Episode #396: Wes Fulford, Viridi Funds – How To Get Exposure To Crypto In Public Markets

Episode #396: Wes Fulford, Viridi Funds – How To Get Exposure To Crypto In Public Markets


Guest: Wes Fulford is the CEO and Portfolio Manager for Viridi Funds. Wes was previously the former CEO and Director of TSXV-listed Bitfarms Ltd., one of the largest publicly-traded cryptocurrency mining companies globally. In July 2019, Bitfarms successfully completed a Canadian public listing.

Date Recorded: 2/9/2022     |     Run-Time: 50:27

Summary: In today’s episode, we’re talking all things crypto mining. Since there isn’t a Bitcoin or crypto ETF in the US, Wes wanted to provide investors the opportunity to get exposure to the crypto markets through the miners themselves. We hear about his background in banking and becoming the CEO of Bitfarms, which he took public in Canada. Then Wes shares why both experiences gave him the idea to launch an ETF focused on crypto miners and related businesses.

We get an overview of the miners’ business model, the importance of clean energy, and how the miners are impacted by the volatility of the underlying crypto prices.

Sponsor: If you’re seeking the less obvious and are curious about the ever-changing world and how it affects investing, The Active Share podcast is for you. Hear thought-provoking conversations with thought leaders, company executives, and William Blair Investment Management’s own analysts and portfolio managers as they share unique perspectives on investing in a world that’s always evolving. Listen to The Active Share on Apple PodcastsGoogle PodcastsStitcherSpotify or TuneIn or visit here.

Comments or suggestions? Interested in sponsoring an episode? Email Colby at colby@cambriainvestments.com

Links from the Episode:

  • 0:40 – Sponsor: The Active Share Podcast
  • 1:14 – Intro
  • 2:01 – Welcome to our guest, Wes Fulford
  • 3:20 – Why Wes transitioned from traditional finance to crypto
  • 6:09 – Wes’ time with Bitfarms
  • 8:09 – What led Wes to launch RIGZ
  • 10:06 – The thesis and overview of RIGZ and what they’re trying to do
  • 18:14 – Wes’ thoughts on valuations in the space
  • 21:09 – The importance of clean energy for miners
  • 28:08 – Mining metrics and other considerations when analyzing miners
  • 39:59 – Wes’ thoughts on the future of Bitcoin and crypto adoption
  • 43:17 – The public conversation and narrative around Bitcoin
  • 44:51 – Learn more about Wes; Viridi Funds
  • 46:06 – Wes’ most memorable investment


Transcript of Episode 396:  

Welcome Message: Welcome to “The Meb Faber Show,” where the focus is on helping you grow and preserve your wealth. Join us as we discuss the craft of investing and uncover new and profitable ideas, all to help you grow wealthier and wiser. Better investing starts here.

Disclaimer: Meb Faber is the co-founder and chief investment officer at Cambria Investment Management. Due to industry regulations, he will not discuss any of Cambria’s funds on this podcast. All opinions expressed by podcast participants are solely their own opinions and do not reflect the opinion of Cambria Investment Management or its affiliates. For more information, visit cambriainvestments.com

Meb: Hey, friends. We got a great episode for you today. Our guest is the CEO and portfolio manager of Viridi Funds and the Viridi Cleaner Energy Crypto-Mining and Semiconductor ETF, RIGZ, R-I-G-Z. In today’s episode, we’re talking all things crypto mining. Since there isn’t a Bitcoin or crypto ETF yet in the U.S., our guest wanted to provide investors the opportunity to get exposure to crypto markets through the miners themselves. We hear about his background in banking and becoming CEO of Bitfarms, which he took public in Canada, and he shares why both experiences gave him the idea to launch an ETF focused on crypto miners and related businesses.

We get an overview of the miners business model, the importance of clean energy, and how the miners are impacted by the volatility of the underlying crypto prices. Please enjoy this episode with Viridi Funds’, Wes Fulford.

Meb: Wes, welcome to the show.

Wes: Thank you very much. Happy to be here.

Meb: Where do we find you today?

Wes: I am based in Toronto, warm and sunny Toronto.

Meb: You sound like you’re Canadian by birth as well.

Wes: I’m actually dual. I was born in Minnesota and migrated up to Canada with the family when I was 10, I guess it was. A long time ago.

Meb: We’ll track the number of A’s you drop in this podcast. So we’ll see if you’re true or just a transplant. All right. It’s an exciting time in your world. The news recently with Razzlekhan and her husband, and it’s just like never a dull day in the crypto space. It has to be one of the odder stories I’ve heard in quite some time. Is that something you see and shake your head or laugh? Or what is the reaction when you see something like the recent $3, $4 billion theft situation?

Wes: I think it provides a little bit of confidence to the marketplace and the groups supporting it or considering allocated capital, the fact that there is some form of traceability or auditability here, and in the events of these major breaches that there are remedies through the powers that be to recover losses. But generally speaking, in this market, having been in this going on about five years, nothing surprises me. It really doesn’t.

Meb: You are the fund manager of the new RIGZ ETF, R-I-G-Z, and we’re going to talk all about mining here in a second. But I wanted to rewind. It looked like you started out in the traditional finance banking world. When did you get the crypto bug and decide to make the hop to crypto world as a full-time gig?

Wes: I started my career in traditional asset management and then I moved over to the wonderful world of investment banking, all based out of Toronto for some multinational banks, and I guess most recently, I led the FinTech and financial institutions investment banking practice for a Canadian bank. And that’s how I got exposed to blockchain and crypto. Here in Canada, the TSX or TSXV has always been a supporter of nascent and emerging marketplaces and sectors, you know, cannabis or crypto blockchain or junior resource development companies and hard-rock mining. Always been a great place to capitalize business plans and new ventures and startups.

I had my pulse on groups that were looking at public company M&A or potential public listings. And certainly, in the capital raising circles in this sector back in 2016, I really started doing a deep dive on Bitcoin and other leading altcoins, and just caught the bug really. Never looked back. I strongly believe that this has its place in the world, whether it be in your portfolio or just as a medium of exchange for people globally that don’t have stable fiat alternatives. And I formally stepped out of the banking world in 2018 to take over the helm as CEO of a private company, which we took public in two marketplaces, a group called Bitfarms, which I think is still sitting on the top of the leaderboard in terms of scale of computing power and dual-listed on the NASDAQ at this point. I stepped away from that in 2020 to pursue some entrepreneurial endeavors, RIGZ being one of them.

Meb: It’s not too much of a stretch for a Canadian to be interested in mining. The gold miners, all my Canadians, half their portfolio is in some form of junior miners, mining companies. So the fact that it happens to be crypto, as long as you include the word mining, I think it’s in all the Canadians’ DNA for sure, Canada and Australia.

Wes: Toronto has always been, I think, probably the single biggest resource development marketplace and capital market globally for hard-rock mining endeavors. Broadly speaking, it’s usually about 30% of the market cap of all publicly-listed companies in terms of sectoral weighting. And I spent five or six years of my investment banking career covering hard-rock junior resource and senior gold producer mining Cos. And crypto mining is very different than hard-rock mining, but you could draw some similarities.

Meb: You saw this attraction, you jumped ship. Tell us briefly what Bitfarms does and, you know, kind of as the helm, talk a little bit about the actual evolution of the company while you were there.

Wes: I joined as…I don’t know what employee I was, but really, joining a team of four founders that had built the company to what it was before I had joined, and they were sitting on a sub-200 petahash, and a petahash would be a unit of computing power. When I left we had scaled it to almost an exahash, about 5x from when I first started. But they’d set a path for the entity to join the public markets through a takeover of a shell in Israel, of all places, on the Tel Aviv Stock Exchange. And that was absolutely the wrong move for the company. It sounded great being the only publicly-listed crypto company in Tel Aviv, but very different type of investor over there in terms of risk profile and attributes of public companies that they look for.

So we pivoted the company back to the Canadian markets, a process that was probably the most complex deal I’d ever done. It took almost a year of planning and execution between shareholder and court approvals and regulatory approvals and sequencing all those events but migrated back to Canada, which had already had, at that point, about 10 other publicly listed companies in the sector. And that was a better path for us to aggregate capital and continue to fund our expansion and identify a new stable of investors to back the vision. But Bitfarms is a cryptocurrency miner. At the time, they had five operations powered by hydroelectricity within the province of Quebec here in Canada, and, yeah, almost an exahash of computing power. Now they’ve got a facility in Washington and they’re expanding operations down in South America, diversifying geographical and jurisdictional risk in addition to chasing other sources of economical power.

Meb: You helmed that shop for a little bit and then eventually decided, what? I’m ready to go this entrepreneurial route, money management. I think I want to capitalize on this trend as a public fund. Nothing out there. What was the thesis? What was the idea? What year in the timeline would this have been?

Wes: We founded RIGZ Viridi Funds, which is the investment manager that would act as portfolio manager for the ETF back in early 2021. But RIGZ and what we’re doing at Viridi, incubating thematic ETFs, is another…very similar to what we were trying to do at Bitfarms, is marry a nascent emerging asset class to traditional financial markets. Getting ready to go listed company in the public market, it’s not for the faint of heart. And frankly, if you’ve got access to the capital required to expand your operations and meet the sort of strategic vision of the business, I wouldn’t recommend it for anybody with the oversight, the costs and accounting fees and regulatory landscape you’ve got to navigate, governance, G&A and overhead you’re adding to the business as a public company.

But I digress. RIGZ is, again, another attempt to marry that emerging nascent sector, being crypto, with traditional financial markets and blue-chip capital. You can buy RIGZ in a PA, in a registered investment account, with the blessing that the service offering that is RIGZ is operating within the confines of the SEC and has the regulatory and governance oversight, versus going at this on your own with an exchange account, buying crypto direct and dealing with cold storage, custody, and you name it. It’s just an easier way to bridge the gap for the people that are willing to extend out on that limb or lack the technological aptitude to go figure out how to own this direct and make it easier to access the sector asset class.

Meb: Give us the overview. What does the fund actually do? What’s the thesis? What’s the theme that it’s trying to capitalize on?

Wes: So RIGZ is an actively-managed, and that’s important, product or ETF investing in global equities of crypto mining companies, primarily. Eighty percent of the funds roughly, our AUM, are allocated to publicly listed cryptocurrency mining stocks. We got about 20% of the portfolio in the foundries, the AMGs and NVIDIAs of the world that are producing the chips required to manufacture the computers that these miners are running. We wanted to go down the value chain. And frankly, the foundries have been stellar performers since we launched RIGZ in July of 2021.

But the thesis for owning a miner really is that infrastructure provider, which is really providing an essential service to the network, which is the validation and verification of global cryptocurrency trades. The miners are all competing against each other on a global computing power network to race to solve an algorithm generated by the network itself that underpins Bitcoin, for the right to create a block. And that block, think of it as an empty digital envelope ready to be loaded full of a megabyte, or just over, worth of cryptocurrency transactions, call it 22 to 2500 transactions. Only after which that transaction finds its way into that empty envelope, that block, that that miner has created, that envelope is sealed and hashed, or tied to all the blocks that created it, thus the term blockchain, and it becomes verified. And that BTC that you bought then lands in your account and is available to spend or transfer to a cold wallet or whatever have you.

So the miners are providing that essential service. They’re paid by the protocol itself coded in the software in the form of a mining reward, new BTC, tied to each block granted by the protocol. That’s the revenue pool that the miners are creating. The more blocks that they create, personally, or as an organization, the more rewards they’re getting for that service. And they can do what they want with those BTC. But we buy the miner because of the infrastructure play. There’s a tangible input cost that goes into the creation of a block in the form of the CapEx on the infrastructure and the mining hardware and the power spend required to run these high-energy intensive computing equipment. But there’s a real economic business that underpins these mines in the form of cash flow and strong paybacks, if they’re buying right on their hardware, and operational insulation to crypto winters, or downturns in crypto pricing, through being a low-cost provider within the global network of computing power.

And then, the trend in 2021 has also been to inventory amongst all the public miners, to inventory as much of their production as possible. So you’ve got exposure to the growing digital asset inventory on the balance sheets of these public co-issuers or listed equities. And much like a senior going back to this junior resource or mining resource analogy is you’ve got leverage to work through a miner to that underlying commodity of choice. So as a senior gold producer, if the price of gold goes from $1,800 an ounce to $2,500 an ounce in a week, there’s really no corresponding direct increase to their cost of production. All of that additional margin flows to the bottom line in the form of EBITDA or cash flow, sort of the same for a miner. If there’s a run in BTC and a leg in the growth of the computing power trying to capitalize on those heightened mining economics, that miner experiences a period of heightened or sizable margin growth that they weren’t a week prior. And that’s been a market condition that’s been pretty prevalent through 2021, which is why you’ve seen all the activity in the public markets in this sector.

Meb: Is this an area that has dozens of potential companies? Certainly, I wouldn’t think over 50 or 100 as far as it goes to the opportunity set. How much is public? Is a lot private? As far as the market cap, is it something that just is going to grow by orders of magnitude in the coming years? What’s it look like?

Wes: There’s now over 50 publicly traded companies globally that have some element that are pure-play miners, pure-play infrastructure providers, hosting miners, or some combination of the above. Some aren’t pure-play miners, but others might have a mining component or mining division within the organization. But there’s over 50 public companies in the sector across the globe. And there’s also a number of announced for the high-profile transactions with this spec process in the U.S. or others that have yet to close that we anticipate closing in late Q1 and into Q2. But I do see the sector evolving in response to the attractive mining economic conditions we’ve experienced in 2021 and continue to experience. And it’s getting institutional adoption and more credibility as we go here. But it’s definitely evolving at a very, very quick pace.

Meb: What do most of these companies look like? We actually had one of our podcast alums is a holding on HIVE Blockchain Technologies. But if you look at a lot of these in your portfolio, where do they stand? I mean, most, I assume, are real revenue-generating companies. Are they profitable at this point? Are they more in the cash flow positive but growth mode, so really expanding? Just give us the banking rundown. Are they traditionally financed through offerings, or is it debt?

Wes: As I mentioned, the trend in 2021 has been to inventory as much of your production as possible within the publicly listed companies. So you spend an enormous amount of money on power and infrastructure and G&A overhead to generate that unit of computing power, a terahash being 1 trillion attempts per second to solve that algorithm created by the network, a petahash being 1,000 terahash per second. There’s a lot of effort and capital that goes into scaling industrial crypto mining operations. But the blessing is you go and procure the hardware. Right now you’ve got some pretty significant timelines, given the global supply chain issues and the heightened demand for this mining hardware. But two years ago, you could go and buy a new machine and have it plugged in and operating two months later, despite the fact that it’s on a boat or a flight from China and you’re having to deal with those logistical delays getting it plugged in wherever you’re operating.

But as soon as it’s operating, it’s generating cash flow, assuming that your BTC rewards from that computer mining hardware are greater than your power spent. When we were scaling Bitfarms under my stewardship, I was looking at 220 to 280 day payback on our mining hardware investment per CapEx, which in any regular business is extremely attractive. Even considering procurement timelines and shipment timelines, you can go out and fully return your CapEx on your hardware inside of a year. It’s a pretty attractive business. I would say that, across this sector, groups have certainly been relying upon the equity capital markets, fundraising through common stock offerings, through convertible debenture offerings, or equipment financing, which has also been a sub-sector of the mining industry that’s been emerging over the last two, two and a half years to ensure that they’ve got the capital required to expand, to pay their power bills so that they can actually inventory their production and not have to sell it to fund their OpEx.

But profitability across the sector varies widely from company to company. I would generally say a lot of the nuances in cash flow from one entity to the other has largely been driven by some of the corporate G&A, i.e., the stock options and your funding decisions that they’ve made at the corporate level to expand.

Meb: Where do we stand right now? Evaluations? How do most investors, or how do you view the opportunity set here? Is it price to revenue multiple? Are you guys looking out to 2025 for EBITDA? How do you think about the portfolio and the construction as well as the secular and cyclical forces that play on wanting to place a bet here? Or do you guys just market cap weight it and done with it?

Wes: No, no. But one of the agendas with RIGZ under an active management structure was to capitalize on what we believe to be fairly relevant or evident mispricings in the equity markets. I mean, you’ve got some pretty high valuations trading out there, companies with $3, $4 billion market caps which may not be able to grow into those through the expansions that are underway, especially when a significant component of that expansion is unfunded. And they’re going to have to pull down capital through the public markets or other avenues and likely dilute shareholders accordingly. But we look at certainly not five years out, we’re looking at right now end of 2022 and max 2023 year-end basis, and taking what we know about their mining hardware fleets and their cost of power and their scaling objectives, which are generally publicly announced and forecasting out where we anticipate them to be sitting and what the balance sheet looks like to support that growth and making some sort of pro-form multiple analysis or diagnostics in terms of evaluating one or two versus the other. And we do it on an enterprise value to EBITDA basis, enterprise value to revenue basis, and even look at things like EV to terahash to see how they’re trading as a function of replacement cost.

When you look at this business, it really is as simple as, how much hardware do you have? How much hardware do you have on order? Where are you going to? What does that hardware look like, the computing power in aggregate of that hardware relative to the current network, and where we anticipate the network to go, i.e., what’s your market share? And what does the makeup of that hardware fleet look like in terms of efficiency, which helps you drive some assumptions around cost of production and electrical spend cost? Electricity is your single biggest OpEx item on your income statement for these entities. If you’re paying three cents running brand new generation equipment, you’re much better positioned for the long term versus the groups that are running mid or older generation equipment paying seven cents per kilowatt-hour under a hosting contract.

If you stood up industrial operations and you understand what really makes one group successful versus another, and the fleet makeup of their operations, the type of hardware they’re running, it’s fairly obvious to derive some multiples to comp one versus another.

Meb: Talk to me a little bit about…you mentioned power being the biggest input. Your fund has an angle that you mentioned, which is essentially this cleaner energy concept. Talk to us. What does that mean? Is this a very specific input into the selection criteria? Unpack that a little bit for us.

Wes: … business, it was basically 100% renewable-based. I do believe that mining operations do have the responsibility, we call it good corporate citizens. There’s a ton of heightened scrutiny and interest in ESG policies up at the board and officer level for these organizations. There are pressures from shareholders. We’ve done a ton of work in this theme lately. And we take the approach that, based on an internal scoring matrix that we’ve created where we case rank, coal, nuclear, hydro, wind, and the scale of the operations drawing upon that source of power, we create a scoring index for each company and benchmark that against our internal thresholds to try and majority weigh our mining investments to renewables-based or quasi renewables-based operations.

There are groups out there that are definitely going at this in a different avenue using carbon offsets to net zero their emissions. I don’t really think that’s a sustainable model going forward with the momentum we’re seeing in the carbon markets. But we’ve definitely got a skew towards or heavily weighting our portfolio choices towards the groups that are renewable backed. And even just from a jurisdictional standpoint, I think there’s a lot more sustainability or viability or less geopolitical risk for those groups plugged into those sources of power long term, assuming that they’re being good citizens and not taxing the grid. And seeing some of those headlines in Texas, the recent storm and some of the operators pulling back to avoid taxing the grid at critical times.

Meb: It seems like not only a smart decision, just from some tertiary reasoning, but just the cost and equation part alone, being located or trying to get the power from a renewable source just seems like would be a good business decision in general. Is that kind of the case?

Wes: If you key in on hydro, generally speaking, as long as that river doesn’t freeze during the winter months, if you’re operating up here in Canada, those turbines generally turn at the same pace 24 hours a day, 7 days a week and generate similar power throughout the entire year. As a mining operation, you’ve got the luxury of being able to locate next to stranded infrastructures. If you’ve got a dam way up in northern Canada, that there’s surplus capacity coming off that dam, it’s actually beneficial to go locate a crypto mining operation next to it, versus incurring the transmission cost infrastructure for that transmission and the losses tied to transmitting that power over hundreds or thousands of kilometers. You can go where the power source is. And because these mines operate 24 hours a day, 7 days a week, things like hydro are the perfect source of power.

Meb: How much of that is essentially well known, though? Has the easy, low-cost power spots been picked over by these companies? Or is this a scenario where it involves a long permitting process with governments? How far are we down that path where it’s totally commoditized and people are now searching for second, third-level power opportunities or developing new ones?

Wes: It’s probably sitting around the bottom of the second or top of the third inning. This is still evolving. There are still lots of surplus capacity. Miners definitely aren’t struggling to go find places to plug in their hardware. They’re definitely struggling to marry the infrastructure required to scale businesses and time that infrastructure build to the delivery of the hardware. That’s a challenge right now amongst the public equities. But finding the power is…certain jurisdictions are better than others. You saw the crackdown in June in China where they outright banned mining. There are problems in Kazakhstan right now. There are issues in Iran. Geopolitical risk is always a concern, and you’ve got to manage that as a miner expanding operations, especially across multiple facilities in multiple jurisdictions. But accessing the power itself hasn’t really restricted network growth at this point. And I do think this evolves to the point where, down the road, as the sector continues to mature and you see real blue-chip capital moves into the sector, and you’re seeing the BlackRocks of the world start to take position in some of the public equities. But the sticky, more conservative endowment fund style capital hasn’t really moved, not in the mining equities anyways. And I do see this evolving to the point where maybe 5 years, 10 years down the road, you’ve got power infrastructure being scaled for the sole purpose to power a miner. And this isn’t a flared gas operation in North Dakota or Texas. It’s like real dams being built and constructed to power crypto mining data centres, as this sector evolves and continues to grow in size and scale.


Meb: How much of this is a North American story, U.S., Canada, versus a global one? And is it complicated by just the domicile of the companies where their stocks are listed in the U.S., but it could be an Asian or a European company, etc.? But what’s the geo picture look like?

Wes: Historically, because the two biggest hardware manufacturers are both in Asia, Bitmain and MicroBT. MicroBT manufactures the Whatsminer equipment. It was founded by one of the leading designers at Bitmain itself. So the staff is spun out Bitmain. They’re based in Asia. And given the availability and early adoption of crypto and Bitcoin and other leading altcoins by certain Asian countries, China, in particular, you saw a ton of hash power concentrated in China, historically. Like, back when I was running Bitfarms there was 65%, 70% of the global hash rates sitting within Chinese borders. Now you’ve got this crypto ban, outright ban on mining in China. And that was announced in June of this last year. All of that hardware struggling to find new homes in a very, very rapid pace, given the attractive mining economics that have been prevailing throughout last year and even now.

But North America has evolved to be one of the biggest mining centres, if not the biggest mining center on the planet. There’s an immense amount of hash rate plugged in, in the U.S., and Canada to a lesser extent, where it’s exponentially larger than it was two years ago. And the lion’s share of the hardware orders that we’ve seen announced by these publicly-listed miners are all going to North American operations. We’re seeing a ton of growth. You’ve got more predictability from a regulatory and political side of things expanding in their home jurisdiction, and there’s access to economical power in lots of different states.

Meb: What are other considerations you think about as you analyze these companies. The hardware angle, I assume, that’s one where it’s just almost a commodity at this point where they’re constantly upgrading and refreshing as these rigs get antiquated or just run out of usefulness. But is insurance a big factor? Is there a huge headcount required here? Like, when you examine these stocks, how easy is it just to compare them just based on some very simple metrics on capacity and actual mining output versus other considerations that might be important we haven’t talked about.

Wes: TNC insurance is actually quite reasonable. It’s not a high-cost premium line item on your income statement. Once you’ve scaled a crypto mining operation with thousands of computers at site and you’ve got competent staff running in-house operational management software, it’s not really all that difficult. The corporate G&A above and beyond your power spend, putting management compensation aside, is quite predictable and a small component of your operating margins. That power spend could grow to in times of weaker crypto pricing or periods where crypto pricing has been flat and you’ve seen a significant amount of network hash rate growth and you’re running the same amount of computing power in a flat BTC environment. Twelve months later, the network has grown by 50%, that computing power is 50% less effective or less economic for you, absent big increase in transaction fees or what have you.

That power spend is really driven by two things. One is obviously the price you’re paying per kilowatt-hour, what kind of economic rate you’re spending. There is a big difference between a group spending three cents being plugged into a hydro facility in Georgia, or a group that owns and operates their own infrastructure like the Rackspace, the network equipment, the high voltage electrical distribution, the data center, the modular-based installation, or the group that’s hosting their equipment in Georgia with a third-party infrastructure provider that’s paying a hosted rate of seven cents per kilowatt-hour. That line item on their balance sheet for power spend is significantly greater as a proportion of revenues versus the group that is owner-operated that runs their own infrastructure. But above and beyond that, the efficiency of the hardware is a significant driver of profitability. The older generation equipment, the S9 two years ago was still the most prevalent miner in the world. The S9 without a firmware upgrade is…I’m going to get into some like mining geek speak, but is running, let’s just say for easy math, 100 joules, running at 100 joules efficiency, or 100 watts per hour of energy consumption if you’re running that S to generate one terahash of computing power.

So if you’re running that hardware for a 24 hour period, you’re using 2.4 kilowatts of energy. If you’re paying 5 cents for that energy, you’re paying 12.5 cents per 24 hour period to create that unit of computing power. Right now you’re getting paid just over 20 cents of revenue for that unit in the form of BTC rewards for creating those blocks. On a power-only basis, you’ve got just under a 50% mining margin. If you’re running the newest generation equipment, it’s more like 30 watts per hour of energy consumption. So in a 24-hour period, 24 times 30 is 724, or .72 kilowatts. So if you’re paying 5 cents per kilowatt-hour, and you’re only spending .72 kilowatts to generate that terahash per 24 hour period, you’re only spending 3.75 cents on your power per day, and you’re getting paid the same amount in BTC rewards, just over 20 cents. So your mining margin is significantly higher than the group that’s using the old generation, less efficient hardware.

Mining fleet makeup and the price of that power, and whether or not you’re running your own infrastructure or using somebody else’s infrastructure, are all very, very material components to profitability in this business. And the groups that will stand the test of time are running best of generation equipment, they’re standing up their own infrastructure, and they have full control over the power pricing.

Meb: What do they do with the old machines? These things get recycled, trashed, sold, put them on eBay?

Wes: Basically. I mean, a year and a half ago, the S9, the old machine, you’d be hard-pressed to give them away at $20, despite the fact that at that point in time, it was a four-year-old miner. Now the S9, you could buy them through Telegram channels or on eBay or whatever. People are paying $250, $300 bucks for an S9, despite the fact it’s a 5-year-old piece of mining hardware, you’re going to have significant degradation of its efficiency and computing power as you run it, and it’s significantly less profitable. I’m a little surprised to see people running five-year-old equipment profitably right now. A year ago, they couldn’t have done that, or call it a year and a half ago they couldn’t have done that. But the price performance has been so strong since October of 2020. And mining computing power hasn’t really caught up to normalize economics or mining economics. You’ve still got these outsized returns that people are chasing and continue to expand operations to capitalize on, so you’re able to utilize old equipment, less efficient equipment, today that frankly, I wouldn’t have anticipated a year ago having this podcast. But there’s that element of luck being plugged in and it’s expanding at the right time to capitalize on these ebbs and flows in economics driven primarily by price appreciation, or volatility in BTC, but it comes with the territory of building a business in an emerging sector.

Meb: At its core, the business seems not too complicated. It seems easier than say, gold mining, where the rewards are totally unknown. I mean, you do the work and you do all the seismograph geology that people try to do, but even then, it’s unknown. This one seems a little more assured, given all the input parameters of if you build something thoughtfully. What are some of the things that people aren’t talking about, whether it’s in the media, your friends, other analysts, CEOs, about this space that you think could use a little more attention, or something that’s on your mind that you think other people just don’t really put much thought into?

Wes: It’s definitely very, very different than permitting and developing and ultimately producing a gold mine. You have the three years of environmental permitting and advanced and extremely costly and timely engineering reports, pre-feasibility study, the scoping study, the bankable feasibility study. You don’t have billions of dollars of CapEx tied to the startup of a mine. You could jump on eBay right now and go buy a miner and have it plugged in your garage by the end of the week. There’s really no bottleneck to having an individual participate in the sector.

I think the difficulty that groups are experiencing right now, certainly in the public markets, is when you go and procure 60,000 miners. When I left Bitfarms we were running 30,000 miners. We had 64 megawatts of power powering that equipment, five data centres where you walk in and your hair stands on end because you’ve got 20 megawatts of power flowing through a facility. It’s loud. It generates a ton of heat. There’s a lot of electrical skills and technicality that go into stepping down a 25,000-volt electrical line to a 240 volts power outlet to plug a miner into. From an infrastructure standpoint, there’s a great deal of, I should say skill, but expertise required to scale these operations and deal with the various elements. If you’re running trailers in Texas, dealing with 120 degrees Fahrenheit in the summer months and pulling that sort of heat into the front of your miners and dealing with troubleshooting miners to those that are overheating that can’t necessarily handle the conditions.

Operationally, there’s definitely nuances that new entrants are going to struggle with trying to move to that tens of megawatts, hundreds of megawatts industrial scale, even just from a procurement standpoint. Like, we were out there making deposits on our big transformers, 10-megawatt transformers, a year in advance when we were scaling our operations. I can only imagine the supply chain is that much worse right now. So just architecting, scheduling this out from a logistical and a build out standpoint, the groups that haven’t done it before are struggling and will continue to struggle. Just because you’ve got the miners ordered doesn’t mean you’ve got a place to rack them when they’re ready to be shipped. And that’s certainly an element of how we allocate funds within the portfolio is backing groups that we’re confident in their ability to deliver, that have done this before at scale, that aren’t brand new entrants, and are surrounded by the right technical and operational team to be meaningful participants.

Meb: What sort of catalysts are you guys think about would be important waypoints in the next year or two as you look out the horizon? It could be legislation, it could be simply adoption, it could be price of various currencies. What are things that you think are important, investors should be thinking about on the horizon?

Wes: Exposure to this sector, as we speak, is definitely not for the faint of heart. We saw crypto hit all-time highs of $67,000 late last year. That was off of a year prior trading levels of around $10,000 or $11,000 bucks a coin, so you saw 5x increase, 6x increase in the price of the BTC in particular. I’m going to continue to talk about BTC primarily. There’s a lot of volatility in pricing. Pricing leads to more media coverage, more products, more market players, and more capital. So I think catalysts, without question, are going to be based on further price appreciation. I think if crypto hit that $100,000, $2 trillion market cap weighting, it’s on the map. I saw an article last Friday, I think it was where KPMG, a big-four accounting firm, has purchased Bitcoin and Ethereum on their balance sheet and they’ve also married it to a carbon offset purchase to be net zero on that allocation. But you’ve got a big-four accounting firm now putting crypto on its treasury and press releasing that initiative.

Frankly, our audit firm in Israel back in the day, because of the difficulties and complications and timelines required for an international money transfer through the SWIFT system, like it was actually rejected a couple of times. We paid our first inventory in BTC because it was just that much easier, instantaneous, not instantaneous, but inside of 10 minutes on average to get that transaction cleared and inside of a block. It’s just easier when you’re dealing with international payments, ongoing adoption, price appreciation, which leads to ongoing allocations. I think, if we were to see in 2022 to see a big fortune 500 convert some of their fiat to BTC or another digital asset, that would be huge for ongoing support and adoption of this emerging sector. And other announcements like El Salvador adopting crypto as a legal tender. It’ll be piecemeal. It’s not going to be one big event. But collectively, these announcements with ongoing price appreciation, I think this looks very different two or three years down the road.

Meb: I was actually chatting with Michael Saylor this morning, and he’s had a pretty unique non-consensus view on adding crypto to treasury balance sheet. We had a similar line of thinking, arrived at a slightly different conclusion, which was our historical modeling demonstrates that investing at least a portion, a third, half, etc., of an allocation, and so this actually applies to corporate but also to individuals, in a global allocation portfolio results in what we believe to be lower volatility and drawdowns. Obviously, crypto as a portion of the global portfolio, it’s small currently, potentially bigger or smaller in the future, who knows? But it’s an interesting thought experiment that listeners should go through. We actually do it with our entire balance sheet at Cambria, my company, as well as personally. Most people don’t think that way, and by most people I mean, 99.9% of people don’t do that. So, listeners, the old post is called “The Stay Rich Portfolio.” But at the very least, it could certainly get you thinking in a different brainstorm sort of way,

Wes: When you look at what the Fed is going to do in 2022, and as the CPI numbers start to roll out, and this very evident stagflationary economic backdrop we’re currently in and then we’ll continue battling waves of COVID and stimulus printing. Inflation is real at the end of the day, and BTC is just a better version of gold as a hedge for inflation. You’ve got a tangible input cost that goes into the creation of a new BTC, like that mining reward. The only new Bitcoin being created on a day-to-day basis are the rewards paid to miners for creating those blocks, which serves the purpose of clearing and validating those trades. And there’s a tangible cost that goes into creating those rewards in the form of CapEx spend on your infrastructure, your equipment, and your power and your operational overhead, your G&A. And you’ve got this fixed supply, and predictable supply, in the form of coin growth, or supply of BTC, right now being almost 19 million. There will only ever be 21 million BTC outstanding. So you don’t have in a time of economic uncertainty, some governing authority that decides to issue 2x more BTC versus the current pace. It’s just not possible. It’s architected in the protocol. It’s very much a digital gold, but better because you’ve got better security and cheaper forms of storage and better transportability. I don’t need to carry gold in my backpack across international borders. I can do it in a secured cold wallet in my pocket. The value proposition of BTC in general, given the macroeconomic environment, I think it has its place. It rewards the addition in a diversified portfolio. We have a ways to go to spend through some of the volatility that keeps people awake at night or keeping them from participating in this sector. But I think that will sort itself out over the coming years and people will realize that this is real. It’s only going to get bigger, and the value prop is something you can’t ignore.

Meb: How do most people who are using your fund, individuals or advisors, slot it in? Do they think it’s a thematic, that it just fits in the equity part? Is it an alternative, does it fit into real assets? Like what’s the conversation you’re having with most people as to how they think about the narrative of how they use it?

Wes: There’s been so much media coverage, you’d have to be completely asleep at the wheel for about three years to have never heard of BTC. Even family dinners three years ago, when BTC hit its first significant run in 2017 people are…five years ago, sorry, totally losing track of time. I’ve got my parents asking me about Bitcoin, or my taxi driver on the way to a restaurant, “Have you seen the price of BTC?” Like people know it’s coming. Just from an inflationary standpoint, if you’re a millennial with $100,000 sitting in your bank account of hard-earned savings trying to buy your first condo or house and you wait a year, that $100,000 unless you’re earning a return on it, purchasing power is going to be less than it is today without question. The price of that house is going to increase with the inflationary environment we’re in, with the stimulus printing tied to COVID that they need to realize a 20% or 30% return on that $100,000 to protect the same amount of purchasing power it had today. I think it’s real. And this something at this point, you can’t ignore. They don’t want to miss the boat. They see the negative correlation properties it has and what it represents in a diversified portfolio, and they’re finally starting to find ways to get exposure to it.

Meb: This has been a whirlwind tour. There are a handful of other things I’d like to chat about. We’ll definitely have to circle back in the future to check on any developments, including the Razzlekhan. There seems to be one of those on occasion every once in a while, so it keeps your world interesting. The best place people to go to follow what you guys are up to, keep track of your fund if they’re curious about investing, what’s the best spot?

Wes: viridifunds.com, V-I-R-I-D-Ifunds.com. You can find all of our social handles on there as well. But you’ve got the portfolio and product announcements, the team bios, etc.

Meb: You guys, you actually alluded to…let’s see if you can talk about this or not. You work with our good friend Wes and crew at Alpha Architect, Empowered Portfolios. Are you guys going to do any more funds? Is this one and done?

Wes: No. I mean, we’re certainly going to be a thematic manager here looking to innovate other thematic ETFs in the U.S. markets. Got a couple in the works right now. A little bit too early to speak about. There’ve been some competitive moats we’re trying to create. But there’ll be more to come certainly in Q1 and Q2.

Meb: Awesome. Looking forward to it. And we forgot, we can squeeze in, you’ve got another minute, what’s been your most memorable investment, good, bad, in between, over your career? Anything come to mind?

Wes: Frankly, being long Toronto housing is one of the hottest real estate markets in North America certainly in the last couple years has been my safe bricks-and-mortar real estate, which is totally contrarian to our conversation about crypto this last hour. But frankly, Steady Eddy, stable returns very, very attractive returns and tax-free capital gains on a principal residence. I can’t beat that.

Meb: I had a guest on the show, years ago, that was talking about Canadian real estate being in a bubble and the ways to short that thesis with the Canadian banks and everything else, and they just keep chugging along. It’s been one of the most unstoppable assets over the past cycle, just romping through everything. There are so many people that are like, “No, this is crazy. It’s going up and up.” And then it just keeps going. It keeps going and going.

Wes: A sign of the times. Bricks and mortar, an inflation hedge on very long residential real estate, definitely not commercial real estate, given this move to decentralized workforces and you name it. Offices are troubled. Industrial has been strong, but residential real estate, just given the tax advantages and great spot to accumulate some wealth, certainly, but all part of a portfolio, and crypto is part of that.

Meb: And a beautiful part of the world. I look forward to getting back when it’s not so cold. Last time I showed up in like shorts and a t-shirt, I almost died. So I’ve lost all of my winter skins. Wes, it’s been a blast. Thanks so much for joining us today.

Wes: Absolutely. Thanks for having me.

Meb: Podcast listeners, we’ll post show notes to today’s conversation at mebfaber.com/podcast. If you love the show, if you hate it, shoot us feedback at feedback@themebfabershow.com. We love to read the reviews. Please review us on iTunes and subscribe to the show anywhere good podcasts are found. Thanks for listening, friends, and good investing.