Key takeaways

• Bitcoin miners are increasingly shifting focus to AI workloads due to declining Bitcoin prices.
• The demand for AI data center capacity remains strong, offering a potential revenue stream for miners.
• Hyperscalers are providing better financing terms to Bitcoin miners, easing financial pressures.
• Co-location leases help miners manage capital expenditures more effectively.
• Bitcoin miners face financial stress from declining hash prices, impacting profitability.
• AI data centers offer significantly higher profitability compared to Bitcoin mining operations.
• The transition to AI workloads is expected to reduce Bitcoin mining hash rates in the US.
• Publicly traded Bitcoin miners represent only a small fraction of the total network hash rate.
• Political pushback on energy allocation for AI data centers could impact miners.
• Retail demand for altcoin trading has decreased, affecting platforms like Coinbase.
• Bitcoin’s market behavior is aligning more with tech stocks than as a safe haven asset.
• Tokenization and stablecoins are poised to benefit major smart contract platforms.

Guest intro

Zach Pandl is Head of Research at Grayscale Investments. Prior to joining Grayscale, he worked as a macroeconomist and markets strategist at Wall Street firms including Goldman Sachs, Nomura Securities, and Lehman Brothers.

The shift towards AI workloads in Bitcoin mining

• Bitcoin miners are increasingly focusing on providing data center capacity for AI workloads. – Zach Pandl
• “So the bitcoin miners are still very much going down the ai route so providing data center capacity for ai workloads that hasn’t changed at all from our last conversation if anything they’ve gone more into that with the bitcoin weakness.” – Zach Pandl
• The demand for data center capacity for AI workloads is expected to remain strong. – Zach Pandl
• “We signed actually the best contract we have seen so far so that kinda reaffirms to us that the demand is is still very strong and if anything has gotten better.” – Zach Pandl
• This strategic pivot indicates how external market pressures are influencing operational decisions.
• Bitcoin miners are diversifying into AI to mitigate risks from the declining Bitcoin market.
• The demand for data center build-outs by hyperscalers is a positive signal for Bitcoin miners. – Zach Pandl
• “I think the market is viewing it a little bit longer term and going okay, you know how much cap bags are we gonna ultimately spend on this what is the refresh cycle gonna look like and that’s where things get a little bit more concerning.” – Zach Pandl

Financial strategies and leasing models in mining

• Colo leases help Bitcoin miners avoid aggressive capital expenditure cycles. – Zach Pandl
• “A lot of them are doing colo leases so you you’re not on the same kind of aggressive capex cycle there’s still a ton of capex to build these data centers but you at least don’t have that very real and significant depreciation on the gpus.” – Zach Pandl
• Hyperscalers are becoming more lenient with bitcoin miners, offering better financing terms. – Zach Pandl
• “What that indicates to us is hyperscalers are being a little bit more lenient with their these counterparties with the bitcoin miners… they’re also looking to or willing to extend full credit over the entire length of the lease and make it easier to finance.” – Zach Pandl
• Longer execution times and non-cancelable contracts provide miners with more flexibility. – Zach Pandl
• “They have longer to execute… you’re not up against a very aggressive date where you have to deliver the data center… if you’re delayed ninety to a hundred and eighty days… the contracts become cancelable… that’s not the case they don’t become cancelable.” – Zach Pandl
• The structure of co-location leases allows miners to avoid upfront GPU capital expenditures. – Zach Pandl
• “The bitcoin miners aren’t responsible for the gpu capex… they’re doing colo leases where they’re not responsible for the gpu just capex.” – Zach Pandl

Market dynamics and profitability challenges

• Bitcoin miners are facing significant financial stress due to declining hash prices. – Zach Pandl
• “Hash price is is down… this is a a very precarious point for bitcoin miners… it seems like the 60,000 range is dangerous for for almost everyone.” – Zach Pandl
• AI data centers are significantly more profitable than Bitcoin mining operations. – Zach Pandl
• “You’re talking about… 15 times on an ev ebitda basis is maybe what the market is paying for an ai data center… a bitcoin miner they’re gonna pay like three three four times ebitda.” – Zach Pandl
• The demand for AI will continue to reshape the economy and financial markets. – Zach Pandl
• “AI is reshaping a lot of the economy… that demand also is just significantly stronger too.” – Zach Pandl
• High-cost miners are exiting the market as older, less efficient rigs are taken offline. – Zach Pandl
• “You’re likely have high cost miners exiting right older rigs being taken offline that are no longer profitable.” – Zach Pandl

Transitioning from Bitcoin mining to AI

• Bitcoin miners are increasingly pivoting to AI workloads as mining profitability declines. – Zach Pandl
• “I don’t think bitcoin being a little bit lower here really changes that… most of these miners are going down AI workloads.” – Zach Pandl
• As AI data centers become operational, Bitcoin mining will continue to decline in certain facilities. – Zach Pandl
• “A lot of these companies… they’re gonna be doing bitcoin mining at one of their sites up until the AI data center is ready to go.” – Zach Pandl
• The public bitcoin miner hash rate in the US is expected to decline over the next twelve to twenty-four months as data centers transition to AI workloads. – Zach Pandl
• “I would say on average that public US hash the percentage of the hash and also just absolute hash should come down and that’s likely gonna happen over the next twelve months as these data centers get built out.” – Zach Pandl
• The transition of bitcoin mining data centers to AI workloads will lead to a reduction in available hash power for bitcoin mining. – Zach Pandl
• “You’re gonna see more of it… when those contracts start kicking in for AI there won’t be bitcoin mining at those sites.” – Zach Pandl

Financial health and strategic shifts in mining

• Publicly traded bitcoin miners represent only a fraction of the total bitcoin hash rate. – Zach Pandl
• “I mean keep in mind the miners are you know I think maybe only what 20% of the total network it’s not like they’re you know 50.” – Zach Pandl
• Approximately 25% of the current bitcoin mining hash rate may go offline in the next two years. – Zach Pandl
• “I would say probably about 25 of that comes offline over the next like two ish year time frame.” – Zach Pandl
• Bitcoin miners are not necessarily selling their bitcoin to cover expenses if they have financing agreements with hyperscalers. – Zach Pandl
• “If you’re signing a a hyperscaler agreement so like a google amazon you’re able to get financing… no one’s really if you’re going down the ai route needing to necessarily sell bitcoin to to fund operations.” – Zach Pandl
• Bitcoin miners are selling their holdings not due to financial distress, but to signal a strategic shift towards AI and to decouple from Bitcoin’s price. – Zach Pandl
• “Yes they are selling down bitcoin but more so to one signal to the market hey we’re we’re really going down ai… we wanna decouple a bit from bitcoin and the price of bitcoin.” – Zach Pandl

Regulatory and political challenges

• There may be increased political pushback against granting power to data centers for AI workloads, which could impact bitcoin miners. – Zach Pandl
• “You are seeing a bit more pushback from a political standpoint at the state level around hey you know should we really be granting all this power to to data centers and to to build all these data centers throughout our states.” – Zach Pandl
• No bill is better than a bad bill for Coinbase’s business. – Zach Pandl
• “That’s why brian armstrong would say hey you know no bill is is better than what he would term a bad bill.” – Zach Pandl
• The market structure bill could lead to a sustainable bottom and recovery in the crypto market. – Zach Pandl
• “If we see some… wealth platforms onboarding bitcoin and ether, we could find a sustainable bottom here and begin a recovery process.” – Zach Pandl

Coinbase’s business dynamics and challenges

• Retail demand for trading altcoins has significantly decreased, impacting Coinbase’s performance. – Zach Pandl
• “The retail demand to trade those coins has really pulled back a lot and so we’ll definitely be looking for any commentary they can give us on that.” – Zach Pandl
• Coinbase needs to diversify its products to reduce correlation with crypto prices and activity. – Zach Pandl
• “We’d actually sort of be less correlated with crypto prices and crypto activity.” – Zach Pandl
• The stablecoin business remains strong and relatively stable despite market fluctuations. – Zach Pandl
• “The stable coin business should be relatively in line… it’s a great business right because it’s very stable for them.” – Zach Pandl
• Coinbase generates significantly more revenue from USDC than Circle due to distribution costs and yield sharing. – Zach Pandl
• “I think we’ve reported on it ad nauseam and it’s one of the worst kept secrets at least in crypto that coinbase makes I think some like orders of magnitude more from usdc than circle does because of the distribution cost and the yield sharing that they make from it.” – Zach Pandl

Market sentiment and investment opportunities

• Low sentiment in crypto could indicate a potential buying opportunity for assets. – Zach Pandl
• “The only positive takeaway is sentiment’s really low and when sentiment gets really low that usually means you know it’s a good time to buy crypto assets.” – Zach Pandl
• The average person’s perception of crypto is currently very negative. – Zach Pandl
• “What concerned me the most was just how much like your average person is not a big fan of crypto right now… it was very negative.” – Zach Pandl
• Bitcoin is currently trading more like technology stocks than as a safe haven asset like gold. – Zach Pandl
• “The price of bitcoin… went up with other frontier technology assets and it went down with those types of assets as well… the charts look very similar with… the price of bitcoin.” – Zach Pandl
• The change in Bitcoin’s trading behavior is linked to the risk appetite of investors in the market. – Zach Pandl
• “What changed was risk taking in in markets… the marginal investor that came into bitcoin in the last couple of years probably was a growth portfolio of some time.” – Zach Pandl

Bitcoin’s role and future in the market

• The current market dynamics are challenging the narrative of Bitcoin as digital gold. – Zach Pandl
• “It’s a challenge to the narrative it’s a challenge to the the digital gold narrative at least over the the short term… it was sort of a disappointing to you know people that own bitcoin for that purpose as a a dollar debasement a type of thesis and didn’t perform as you would have expected in that sort of scenario.” – Zach Pandl
• Tokenization and stable coins are likely to benefit major smart contract platforms. – Zach Pandl
• “Beneficiaries of things like tokenization stable coins are the big smart contract platforms ethereum solana and other critical middleware technology like chainlink.” – Zach Pandl
• Bitcoin may lag behind other assets if it fails to address key questions about its future. – Zach Pandl
• “If bitcoin struggles to answer those questions over the short term it’s possible that the kinda asset that drove the asset class primarily to this point… begins to lag.” – Zach Pandl

The role of AI and blockchain in finance

• Public blockchain technology and AI are complementary rather than competitive. – Zach Pandl
• “I think public blockchain technology is more like the latter than the former… creating trustless systems for finance is completely different than what AI models are doing.” – Zach Pandl
• Key trends in the crypto asset class include regulatory clarity, stable coins, and public blockchain use cases. – Zach Pandl
• “The mega trends in the crypto asset class… regulatory clarity driving adoption of stable coins and tokenized assets of use case of a public blockchains.” – Zach Pandl
• The next stage in the market will involve a more thoughtful differentiation between software stocks based on their vulnerability to AI disruption. – Zach Pandl
• “I think the next stage is going to be a more thoughtful differentiation between the things that seem most likely to be disrupted by ai.” – Zach Pandl