Rebecca Hotsko (00:03:53):

So your fund is focused on Bitcoin miners. While I think most people are familiar with Bitcoin and other cryptocurrencies, miners maybe not so much. So to start off, can you walk us through what Bitcoin mining is, how does it work and how are these companies generating their money?

David Khalif (00:04:11):

Of course. So Bitcoin mining is definitely a unique concept because when people think of mining, they probably think of very similar to gold mining where you go into a cave, you might have a pickaxe and a hard hat and you bring out some ore. But really with Bitcoin mining and really digital asset mining in general, a lot of it comes down to very similar to data centers you would see at Microsoft or Amazon or Google where it’s a giant warehouse with thousands of computers running and these computers are effectively trying to solve calculations. Now, the whole reason they do this is to secure the network. So if I today have one bitcoin in my wallet and I want to send it to you, Rebecca, there needs to be someone that actually transfers that data on the blockchain, someone who validates that I have a Bitcoin and validates that your wallet exists and then finally transfers and sends it.

David Khalif (00:04:59):

And so when we think about going into a store today and buying something at a grocery store, we go to a cash register, we put in our credit card and we pay, and that’s effectively recording the transaction, is that machine. So it’s the same thing with Bitcoin and the blockchain in a sense that all of those computers are just in warehouses or hidden across the world wherever people are running them. But they are doing the same thing. They’re calculating transactions, they’re making sure that things are accurate and valid. And in return for doing this, which costs money for the computers and electricity, they’re getting Bitcoin as a reward. So oftentimes people hear about 21 million Bitcoin being out there, and currently 19 million exist and 2 million are left to be mined by these miners. So we’re essentially rewarding the miners for their work because they’re helping secure and validate the network.

David Khalif (00:05:45):

And to date, we haven’t really had any real issues with Bitcoin, which is amazing for a software that’s been out for this long because everybody who owned a Bitcoin five years ago, if they didn’t do anything with it, the blockchain still says you have that and that’s being validated every single time that these mins are validating transactions. So that’s truly what the miners are doing. And for our focus, we looked at the miners and said, “Well, this is another way to put the space” because there’s gold miners versus gold, just like you can hold Bitcoin itself, you can also own the miners. And that’s where we spend our time researching these miners, looking at the teams and the companies and in all just looking at the service they provide and the costs that it costs them to getting Bitcoin versus the market value that we see today for a price of a Bitcoin.

Rebecca Hotsko (00:06:31):

That’s really interesting. One thing that I was wondering about miners is like you mentioned, if there’s only 2 million Bitcoin left to be mined, what happens to them when all the Bitcoin is mined? But they still generate revenue then by just verifying transactions as people are buying and selling?

David Khalif (00:06:50):

Yeah. So really whenever anyone sends anything through the blockchain, whether I want to send you that Bitcoin, there’ll be a slight transaction fee added on top. And today that transaction fee is very, very cheap. It might be only a few dollars. But as Bitcoin demand maybe grows in the future, we could see those transaction fees rising. So when we think about the 2 million Bitcoin left to be mined, when we finally do run out of new Bitcoin, the only thing sustaining the network will be transaction fees. And this was actually something that the creator of Bitcoin, Satoshi Nakamoto, had actually thought about when he was thinking, “Okay, we have this concept of trying to get the miners to economic feasibility, but then the network needs to prove that it’s valuable enough to sustain itself. And so if there’s not enough people paying for the value and services of Bitcoin in the future and paying these miners to validate the transactions, then the network won’t work.”

David Khalif (00:07:46):

And so we’re seeing today that that’s one of the large focuses is obviously seeing how many people can use Bitcoin in their day to day, finding use cases for it. And so today the miners are still doing just fine with the new Bitcoin rewards, but they are earning those transaction fees every single time as well. And today those transaction fees we expect to kind of stay cheap, but within a few decades I would expect demand to continue to grow on the network and the miners will be compensated accordingly.

Rebecca Hotsko (00:08:07):

I want to dive a bit deeper into what you look at specifically for these companies in a bit, but I first kind of just want to talk about the crypto landscape over the past year. There’s been lots going on, so I kind of want to unpack it with you. So there’s been lots of changes in the mining industry where China used to be a big contributor to the crypto mining space until it was banned. So can you just talk a bit about how this impacted the industry and was it negative or positive?

David Khalif (00:08:37):

Sure. So when we think about the core of Bitcoin mining, really what matters is all of these computers are spread around the world processing transactions. And a lot of people may have heard of the term decentralization and said, “Well, what does that really mean for Bitcoin?” And what it means is that I can run a piece of software that supports the Bitcoin network right now at my home computer. The reason why I may not want to do that is because it costs electricity and I’ll hear a buzzing noise from my computer all the time. So we tend to see that people put them in early days in their garages, but then over time into factories. And a lot of those factories ended up in China.

David Khalif (00:09:13):

And really most of the network hash rate, which people can think of as the compute power on the network, all of these computers are working together and they create some amount of compute power. Most of that, about 65 to 75%, was in China prior to their Bitcoin mining ban. And China had decided one day that they don’t want to have Bitcoin mining anymore. There’s a variety of reasons as to why we think that happened, which we can go into, but essentially they banned and now people had to figure out what to do with these miners. So they now exported them to many other countries across the world. And we see that as to what the current landscape is today.

David Khalif (00:09:47):

So the United States and Canada where large beneficiaries of this. People move their operations from China to places in Canada or United States that they saw the best regulatory environment and cheap electricity costs. But we’ve also noticed some countries like Kazakhstan had a significant rise. And that’s typically due completely to the same things, low electricity costs from coal being there as well as kind of a regulatory environment that didn’t mind Bitcoin mining.

David Khalif (00:10:13):

And of course if you’re a Bitcoin miner and you spend millions of dollars on factories and infrastructure and employees to run the machines and all of these things, you don’t want to get banned one day as we saw with China. So certainly I think it was a positive thing because now Bitcoin mining has spread across the globe a little bit more. It’s significantly more decentralized. And personally, I feel better about a network that’s more secure through democratic countries in the world. And I like to see US and Canada and European countries stepping up in this way. But it’s nice to know that globally we’re seeing more in South America, we’re also seeing more in other regions of Asia. This is also totally fine because it’s a global network and nobody should have an issue if there’s other people supporting it globally as well. And that’s really the way that miners treated.

David Khalif (00:10:57):

And as a result of those actions from China, we saw a huge boom in mining activity in the United States. A lot of crypto mining stocks and investments actually went up in value because these operations went from say 0.5% of the networks total compute power to now 2, 3, 4, 5%, which directly correlates with the rewards that you earn in Bitcoin. So I personally think it’s positive, although we knew many Chinese miners who obviously lost their operations and it was tough on them. And to this day, there is probably some operations still occurring in China, but of course it is now hidden and not very public for the government to see.

Rebecca Hotsko (00:11:34):

Yeah, that’s really interesting. I want to talk to you about the reasons behind why they banned it in the first place and do you see that as a risk for other countries now going forward? So there’s kind of two things that I read. One was due to the concerns of the large amounts of energy required, and then another one was just they wanted, I suppose, more of financial stability. And so what are your thoughts on that?

David Khalif (00:11:59):

At least for my thoughts on China, I know that they certainly want to limit the number of financial transactions that are not in their control. So when you think about the Bitcoin network, it doesn’t really matter whether or not I want to send you my Bitcoin on a Sunday when the banks are closed or if I want to send it to you from the middle of the United States or from another country. I can do that as long as I have access to my wallet and the internet. But in China, of course, when you think about money laundering issues or when you think about maybe investors who don’t have the ability to pull their money out of Chinese banks but would be able to put it into Bitcoin and then send it somewhere else, China really clearly stated they don’t want this to occur. And they really tried to hunker down on the one prosperity for China, one common thing, and having one currency, one banking system under them. So that’s certainly one aspect.

David Khalif (00:12:48):

The environmental is also another aspect. I know China is committed to a lot more clean energy initiatives, and Bitcoin mining frankly is a very energy intensive operation. So regardless of whether or not that energy is clean energy sourced or not, China probably saw it as, “Why do we need this? Why do we want this in our country?” And instead said, “Well, take these operations and let them go.” And for me personally, I think they’re starting to regret that. We’re starting to see the China maybe jump the gun by completely banning it and now allowing most of this hash rate and network power to go to other countries. And for me, I can see that they are probably going to continue to try to get back into the space, maybe not as publicly. However, at the time the Bitcoin mining ban was very abrupt and essentially the reasons were not super disclosed. It was kind of this is what’s happening and deal with it, right?

David Khalif (00:13:37):

So as a United States researcher and looking at United States companies and looking at it, this was a big opportunity for them to be receivers of Bitcoin miners in those operations. But from China’s actual perspective, it’s still to this day completely unclear as to what really pulled the trigger and what caused the change. However, we think it’s a multitude of reasons, including the environmental and regulatory concerns.

Rebecca Hotsko (00:14:00):

Yeah. I wanted to touch on those reasons because you mentioned how it was kind of good for the mining industry because it expanded to other countries, the US and Canada more. But I guess I’m just wondering how you’re thinking about those risks and assessing them if those were to happen now in other countries as well. Because I know I am in Canada and I know our government is very forward on their clean energy initiative, same with the US. And so I’m just wondering how you’re kind of thinking about those risks and if you see them as kind of materializing at all.

David Khalif (00:14:35):

Yeah, we read a lot of reports. President Joe Biden here in the United States actually had an executive order about six months ago focusing on the digital asset space. And it wasn’t just the environmental aspect, he was looking at a variety of things that he wanted the treasury department to look into, including the utility of coins, whether the US should have their own coin. But one of the aspects is certainly the environmental. We are starting to see more and more reports from the federal government on this. And additionally, in response to Canada, we see similar things where there’s a huge concern around, “Where is all this energy going? Is it clean energy sourced? And frankly, why do we need it in our country?” And so we constantly launch this.

David Khalif (00:15:15):

I will say that now to date, we’re starting to see that these businesses are ethical actors in the sense that they pay taxes, they’re trying to work within the regulatory system. And that’s something that we think will play out very well in the long term. When you build your facility for example in Texas and the Texas governor and state of Texas supports it, there’s a lot more likelihood that your facility will be able to live and exist there for a long time. One of the issues we did see though is early on in the United States, we saw states such as the state of Washington that actually banned Bitcoin mining or had restrictions after people set up operations. Many of these can be driven by communities nearby that hear the loud noises from these factories or from these data centers essentially, also people concerned about what this electricity cost might be to them or if the demand on the grid is too much. So these are all concerns we watch.

David Khalif (00:16:06):

However, in my personal opinion, the United States, Canada and a few other European countries that have really started develop are doing it within the right frameworks. They’re trying to do it correctly, they’re building political capital to get this supported by people within governments. And from my perspective, I don’t have nearly as much of a risk tolerance towards these operations being destroyed or abruptly stopped like it was in China. However, one thing we are closely paying attention to is what are the ways that the governments can kind of stop these operations from occurring without saying get out. And a few of these might include having taxes or increased energy costs on these operations, maybe having certain things that require them to employ a certain number of people in the community to actually give back enough.

David Khalif (00:16:48):

So there are restrictions we’re seeing. And so far between United States and Canadian companies, they’re really working hard on meeting these requirements and I see it as a very positive thing, but obviously it’s of huge concern. We always spend our time researching it. Knock on wood, so far it has been okay between those two major countries I’ve discussed.

Rebecca Hotsko (00:17:08):

I was pretty interested when I was reading some data on just how energy intensive it is. I’m wondering if you can walk us through just to put into perspective for us and our listeners of what it takes to mine Bitcoin.

David Khalif (00:17:25):

Yeah, of course. I always tell people it’s funny because it’s not a problem when you have say one Bitcoin miner running, really it’s when you have thousands and thousands of miners that it becomes an entire operation. I’ve actually visited a few facilities including one down here in Texas by Riot Blockchain, one of our public holding companies. And it’s an incredible operation. I mean there’s hundred megawatt basically build outs of data centers. You have hundreds of thousands of computers kind of buzzing in there. And as you might imagine, it’s not only a bunch of electricity, but if there’s heat and you need to cool it. And so that there’s a lot of kind of things occurring. Ironically enough, people tend to really focus in on Bitcoin mining because it’s extremely public that the environmental concerns are there, but we don’t really think that these exact operations also exist within Google and Facebook and Microsoft’s data centers as well. So there are thousands of computers buzzing all the time.

David Khalif (00:18:19):

But for the average investor, for someone listening in on this, there’s a ton of energy that’s being used by these miners because they need to power these operations. However, one of the really nice benefits we’re seeing is, A, the entire space from a public perspective, so public miners we look to invest in. They’ve acknowledged the environmental concerns. Many of them are sourcing their operations through queen energy. So they’ll actually set up their operation next to a hydroelectric dam or they might set it up next to where solar and wind exists.

David Khalif (00:18:47):

Another really interesting aspects about these operations and these companies is that for the ones who maybe aren’t 100% clean energy, we’re seeing them purchase renewable energy certificates, because from their perspective they don’t want to treat Bitcoin as a dirty coin. They don’t want people to think of this as something where, “Oh, it’s just an environmental waste.” Certainly it uses a lot of energy, but from their perspective it creates a very clear value of securing digital assets, having a place where you and I, for example, can own Bitcoin and we’re our own digital bank. In the United States or Canada, it maybe is less necessary to have these private digital banks, but when we look at other countries in the world, say Venezuela where the currency is not as strong, it’s extremely valuable for people to have access to something where they can store their money and have a chance to actually own it.

David Khalif (00:19:34):

And so from that perspective, I definitely think the energy cost is justified. But metrics have definitely been thrown out there. For example, there’s more electricity used by the Bitcoin mining network than the entire country of Argentina, which is a very big thing to think about when you talk about, “Wow, how much energy is that? Where is it going towards?” But a lot of this is starting to be queen energy sourced. And especially for our portfolio and within a lot of United States and Canadian public companies, we’re seeing them be extremely sensitive towards this topic, versus say if you owned and operated a miner in Kazakhstan, it’s much more likely to be coal-based and coal-operated.

David Khalif (00:20:09):

And then this is something that we had already pay attention to, but ultimately it is a concern going forward. We’ve seen the United States government especially call out the environmental concerns there, and it’s one kind of solution that all of us are working together to solve. Within the space we’re seeing innovations, we’re seeing more clean energy sourcing, but ultimately we don’t believe a lot of people in the Bitcoin mining space don’t necessarily believe that we should curb our energy usage. Instead, we want to create more energy usage and a more abundant queen energy society. And hopefully Bitcoin can be using a part of that. And then that tends to be the way that most people in the space view it.

Rebecca Hotsko (00:20:47):

I’m wondering if you can talk a little bit about some of the ways that some cryptocurrencies are trying to reduce their energy intensiveness. I know that Ethereum is trying to change the amount of energy its miners consume, so I’m just wondering if you can talk a bit about which cryptocurrencies are maybe more energy efficient.

David Khalif (00:21:11):

Yeah, of course. I know for potentially many listeners, it depends on which cryptocurrency you’ve heard of first. Maybe you’ve heard of Dogecoin or Ethereum or a variety of other coins that exist. So I think one thing that I would like to kind of level set here is that for many different cryptocurrencies, they’re solving different problems. I like to think of it as in the early 2000s with the dotcom bubble, there were winning companies that we still see today that are some of the largest. I think that is very true of the crypto space where there are going to be projects today, cryptocurrencies that are large winners, and then there are going to be some that are obviously not as well off or will be a scam or will end up not having a business model that works.

David Khalif (00:21:50):

And so when we think about other cryptocurrencies in general and how you would maybe compare them, especially the environmental impacts, Bitcoin in my opinion is solving a very different problem than say Ethereum or Dogecoin. And so Ethereum, they just recently moved over through a merge to proof-of-stake, which for listeners is essentially a different way of validating transactions. And with computers and Bitcoin, it’s proof of work which essentially requires them to calculate hundreds of thousands of calculations, which is why you need so many computers buzzing around the clock. And at the end of kind of a solution, these Bitcoin miners say, “Hey, I came up with a number. Let’s validate it across the network. And if everyone’s happy, if everyone did their calculations, then we’re going to add it to the blockchain.”

David Khalif (00:22:28):

And with Ethereum and other currencies that are using proof-of-stake or other forms of validation mechanisms, they don’t need thousands of decentralized computers. They tend to be very centralized. So in a sense, there are only a limited number of validators that can secure the Ethereum network. And to become a validator, you need different things, you need a certain amount of stake in that protocol. So for the average person in the United States or Canada or really across the world, it’s not super feasible to become a validator of Ethereum because it requires a significant capital cost upfront. However, you and I could run on a very old laptop Bitcoin mining software that helps secure the network. It probably wouldn’t be profitable and there’s likely no reason for us to set out a profitable venture, but the point is that we could secure the network in a decentralized manner doing that versus other protocols.

David Khalif (00:23:18):

And for many people, they don’t mind necessarily having a centralized validator. For example, today people use Cash App or Venmo. Those are all centralized institutions like PayPal that process your transaction, and we’re completely fine with that. But I know for Bitcoin and the problem that people want to solve with that, they want it to be decentralized. They want you to be able to support the network from anywhere in the world if you choose to do so. And that’s really one of the large reasons why I think of Bitcoin as very different crypto versus other currencies out there. And really from an environmental impact, I don’t see it going away because Bitcoin miners want that extra level of security and validation by allowing anyone to secure the network, versus Ethereum is willing, for example, to make the concession that, “Hey, we’ll only have a specific number of validators and that’s okay with us.”

David Khalif (00:24:05):

So that’s certainly where the big trade off is. But from an investment perspective or from the average person listening to this, that’s one of the big pieces of research you can kind of do when researching a cryptocurrency is, well, how do they validate their transactions? How do they make sure this is secure? And at least for Bitcoin, it’s been the same way since it’s incepted 13, 14 years ago. But we know that Ethereum just moved over a few days ago to a new form, so everyone’s closely watching to see is it going to be just as secure, will it be just as safe for your funds. Because ultimately, we see millions and millions of dollars, if not billions of dollars now at this point being traded every day and it absolutely needs to be secure for people to have trust in it.

Rebecca Hotsko (00:24:46):

Do you think that Bitcoin could lose its competitive edge if it doesn’t kind of follow suit of trying to reduce its energy intensiveness or being more energy efficient like you mentioned Ethereum is?

David Khalif (00:24:59):

Yeah, it’s definitely something that… I tend to think one of the best things about the market, and I say this is in the market price of these stocks, but also the market price of Bitcoin and Ethereum, is that the market speaks for itself, right? People will go out and buy what reflects their values, what they believe is the safest. You don’t see a giant investor like say Goldman Sachs going out and putting all of their money into Dogecoin, and there’s a reason behind this, right? Someone at the company or some risk management policy has said, “Well, maybe this isn’t safe for us to put our funds into and we should wait till it’s safer.” However, we are starting to see things like Fidelity announcing that they do want Bitcoin to be available to their customers. So certainly, in my perspective, that security in that extra layer has started to pay off especially as we think about Bitcoin in long term versus other cryptocurrencies. What is its place? What do people assign value to it?

David Khalif (00:25:51):

And I think when I talk to people my age and the average millennial investor, they’re not buying gold, they’re not buying silver when we think of these things. They’re buying digital currencies, they’re buying stocks, they’re buying ETFs. And so in my opinion, if you look at something like gold today, which is 10 trillion market cap, and Bitcoin is hovering between 500 to 700 billion at current market rates, there’s a lot of room to grow. Even if let’s say by the time three decades from now we’re only half of gold’s market cap, you’re talking about a 7, 8, 9X in the price of Bitcoin, which is a significant amount of price change. And in my opinion, if we do think Bitcoin is a replacement for gold as a digital store of value, then that’s something I would certainly want to own.

David Khalif (00:26:34):

But that doesn’t mean that it will be the most competitive or that it will always be number one. I certainly think Ethereum and other cryptocurrencies have a lot of value as well. However, in my mind, Ethereum is competing for a very different solution. Ethereum is trying to solve defi, for example, decentralized finance and a bunch of different applications. So a really simple example is that I can take my Bitcoin today, and I have done this, and I can go to the Ethereum network and essentially take a loan against my Bitcoin. So Ethereum is offering, for example, that service of being a bank allowing me to get capital against my collateral. But what I was using as collateral was Bitcoin, which really speaks volumes to people think and treat Bitcoin as a very long term store value. And no one in the crypto space that I’ve heard of is unwilling to accept a Bitcoin as collateral, which really speaks, in my opinion, towards how people treat it as a very, very solid asset for the long term of the space.

David Khalif (00:27:28):

One other kind of interesting metric that I follow is market dominance, which is essentially a metric that says, “Okay, here is Bitcoin’s market cap relative to all of cryptocurrency coins.” Last year it was actually getting to one of its lowest points, about 38% of every dollar in crypto was in Bitcoin. But now during kind of an economic recession or inflation going higher, we’re actually starting to see it go back up to the mid 40s. And so for me personally, that speaks volumes to when investors get scared, when they get worried, they start to allocate back into Bitcoin as they’re safe cryptocurrency for lack of a better term.

David Khalif (00:28:02):

And that’s something that I find very interesting and when we’re talking to advisors or retail clients and saying, “Well, this is what we think is your best option long term,” we look at what the facts tell us. People go to Bitcoin for safety, for fleet, whenever there’s other hard times going on in other cryptos. And it’s been around since day one and it’s still very competitive with a lot of people working on it, talking about it. And now Fidelity and other financial institutions starting to allow people to purchase it. So for me, it’s still very competitive. It still looks like a great option going forward, but I certainly don’t claim a stake that today it’s going to be as dominant as it is 10 years, 20 years, 30 years from now.

Rebecca Hotsko (00:28:39):

Oh, I was reading some articles on your website. There’s a lot of great kind of analysis on the crypto space. One was talking about comparing Bitcoin, the total market cap, to gold. I think that’s a part that I have trouble kind of wrapping my head around what the total market cap of Bitcoin could be in the valuation process and everything. And so I’m just wondering if you can speak a bit about why your team kind of related it to gold and how you see that linkage in helping, I guess, investors think about the potential growth in the Bitcoin space.

David Khalif (00:29:17):

Yeah. I tend to find that people will have a bunch of different models for how they justify Bitcoin valuations. And people have, in my mind, come up with creative ways because you can’t really do a DCF model as you would do of a traditional type of asset because there is no cash flow that you’re necessarily getting, no dividend you hold onto by being a Bitcoin owner.

David Khalif (00:29:39):

However, I tend to look at this as, okay, today my parents and grandparents, for example, may own a gold. And really one of the things people don’t consider is that it’s not super transferable to get rid of that gold. Say I did have a gold bar, I’d have to find a willing buyer in my area or go to a shop and I have to kind of accept their market price. And it requires a lot of effort in terms of going there. And frankly, if everybody in the world who owned gold personally tried to cash out at once, we have a huge liquidity crunch and there wouldn’t be any demand for it because ultimately gold is typically used for cosmetic items or maybe instead of cell phones or things of that nature. But the actual demand needed every year is easily found through mining operations. So truly gold has this kind of unique value associated with it because it is something that sentimentally people in the past have talked about, used, kings and countries, and just in general it’s just a form of wealth.

David Khalif (00:30:31):

But currently today, the US no longer operates on a gold system. We have dollars that are used by faith and trust. And I think that’s similar to what we think of with Bitcoin, where Bitcoin is a version of gold, in my opinion, because it is an asset that people look at as collateral, as safe, but in my mind it’s so much easier to transfer and use Bitcoin. So for those who’ve never used the network, you don’t have to use a full Bitcoin for a transaction. You can use a fraction, going out to nine 10 decimal points. So if I theoretically wanted to send you $1 worth of Bitcoin or you wanted to only purchase $1 worth of Bitcoin, you could do that. That doesn’t really exist within gold. Obviously, it’d be a little bit difficult to weigh out $1 worth of gold and no one would really be willing to sell it to you.

David Khalif (00:31:13):

But ultimately, I think my thesis and really Viridi Funds thesis as a whole around that is that where is the generational wealth going to go? Today our grandparents and parents, when eventually that wealth gets transferred onto kids, where do they allocate in their portfolios? And today I see people taking a lot more aggressive chances with tech stocks. People are willing to look for opportunities that support their value. For example, I know Beyond Meat as a popular company because people support kind of their mission and would like a society where meatless things exist. But for me, when I think about digital assets and digital security and really what would be the value add there, I think there’s a lot of wealth that will be transferred globally outside of the US and Canada where people will say, “Well, I don’t want to hold my currency of my home country. I want to hold something that’s more secure.” And a lot of people only really look at Bitcoin for its value compared to the US dollar.

David Khalif (00:32:02):

So I know personally people who I worked with at Microsoft that they would get a paycheck and send money back to their families in South America, but instead of having to do it through a US bank and waiting three to four days and having all of these things, they were able to send it through Bitcoin to their family and their family got it within 10 minutes. And then that family was able to use that Bitcoin in a Bitcoin ATM and get cash right there and then. This is something that again is amazing technology to people, especially because I’ve never had to be in a situation where that has happened. But for people whose families are dependent on that, it’s extremely important that funds can get there safely, that the fees are reduced, and frankly that it’s 24/7. I can’t imagine you’re having a crisis where the bank says they’re closed and now you have to wait another day.

David Khalif (00:32:44):

So that is certainly a few of the value adds there. But when I look at the value of Bitcoin and why we compared it to gold, a lot of it comes down to where is the next transfer of wealth, how are people thinking about digital assets. And frankly speaking, most of the reason why people allocate to non Bitcoin crypto assets such as NFTs, Dogecoin, Ethereum, is a lot of it comes down to their first entrance into crypto. How did they hear about it, who’s told them to buy it. And as people do more research over time, I think a clear diversified balance portfolio in crypto will be a necessary part of financial advisors allocations and really just how people should think about allocating for their clients or for retail investors personally.

Rebecca Hotsko (00:33:26):

I kind of want to touch on that for a second. So what do you think is an appropriate allocation for crypto in a millennial’s portfolio? And then I guess how do you think of the time horizon?

David Khalif (00:33:36):

Yeah, it’s a great question. And even as someone who’s very active in the space and has what I would consider maybe a higher tolerance for the risk and willing to wait it out on a long term, I think today between 1 to 3% is a very normal allocation of a portfolio. Crypto is a very new asset class. I would consider this to be very much in the alternative investment category where people should very much realize there are risks. If you were to own say a commodity, you could replace that part of your portfolio with something like Bitcoin. There’s no guarantee that Bitcoin will survive regulatory hurdles over the next few decades. There’s no guarantee that people will flock necessarily to Bitcoin over another currency. But in my mind, when you think about kind of a healthy allocation, this is an asset that has outperformed almost every other asset class over the last decade.

David Khalif (00:34:24):

And if you look at something like a quilt chart and just compare tech stocks and S&P and all these things to Bitcoin performance, generally speaking, three out of every four years, Bitcoin is heavily outperforming. And in the fourth years is maybe when I would consider allocating or buying the dip or doing things of that nature. Well, funny enough, 2022 is that fourth year. It tends to follow the trend that we saw in 2018 with Bitcoin going down. And at least for me personally, I don’t look at it as a short term investment. I would say if you’re a millennial and you were going to check the price every day, then this is not the investment for you because if you own Bitcoin, you should have the reasons in your mind is to, “Here’s the use cases that I like. Here’s the things that I’m looking forward to in the next few years.” And in my mind, if those things are met, we’re going to continue to see Bitcoin increase in value.

David Khalif (00:35:12):

So one of the things, for example, that I would pay attention to as opposed to the price every day would be, well, how is the US and Canadian government thinking about cryptocurrency? Is there a law that really worries you that says, “Hey, it might get banned”? That type of stuff to me is extremely relevant. But within the United States, I can tell you full exchanges like Coinbase exists that exist off of cryptocurrencies being traded. These are thousands of jobs, these are tax paying citizens. I think it’s becoming a lot more difficult to just say, “Well, we’re going to ban everything in the United States or we’re going to ban everything in Canada.”

David Khalif (00:35:44):

And so for me personally, I see it as a very good long term hold, similar to how I would hold the S&P 500 or any other kind of large thing I have conviction in, but certainly not 10 or 20% of a portfolio. And even within that 1 to 3% allocation, I would consider a healthy balance between the miners and then holding currencies themselves. And of course we can go deeper into the thoughts there, but at least for me personally, I don’t see why we wouldn’t diversify your risk within the space, right? You don’t need to pick all in on Dogecoin and hope that it works when you can own a few different cryptocurrencies and maybe the miners for Bitcoin, and that gives you a very diversified way to play the space.

Rebecca Hotsko (00:36:24):

That kind of brings up a question I have because we’re kind of comparing Bitcoin to gold before, and I know they’re not directly comparable by any means, but just in the sense that they could both be used as a store of value. I guess I’m wondering how Bitcoin can be compared as a similar store value given it’s so volatile.

David Khalif (00:36:53):

Right. And I think it’s a very fair call out. When you look at gold price over 20 years, I mean, it’s way more stable than Bitcoin is. But I guess my fun counter argument to that would definitely be that we’re still super early in the Bitcoin space, I mean when you talk about gold that’s been around thousands of years effectively now, versus Bitcoin is 14 years and the digital age things move at lightning speed. But with that being said, of course in my allocation to Bitcoin and my thought process, I tend to dollar cost average into the space. I tend to buy once every month, for example, at a flat timing. And I don’t really pay attention too much to the price on that day or to some macro event.

David Khalif (00:37:24):

And really why this matters for me specifically or why I tell this as kind of an anecdote is that in my mind, Bitcoin today fell from 65,000 to 20,000, which is a huge decrease. And I could imagine investor who bought it 65,000 would say, “Well, what happened? Why am I down so much?” And I think that’s a very fair issue. But one of the things that’s funny is in the pandemic Bitcoin was the slow as 3,000, right? So a consistent kind of dollar cost average strategy, you would say, “Well, 3,000 to 20,000 is an incredible return,” right? And if you’re thinking about comparing it to something like inflation going up, if you had bought Bitcoin steadily over the last three, four or five years, your value on that Bitcoin would certainly be higher than what you started with, which is what I tend to think of with a store of value when you own something and if you want it to be stable and secure over time.

David Khalif (00:38:12):

But I can totally understand an investor that got in at late 2021. They’re feeling very burned right now. They might feel very turned off by the space because it’s extremely volatile and they took the bad end of it. But certainly that’s one of the reasons why I definitely encourage people to read through what’s called a white paper, essentially a prospectus for these coins, and make sure you don’t invest in something that you don’t understand, because I know a lot of people got really into Dogecoin when there was that huge fiasco and Elon Musk was on television. Frankly, if you had come up to almost anyone who was retail and said, “Can you explain the business model behind Dogecoin? How do you expect it to get to $5? What’s the model?” Most people were just speculating and hoping someone else would buy it from them, right?

David Khalif (00:38:54):

And so that’s one of the things where I always tell people start with the Bitcoin use cases. What do I see being used today? How are companies thinking about it? What businesses are being built? And ultimately that is why my long-term horizon, I’m not nearly as concerned. But I definitely wouldn’t say you need to replace the full gold allocation, for example, because you are right, a gold is significantly more stable today. I don’t think people are going to be comfortable with minus 80% Bitcoin swings all the time. But hopefully as this asset class matures, that becomes less and less of an issue. And we’re seeing it play out even now with a macro environment that’s very not favorable. We’re seeing Bitcoin still holding 18, 19 grand when only a few years ago it was 3,000, $4,000. So certainly an increase from that point.

Rebecca Hotsko (00:39:38):

As adoption has increased in Bitcoin, has the volatility decreased at all?

David Khalif (00:39:45):

I would say generally the volatility hasn’t decreased significantly. I mean, certainly a lot more than the early days where it was minus 90% crash and that was relatively consistent. But since more and more people are holding it, and one of the things we actually pay attention to are, okay, when you own Bitcoin, you store it in a digital wallet, and this is all on the blockchain. So you can actually track digital wallets, you can see what people are doing. Now, again, I won’t know Rebecca’s wallet specifically unless you tell me, “This is my digital wallet,” but I will be able in the aggregate to see, “Well, there are 10,000 people in the world who have one Bitcoin and they haven’t touched it for years,” right? And that suggests to me people who are not willing to sell even when the price goes down, they’re not affected by short term price action. And so that’s certainly going to help volatility in the long term when you have very long-term high conviction holders essentially who are not willing to sell every time the price goes up or down.

David Khalif (00:40:40):

That being said, I do think the volatility will also decrease as we see institutional adoption increase. And with Fidelity offering it for more clients, we’ve seen more and more institutions around the world asking about Bitcoin and learning about the qualities and maybe even allocating towards it. We’re still very, very early. In the future, I can imagine a 20/60 retirement fund for myself having a 0.5% allocation to crypto. And when you talk about that, that’s going to be consistent buying demand every 401k that occurs, right? Every time someone allocates their 401k, it’ll go towards that. Anytime someone purchases in their Roth, it’ll go towards that. And of course today it sounds crazy to think about having a fixed portfolio allocation towards crypto, but hopefully in a decade or even less than that, we’re going to see more and more institutions getting client demand that says, ‘Hey, I want to own some crypto in my portfolio, and why isn’t it there?”

David Khalif (00:41:33):

And so we talk to a variety of financial advisors who certainly are seeing more and more questions and calls about, “Hey, my clients are asking me to invest in crypto and I don’t know how to help them. Should I be buying Dogecoin for them? Should I be buying Bitcoin?” And that’s part of where Viridi sets out to create very transparent materials in space. We talk to advisors. We don’t tell them Bitcoin’s going to be a winner. We tell them the facts. We say, “This is what we see with Bitcoin today. This is how we think of it versus other currencies.” And if I had a conversation with a client, I wouldn’t feel comfortable allocating to Dogecoin because I don’t see the future vision of how it’s going to become more valuable. But I do see it with something like Bitcoin. And that’s why I think longer term volatility will go down, but I certainly don’t expect it in the next five to 10 years especially as regulatory hurdles continue to pop up.

Rebecca Hotsko (00:42:23):

One other thing I want to ask you about is, because you mentioned Bitcoin goes through market cycles and you look through history, you can see the clear patterns of up and down, but I think that one thing that I’m still unsure about is I find myself relying on technicals to try and figure out if Bitcoin is overvalued or undervalued. And that goes against everything I know as long term investor. So I guess I’m just wondering, are technicals useless for Bitcoin and what can we use instead to kind of compare if it’s over? Undervalued?

David Khalif (00:43:00):

Yeah, I would definitely say that technicals haven’t perfectly transpired to success within the crypto space and especially Bitcoin. Now, many people, and I’ll name a few things so that people listening in might be able to go research them or maybe explore them more, I know one model that people talk about is stock-to-flow, which is essentially, “Okay, how much today in Bitcoin do we have versus the new flow that we get every day?” And I guess for context here, when we talk about 21 million Bitcoin and 19 million have already been mined, as you and I are speaking, Bitcoin is being mined today, and every single day 900 new Bitcoin is issued right now. And that will occur up until about 2024 where the protocol says it’s going to half it. So then instead of 900 new per day, it’ll be 450.

David Khalif (00:43:45):

Now this context is important because essentially the supply, as you can see, is going to start going down and down in terms of newly mined Bitcoin. And we’ve seen that since inception when there used to be blocks that would be basically validated by these miners and it used to give 50 Bitcoin as a reward. Today a current block is 6.25 Bitcoin and it happens every 10 minutes. And so just for the average person on here listening, you can certainly get a revenue and a cashflow for some of these companies like the miners. And you can use technical analysis and all of the factors that you might want to be interested in. Because these are publicly traded stocks and you can clearly see the business model and do a DCF model, all of that definitely exists.

David Khalif (00:44:25):

But for Bitcoin itself, I would tend to look at metrics such as adoption metrics, right? How many Bitcoin wallets are being used? What’s the average transaction fee? Because if we look at something like transaction fees going up, that would suggest to me more and more demand on the network. People are clearly interested in using the service and they’re willing to pay a little bit more to do so. And at least for me, those are kind of some of the main things I think about. We’ve known a lot of people to use that stock-to-flow model, but essentially it hasn’t really held true recently with kind of the price fallout that we saw from Bitcoin. And it had held true for the past cycle, which is why a lot of people paid attention to it.

David Khalif (00:45:02):

But for us personally, there are not too many crazy technical factors, because unfortunately with Bitcoin, the supply and demand are very relevant off of macro conditions as well. When we initially started our research at Veridi Funds, we still wholeheartedly believe that inflation hedge is true for Bitcoin over a very long term horizon because more US dollars or Canadian dollars are printed than new Bitcoin printed every day. So technically over time, that can be a factor you would look at. However, Bitcoin, I don’t think anyone expected it to go from 3,000 at the bottom of the pandemic to 67,000, 68,000 so quickly in a year. And I think this natural pullback to 20,000, which is a significant pullback, is still relatively okay in the grand scheme of things if you were to zoom out, because essentially in my mind, those cycles do occur every four years.

David Khalif (00:45:53):

There was a quote I remember hearing that said, “No one in the history of Bitcoin who purchased Bitcoin and held it for at least four years has lost money.” Now, that’s obviously not financial advice to say you’re guaranteed to win, but historically we’ve seen that whole true. And so the holder who purchased it’s $68,000, at least my assumption would be holding over a long enough time horizon if Bitcoin pans out the way we expect it to will eventually increase in value. And again, it must be tough for people who rely on technical metrics. And of course there’s no easy solution or answer here, but it’s a new asset class. So frankly, modeling it off of other asset classes is probably not going to be the successful way to look at these type of asset.

David Khalif (00:46:36):

In my opinion, we have to come up with new creative metrics. We have to maybe assign evaluation for who are the users from today who own gold when they transfer that wealth to their kids. That’s one aspect of demand. What about other aspects such as countries that may start using it as a reserve? And we’ve seen this with MicroStrategy as a company in the United States that actually does it, but we’ve also seen El Salvador owns Bitcoin for their government. And if enough countries in the world start to do this, now there’s artificial demands similar to a gold reserve that the United States has.

David Khalif (00:47:06):

So I’m very excited about it because I think we’re very early on and those are the metrics that I pay attention to, but certainly there are people out there who do tons of technical analysis who try to find maybe where it is in the curve and see if it’s maybe low on valuation front. But at the end of the day, people don’t have anything to back Bitcoin with. So I can’t go to a bank and say, “Give me $20,000 for my Bitcoin or give me a car or some physical asset.” So it’s really a trust-based system. When I trade with you, it’s because you assigned value to Bitcoin yourself and I assigned value to Bitcoin myself. So who knows how that will play out in an ultra long term and how to model that correctly? But certainly for me, on a long enough time horizon, I’m relatively confident that Bitcoin will continue to find use cases and will continue to grow in value.

Rebecca Hotsko (00:47:53):

I feel like we could have a whole another conversation just on how to value Bitcoin. That was so interesting and so helpful to just think about in that perspective. I want to talk to you about miners now because that is what you are in the business of. So let’s just talk a bit about Bitcoin miners and what we’re looking for in terms of what constitutes a good bitcoin mining company.

David Khalif (00:48:20):

Sure. So we’ll go through a fun list here, but it should be hopefully pretty easy to figure the good miners versus the bad miners at the end of it. So one thing to point out is we are an actively managed fund, and this is what we spend our time doing. We research these companies. And for me it starts, A, with the management team. I always like to say, “Okay, what are the management teams in this space?” It’s a new asset class so we certainly want innovative managers, but also people who understand how to build a business for the long term. And in the Bitcoin mining space, what this really means is when do you raise an equity offering or when do you take on debt? At what point in Bitcoin are you predicting a break even for your business?

David Khalif (00:49:00):

So if we take for example, Miner X, and Miner X is a very good miner in my opinion, that would essentially be, okay, they have a low cost of electricity in their operation. This means that the energy they’re sourcing is not only hopefully renewable, but also it’s as low as they can get it. And for you and I, at least I can tell you here in Texas, my personal rate that I pay for an apartment might be 13 to 14 cents per kilowatt hour. And for some of these very, very, very developed companies with great contracts or great energy, they’re getting it as low as maybe 2 cents per kilowatt hour. So this is obviously a huge change in the cost of just mining your machine, essentially letting it run all day because their electricity cost is extremely favorable.

David Khalif (00:49:42):

Another aspect of this is where do you put your miners, right? So if you’re a good miner, you need to have the infrastructure in space to actually plug in thousands of machines. I mean, people tend to kind of underestimate the operation itself. But if I tomorrow needed to plug in a thousand computers, I mean it’s going to be impossible for me to do it alone. I’m going to need to have a team. There’s wires that need to be hung. And in the United States and Canada especially, that infrastructure has to have permits and regulatory bodies that approve it.

David Khalif (00:50:10):

This was one of the reasons why Kazakhstan was one of the biggest receivers of miners after the China ban, is the regulatory body really doesn’t exist there. So you can plug in miners haphazardly, you can have a lot less safety protocol. And that means that if you and I both were trying to build our data center and you were in Kazakhstan, you could build yours in two months. In the United States and Canada, you’re talking six to 12 months minimum for regulatory things, making sure the building has fire safety. So I think that’s a positive thing. I tend to look at it as I’d rather have a regulatory more safe environment, but that adds a lot of time. And so when we look at miners in space, we look at what infrastructure do they have today versus what are they building. And a lot of miners, if we talk about the China ban as example, they were able to scoop up tons of Bitcoin mining machines themselves for cheap, but they didn’t have a place to plug them in. And if you can’t plug them in, you’re not generating revenue for your shareholders.

David Khalif (00:51:03):

So electricity cost is very important. The infrastructure, whether you’re buying it or leasing it, how much of it you have is really important. And now, as you mentioned earlier in the conversation, the ESG component of that infrastructure is very important. So are you setting up next to a hydroelectric dam and you have 99% renewable energy? Many of our top holdings actually do have those types of setups where they’re next to wind energy or they’re next to hydroelectric. But that is a factor that I think is increasingly important for shareholders to pay attention to and that’s something we also try to pay attention to when talking to these companies.

David Khalif (00:51:37):

The final thing, and this is what I would say is maybe the most improvement in the space that we’ve seen, is the actual machine itself. So when you think about Bitcoin mining in the very early days, people used to run them on personal computers. Then they figured out, “Okay, instead of personal computers, we can use GPUs.” And then instead of GPUs, we now use what’s modern day called an ASIC. An ASIC is a term in the industry. It’s an application-specific integrated circuit. And again, for your users and viewers on this call, I don’t really expect people to know what that is off top of her head, but it’s essentially a specialized machine that only does Bitcoin mining. So you can’t really plug it in and go to facebook.com on it. Instead, it’s hyper specialized and built to be as efficient at processing and validating those transactions for the network.

David Khalif (00:52:22):

So you can see we’re starting to see a massive increase, and now almost every company on the planet that Bitcoin mines is using these ASIC exclusively because it’s the best way to mine for Bitcoin, it’s the best way to be competitive amongst other miners. And so when I think about the best miner you could buy for your buck versus the bad ones, you’re looking at where did they set up location-wise. Is it safe from a regulatory perspective? Is their electricity cost actually low? What infrastructure do they have? And finally, what are these miners that they’re using? Are they newer generation miners? Are they old generation? And just between you and I, if we were to do mental math, kind of a newer miner might be 3, 4, 5 times as efficient from an energy usage and it will be more powerful than an older generation miner.

David Khalif (00:53:09):

So you can imagine that a fleet of completely new miners is not only using less energy to support their operation, but they’re actually getting way more compute power. And this is something that these machines being specialized can cost several thousands of dollars a piece. And during the peak of the bull market in 2021, you would have a hard time getting your hands on these machines for less than 10,000 a piece. So when you’re talking about an operation of hundreds of thousands of these machines being put up together, I mean, these are extremely capital intensive operations, so we pay attention to financing and debt. But if you’re an investor looking at this, I would say the simplest way to boil it down is the best operators that we own today can mine Bitcoin for as low as $5,000 a coin on average, versus the market price of about $20,000 a coin.

David Khalif (00:53:57):

And some of maybe the worst operators we see actually are mining at about 15,000 per coin. And so you can imagine if the price of Bitcoin drops from 20,000 to 10,000, some of those miners are no longer profitable, and some of them are saying, “We’re still making a very nice margin.” And that’s really how our portfolio is structured, is looking at all of these factors and getting down to a cost per coin. And many people are very surprised to find out that even at Bitcoin $20,000 when it fell 80% in price, that miners are still handover fish making very good profits.

Rebecca Hotsko (00:54:31):

So I want to talk about miners’ performance over kind of this last year because you mentioned a big component is their costs of production or their energy costs. And so we know that energy costs have gone up significantly this past year. I’m just wondering, are there certain miners that are doing things to kind of, I guess, mitigate these going forward if we kind of see these prices sticking for longer? Or how has this been impacting their performance?

David Khalif (00:54:58):

Yeah, it’s something we definitely accounted for in our models. The way I think about it is there’s a few different metrics we have to pay attention to. So if the price of Bitcoin goes down, then the revenue for these companies is obviously severely impacted. So when we modeled out these companies, we never assumed extremely positive Bitcoin mining economics, because that would be kind of a bad way to look at the business because in general, when you look at a historical graph of actual performance, we see that Bitcoin miners may have peaks where they make a lot of extra money. But in general, there’s some general kind of area we can pay attention to where most of their income will come from.

David Khalif (00:55:36):

And so we definitely model the revenue side conservatively, but from a cost perspective, it now really is important where you set up your location. So some of these companies actually have what’s called like a power purchase agreement where they have a long term five-year, 10-year contract with a power company near them. And if you’re next to a hydroelectric dam, knock on wood, assuming the hydroelectric dam has no issues, you should have a very clear source of energy to tap into. What we see is actually in places like Texas, we see the opposite. So what happened is we built a bunch of infrastructure for Bitcoin miners. And what’s happening is there’s huge demand on the grid during peak summer. So I can tell you for myself, when it’s 110 degrees outside, AC is blasting in all of these buildings. There’s a lot of just infrastructure that’s being used and energy demand.

David Khalif (00:56:23):

So what’s interesting about the Bitcoin mining space is it’s one of the few industries where they can unplug their miners and have no repercussions. So Riot Blockchain, which is one of the companies we own in our portfolio and they’re down here in Texas, they actually unplug their miners because their agreement with the grid is actually to get paid for giving back that excess demand. So when the grid really needs to tap into an extra hundred megawatts of energy, Riot says, “No issue at all. We’ll turn off our computers for the day, for the week, whatever you guys need.” And then the city essentially pays Riot that premium of saying, “Hey, thank you for letting us use energy during peak demand. That helped us support our hospitals, helped us support all the other people in the community.” And as a result, Riot actually didn’t have to run anything, but they were able to get paid out credits and they were able to get paid out revenue.

David Khalif (00:57:11):

So from our perspective, this is a great thing for the future because if you don’t have something like a Riot Blockchain in Texas, then you wouldn’t have that excess energy to begin with, right? They built the infrastructure to support hundreds of extra megawatts of energy for the grid. And now that that exists, we can tap into it during peak demand. So I think ironically, people look at Bitcoin mining as a terrible waste of energy, but Bitcoin miners have been some of the strong advocates of saying, “Hey, there are use cases where we can actually help the grid through some of our actions.” And this supports them in their energy costs overall because if you can sell back to the grid during peak demand, you’re actually saving a lot of costs for your business over the long term.

David Khalif (00:57:52):

One of my kind of favorite stories I’ve heard in Bitcoin mining space comes from a city that was near a river in New York that used to have a hydroelectric dam that was operational. But the city, they were super small and they didn’t have enough demand to keep that hydroelectric dam running all the time. So instead, they were able to set up a Bitcoin mining operation and that was able to make it profitable enough for that dam to run all year. And now that entire community uses the hydroelectric energy.

David Khalif (00:58:18):

So in my mind, this is something that’s a very new topic, but Bitcoin miners have been excited about it, which is where can we place miners across the planet to actually help with environmental needs? Because these miners can be used to substitute the cost when there’s not enough people using the grid or when there’s not enough demand on the grid. And so that’s a very kind of deep subject as well, but for the average miner, we look at this as we want to build a sustainable future. And I really lean in on the idea that in the future we want to have more abundance of energy. We don’t want to be curbing it. We don’t want to have situations where people are restricted. I think society will always do better if there’s more queen energy and more abundant energy for us to tap into.

Rebecca Hotsko (00:58:57):

Yeah, I feel like there’s still so much that we could cover in today’s episode. We’re kind of running out of time. I want to ask you though, I guess what would be the benefits of holding Bitcoin mins be in addition to also holding Bitcoin? Can you talk a bit about that?

David Khalif (00:59:13):

Yeah, of course. I am of course a little bit biased given that I have an ETF and that the RIGZ ETF that we launched, RIGZ, owns exclusively the Bitcoin miners and a few semiconductor companies that are within that system as well. But at the end of the day, I think there’s a very simple use case, which is, if you’re going to play the crypto space in a sense, if you’re going to allocate to it at all, there’s nothing inherently wrong with just owning the miners or just owning Bitcoin. But I would treat this just like any other investing concept where you want to diversify, it makes sense to hold the miners in Bitcoin together because when Bitcoin’s flat, say a 20K for six months straight, the Bitcoin miners are still mining Bitcoin every single day. And we actually… I encourage people to do this if they look at our portfolio, to search up any company and actually look at their monthly update where you can see how many Bitcoin were mined that month by that company.

David Khalif (01:00:05):

So if there’s 900 new Bitcoin per day being mined, and over the course of a month one of our top holdings, let’s say mined 400 new Bitcoin, well even if the price of Bitcoin stays at the exact same number, the balance sheet for that company is growing every single month. Some of our largest miners have 8,000, 9,000 Bitcoin on their balance sheet now, which when Bitcoin goes on a run, or I should say if it goes on a run again, but then that balance sheet will support it through the valuation, right? So you can not only personally gain from Bitcoin going 20 to 60K because you own Bitcoin, but the miners themselves will also kind of pop with that underlying valuation. I think this is very easily supported by looking at historical gold miners versus gold, because when gold itself goes up 10%, the miners typically go up a multiplier of that 10%, maybe 13 or 14%.

David Khalif (01:00:53):

And when we launched last year in July 20th, we actually held from that moment of inception to December 1st, Bitcoin went up 89%, and our ETF was up about 90, 91%. So it’s following Bitcoin very well. There was actually a little bit of a pop, but as kind of mentioned, we own semiconductor companies, and so we’re not a full 100% Bitcoin mining ETF, although 80% of our assets are Bitcoin mining. So in my perspective, that meant for an advisor, especially advisors in the US today who can’t own Bitcoin directly for their clients because there’s regulatory hurdles, the proxy is you can own the miners and get a very good exact basically replica of Bitcoin. However, in my opinion, during times like now where Bitcoin’s 20K for multiple months, the miners are actually building their balance sheet and they’re growing.

David Khalif (01:01:42):

But that being said, we are a Bitcoin mining product, and so with Bitcoin goes down 80%, we’re also down 80%. And in my opinion that’s a sign of a good product because it works as intended. We don’t want to reflect non Bitcoin prices. We don’t want to reflect the S&P 500. We’re looking to specifically reflect the miners, and that business is based exclusively on the Bitcoin price itself.

Rebecca Hotsko (01:02:04):

So the last thing I want to get your thoughts on today is, in your view, what catalyst would it take for Bitcoin to start another run up? What would we be looking for?

David Khalif (01:02:17):

Yeah, it’s tough because there’s so many cool things that really could be a great catalyst. But for me personally, and again, if a lot of listeners are from Canada, they probably won’t really even realize the regulatory issues that the US is running through. But the SEC, for example, refuses to approve a spot Bitcoin ETF, even though we know it works in so many other countries including Canada. And when I think about what the next catalyst would be, it would be providing more and more regulatory certainty around Bitcoin. What’s really nice is that something like Ethereum, the SEC has come out and said, “This is potentially a security. We’re going to investigate it.” But they’ve actually defined Bitcoin as not a security, and they’ve specifically said that this should be handled by with the CFTC, the Futures Trading Commission. And then there’s so many kind of positive upticks allowing institutions to feel more comfortable that, “Hey, Bitcoin isn’t something that tomorrow the government is likely to ban.”

David Khalif (01:03:13):

And that being said, if you’re looking at say allocating into the space or if I’m thinking about institutions that might allocate into the space, every single day that we get more and more confidence around Bitcoin and more and more kind of regulatory certainty from the government, I think it’s a very positive catalyst. I do believe big announcements like Fidelity this month were really helpful. But honestly, regardless of what happens with Bitcoin price in the short term, a lot of the long term trends, in my opinion, are still holding true. We’re seeing more and more young people who are investing, looking at digital assets. We’re seeing a great transfer of wealth in the next decade or two that’s coming along with, in my mind, a lot of use cases that are coming out every single day for Bitcoin. And frankly, if it continues to be used as collateral and continues to be used in financial transactions, I don’t see a future in which Bitcoin would not be considered more and more valuable.

David Khalif (01:04:05):

But as for catalyst, I mean, who knows in this market? I’m bullish that by the end of the year we’ll hopefully be above about 25 to 30K Bitcoin price, which I think would be a great way to end kind of the year. But that’s again my view on it. And in this macro environment, there’s a lot of things that might affect Bitcoin that are outside of the protocols control.

Rebecca Hotsko (01:04:25):

Well, thank you so much, David. I know that I learned so much today.

David Khalif (01:04:30):

Yeah, of course.

Rebecca Hotsko (01:04:32):

I would love to have you back on and talk more about this in detail. I still had so much that I wanted to cover with you more on how to get exposure to these, more about your mining ETF and the differences between Bitcoin ETFs. But before we close out, where can our listeners go to learn more about you, your company, and then everything you guys do?

David Khalif (01:04:53):

Perfect. Yeah, so we are a very retail friendly company in the sense that we want to help out people as much as we can. So a few resources I like, A, we have a YouTube channel. So our YouTube channel for Viridi Funds, we actually interview the CEOs of these Bitcoin mining companies. So you get to see not only the company and the portfolio, but us asking questions and you hearing them talk about the business. We also have viridiresearch.com, which is essentially our free research site. You can see all the articles that we post there. And then finally, anyone can feel free to contact us through the websites. We get the contact email directly, and we’re happy to answer questions from anything regarding portfolio allocations or how we’re thinking about the space.

David Khalif (01:05:34):

And again, this is not something where we don’t want to be transparent. We love the fact that Viridi stands for looking for clean energy operators. We love the fact that Bitcoin is an exciting new asset class. We know it’s confusing for a lot of people. So any of those places are good resources. And of course, we are always happy being fact checked and people can follow us on Twitter and kind of see the stuff that we post. But we are trying our best to basically be open and transparent, and I’d be happy to help any user or viewers interested in kind of learning more if they reach out.

Rebecca Hotsko (01:06:04):

Excellent. Thank you so much again, David.

David Khalif (01:06:07):

Thank you so much, Rebecca.

Rebecca Hotsko (01:06:09):

All right. I hope you enjoy today’s episode. Make sure to subscribe to the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I’d really appreciate it if you left us a rating or review. This really helps support us and is the best way to help new people discover the show. And if you haven’t already, be sure to check out our website, thenvestorspodcast.com. There’s a ton of useful educational resources on there, as well as our TIP finance tool, which is a great tool to help you manage your own stock portfolio. And with that, I will see you again next time.

Outro (01:06:47):

Thank you for listening to TIP. Make sure to subscribe to We Study Billionaires by The Investor’s Podcast Network. Every Wednesday, we teach you about Bitcoin and every Saturday We Study Billionaires and the financial markets. To access our show notes, transcripts, or courses, go to theinvestorspodcast.com. This show is for entertainment purposes only. Before making any decision, consult a professional. This show is copyrighted by The Investor’s Podcast Network. Written permission must be granted before syndication or rebroadcasting.