Bitcoin mining has grown from occurring inside people’s basements nearly a decade ago into a multi-billion dollar industrial business today. Demand that the network creates is a direct function of the price of bitcoin or Ethereum. The more the price of BTC or ETH goes up, the more profitable miners can become. That attracts more miners into the network, who need to finance hardware.
Foundry, which was launched about a year ago under the Digital Currency Group (DCG) banner, was established with this in mind. The company looked at the infrastructure of Bitcoin and proof-of-work (POW) mining but also ETH. With Ethereum moving into proof-of-stake (POS) in the near future, there is a whole lot more infrastructure involved. DCG has a bunch of portfolio companies and clients who likely have an interest in this area.
Mike Colyer, CEO of Foundry, joined Paul Gordon of Coinscrum Markets to discuss the market opportunity and state of the industry. Colyer explained how he has been in the mining space for about three years after spending more than two decades of his career in manufacturing and distribution where he was a “hired gun” in the private equity space.
(18:49) “About three years ago [I] jumped into the crypto markets and fell in love with the mining aspect of it because I really felt like we had to build out the infrastructure before this could really scale. It reminded me of the start of the internet back in the early 90s. I was in college when Netscape came out. And it felt like this solves a lot of stuff that couldn’t be solved with the current technology,” said Colyer.
He received a call from DCG CEO Barry Silbert who asked him to come on board to run a new business called Foundry. DCG had until then avoided the mining space because it was truly the Wild Wild West and seemed like a tough business to be in. When Silbert went to buy machines to mine an algorithm, he realized that it was still the Wild Wild West. Considering it’s such an important part of the overall ecosystem, Silbert knew it was time for DCG to get involved.
(20:13) “It’s been great, it’s been a while 12 months,” said Colyer. “He basically gave me a white sheet of paper and said figure out where we can leverage the DCG balance sheet, its brand, its portfolio companies and where can we add the most value in the mining ecosystem?”
Growing the Hashrate in North America
Foundry is focused on both POW and POS. The team firmly believes that more institutional players are going to be coming off the sidelines and into the space once they recognize the opportunity and Foundry wants to be there when they do. Foundry is looking at how to grow the hashrate in North America to continue to decentralize this Bitcoin network throughout the world.
Colyer described the the speed at which the mining market has evolved as “amazing,” saying that in the past three years, they’ve gone from looking at mining facilities with 1MW-3MW of capacity to now looking at sites with 100MW worth of machines on them, which is what people are planning for going forward.
If there are going to be more 100MW facilities, it is going to take a huge amount of capital in order to build that infrastructure, Gordon noted. And if the bitcoin price continues to rise, it will be a virtuous cycle in which that fuels demand for more capital amid profit incentives.
Colyer went on to provide more details on the “blank sheet of paper” that he was given and tasked with finding value, reiterating that Foundry wants to bring more hashrate into North America. Colyer explained,
(23:00) “All the machines are manufactured in China. It’s difficult to get to the front of the line to get the latest and greatest. So we decided…we wanted to help miners in North America. So what we want to do is provide the capital to them so they can get to the front of the line first and get the machines so they can grow their hashrate.”
He went on to explain a “technology shift” in which the newest miners are out and they are more efficient than the old miners. As a result, everyone has to upgrade. They decided to build a business around equipment financing using the equipment as collateral, which he described as a “huge success.”
Foundry itself also participates in mining and has its own fleet of machines. It does not, however, have its own facility and instead partners with trusted host providers throughout North America where they can develop relationships with those that have got “skin in the game.” Foundry also provides advisory services and expects that as more institutional money enters the space, Colyer and his team can help them to navigate the pitfalls of mining.
Foundry is very careful about who the end miner is, as they want to work with folks that both understand the risks of the space and have experience in it. That is why they are only doing financing for new generation machines made by Bitmain and MicroBT, as they have the best equipment available now. Colyer explained that they are not doing smaller deals and have a minimum commitment of $1 million. On the other end of the spectrum, they will go as big as the credit of the counterparty will allow them to go.
He compared the current mining cycle to that of late 2017/early 2018, saying the biggest difference today is that there is a limit on the wafer production now. This is changing the dynamics and will continue to do so for the next six months, Colyer predicts, because Samsung and TSMC are not giving the same allocations as they have in the past. So for the best-performing machines, there’s a limited supply and it’s really hard to get your hands on them, he said.
Coinscrum’s Gordon mentioned that there is currently a six-month wait, and if miners don’t have their orders in they’re not getting anything before April 2021. Foundry’s Colyer agreed, saying MicroBT and Bitmain’s best units are “pretty much sold out through April.” Meanwhile, the bitcoin price continues to rise, fueling greater demand, which is making the industry tricky to navigate.
(27:30) “You have to place your bet six months ahead. You have to put your money down six months ahead of time. And there’s a lot of risk with that. You hope that the equipment manufacturers will honor your order. You hope that they ship on time and then hope that they get installed on time,” said Colyer.
He goes on to say that in the current cycle, there has been a lot of capacity built out in North America in the last three years, adding that “we were late to the game in terms of building out large-scale mining facilities.” In 2018-2020, however, there’s been a lot of construction built and so there is a great deal of space available for equipment but now there’s not a lot of equipment out there.
More Than $100 Million Deployed Into Mining Ecosystem
Foundry’s Colyer went on to compare the bitcoin and Ethereum mining cycles to that of commodities, saying that “our cycle is much faster then the other cycle” and “you have to be quick.” And similar to commodities, you’ve got to bet countercyclical. For instance, in January 2020, when the online mining calculator said it wasn’t a good time to buy new machines, Foundry placed enormous bets on procuring equipment that wouldn’t arrive until May. They have deployed over $100 million into the North American mining ecosystem and have had the latest generation of machines plugged in since May. They have been mining ever since and the machines are worth more today than they were when they bought them.
(30:10) “I don’t know how people don’t think mining is a good investment. It’s been a great investment and it’s going to continue to be a great investment for the next 18-24 months,” said Colyer.
As alluded to, Foundry requires its customers use the equipment as collateral and to also put some skin in the game, which typically means putting 20% down. They finance equipment for between 12-18 months. The idea, Colyer explains, is to get the equipment plugged in and let it pay for itself.
Coinscrum’s Gordon asked about the risk of frontloading hashrate into the market. In response, Colyer said that given that the market goes through cycles, there will definitely be a point in time where it will be overheated, similar to the market conditions at year-end 2017 and early 2018. In today’s market, however, the limiting factor is wafer production as far as they can see.
Over the past 12 months, Foundry has continued to build out the team and is up to about 14 people and growing fast. Part of the team is focused on POW, with the other part focused on POS. And even though the market went through crypto winter, that was a time when developers had their noses down and were building, resulting in the launch of projects like Filecoin. Foundry’s job is to be an infrastructure provider for DCG and its portfolio companies as well as other institutional investors interested in getting involved in POS.
On that note, he points out that despite interest rates hovering at zero or even lower, big investors have yet to realize the potential of the returns they can generate by staking, which can be in the range of 6-7% for staking ETH. Colyer noted that people are just starting to understand bitcoin. The industry remains in the very early stages, though things are happening fast. People are going to be looking for yield, and there are some really good solutions out there to find it, he said.
Colyer described bitcoin mining as a “yield product,” saying it is a utility. If someone is looking to get rich, just buy bitcoin. But if they manage it properly, they can get a dividend from mining on a regular basis. He expects there will be other options with POS to do the same thing.