Episode 47: Texas Energy Dominance

Texas is positioned at the forefront of the Bitcoin mining landscape, exemplifying the convergence of energy and digital currency innovation. This episode delves into the critical role that natural gas, renewable energy, and forward-thinking regulatory frameworks play in powering both Bitcoin mining operations and the region's electricity infrastructure.

• Texas claims approximately 15% of the global Bitcoin mining hash rate 
• Natural gas availability leads to lower energy costs beneficial for mining 
• Significant investments in wind and solar power enhance energy stability 
• The decline of coal in favor of renewable resources improves environmental impact 
• Batteries serve as essential energy storage solutions for grid stability 
• Bitcoin miners provide flexibility to meet high energy demands 
• The energy-only market fosters competitive pricing in electricity supply 
• Bitcoin serves as a hedge against inflation and a viable monetary system 
• Riot Platforms positions itself for sustainable growth in the Texas landscape

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Chapters

• 0:07 Bitcoin Mining and Texas Grid Integration
• 14:38 Texas Grid Structure and Deregulation
• 22:56 Texas Grid Flexibility and Innovation
• 29:14 Bitcoin Mining Economics and Grid Balance
• 46:38 Bitcoin
• 53:09 Bitcoin Reliability and Growth

Transcript

Speaker 1: 0:07

Welcome to the BlockTime podcast hosted by Riot Platforms, where we take a deep dive into Bitcoin, bitcoin mining and the energy grid. So today we're going to do a recap of kind of integrating all these different concepts, and we're going to start with, obviously, we have our largest sites here in Texas, so we're really going to be focusing here on Texas and the Texas grid. But first I want to zoom out and take a look globally. Where is Bitcoin mining located? So the United States is estimated to have approximately 40% of the global hash rate. To have approximately 40% of the global hash rate and that stands out as greater than any other single country. When we translate that hash rate into what that means in terms of electricity consumption, it's approximately 20 gigawatts of power consumption total. And we can put that into context, especially here in the United States, by comparing how much Bitcoin mining is here, which is approximately 8 gigawatts, compared to the total generation capacity of the country, which is 1,100 gigawatts. So that means that Bitcoin mining consumes approximately 0.6% of United States electricity. And to further put that into context, in the first half of 2024, the US added 20 gigawatts of generating capacity, so double the amount of Bitcoin mining. It really shows how quickly the grid is growing in the United States for a number of different reasons, this electrification phenomenon, which ranges from people plugging in their Teslas at home to new data centers and, of course, bitcoin mining. So, zooming in on Texas, texas has approximately 30 million people, which is 0.4 percent of the global population. We've got 700,000 square kilometers, which is 0.4% of the global population. We've got 700,000 square kilometers, which is 0.5% of global land, and we have 100 exahash, which is 15% of the global Bitcoin mining hash rate. So one of the interesting questions is why does Texas have a disproportionate amount of Bitcoin mining compared to anywhere else in the world? Now, this is a picture of our site up in Corsicana, our beautiful buildings A and B, and this you know.

Speaker 1: 2:40

To answer that question that I posed about what drives Texas's leadership in Bitcoin mining, it's the combination of the energy abundance that comes from nature, the deregulated grid, or as I like to call it, the well-regulated grid, and number three is the specific electrical properties and economic properties of Bitcoin mining, which make it a flexible load, and we'll get into that later. So, starting off with the natural energy abundance that Texas has, we have to start with natural gas. So Texas has several resources below the ground, most notably the Permian Basin that has been developed to extract oil and, as a byproduct of that oil extraction, natural gas. So this has a number of interesting effects. One is that when the price of oil is high, people go out and they pump more oil, but they also pump gas as an associated gas, as they call it, which means that there's really an excess amount of natural gas being produced and driving down the cost of this energy resource. Now we also in Texas have the benefit of a very well-developed system of pipelines, a network of pipelines that bring gas from West Texas to the population centers, to the coast, where we have new export facilities of LNG liquid natural gas and we also have along the way lots of natural gas power plants.

Speaker 1: 4:26

And what a natural gas power plant is is essentially a turbine, a gas turbine which looks like and operates like a jet engine so you might be familiar with those from traveling around, traveling around and these jet engines are then connected to a generator, which is magnets that are spinning to create that electricity instead of creating that propulsion for flying a plane. These natural gas power plants are very well regulated as well from an emissions perspective. They have to make sure that they're respecting the environmental norms set by both the EPA and, of course, the Texas Environmental Regulator. And they produce approximately half of the electricity here in Texas, so it's 68 gigawatts of capacity. Texas, so it's 68 gigawatts of capacity. And the other really important property of a natural gas power plant is that it can be turned on or off at will. So this is what leads them to being referred to as dispatchable resources. In terms of the service they provide to the grid, they're also a very quick start, so you can start a natural gas turbine very quickly, just as you can imagine an airplane taking off. They're able to adjust how much electricity a natural gas power plant is producing.

Speaker 1: 5:57

Now, another very important resource on the grid is wind. So if we look at a map of wind distribution, it's not evenly distributed like you might expect. In fact, there's very large disparities where you have a big wind corridor that goes down the middle of the United States, through Texas, especially through the west of Texas, which means that it's far more economical to site power generation with wind in that area. Now one of the challenges historically has been how do we get the electricity from West Texas to the population centers where it gets consumed. Texas policymakers addressed this by creating the competitive renewable energy zones CREZ. This was a $7 billion transmission project that cracked the chicken and egg problem of who builds first transmission or generation. In addition to investing in transmission at the federal level, there's also incentives to build wind power. There's the federal production tax credit and the investment tax credit. These have been amplified with the infrastructure bills that have been passed at the federal level to further drive the development of renewable resources.

Speaker 1: 7:23

Now, one of the challenges with wind, obviously, is that sometimes there's no wind. Sometimes there's a lot of wind, in particular at night. There's usually far more wind at night than there is during the day, but that is offset by the development of solar power. So Texas has a leading amount of grid-connected solar power 27 gigawatts and these solar panels a lot of them are in West Texas as well, because when we look at a map of the distribution of what's called solar irradiance, which is a measure of how much sunlight can you actually harvest and convert into electricity, it's also far more prevalent in the south right. So if you go to North Dakota, you're not going to have a lot of sunlight compared to going closer to our neighbors in Mexico, and it's also more prevalent in the West. So West Texas, new Mexico, arizona, the South of California all great places to site solar panels and we've seen the rapid development of grid scale solar in those geographies.

Speaker 1: 8:40

Now last but not well, actually not quite last but something that has been gradually going away in Texas is the power generation from coal. So if we look at how the Texas grid has evolved over the past couple of decades, we see a notable decrease in the use of coal. Coal used to be 37% of power generation in Texas, and this is fairly recent, in 2007. And since then it has decreased to 12%. And what has replaced it? It's actually wind and solar that have replaced it. Wind has gone from 3% to 23%. Solar went from 0% to 10%. Now gas stayed about the same at 45%. Nuclear kind of decreased a little bit from 13% to 8%, mostly because no new nuclear was built and the grid grew. So as the pie grew, its percentage market share decreased. There is a renewed push to add more nuclear to the Texas grid. So that will be really cool to see. I think that it's a great technology and Texas policymakers, as well as the policymakers at the federal level recognize the strategic importance of having more nuclear power in the United States.

Speaker 1: 9:59

So this decrease in coal is really great for our air quality. Coal unfortunately does cause the most air pollution if we compare it, especially if we compare it to other dispatchable power like nuclear or like natural gas. Coal emits a lot of particulate matter and SOx, sodium and nitrous oxide, nox. These are obviously bad for our health and they're also very expensive to filter out. And so as EPA requirements on those emissions have tightened, coal has become less and less competitive from an economic perspective and that has driven it to kind of slow down and close down coal plants here in Texas.

Speaker 1: 10:52

On this map here on the left you can see we've got highlighted one of the larger coal plants that used to exist out by the Sandow Lakes. So this was Alcoa's Sandow Mine. It had a combination of a coal mine, a coal power plant and an aluminum smelting facility. So this coal plant was powering the development, the production of high-grade aluminum. The aluminum was going into the space shuttle program. Now obviously the space shuttle program wound down.

Speaker 1: 11:27

That led to the closure of the aluminum plant, had the knock-on effect of causing the closure of the coal plant as well, and it caused a lot of economic uncertainty in the town of Rockdale, which is close to Alcoa's Sandow facility. This also caused the existence of stranded electricity, because there was a lot of infrastructure from a transmission perspective that was left in this area, underutilized. Now, one of the really neat things about Bitcoin mining is that it can be cited and it's actually advantageous to cite it somewhere that has stranded power assets. So this was a perfect place to develop the grid scale Bitcoin mining, and this is where Riot's Rockdale facility is located. There's also other Bitcoin miners in the local area that have popped up and have revitalized the town of Rockdale and created lots of employment for folks who used to work at Alcoa but were laid off and then they had to start commuting to other places or had to move, and now they're able to work in their local community, benefit the local economy and, of course, as taxpayers. Riot pays property taxes there, so as do the other Bitcoin miners, and that has driven lots of additional resources for local government.

Speaker 1: 13:01

The next resource is batteries. The next resource is batteries. So batteries are a small resource relative to these other major ones that we've discussed, but they're very strategically important because they can be located in places where transmission constraints actually cause issues with those peak times when everybody's using the grid, and these batteries are able to meet that local demand and bolster the grid and provide power back. They can also charge when there's too much electricity, and so that way they're providing a form of energy arbitrage over time to make sure that the grid stays balanced. The growth of batteries has been driven not just by the necessity of providing kind of a backup to renewables that are intermittent, but also because the economics of battery technology have improved. So, as people are using batteries in more and more applications, like cars, for example, the unit cost of these batteries has been decreasing and have created a really interesting economic scenario for them. Last but not least, texas has the ability to import and export electricity with our neighbors. We have what are called DC ties direct current that go to the north, to the east and, of course, to the south. These connect to our neighbors without needing to synchronize with them.

Speaker 1: 14:38

So often you'll hear people say that the Texas grid ERCOT, that they need to join the national grid, and what they mean by that is that it's not that there's no physical connection, it's that they want there to be more coordination with our neighboring grids so that instead of being direct current we're on alternating current and we're at the same frequency of 60 hertz. Now that proposal sounds great on paper, but then when you actually look at the facts, there is no national grid. There are lots of regional grids in North America and they all serve different you know different constituencies. And that used to be the case a long time ago. Back in the early 20th century they did try to synchronize the West Coast and the East Coast on the same alternating current. They were successful for a little bit of time, but they quickly realized that the effort in maintaining that same frequency was far greater than any benefit, because you're just having to go over a very long distance and it just didn't really make a whole lot of sense. So usually what people mean when they want Texas to join the national grid is that they want Texas to have the same regulatory framework that other grid operators have, because they cross state lines. Then they roll up into the federal framework for the regulation of electricity with FERC. Now the reason why Texas has not wanted to integrate with that federal framework really has to do with the fact that Texas wants to be more dynamic and independent and be able to meet the needs of local residents, local power consumers, but also create a market that is very competitive and agile.

Speaker 1: 16:39

The advantage of Texas's model also goes into how the market is designed here. So we have what's called an energy-only market, which is contrasted with markets that have both energy and capacity. What energy-only means is that the power generators are independent, right, so they're not owned by the government. They're not owned by the grid operator, they're private companies. There's also co-ops, so there are nonprofits that are involved in power generation as well, but they only get paid based on the electricity that they actually produce and deliver to customers. They don't get paid capacity payments through capacity auctions, like other jurisdictions do.

Speaker 1: 17:29

So how does this Texas grid work on a day-to-day basis? It's a combination of what's called dispatchable energy and then ancillary services capacity. So on a day-to-day basis, the Texas grid operator, ercot, looks at the weather forecast so they see okay, what's going to be the temperature tomorrow, how much wind are we going to have, how much sun are we going to have, and from that they can estimate what's going to be the total demand for electricity minus the generation from solar and wind. That way they know how much dispatchable power they need to have and that they need to incentivize or have a market for those dispatchable resources. So, from there natural gas power plants, nuclear plants, coal plants, batteries as well will bid into that system to provide electricity to the grid for the next day.

Speaker 1: 18:31

Now, obviously, if you've lived in Texas for a little while, you might know that the weather forecast is not always 100% accurate. In fact, sometimes it's pretty wrong. So they can't rely purely on the weather forecast. They also have to build in a reserve and this is where the ancillary services capacity is critical as well where, as a power plant, you can choose am I going to bid into energy and get paid for producing electricity, or am I going to bid into ancillary services and get paid to not be on right? So to stay off the grid and not produce electricity in case there's a forecast miss and in case the grid operator needs to bring me online at the last minute to meet that forecast and miss and to make sure that there's no brownouts or blackouts. This is important not just, you know, on a minute by minute level, but actually on a second by second level, subsecond level, because if you think about what a grid frequency is 60 hertz. That means that you have to be matching supply and demand at a sub-second level in order to prevent the electricity grid from collapsing. So it's very crucial to make sure that you have enough reserves to call upon and to balance the grid. So when ERCOT goes and asks for resources, for reserves, they actually don't just ask for generation, they also ask for load, because there are consumers of electricity that can be flexible as well, most notably Bitcoin miners. So when they go to a load, it's the mirror image of the contract that they would have with a generator, where, with a generator, they pay the generator to stay off in reserve. With a load, they pay the load to stay on in reserve. It sounds counterintuitive, but it actually has the same outcome from an electrical engineering perspective and also from an economic perspective.

Speaker 1: 20:50

Moving on to the aspect of deregulation, as we've mentioned, the Texas grid is well regulated by separating out the different resources. So you have power generators that compete against each other on a free market, and then you have, in between, you have the transmission and distribution system, and this system is where, essentially, instead of having lots of competition, so lots of power lines that are duplicative, going between different geographies they set up quasi-monopolies, right where there's a competitive bidding process and then there's a regulated rate of return for those assets to make sure that you know the system is not too expensive for consumers. The system is not too expensive for consumers. And then on the consumer side there's a competitive process for having retail services essentially billing and customer support to make sure that people are able to choose what kind of contract they want to have. Sometimes that looks like a fixed rate contract. So a consumer will say I don't want to have to worry about the price of electricity going up because I'm going to be living here for five years, so I'm going to lock in a rate today. Other times they might be renting and they know they're going to be moving in a year, so they prefer a short term fixed rate contract. But they're able to compare the prices of different retail providers and pick out the solution that works best for them. This can be contrasted with prior systems of providing electricity in the United States. So the alternative is to have one big monopoly that does the power generation, does the transmission and distribution and also has that relationship with the end customer, and then the regulators will make sure that they're not gouging the customers.

Speaker 1: 22:56

This was historically how a lot of grids operate. Some still do operate this way. How a lot of grids operate. Some still do operate this way and what folks have found is that that can get expensive because it's hard to tell whether there's actually gouging or not and you don't have that competitive market dynamic. You also don't have the enablement of new technologies that come in and disrupt the market right. So you know, if you decide that you want to do batteries, for example, in the Texas grid, well you can just get approval for that and you can start building those resources and either the economics work out or they don't. You don't have to go through a rate-making process of lobbying the legislature to let you build batteries process of lobbying the legislature to let you build batteries. It's a far more open system that invites new technologies, new ways of thinking and deliver better value for consumers.

Speaker 1: 23:55

So this also feeds into the philosophy that the grid operator has called connect and manage. So rather than trying to centrally plan everything and make sure that everything works up front, ercot will essentially fast track resources to get them onto the grid and then manage them after they're on the grid by managing. What that might mean is that a developer might build a large solar grid scale facility right, that might have an output of, say, 500 megawatts, and other grids might say, hey, you're not allowed to build that until we have enough transmission for 500 megawatts. What ERCOT will say is you can build that. We only have transmission, let's say, for 250 megawatts, but we're going to add more transmission in the future, and so you can size it to 500 megawatts, but we will manage the resource and limit it to its output until we've built additional transmission. And so in practice, that allows developers to move more quickly, and then ERCOT can work around that and build that transmission at a later point. So this has attracted a lot of developers who want to build quickly and want to use new technologies.

Speaker 1: 25:22

So here I have a table of what's called the interconnection queue, which you can think of the line of projects that are hoping to be built in the future and who have applied for approval with the grid operator, applied for approval with the grid operator and are under study to make sure that they're going to not destabilize the grid but are actually going to help improve it, and you can see that there's an astronomical amount of power generation that wants to get onto the grid approximately 400 gigawatts, which is a multiple of the current existing resources, which are around 80 gigawatts. Now, not all of these projects will get built, so typically you can expect that approximately 10% of these projects will actually come to fruition, but it reflects that there's just a tremendous amount of interest to build more power generation in Texas to meet the increasing demand for the booming economy. Here, most notably, there's lots of solar that wants to come, solar and lots of battery as well, and these are very complementary technologies. The other thing to highlight is that at the bottom here I have the Texas Energy Fund notice of intents of 55 gigawatts. This is natural gas power plants that want to respond to what the legislature has asked for and what the people of Texas have asked for, because this actually this fund of loans that have a lower interest rate was approved by referendum by the people of Texas as essentially trying to create a grid-wide backup power source in case the intermittent power generation from solar and wind are insufficient. The necessity of this comes from the fact that, as we mentioned earlier, solar and wind benefit from federal subsidies, and so if we don't offset that with subsidies for other dispatchable technologies, then we would end up with too much solar and wind and that would put the grid at risk of having blackouts and brownouts in the situations where there's not enough solar and wind being produced. So here's an example of what that might look like.

Speaker 1: 27:49

So when we look at, when do we have solar? So solar ramps up in the morning around 8 am and I took for this case study I took May 8th because this is a particular day where there was a gap at the end of the day when solar was ramping down from 7 pm to 8 pm. The wind was not picking up as much as the grid operator would hope it would, and that you know. We saw that the natural gas power plants essentially were operating, you know, full steam and were producing as much electricity as they could. The batteries also kicked in. Almost four gigawatts of batteries were outputting power and this was a very tight situation because on the demand side there was it was actually an exceptionally warm day early in the season and the electricity price in real time skyrocketed from $20 a megawatt all the way up to $4,000 a megawatt, which is very close to what is the regulatory limit of $5,000 a megawatt, limit of $5,000 a megawatt. So in that kind of situation the price is sending a signal that there's an imbalance between the amount of supply and the demand for electricity.

Speaker 1: 29:14

So something else that we don't necessarily see on these charts but happens in situations like this is that Bitcoin miners are incentivized to turn off when there's a tight situation. So to kind of lay the table here for different loads and how they react to high prices, we can compare Bitcoin miners with data centers and steel mills. So, first of all, the cost of reacting as a Bitcoin miner is far lower than for your typical data center, and that really has to do with the decentralized nature of the Bitcoin network. When electricity prices are high here in Texas and you have Bitcoin miners turn off, that's 15% of the Bitcoin hash rate that's turning off. That means that on average, bitcoin transactions get approved 15% more slowly because the other 85% of the hash rate that is outside of Texas continues to operate just as normal For a data center. If you turn off a data center here in Texas, that might mean that a website is not accessible anymore or that a hospital's medical records are no longer accessible, and so the cost of turning off a centralized data center is far greater than the cost of turning off a decentralized Bitcoin miner.

Speaker 1: 30:48

And then, of course, with a steel mill. If you turn off, then that means that they're not going to be producing steel anymore, and that comes with an opportunity cost as well. So you see a similar picture on the reaction time, the availability and the granularity of how Bitcoin mining load reacts relative to these other load resources. In particular, on the granularity, bitcoin mining facilities can be like a dimmer switch. You can turn off 1% of the Bitcoin miners in the facility and be able to ramp down in a way that is very targeted so that you're not overly. You know you're not dropping so much load that you end up with an imbalance in the other direction. With a steel mill, for example, that's not possible. Either the steel mill is operating at 100% or at 0%. It's much more binary like that. So we can illustrate it with a really interesting day that happened on April 8th.

Speaker 1: 31:55

April 8th was a total solar eclipse, something that doesn't happen all that often and in fact, there were a lot of tourists that came to texas to witness this solar eclipse. As you can imagine, if you have a total solar eclipse, that means that power generation from solar goes from 15 gigawatts to zero gigawatts, back to 15 gigawatts in a very short time frame, approximately an an hour. So when you have that amount of variability in power production, that has to be offset either by lower demand or by other resources like natural gas power plants turning on, that are being held in reserve. So on April 8th, we saw the price of electricity skyrocket from approximately $10 per megawatt up to $1,000 a megawatt, back to $10 per megawatt all in the span of a few hours. This chart shows when the price of electricity went over what we call the break-even. That is that you can think of the break-even for Bitcoin mining, as how much money does a Bitcoin miner earn per megawatt hour? So on this day, ercot estimated that it was around $150 per megawatt hour, and you see that when the electricity price went over $150 per megawatt hour, the Bitcoin miners shed load. So they are incentivized by the economics the marginal economics to turn off their Bitcoin miners in order to avoid operating at a loss. And then you see that once the electricity price came back down, as the sun came back out of the eclipse, that the load came back on, and so it really reflects the natural economics of supply and demand and how that helps balance the grid big picture. Balance the grid big picture. The other interesting thing is that Bitcoin miners, because their break-even is relatively low at $150 a megawatt, they turn off fairly early compared to where the electricity price ends up at, and so they are helping solve the problem even before it becomes a real problem for the grid in terms of stress. So the break-even is actually fairly stable. If we look at it historically, this chart it looks like this is volatile, but that's only because we're zoomed in. If we were to put it on a chart that goes from $0 to $5,000, this would look very stable, but we've zoomed in to approximately $400 a megawatt as the top, and the variability comes from a number of different factors. So here each line reflects the break-even for a particular Bitcoin mining model.

Speaker 1: 35:05

There's been a long history of different Bitcoin mining rigs that the main difference between the Bitcoin mining rigs has been their efficiency. So per amount of electricity going into the mining rig, how much hash rate is coming out the other end, and that is measured as joules per terahash. So as new semiconductor technology is applied to Bitcoin mining, the efficiency improves. You get lower and lower joules per terahash, which means that all else equal. A latest generation Bitcoin mining rig is going to have a higher marginal revenue per megawatt hour than the older generation, and you can see that here. You know, for example, the Antminer S21XP has a much greater breakeven of approximately $150 per megawatt hour than one of the earliest generations of the S9, which is now approximately $10 to $20 per megawatt hour. So the S9 has really become almost completely uneconomical to operate and very few grid scale miners In fact none that I know of still use an S9 because they've cycled out to newer generations.

Speaker 1: 36:30

The other factor that drives the variability in the breakeven is the Bitcoin price. So when the Bitcoin price increases, the marginal revenue increases. That has to also factor in the global competition for Bitcoin mining hash rate. So as more hash rate comes online, that drives down the marginal revenue per megawatt hour because it causes what's called a difficulty adjustment. So it's a fixed pie of revenue that the Bitcoin miners are splitting up and as they compete for that, that ends up driving down the marginal revenues.

Speaker 1: 37:16

So I also want to highlight another big factor which happened last year in April, which you can see here on the chart, caused a big spike and then a big fall. So this was the Bitcoin halving. The Bitcoin halving happens every four years, approximately 210,000 blocks. There's a block every 10 minutes and what it does is it cuts in half the number of Bitcoin being added to the ledger. So you went from 6.25 Bitcoin to 3.125 Bitcoin every 10 minutes. This is what enables Bitcoin to have a sound monetary policy, but obviously, from a mining perspective, it also causes the break-even, the marginal revenue, to get cut in half overnight. It had a big spike up because people wanted to get their transaction into that halving block. They were playing a bit of a game with that. So that's another factor that drives the volatility in terms of marginal revenue.

Speaker 1: 38:27

Bitcoin miners get paid through a combination of new rewards the subsidy of adding more Bitcoin to the ledger, with transaction fees. When somebody sends a Bitcoin transaction, they pay a fee to the Bitcoin miners. When there's lots of competition to get into a block, you have the equivalent of surge pricing. Right when the network is so congested with transactions, they're trying to out-compete each other by bidding up the transaction fees and the Bitcoin miners collect that windfall of transaction fees. So that explains that spike right at the halving. That might look like the Bitcoin breakeven is moving around a lot, but when you chart it against the price of electricity, the mining breakeven is actually very stable, in particular when you look at a very volatile month. So arguably the worst month for electricity volatility here in Texas was in August of 2023.

Speaker 1: 39:32

It was at the end of a very hot summer where I remember, almost every day it was above 100 degrees Fahrenheit. Day it was above 100 degrees Fahrenheit and that you know was. It caused the natural gas power plants to be operating a lot more than they're used to, and so at the end of the summer we were running low on natural gas power plants. A lot of them were in maintenance, still very hot, and it was also very hot even after the sun set. I remember you know it would be dark outside and you go outside and it's still 100 degrees. So everyone had their AC on and it caused a spike in the price of electricity almost every evening. In some evenings you would even get a text message from the grid operator saying hey, can you turn the temperature up on your AC so that the grid is less stressed? Now?

Speaker 1: 40:30

Bitcoin miners were good grid citizens and turning off both to help support the grid but also because it was completely uneconomical to be mining when its price of electricity is at $5,000 a megawatt so you can see here that you know, during those summer days it's really important to have flexible resources because the sun has set, solar has gone away and the wind has not picked up. The wind, you know, generally it would pick up later in the evening. So you'd have this window where you just don't have enough wind, you don't have any solar and you need dispatchable natural gas and then, when you run out of that, you need batteries and when you run out of that, you need to have demand response from Bitcoin miners. But the month of August is not necessarily reflective of every month, and this is where we get to the other part of the story of how Bitcoin miners help the grid. If you look at the whole year, you've got one month of very high prices in August of 2023. But when you look at the shoulders of those months that are either in the spring or in the fall, you have lots of low prices where it might even be negative.

Speaker 1: 41:55

So there's times where the Texas grid has negative electricity prices because the wind power and the solar power is running at 100% capacity and they actually don't have any incentive to curtail because of the production tax credit, so they're still getting paid, even if the electricity price is negative. Now, even outside of that here, you can see on this chart that there's almost more than half of the time, the price of electricity is between $0 and $20 per megawatt. So it's really important to have not just a resource that turns off during high prices, like Bitcoin miners, but also that is operating when prices are very low, meaning that Bitcoin miners are providing revenues for power generation when the air conditioning is not operating right, and the air conditioning in your home is not providing revenue. So why is it important to have revenue for power generation? So that they are still around during those peak times? The grid is built both from a transmission and from a generation perspective to meet that peak load during either the summer or during a winter storm, for example. And outside of those peak times, 99% of the time, electricity prices are low and the grid is underutilized, and so that's where Bitcoin miners are essentially providing a backs up of demand to make sure that the grid still has the financial resources to be able to pay for these underutilized assets.

Speaker 1: 43:45

Zooming out throughout the past five years, you can see that. This chart shows what percentage of the time was it economical to turn off a typical S19. During winter storm Yuri in February of 2021, that was 25% of the time because the price of electricity was at $5,000. It was actually $9,000 a megawatt at the time, because this is before they changed the regulatory maximum and the grid was in a blackout situation. I was at home with my young family and it was a very terrible time. So you know, that explains that bar. But if you look past that, and obviously the Bitcoin miners were turned off because it made no sense to be on and there was a grid-wide crisis, the grid is stressed on any given month, it can be 0%, it can be 1%, it can be 10%, it can be 5%. It really just depends on the weather. And so this is where it's really important to have a flexible load like Bitcoin mining. And this helps explain why Bitcoin mining has been able to grow in Texas is because it's so flexible. It fits into this grid that has a very volatile wind and solar power generation and ever-changing weather, and the Texas market share for Bitcoin mining has held stable around 15% as the global Bitcoin mining has grown.

Speaker 1: 45:33

Okay, so one of the big questions that often comes up with Bitcoin mining in Texas is is this resource going to suddenly disappear overnight? Right, because people are worried that Bitcoin itself, the Bitcoin price, is so volatile. Sometimes folks think that it's going to go to zero, that it's like tulip mania or beanie babies, and that if Bitcoin is just a fad, then should we really think of the Texas grid as having this large scale balancing asset on it, and maybe that would be a source of concern. So I think it's really important to get into what is driving the demand for Bitcoin and why. Bitcoin's price being volatile doesn't necessarily mean that Bitcoin's value is volatile, if we look at the underlying value of the system. So first we have to start with.

Speaker 1: 46:38

What problem does Bitcoin solve? And it's a very simple problem, which is the distrust that we have in the central banking experiment, as I put it. But it's also a very complicated problem because it's a system that we've gotten used to. We just take it for granted that our money is constantly losing its purchasing power and that we have to live paycheck to paycheck. We have to either spend all of our money in two weeks, or we have a melting ice cube in our bank account or we have to put that money to work by taking on greater and greater risk in our investments.

Speaker 1: 47:16

We saw this during the 2008 financial crisis Banks were investing in loans that didn't make any sense because they had to. Otherwise, the value of that money got eaten away by inflation. So where does this inflation come from? It comes from the money printer, right? It's just supply and demand. The more money gets created, and that money goes, first and foremost, to politicians, to bankers on the coast right On the East Coast, primarily, new York, washington DC, have benefited from this money printer and then it trickles out into the wider economy from there, and we pay for that in the form of inflation. So that has driven a massive increase in wealth inequality and also just in political polarization, as this phenomenon has divided us as a country.

Speaker 1: 48:16

So how does Bitcoin solve this problem? Bitcoin, it creates trust, right, and it's interesting because we often talk about Bitcoin minimizing the need for trust, but it's really that's how it creates trust is by not needing the trust. So let's get into this paradox. First of all, there's the transparency of the Bitcoin, so Bitcoin's code is open source. The software that is driving this protocol is something that you can evaluate on your own. You can look at every line of code and you can see what is the actual underlying operation of this monetary system. You can't do that with the Federal Reserve, for example. If you try to access the source code for the Federal Reserve, you're going to get arrested. Okay, don't try to audit it. It's all proprietary behind closed doors and you cannot contribute to the Visa payment network, right? You have to get a job at Visa in order to have access to their source code.

Speaker 1: 49:23

And it's not just the source code that is transparent, it's also the ledger itself. So when you take the code and you compile it and then you run the Bitcoin software, what it does is it downloads all of the Bitcoin transactions from the first day of Bitcoin's history back in 2009 to today. It verifies all these transactions to make sure that they're following the rules of the Bitcoin protocol, and that allows you to see that nobody's tampering with the ledger, and you can prove this using cryptography. It's not like you have to trust anyone to tell you this. You can verify your own transactions. If you've ever had the experience of sending a payment and not quite knowing where the money is. It's not in your bank account. It's not in the recipient's bank account, it's somewhere in limbo in the banking system. Well, you don't have that problem with Bitcoin, because you can actually check and see where the money is yourself and not have to trust the bank and them losing your money or something like that. You can also verify the Bitcoin monetary policy, and this is where we get into the question of accountability.

Speaker 1: 50:42

With the existing fiat system, you have to trust that the Fed is telling you the truth when they're talking about how much money they created, and usually they're probably telling you the truth when they're telling you they printed trillions of dollars. But there's actually been situations where it wasn't quite clear where the money went. Sometimes they fly pallets of cash $100 bills to third world countries and they disappear. That's not a conspiracy theory. They actually admit to this happening in various contexts. So the amount of accountability that comes with the fiat system is very low.

Speaker 1: 51:25

With Bitcoin, there's total accountability because not only are you your own bank when you hold your own bitcoin keys. That is that you know. That's. That's what allows you to unlock your bitcoin. It also allows you to be your own central bank when you run your own bitcoin node and you can verify the entire ledger. You are a self-sovereign peer on this global network and you're part of the backbone. There's nobody else that is more important than you when you're running your own Bitcoin node and holding your own keys and verifying your own transactions. That accountability that also comes with a lot of responsibility. So you're free to do whatever you want with your Bitcoin, but that means that you're free to lose your Bitcoin. If you lose your private key, there's no customer support that you can call and say, hey, I need to reset my password. No, that's not part of the Bitcoin system. Likewise, if you lend your Bitcoin out to someone and they lose it, there's no bailouts where you can say, hey, I need a FDIC insurance or something like that. So we've seen this happen in practice with exchanges like Mt Gox or FTX, where people lent out their Bitcoin you know Celsius or BlockFi and then these centralized entities lose that person's Bitcoin and they end up in the bankruptcy system and they've got to hire an attorney and try to get their money back. So you have to hold yourself accountable when it comes to Bitcoin and that's what allows you to build up trust with the Bitcoin system itself.

Speaker 1: 53:09

The third part is really critical and it distinguishes Bitcoin from all of the other cryptocurrencies, and that has to do with the reliability of the system. So how does Bitcoin achieve this 100% reliability? One is that the architecture of the Bitcoin system is decentralized. The architecture of the Bitcoin system is decentralized so by removing single points of failure, your neighbor's node can stop working. They can accidentally unplug their computer. That doesn't affect you. Your neighbor can lose their private keys. You still have yours. It doesn't affect you. All of the Bitcoin miners in Texas can turn off for demand response. That still doesn't affect you, and you know there's still lots of Bitcoin mining going on around the world. You can actually run your own Bitcoin mining rig at home as well. There's people who mine in their garage, or you can get a small bit X that you can plug in in your home office. So that decentralized architecture maintains the uptime of the Bitcoin network.

Speaker 1: 54:17

And then, simultaneously, if you look at the software development and the protocol researchers that are trying to find ways to improve Bitcoin, they always optimize the improvements to focus on the security and the stability of the system. So it's a very conservative development philosophy that is completely different from other cryptocurrencies like Ethereum or Solana or XRP that try to be very innovative and are constantly adding new features, that if we look at the history of these systems, they cause instability in the actual network, so these other competing networks will have downtime, they'll have more bugs than Bitcoin does and so they're less reliable than Bitcoin is, which means that people just trust them less. And it's a completely rational thing that the more bells and whistles you add to a system, the greater the surface area is of things that can go wrong. Bitcoin just focuses on how can we have a good monetary system where you know there's really three functionalities I want to receive the money, I want to hold the money and then I want to send the money. I don't necessarily need monkey pictures in my wallet, I just want a stable monetary system, and that's how Bitcoin has grown from having a market cap of $0 in 2009 to approximate almost $2 trillion today.

Speaker 1: 55:51

Obviously, it depends on the volatile Bitcoin price, but even when we look at the Bitcoin price volatility, you can see that it is very cyclical. So if you look at the Bitcoin price from the low points during the bear market, from one bear market to the next bear market, the bottom has increased and this means that Bitcoin is accruing fundamental value, because you can see this Bitcoin price as a proxy for the adoption that is driven by those properties of transparency, accountability and reliability that people look for in a money. The Bitcoin cycles historically have been triggered by those halvings that we were talking about. And that's just supply and demand, right. So you cut the supply of new Bitcoin being added to the ledger in half, and that tends to trigger the price to go up over the months and years that come after that supply shock. And then, of course, you have the demand. That happens in waves.

Speaker 1: 56:59

Humans are social animals, so we're very prone to mass hysteria of, hey, we all need to buy Bitcoin at the same time, we all need to buy Bitcoin at the same time, and then, of course, panic selling afterwards when we're seeing the price chart go in the other direction.

Speaker 1: 57:18

Now, what I always tell people is that if you want to be accumulating Bitcoin and saving this commodity that is scarce, you do need to zoom out and you need to dollar cost average, right, so that you're not following the herd and you're thinking for yourself and that you're able to build a nest egg for the long term and that's really been Riot's strategy as well, as a business is gradually building up the mining business and, of course, through vertical integration, along construction, building our own facilities, owning the underlying real estate and then acquiring an electrical equipment manufacturer in ESS Metron in Colorado to acquiring the new Bitcoin mining operations in Kentucky and building up the balance sheet of Bitcoin that Riot has, both from essentially dollar cost averaging by saving the Bitcoin that we mine and then, of course, also identifying strategic opportunities like issuing a convertible bond and acquiring more Bitcoin for the balance sheet in order to build up a very robust and conservative business, but also capitalizing on the rapid growth in the Bitcoin ecosystem.

Speaker 1: 58:43

So you know, you can see here that Riot has been growing here in Texas and Kentucky as well, and that we're planning on continuing to grow, both for the underlying economics of Bitcoin and, of course, to provide those grid services to Texas and to Kentucky to stabilize the grid when there's too much electricity absorbing it and then, when there's not enough electricity, selling it and providing that capacity to greater uses. So I hope you enjoyed this kind of synthesis, this recap of Bitcoin mining, how it interacts with the grid and the underlying Bitcoin value proposition, and how it all ties together. So if you have any questions, feel free to reach out, send us a DM and we look forward to seeing you on the next episode. Thanks for joining us. Make sure to leave a review, share it with your friends and family, and we're looking forward to hearing from you.