. And then two, you need to show that you can execute. Because if, if all these guys start falling down and aren't able to execute, maybe leases start getting canceled and you really should trade at a significant discount to the data center reads that can execute. So those are the two pieces that need to be, you know, that need to give the market comfort right there.
- [12:18]
Steve Ehrlich
Understood. I have one more question about all this and then we're going to actually turn a little more back to bitcoin mining. But you talked about how sometimes the capex is cheaper. It's easier than procuring bitcoin miners by themselves. I mean, we both remember going back to even like the heady days of 2021, the pandemic when miners were paying nine months, sometimes a year in advance for machines that weren't even built yet in order to kind of get first in line. Because there was never going to be enough capacity from the Bitmains and Micro bts of the world to satisfy all demand. And I mean, the outlays were nine figures, sometimes 10 figures to get these devices. How is it different when it comes to acquiring GPUs and sort of like building out the infrastructure inside these hosting centers?
- [13:06]
John Todaro
It's not all that different. The argument I was making is these bitcoin miners aren't responsible for the GPU capex. So that's where there are tenants in most of these. It's called a colocation lease, where the tenant brings in their own GPUs. So for most of these, Iran's different because IRIN is going down more a cloud compute route. So they have that contract with Microsoft where Iron is spending capex on the gpu. So it does look a little bit more, more similar to that bitcoin mining kind of capex you were talking about. The other names for the most part are doing colo leases where they're not responsible for the gpu.
- [13:43]
Steve Ehrlich
Okay, so like, like a marathon, for instance. I mean, they would have to get the capacity or some sort of vertically integrated miner. They would have to get the capacity, the power, everything, and then they would have to procure the ASX. In this case, the companies themselves are doing steps one and two. But when it comes down to the GPUs the actual engines. It's like Google or Fluidstack or whoever is the client is supplying it on their behalf.
- [14:06]
John Todaro
Exactly.
- [14:06]
Steve Ehrlich
Got it.
- [14:07]
John Todaro
Exactly.
- [14:08]
Steve Ehrlich
All right. And I'm sure that's. Yeah, I mean that's easier from a cash flow point of view for some of these companies. So. All right, let's turn directly back towards bitcoin mining because you pointed out how hash price is down. I mean it's been continuously going down for, for years at this point. But this is a very precarious point for bitcoin miners. I know the answer is to this question is it depends because every miner has a different sort of cost of production. But it seems like the 60,000 range is dangerous for almost everyone. Even though everyone's talking about strategy more, their danger point is like 8,000. So I mean, what do you see right now? I mean hash price is continuing to go down. If bitcoin does not break out of this range to the upside, are you seeing a lot of stress on the finances of these miners? Is it going to mean that they keep turning even more, I guess you even said more towards AI and not buying more miners themselves? Are they going to have to start selling bitcoin to cover expenses? What are you seeing there?
- [15:18]
John Todaro
Yeah, I would say so. It is more topical now than, than it's really been kind of around this cycle. Right. So we were just on an earnings call today and it was one of the, the, I think the, the first time kind of this cycle where we heard, hey, are you going to turn off rigs given where bitcoin prices are and where hash price is? So it is starting to become a much more topical question which we didn't really have before. There was, there was definitely some margin in there. At these levels you're pretty close to cash break even costs in some cases. Some miners might be higher on cash production. When you factor in the depreciation on the GPUs, a lot of them are above where the bitcoin prices are or kind of right around it. So from that standpoint, yes, it starts to be a little bit more of a concern than obviously it's at When Bitcoin was 85k and hash price was a little bit higher. What I would say though, in terms of the bitcoin miners pivoting to AI, I don't know if any of the names in my coverage universe are looking at it going, okay, bitcoin is here. I'm going to push more into AI because the AI component was already just so much so Much better. From a stock perspective. You're talking about 15 times on an EV EBITDA basis is maybe what the markets is paying for an AI data center, a bitcoin miner, they're going to pay like 3, 3, 4 times EBITDA. So you already had a massive difference in the multiple and then the underlying kind of the dollars per megawatt you could generate and the stability of that too because these are stable 15 year contracts. Right. So you know, the margin, that profile also looked a lot better for AI versus Bitcoin mining. And then you look at just the, the ultimate AI demand. I mean one of the reasons a lot of software stocks have been weak is, is, is AI. You know, AI is going to eat all that. So it is, is kind of, you know, AI is reshaping a lot of, a lot of the, the economy, you know, financial markets. So that demand also is just significantly stronger too. So it, it's, I would say none of the miners are necessarily going, oh man, you know, bitcoin's now down 25% versus this. We're going to pivot a little bit more towards it. I think it was more so of a light bulb moment of if you can go into AI workloads and felt comfortable in your execution and if your sites were set up for it, you're going to go down that path. I don't think bitcoin being a little bit lower here really changes that. They, I think they made up their mind that the train has left the station. Most of these miners are going down AI workloads and you would need something on the AI side to break for them to pivot back in mining.
- [18:00]
Steve Ehrlich
Understood. Okay, so let's talk a little more then about hash rate. I mean it's pretty much been going down since I guess October. I mean October 10th, middle of October when, when bitcoin hit an all time high of I think it was 126,000 and it's been a continuous trend downward since then. You mentioned how I, I guess one of the companies you were on a call with today talked about perhaps reaching that point where they start turning off machines because it's no longer economic to mine. But where has the drawdown been coming from so far over these last few months?
- [18:35]
John Todaro
Yeah, and in fairness this company said on the call we haven't reached that level yet. So. But it, but it is becoming topical. You know, there's another sell side analyst who asked that question. So it is, it is popping up. It's just, you know, on prior analyst calls, I Don't think I've heard that. So that was one of the first times we're not starting to hear it again. And it makes sense. I mean the price is where bitcoin's at. That's, you know, it makes sense to ask that question. Yeah, of course. So, so in terms of kind of why hash is maybe coming off the.
- [19:05]
Zach Pandal
Network, I would say it's a combination.
- [19:07]
John Todaro
You're, you're likely have high cost miners exiting. Right. Older rigs being taken offline that are no longer profitable. We are seeing that. So a lot of these companies do want to continue to kind of refresh. Some of them have more access to rigs and so you're able to slater slate in more efficient rigs versus older rigs. And so you're taking older rigs off and then you are seeing, you're starting to see a real effect from at least in the us, your public US Bitcoin miners moving data centers towards HPC AI and that's resulting in some hash coming offline, I would say. Still a lot of These companies, like CleanSpark for instance, they're going to be doing bitcoin mining at one of their sites up until the AI data center is ready to go and then they're going to be able to kind of switch, you know, kind of fairly close to that, that the date for when the AI kicks in. Some of these other ones need to start making the allocation now where they're, they're taking some of those data centers down that are for bitcoin mining and putting in HPC AI. So you've seen some of that. The point I'm trying to make is you're going to see more of it. So if you look at the bitcoin miners in the US today, the public ones, they still have a lot of data centers dedicated towards bitcoin mining, but those are earmarked for AI and the work on kind of retrofitting those towards AI is happening. And at some point when those contracts start kicking in for AI, there won't be bitcoin mining at those sites. They will have to take that down. So that's also another chunk of hash that will likely come off the network. You're seeing some of that today, but keep in mind most of these AI data centers have not been built yet.
- [20:40]
Steve Ehrlich
Okay, so that's actually really interesting. So is it talking like one to two years in the future? I mean, give me a timeline. And also what do you think hash rate is going to settle at once we reach that point? Because Perhaps it's time to, perhaps some people listening here today might think, well, I can try to calculate what hash price should be once we reach that point where the competitive environment for mining is a little less arduous.
- [21:10]
John Todaro
Yes, the timeline about that, like a 12 month time frame, you're going to see more of the public miner hash go down for some of these companies now other ones are growing it a little bit. So it's, it's not kind of, you know, everything will, will happen in tandem. But I would say on average that public U.S. hash, the percentage of the hash and also just absolute hash should come down and that's likely going to happen over the next 12 months as these data centers get, get built out and then it's going to accelerate on probably a 24 month time frame. If I'm looking at who's trying to secure AI leases now and when those data centers ultimately get built, you're kind of on a 12 to 24 month timeframe. And so more hash will come off the network over that frame. In terms of the kind of net impact, it's hard to tell. Right. Because then there's more efficient machines, some are growing hash a little bit. Will they be able to find a little bit more power and then put bitcoin mining back to that those sites. Right. So there is also a conversation among some of these bitcoin miners is hey, maybe I have a big site that, that I want to do AI with and it's suitable for AI, but maybe I can still go procure in that 24 month time frame some more remote site or a site that maybe isn't suitable for AI data center workloads and I can go put my rigs over there and do bitcoin mining there. So if they don't find any extra capacity, I don't know, it'd be a decent chunk, maybe, maybe five. But, but also not, not everything. Right. I mean keep in mind the miners are, you know, I think maybe only what, 20% of the total network. It's not like they're you know, 50.
- [22:52]
Steve Ehrlich
Yeah, I mean that's the important point. Like publicly traded bitcoin miners is not the entire bitcoin hash rate. Right. Most people listening here probably know that, but it's always worth kind of reiterating.
- [23:02]
John Todaro
Yeah. So I would say probably if you just take all their hash they have today, I would say probably about 25% of that comes offline over the next like 2ish year time frame.
- [23:12]
Steve Ehrlich
Okay, that is, that is interesting and probably a bit of A welcome respite for the ones that are still committed to, to doing it. Yeah, I had one more question along these lines, but I'm actually like, yeah, here it is. Last time that there was a big bear market, we were actively tracking how much bitcoin was being sold by miners. And that became a big hurdle that needed to be overcome in order for the price to sort of go back up. And obviously all that changed in the middle of 2024 when Donald Trump embraced bitcoin and away we went. Are you tracking right now bitcoin miners? Have any been selling, Selling in mass and are conversations happening about having to liquidate some funds in order to cover expenses?
- [24:03]
John Todaro
So they have been selling, but not necessarily to cover expenses. The ones going down AI routes, if you're signing a hyperscaler agreement, so like a Google Amazon, you're able to get financing. Cypher just closed that. Very attractive financing. Right. It was very low rate. They were able to get on that. So, you know, no one's really, if you're going down the AI route, needing to necessarily sell bitcoin to fund operations, you are, you do have at least the public ones. They have access to the capital markets and the capital markets are willing to lend to them if they have these contracts in hand.
- [24:40]
Steve Ehrlich
I guess you are. I was going to ask too, like, aside from that, just like operational expenses, overhead for, for operating the mining part of the business.
- [24:50]
Zach Pandal
Yeah.
- [24:50]
John Todaro
So some of them, yes. But that's been their policy for a while.
- [24:54]
Zach Pandal
Right.
- [24:55]
John Todaro
Like Cipher, I think, sells a good chunk of their bitcoin always to just kind of support their operating business for their cash costs and running that business. And they've done that for a while. So it's not necessarily kind of a change with where bitcoin prices are. The ones we have seen sell more bitcoin than they otherwise would have has been more so related to AI. And you started to see them selling a bit more even before bitcoin really broke down and started to sell off. So, you know, I guess the, the overarching point I'm trying to make on this is yes, they are selling down bitcoin, but more so to one signal to the market, hey, we're, we're really going down AI. We're taking it seriously. We don't want to be as closely correlated to bitcoin. We want to decouple a bit from bitcoin and the price of bitcoin and we also want to take those proceeds and maybe invest them into AI versus any minor going, hey, we're we're strapped for cash, we're at, you know, very negative margins here. We need to sell Bitco bitcoin to fund our operations. I haven't really seen that, at least among the public ones I cover private companies likely different. You might start seeing that, but not among my public.
- [26:01]
Steve Ehrlich
One last question to just kind of distill the main question that I think some of our listeners might have is is there some sort of big sell wall coming if the price of bitcoin drops into the low 60s or or below for a sustained period of, of time? Everyone's wondering like when are we going to reach the bottom? What type of, what does capitulation mean do you think we're sitting at? Is there a danger zone that people should be paying attention to?
- [26:32]
John Todaro
I don't know if there's necessarily a hard sell the miners would have to do, but I've always considered it somewhat of a danger zone when you're at your break even costs. And into your point earlier, we're at that for a lot of these public bitcoin miners or you're likely a little bit higher than that. But if you get, you know, into the 50s, low 60s, you know, you're, you're putting that margin a little bit more under pressure and then you have to think what the, the next havings coming up that's starting to loom, right? So then that's another thing these guys have to start considering. So that's always, I've always viewed that a little bit as a danger zone, but I wouldn't say, you know, there's not necessarily kind of a, a hard point where they need to sell. And it was different from last cycle.
- [27:22]
Zach Pandal
Because last cycle they did take a.
- [27:23]
John Todaro
Look, take on a lot of debt to fund the capex cycle for bitcoin mining machines. A many of those companies went bankrupt. In what emerged. You didn't have bitcoin miners taking on debt for, for their bitcoin mining initiative. So a lot of them, if they're doing pure play bitcoin mining, you don't have kind of certain, you know, debt that you need to pay down or anything like that. Big, big payments that are coming due. You are starting to get a lot of debt. But it's all linked to AI. They're not being lent this, these funds for bitcoin mining. They're being lent this for their data center builds. And so they are layering in debt. But it's specific to AI data centers. In some cases they're kind of borrowing at that data center level versus at the corporate level.
- [28:06]
Steve Ehrlich
Gotcha. Okay, thanks for all that. Before we just touch on a couple of other small topics before I let you go. Is there anything else related to the AI Bitcoin mining conversation that you'd like to mention?
- [28:18]
John Todaro
Yeah, I think what folks need to be considering too right now is, you know, if all these miners are going to be able to get power. Right. And that's been a question. It's been a question since they all started to pivot. But you are seeing a bit more pushback from a political standpoint at the state level around, hey, you know, should we really be granting all this power to data centers and to build all these data centers throughout our states and maybe localization, you're seeing protests in some cases. So I do think, you know, that isn't fully fleshed out yet. If there's going to be more political blowback and there starts being kind of less power that these miners are able to get than what everyone has in their power pipeline. And the market's trying to sniff that out a little bit right now too. The big thing to look for right now is the ercot, their new batch processing. It's not yet decided. It's, it's unclear kind of where that ultimately shakes out or what those rules will be if the miners all get the power they expect. Many of them have said, yes, we do fully expect us to get the power that we're kind of in. Some have framed it as grandfathered in. The reality is, I just don't think we know yet, but we are starting to see a little bit of pushback from kind of at the state level around all this power and compute going to AI workloads.
- [29:41]
Steve Ehrlich
Okay, got it. All right, well, thank you for walking us through all that. Just a couple of other crypto related topics to discuss. Coinbase is reporting earnings later today, I guess after market close. Expectations are like every other company that's already reported a disappointing quarter. But what are you looking for and what do you want to hear from Brian Armstrong and the rest of the leadership on the analyst call?
- [30:08]
John Todaro
Yeah, so in terms of results, I think our number, our estimates are a little bit lower than street consensus. So if you take that view, you would say, okay, there's going to be kind of a narrow mission, but I would say the buy side has already kind of brought numbers down. I think what's also going to be a bigger deal because Q4 should be okay. We have Robinhood out there. Q4 was okay. What is going to be the bigger focus is what's happening right now in Q1 and also the outlook there. What Brian Armstrong. So first off, what we're going to focus on is retail. Take rates because retail is such a big part of that business. It's one of the items we don't know kind of where cake rate ultimately landed. And then the, the total, the actual share of retail volumes. You don't know those actual numbers yet. You can have a pretty good estimate, but you don't know those actual numbers until earnings.
- [30:55]
Steve Ehrlich
So we worry for, been really sticky for Coinbase for, for years despite some people.
- [31:00]
John Todaro
They've been fairly sticky. Yeah, yeah. But a good, a good chunk of that will be mixed shift. So I would expect it to come down some which typically happens in these type of environments. But, and you saw that a little bit with, with Robin Hood as well. So, so, but, but the bigger question is going to be kind of where does the crypto industry evolve from here?
- [31:23]
Zach Pandal
Right.
- [31:24]
John Todaro
Because a big chunk of Coinbase's business at the end of the day is still altcoins. There's altcoin activity. Right. Net trading activity and they're in a precari. That's a precarious spot. I think the, the retail demand to trade those coins has really pulled back a lot and so we'll definitely be looking for any commentary they can give us on that. They're trying to diversify their product suite to actually sort of be less correlated with crypto prices and crypto activity. I don't think anything's going to show up that's all too moving for Q4 and likely not too, too moving in the first couple of months here of 26. But we would like to see their framework for prediction markets. Some of these other assets beyond crypto, where you can grow in that how you're looking to try to become a super app to compete more squarely with Robin Hood. And then the stablecoin business, the stablecoin business should be relatively in line. I mean that's pretty easy to model out and estimate. It's a great business.
- [32:17]
Zach Pandal
Right.
- [32:17]
John Todaro
Because it's, it's very stable for them. USDC Supply, that market cap has come down, but, but not all too much. They, they likely lost maybe a little bit of share to start the year versus Circle, but relatively that, that should be a fairly strong business segment for them or a stable business segment, I think where it gets a little bit more concerning too. And what we'll look for is where some of these, these bills ultimately shake out.
- [32:43]
Zach Pandal
Right.
- [32:43]
John Todaro
Because Coinbase is in the unique Position where you have the trading business that you don't want restricted.
- [32:49]
Zach Pandal
Right.
- [32:50]
John Todaro
You don't want defi restricted, but then you also don't want that yield payment on stablecoins restricted where most crypto companies aren't in both, like you look at Robinhood, they don't care as much about the yield on stable coins. Right. And then maybe Circle cares about that, but doesn't care as much about some like, trading restrictions because they don't have a brokerage business. So Coinbase is one of the few companies where it's, you know, it's almost negatively impacted with any, you know, kind of consolation. Right. So Brian Armstrong needs that bill to basically go his way or his business gets negatively impacted versus what they're doing today.
- [33:24]
Steve Ehrlich
Yeah, I mean, I'm glad you kind of led into that because that's where I was going to take the conversation next. The Clarity act and the yield issue with regards to stablecoins, I think we've reported on ad nauseam and it's one of the worst kept secrets, at least in crypto that Coinbase makes, I think some like orders of magnitude more from USDC than Circle does because of the distribution costs and I guess the yield sharing that they make from it. So if that goes away, that could be a significant problem. And I'm curious how you try to model something like that when you're figuring out what to do because it's such a bi binary outcome, like it's going to go one way or the other and you kind of have to live in this multiverse and plan for, plan for both. I mean, how do you account for that?
- [34:10]
John Todaro
Yeah, I would say it's very hard to determine how much USDC on Coinbase is ultimately just to get yield. Right. I think we can, we can get numbers and say, okay, a large chunk of it is getting yield on Coinbase, but that's not the same thing as hey, you're going to pull assets off Coinbase if you're not able to get that yield. So maybe you have USDC on Coinbase for other reasons and there's an opportunity to earn yield. So of course you're going to lock in and sign up for that. But I don't know if it's necessarily the same thing as the only reason you have USDC on Coinbase is because they're paying a yield. I would think, though, there is a non negligible chunk that likely does leave Coinbase if they're not able to offer those rewards on USDC or if there's not some loophole that they can try and, and utilized to do that. So I would think that that's fairly negative. Which is why Brian Armstrong would say hey, you know, no bill is, is better than what he would term a bad bill. And a bad bill is the one that impacts their business. And that's because right now they can do both. Right? There's kind of unfettered activity in DeFi. There's kind of no real restrictions there. So Coinbase and these crypto companies can benefit from DEFI continuing to, to grow or just not contract as much as it otherwise would have. And then you can also do the yield components component. So it's hard to determine really kind of how much USDC leaves the Coinbase platform, but that's where, that's where they get the benefit. You know the way the circle Coinbase relationship works is if the assets are held on Coinbase, they get the, the full share of the interest income on that. If it's on 30 third party platforms, they split it 50, 50 less any kind of distribution payments to those like Binance. And so if you do see USDC siphon off from the Coinbase platform, then that interest income where they receive 100% of it does go away. Now they're also paying, they're paying out on that too. So it's not like you get the full 100% effectively understood.
- [36:04]
Steve Ehrlich
And then just quickly because we're almost at time here going back to sort of like the, I guess negative sentiment in particular surrounding Altcoins and how that can impact Coinbase's trading business which are still obviously it's main workhorse wondering. I know they just announced their partnership with Kalshi. I'm not even entirely sure how up to date it is or sorry, how far off the ground it is. I mean they are moving into a couple of other areas. They've launched a perps business, they're getting into tokenized stocks, they're doing some more agent to commerce stuff, especially on base. Are there any particular markers, signposts that you kind of want to look for, you want to hear to get a sense of, even if it's early days, the type of traction that some of those new offerings are getting?
- [36:55]
John Todaro
Yeah, we would love to start seeing, you know. Well, one just commentary on customer adoption. So is it new customers coming out of the platform to participate in prediction markets? Is it existing customers going into prediction markets? Is it cannibalizing? So would management expect more prediction markets related to crypto? And that's not great because that just Means the crypto person is expressing a view a different way. And so maybe it cannibalizes the traditional trading volumes. Is it more, you know, sports folks? So that's what we're mostly going to be looking for. And then any growth net activity. Robinhood just had one of their best months ever. I think January was their best month ever in terms of prediction volume. So that's a positive tailwind. Would hope to see some of these other companies replicate as well, like Gemini now is prediction markets. Right. What I would say, though is it's starting to become fairly commoditized in that, you know, Robinhood has these. It's not like if you roll this out, you have something that that hood doesn't have and vice versa. You are starting to see, you know, it's just kind of competing for market share at some point here versus total, total gains.
- [38:03]
Steve Ehrlich
Okay, gotcha. All right, well, one last one. One last one. And it's a hard one. So I want you to think carefully. All right?
- [38:10]
John Todaro
Okay.
- [38:10]
Steve Ehrlich
You ready?
- [38:11]
John Todaro
Yeah, I'm ready.
- [38:12]
Steve Ehrlich
All right. What did you think of the Coinbase super bowl ad?
- [38:15]
John Todaro
Oh, so I actually didn't catch it live. I didn't have the super bowl on for the full time. I only caught a little bit of it. But I did see a lot of the reaction in fairly real time on different social media networks. I think what concerned me the most was just how much, like, your average person is not a big fan of crypto right now. So I, I didn't, I didn't love that. I didn't. I mean, sentiment's obviously way low in crypto, but it's, it's, it's. It was very negative. It's, it's almost your, your average person, I think, has a very negative view of crypto and crypto companies, and maybe to some extent, rightfully so. Like, you know, meme coins didn't really pan out. A lot of folks, like, they lost money there. Crypto is down a little bit in the dumps. I would say the only positive takeaway is sentiment's really low. And when sentiment gets really low, that usually means, you know, it's a good time to buy crypto assets. But in terms of volumes coming back and in terms of Coinbase attracting more everyday people who want exposure to crypto, there's likely some, some room we gotta go to get your average retail person where they, they like crypto and are interested and excited about it, because it did seem like the reaction just everyone's or a lot of these people's reactions just immediately seem negative, which I'm a little surprised by.
- [39:36]
Steve Ehrlich
Let me not that you asked, but let me tell you my experience with it. So we're watching the game and my daughters say why are they playing an old fashioned song on TV? And I'm like I think I was 18 or something when the song came out. So I immediately felt old and then I didn't get it. So I texted someone at Coinbase in PR to ask them what was the point of that ad because maybe I'm just not cool and I didn't get it. And then they told me it's basically a way to kind of like hoodwink people into being like Coinbase. And I got a lot of people talking. I guess that's the point of the ad. Although it's tough to sell something when it's so hopefully you have to be brave to buy. But it did get a lot of people talking so we'll have to see what happens and we will leave it at there. John, as always, thanks for for joining us and thank you to everybody for watching and listening. Please stick around because we I'm going to be coming back in a couple minutes with Zach Handel, the director of research at Grayscale, to talk more about how bitcoin and tech stocks are trading and that so divergence between bitcoin and gold. And I'm going to get his reaction to the super bowl ad too. So so please stick around. We will be right back.
- [40:47]
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- [42:02]
Steve Ehrlich
Welcome back. As promised, I'm here with Zach Pandal, the director of research at Grayscale Investments. And unfortunately, he's a fan of the New York Giants and also the Green Bay packers, two teams that haven't had success in a little while. And he has to deal with me talking about my Eagles, who are just one season removed from winning their second super bowl championship. But as we, as I promised. Zach, what do you think? What did you think of the ad?
- [42:28]
Zach Pandal
Hey, Steve. Hey, everybody. Thanks for tuning in. Look, maybe I just have positivity bias, but I love the ad. I thought it was great. I was in a big party with, you know, friends and family, their kids, my kids, that sort of thing, and everybody kind of stopped to listen and started humming and singing along, not sure exactly what was going on. And then we were all surprised when it was coinbase. So I don't know how successful these things are. I'm not a marketing guy, but in terms of, you know, we're an attention starved kind of world and very hard to break through, at least in the event that I was at it definitely broke through more so than anything else that came up on screen.
- [43:09]
Steve Ehrlich
Got it. Okay. All right, so let's get into it. You published an interesting report this week, really talking about how bitcoin has been trading more like tech than gold, despite its sort of prevailing narrative as a form of digital gold. There's been plenty of times, as you've pointed out, that it tries to sort of thread the needle or straddle the lines between both. But, but right now it doesn't seem to be trading like gold at all. And, and as opposed to trading up, when tech goes up, it's going down with tech. So talk to me about what you saw and what you wrote.
- [43:42]
Zach Pandal
Yeah, this is sort of the key observation. And let, let me just talk about the facts first and the narrative piece second. And I, I think that's maybe the, the more challenging part, but the, the facts are relatively straightforward. The price of bitcoin, you know, went up with other frontier technology assets and it went down with those types of assets as well. And this is software companies, this is defense tech. This is quantum computing stocks. I think that's an important point to emphasize. You know, the charts look very similar with, you know, quantum stocks and, and price of bitcoin. And what that tells me is there's not something wrong with, with bitcoin per se. You know, nothing has changed about the functioning of the network and all the Particulars and we can talk about all of those things. But what changed was risk taking in markets. And I think it was a pretty clear tell that the marginal investor that came into Bitcoin in the last couple of years probably was a growth portfolio of some kind. And we can talk about again the narratives. But I think growth investors see public blockchain technology as a secular growth industry with tailwinds, regulatory tailwinds, adoption tailwinds related to stablecoins, tokenized assets, these sorts of things. And bought bitcoin, bought ether for that reason to build it into a growth portfolio. And as those types of portfolios were de risking, that meant de risking in crypto selling, crypto also. So I think that that's transparency transparently what's going on in the market and not something broken about crypto. What it is is a challenge to the narrative. It's a challenge to the digital gold narrative, at least over the short term. Price of gold, price of silver. We're running earlier this year and I certainly consider myself a deep believer in this idea that macro imbalances are driving demand for scarce commodities and that crypto should be considered part of that thesis. So it was sort of a disappointing to people that own Bitcoin for that purpose as a dollar debasement type of thesis and didn't perform as you would have expected in that sort of scenario. So it's a challenge to the narrative. I don't think it's a challenge to the technology. And I still believe in that thesis, that narrative in long run. But those are the facts that I think what is causing some debate for sure and puzzlement among many bitcoin investors at the moment.
- [46:12]
Steve Ehrlich
I'm curious your thoughts because we talk a lot offline, but we haven't had a chance to speak about this. All the rumors are maybe more than rumors. Retail buying of gold in particular from the Chinese market because we track central bank buying. In fact, some central banks have been deleveraging their gold because of the price appreciation has been so high that they have to maintain certain portfolio allocations. Are there any sort of market structure imbalances like that, for lack of a better term, to explain why certain precious metals are going up and bitcoin's not? I mean, bitcoin is obviously banned in China, even though I know there are ways for people to get it?
- [46:51]
Zach Pandal
I think in this case it's more about the things that were causing the squeeze on the metals side rather than something problematic necessarily with crypto. Of course, in the crypto asset class, the exposure and the access are getting broader and broader. Grayscale and important piece of that story introducing more ways to access a crypto through ETFs and all this sort of thing. Your listeners very familiar with kind of grayscale, the grayscale story in that, in that regard. But what you did have was some squeeze happening in the metals markets. Some people are familiar with this. But if not the kind of backstory is that the US threatened tariffs on lots of different products, including potentially precious metals that caused some precious metals to leave the London market, come to New York to avoid potential tariffs. And so when you had speculative inflows into the ETFs into other things, there wasn't necessarily enough inventory to meet that demand. And you got really squeezy price action, this sort of parabolic move in silver and then a big retracement and it continues to fall today. And I think that that tells you that while there is clearly demand for scarce physical commodities related to the debasement trade, and I think that that's something that continues for many years, frankly, we probably overshoot shot by a significant margin on speculative capital inflows and shortages in the London metals market. And so we've given that back. I think my own view be precious metals trade kind of weak for the short term. For those reasons, I think we overshoot shot. I think there's retail losses there. You know, the correlation with stocks is now positive. Just, just like Bitcoin, everything is kind of de risking it. Crypto often moves first. It hit us obviously significantly over the last couple of months now affecting precious metals. I think these are some of the same market dynamics at play.
- [48:44]
Steve Ehrlich
All right, so just have a couple of minutes here, but I want to look ahead a little bit. The FT actually had a really interesting headline. I think it was earlier this week. It was something along the lines of the rise of the everything but tech trademark because there were these huge sell offs from I guess fears about the big capex for the AI developers that I spoke about with John earlier and then the impact of what that could mean for like tax software companies and the like. So if we're in this world where people are selling off in tech and bitcoin is now trading with tech going down, what do you see happening next?
- [49:24]
Zach Pandal
That's a great question. I'd love to tackle this. Look, in markets you very often see a shoot first, ask questions later type of dynamic. You know, you worry about AI disruption and the first instinct is to retreat from all types of software stocks. But I think the Next stage is going to be a more thoughtful differentiation between the things that seem most likely to be disrupted by AI. You know, the legal and compliance barriers are lower in some sort of way and they're more readily disrupted and then things that are not obviously readily disrupted or maybe even complementary to AI. They may be software, but it doesn't mean that they're disrupted by AI. There's a lot of things going on in crypto, but I do want to emphasize that I think public blockchain technology is more like the latter than the former. It's certainly not obvious to me why large language models are going to displace what public blockchain technology is doing. Creating trustless systems for finance is completely different than what AI models are doing. And I think there are some pressures from AI to crypto. Things like privacy is an important question and what that means. But by and large, I think these technologies are complementary, that, you know, public blockchains probably will be part of the financial rails that AI agents are using. So I think what we had was a shoot first, ask questions later sort of dynamic, both in software stocks and in other things. You know, quantum is hardware technology that, that felt, you know, public blockchain technology, its own special thing. All of that stuff sold off together. I think you're going to see a differentiation trade. Looking ahead, my guess is, you know, crypto, we certainly have some challenges that we're working through, but there's some potential positives. We get the market structure bill passed, if we see some wealth platforms, onboarding, Bitcoin and Ether, we could find a sustainable bottom here and begin a recovery process. So that's my view. Differentiation trade is the next phase following the sell off that we saw really across the board recently.
- [51:27]
Steve Ehrlich
What does that differentiation trade look like? I mean, tech was sort of a canopy across, or AI was a canopy across all of tech. But clearly now we're seeing some segmentation here. How long might it take for some of those lines to be drawn? What are the different sides? And how do you get Bitcoin to fit into the right narrative so that people sort of put it into the correct bucket when it comes to figuring out how assets should be correlated with each other?
- [51:59]
Zach Pandal
The message that we are sending to our clients is that you should focus on the key first fundamental trends, the mega trends in the crypto asset class. That's where you should be deploying capital. And what are those things? To me, those are regulatory clarity, driving adoption of stable coins and tokenized assets of a use case of a public blockchains and then what we're calling maybe because it's easy to remember the three Ps, privacy, prediction markets, and perpetual futures. To me, those are the innovation trends within the crypto asset class. So we're encouraging investors to allocate capital to those places first. So, you know, the obvious beneficiaries of things like tokenization, stablecoins are the big smart contract platforms, Ethereum, Solana and other critical middleware technology like Chainlink. You know, these are things that are likely to benefit from growing adoption in general. And of course, there's lots of other assets on privacy prediction markets, perpetual futures, zcash, Hyper liquid. You know, your audience knows these as stories. These are assets that we are fond of with. So I think that there are important structural trends and you're supposed to allocate capital to things that are most closely tied to those fundamentals. What about Bitcoin needs to overcome to make sure that it is leading if it's, if it's going to lead the asset class. And some of these things are the quantum question and its correlation to gold. If Bitcoin struggles to answer those questions over the short term, it's possible that the kind of asset that drove the asset class primarily to this point, you know, begins to lag. We will see, we will see how that goes. But it's possible that in a scenario where stable coins and tokenized assets are really the thing, the engine driving the crypto asset class forward, that could be a scenario where Bitcoin specifically lags some other assets. So these are the kind of open questions I think are still unanswered at the moment.
- [53:54]
John Todaro
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