Bitcoin mining: China, Iran have ‘risks that are difficult to price,’ Cipher Mining CEO says

Cipher Mining CEO Tyler Page joins Yahoo Finance Live to discuss the 2022 outlook for bitcoin mining, difficulties in mining cryptocurrencies, and the mining firm's business model that allows it to compete in that space.

Video Transcript

ZACK GUZMAN: Well, there's a lot of different factors that go into profitability for Bitcoin miners. Of course, the price of Bitcoin, pretty important here and we are seeing that slide. The weakest month on the year since May. But for Cipher Mining, also, a very interesting play for next year as they ramp up their business. We've seen this turn into a global story, really, after China shut down mining in their country and for the second time this year, we've got Iran shutting down licensed Bitcoin miners in that country as part of an effort to reduce the stress on the country's power plants.

Back here at home, though, Cipher continuing to build out its network of Bitcoin miners. And for more on that, I want to bring on the CEO of Cipher Mining, Tyler Page, who joins us once again. Tyler, good to be chatting with you. I mentioned, kind of, some of those other stories out there because obviously, all Bitcoin miners are kind of competing for other miners on the network for the same reward here.

The more-- more miners that are on the network, makes it more difficult to kind of get that profits are impacted. And we've seen that kind of change now. It's more of come back online after the relocated out of China. What does it look like, though, for you guys in 2022 as you build some of that stuff out as, I guess, competition gets a bit more intense?

TYLER PAGE: It's going to be a really interesting year. Thanks for having me back, Zack. It's always great to talk to you. Yeah. I mean, listen. 2022 for the entire industry of Bitcoin mining, I think is going to really be about execution. You know, this year, 2021, was a historical one in terms of capital coming into our sector, the overall market caps of the companies have grown quite a bit, the total revenue paid to miners is tracking in the neighborhood of $16 billion as a total market revenue over the course of the year. So it's big and exciting.

And with that and with the pretty big profit margins projected in the space, lots of capital is flown in. And so, you know, folks having ambitious plans, 2022 is really going to be a year of execution. Can companies deliver on what they've said they're going to deliver? In terms of Cipher, you know, we're in the process of building five data centers currently. The first one's come online in the first quarter of next year. And we're really excited to ramp up. We have a really strong team and we're laser-focused on that execution story.

BRIAN CHEUNG: Hey, Tyler. Brian Cheung here. Now even if you don't operate directly in these markets, but what do you see in terms of the developments in China where they've just, kind of, put a wholesale ban on Bitcoin mining and then in other countries like Iran, and Zack was kind of teasing earlier, them also banning crypto mining, although in their case, it seems like it might be to conserve power, how do you think that kind of affects the outlook for your business and your industry?

TYLER PAGE: It's a very good question, Brian. I think of it this way. We came to market. Back at the beginning of this year, we announced our SPAC merger to come public. And when we did that, which was back in March of this year, our thesis was that mining globally, perhaps, was underpricing the risks associated with some of the geographical locations.

And so we are very US focused in a big part of that is because, not only do we have abundant sources of cheap power here in this country, but we also have an established rule of law, mature capital markets. Things are generally very stable. Right? And so part of our thesis was that even if you could find pockets of opportunity in terms of cheap prices for power around the globe, perhaps there were other extraneous risks that weren't being fully priced into the opportunity set.

And that's what I take away from, you know, the stories in places like China, and Iran, and Kazakhstan that there are just extra risks that are very difficult to price. So overall, what does it mean for us and for US mining in general? Is it's a very positive thing. You've seen a migration of hashrate that truthfully has happened much faster than I would have thought would happen, and I think we now have an opportunity in the United States to really embrace this technology in this industry and make sure that it has a permanent, safe home here.

ZACK GUZMAN: Yeah. We had on when the deal was closing at Cipher, stocks off by a little bit more than 50% since then. You know, some other miners have gotten attention that were up and running kind of at fuller scale. Bitfarms, the Canadian operator there would be one example here. That stocks up by about 175% on the year.

Obviously, it takes time to get this stuff off the ground, and you guys are building that out for next year. You kind of look at your projections for what you're going to have six exahash per second by the summer, I think is what I saw in your guys' investor projections there.

Talk to me about how that kind of compares to other people out there in the market because I think Bitfarms has theirs is at eight by the end of the year for 2022. What's kind of the, strategy there though? Because Bitfarms is much more focused, I guess, on sustainable energy. It looks like you guys are also leaning in on that as well. So how do you differentiate? Or is it just kind of a case of look, if we can all make money in this space, we'll all make money in the space.

TYLER PAGE: I hope that we all make money in the space. But I'll tell you the real key differentiator, I think between our model and all the competitors. Like I said, 2022 is going to be a big year for execution. Lots of people have big plans. We have secured purchase contracts for mining rigs to be delivered in 2022 that are capable of delivering up to 19 and 1/2 exahashes. So depending on the pace of our buildout, you know, we could be very big. We anticipate having the first five data centers, like I said, accepting rigs by the third quarter. And so we will be moving along through significant mileposts as the year progresses.

But the big differentiator, and I think what the investing world needs to start to appreciate to differentiate among these miners, is what kind of cost discipline do they have on the main inputs? The cost of power, which is the biggest OpEx cost input. And the cost that you pay for compute power or for mining rigs themselves, which is the biggest CapEX expenditure.

You know, on those fronts, we think Cipher is much stronger than the rest of the competition. We pay an average price at 2.7 cents per kilowatt hour for our power and we pay about 38 and 1/2 per terahash, which is a measure of the compute power of your mining fleet. And overall, those are at the lowest end of the spectrum for what miners pay.

That's really important because right now, profit margins may be very high, 90%. In mining, it is somewhat of a cyclical business and when those profit margins tighten whether because of price action or network competition, you will want to be invested with the companies that have that cost discipline and great resilience against profitability squeezes.

BRIAN CHEUNG: Tyler, are those margins inclusive of the R&D and the investment into those new rigs? Because I imagine that's going to be pretty expensive. I mean, I know you had that capital raised when you went public, but how is the growth stage? Which I imagine a lot of companies are also going through congruently with you. What does it look like when you're making these investments at the same time?

TYLER PAGE: I think that's right. It's another great point for investors to really dig into how they analyze these different companies. I think the statistics that you typically see cited are costs-- or figures. Excuse me. Like, costs per Bitcoin mined. Right? And really, the story of a miner is that you're effectively manufacturing Bitcoin for a much lower price than the market price like any commodities E&P type business. Right?

And so in addition to, kind of, the variable costs, both the operating cost for operating your facilities and paying for power or paying for hosting, that produces a variable cost per Bitcoin. You also need-- pardon me. Do you need to think about depreciation and amortization of the capital expenditure you've had. And so analyzing that total stack is the best way to differentiate among the miners. Like I said, we're getting-- our production begins in the first quarter of next year, and I'm excited to share those numbers when we've got them.

ZACK GUZMAN: Lastly, just because we were showing that our bottom headline here, chyron, was talking about 90% of Bitcoin being mined already, obviously, you know, the mining reward gets cut in half every four years. I think some of our viewers know that. Our viewers also know there's only 21 million Bitcoin ever to be in circulation.

But what does it look like, maybe, once you move to that point where the mining reward is so small and you, kind of, eventually rely on transaction fees as a miner? I mean, what does that eventually look like for the stock itself and how maybe, investors should be looking at that piece of the pie down the road?

TYLER PAGE: Yeah. It's a very good question, but I think of it this way. If history is any guide, thus far, we've gone through several halving cycles, and the compound growth rate of the value of Bitcoin has always outpaced, over longer time periods, the halving of the block rewards.

And so, you know, the next halving is scheduled to come in about 2 and 1/4 years. There'll be another one subsequently four years after that. I think, really, what will overwhelm the economics are in what determines the total value available to a miner is both the transaction fees you mentioned, but also the block rewards. And that's going to depend a little bit on the price of Bitcoin, right? Do we continue to see network adoption and further investment in the space?

So you know, from my perspective, thinking about things over the course of the next halving or even the one beyond that is probably still dominated by the story of network adoption around Bitcoin, and probably the block reward is really going to be the majority of that. And we'll see. There's different forecasts for transaction fees. It really depends on the future growth of the network.

ZACK GUZMAN: All right, Tyler Page, CEO of Cipher Mining. Thanks so much for stopping by and a Happy New Year to you.