Remy: In New York morning trade, Bitcoin is flat and holding right up at $80,000 while Bitcoin mining has traditionally been quite the brutal way to make money in crypto. But this year the business model experienced a generational pivot. Now facing record high production costs that drove operations below cash break even enlisted miners pivoted from running rigs to renting power. And in recent months, public operators have signed 15 and 20 year leases. With hyper scales and frontier labs like anthropic repositioning themselves as essential landlords to the boom. Well joining us this morning to weigh in as Brian Dixon, CEO of Off the Chain Capital. Good morning, Brian, and happy Monday to you. So first and foremost, mining Bitcoin became too expensive as production costs rose. But why did miners decide to rent their power to AI companies instead of continuing to mine crypto?
Brian Dixon: Well, I think this is something they're going to continue to do both of over time, but this is something we've learned years ago as a value investor that got us excited is the Bitcoin mining companies that have tremendous infrastructure and data houses can actually go and do contracts with these large AI businesses and provide that compute for them. And the compute revenue drivers on AI is a significantly more profitable business than the mining of Bitcoin. And as of today, one of the biggest bottlenecks with AI is power, right? It's a, it's a huge bottleneck to try to continue to get the amount of compute needed to keep up with the demands of artificial intelligence as it grows. And a great customer for that and a great Provider for that are the Bitcoin mining companies because they already have this infrastructure developed. They often have them on stranded assets in areas where it's very efficient to mine and they can get good power costs. And by partnering with these larger LLMs, it generates a brand new revenue stream that often allows these businesses to trade at significant multiples over their fair market value.
Remy: Yeah, and speaking of which, uh, Brian, Wall Street is paying a premium for minors with signed AI tenants. So do you think this is a better business model or do you think investors out there are chasing AI hype?
Brian Dixon: I think at current, it's a combination of two. I think there's chasing a little bit of the hype because there is a lot of hype around the AI space right now. But in terms of a better business model, I look at it as an additional business model. I think a lot of the core Bitcoin miners will continue to do that into the future, but you have to remember a Bitcoin miner is basically producing a commodity, it has no control over the cost. Of, right? So, Bitcoin could be 50,000, it could be 80,000, it could be 125,000. The miner doesn't control that, but they're gonna still dedicate compute to go and create the opportunity to mine Bitcoin. So what they're looking for is new opportunities to generate profitability to expand those business models into the future and AI compute contracts is a great Way to do that because of how much more profitable they are. Now we have seen some Bitcoin mining companies that have begun to sell large and some of them even all of the Bitcoin off of their balance sheet to fund the operations and development of some of this to expand their compute contracts. But whether they're gonna stop mining Bitcoin altogether, I don't see that in the foreseeable future. I think the big powerhouses that are the Bitcoin miners will continue. to do that. It's a pivotal part of security of the Bitcoin network. And if you look at Bitcoin's performance over time, it goes through these cycles. So the most recent all-time high we had in October of last year, it went up to around 126,000, and I believe we'll see it go far past that in time. So as it continues to move through those cycles, um, that will create another opportunity for profitability. It'll just go in cycles with Bitcoin cycles.
Remy: Yes, and when it comes to the miners, it goes without saying that they have signed massive deals, but what do these companies need to do in order to turn contract promises into real cash flow?
Brian Dixon: They're gonna have to build and that's kind of the challenging part, right? So you can get these big contracts and you have to make sure you have the infrastructure, but a lot of them have to go build out additional infrastructure to support this. So what we know today is there's been about 4 gigawatts that's been contracted with these large AI compute companies. But only 550 megawatts of this is paying that rent today. So that means there's a tremendous amount of development that still needs to take place, and the market as of today is paying for these contracts. So there's about a 12.9 times forward sales if they have a tenant. And at 3.7 times that without a tenant. So what that tells us is that if you have that tenant coming in, the market is pricing that at a massive multiple. And so all of these deals that we're looking at here, you really got to pay attention to do they have the contract? Have they built it out? Is that getting paid on yet? Or is it part of these multiple gigawatts of additional infrastructure that need to be built over time to execute on those contracts?
Remy: And of course it's a big week for earnings as well as central banks, and your report, which was recently released, does show delays to hurt value much more than interest rate hikes. So why does the building calendar matter more to investors than what the central banks do, in particular the Fed?
Brian Dixon: Yeah, because at the end of the day, the interest rates are high or lower, depending on how they change them, these providers still need to build this out, right? And so, yes, that's gonna create an impact in the short term, but long term executing on these contracts, it just can't be done unless those development projects get built to completion. And so the delays in construction from what we've seen provide a much bigger issue and impact than a small. rate change for what the federal government could do. So the miners need to continue to build out the infrastructure. They need to execute that so that they can basically make sure they can fulfill their end of these contracts that they are putting in place, because without that, it really doesn't come to fruition like it needs to. So in our experience and through our research, the delays in these construction issues that may arise will create a much bigger impact on the miner than any particular rate change.
Remy: And Brian, when we're talking about upgrading some of these sites, we know it costs a pretty penny, and miners are relying on some of the big Tech giants out there. So what happens to these companies if big tech cuts back on spending?
Brian Dixon: So if they cut back on spending, I think that would just create an impact to the profitability of the revenue drivers for these types of contracts. So, you know, over time, we've seen an expansion of that with AI compute. I don't see that occurring in the short term because they're, I actually believe today, although there's a lot of hype dollars chasing the AI trade, I think the AI space. Over the next 5 to 10 years will grow so significantly, we really can't conceive what those numbers will be because it's really impacting every area of our life. Just like digital assets has done over the last 10 years and now it's being integrated in the traditional financial system. It's going to be integrated in every area of our life and we're even seeing the traditional stock market. Tokenize stocks so those can be traded after the business model that crypto assets created, which is 24/7 trading three days a week. Just recently, NASDAQ did a $100 million investment in Kraken, which is the second largest crypto exchange in the US, to execute on a similar concept for tokenizing stocks in the traditional securities market. And I actually think that's going to expand along with the AI market and it's going to get way bigger than where it is today over the next 5 to 10 years. And as that continues to occur, I think in the long term, the miners will experience tremendous profitability for that because they're a prime candidate to be a provider of this infrastructure they have in place and have the experience and skill set to continue to develop into the future.
Remy: And Brian, finally, before I let you go, in New York morning trade, we are looking at Bitcoin hovering right below the 80,000 level. And of course as we look ahead to the months of November and December, there are a lot of fundamentals and technicals we're paying attention to. But what range do you expect Bitcoin to end at as we head into the new year?
Brian Dixon: So it's always challenging to predict exactly where Bitcoin is going to be. So I like to look at models that we use to help us analyze that. So the majority of the models that we use today, whether that's stock to flow, whether that's basic trend line analysis, whether that is power law models or models like Metcalfe's law where you take the number of users in the network, you square it, and then you multiply it by the transactional volume. That's flowing through that network. Those models today indicate that Bitcoin is significantly undervalued. Some of those models even show Bitcoin should be somewhere in the $150,000 to $250,000 range as of today, but it's trading at $80,000. So when we analyze those, that looks like a buy opportunity for Bitcoin in the market today as being a significantly undervalued asset from where a lot of these models indicate it should be.
Remy: Well, Brian, always great talking to you. Thank you so much for joining us this morning and thank you so much for sharing all of your insights as well as your perspective.
Brian Dixon: Thanks for having me on. I appreciate it, Remy. Take care.
