Sazmining Podcast Episode 15: Neil Van Huis on Mining and Energy

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Synopsis:

In this episode of The Sazmining Podcast, Will speaks with Neil Van Huis, Director of Sales & Institutional Trading at Blockfills. They discuss the future of equipment manufacturing, interest rates, the relationship between mining and energy, and more.

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Will Szamosszegi (00:04):

Welcome to the SA mining podcast at SA mining, we are bringing you into conversations with today's industry leaders and blockchain and cryptocurrency. Our goal with this podcast is to improve the understanding and adoption of blockchain and cryptocurrency by giving you an insider's look at what's being built and inform predictions on what the future holds.

Will Szamosszegi (00:31):

Today's guest is an alum of Lewis university, where he received his bachelor's in finance and business management. Previously, he was a senior quantitative trader for trans market group in Chicago. One of the world's most credible proprietary trading firms. He then went on to start his own boutique trading firm, where he was again, a senior quantitative trader and managing partner. Today. He is co-founder of K and age crypto, LLC, and institutional trading and investment firm focused on leveraging years of capital markets, investment experience to generate both excess returns and trading as well as successful venture investments. He's also actively a partner and the director of sales and institutional trading at block Bill's the global financial services technology and trading firm in digital asset space block Bill's provides liquidity technology and clearing of digital assets for professional and institutional clients. So with all that said, I'd like to welcome you to the podcast. Neil Ben S

Neil Van Huis (01:32):

Thank you guys. Appreciate very much William pleasure to be with you here.

Will Szamosszegi (01:36):

Yeah, definitely. So to kick things off, can you just talk a little bit about what got you into cryptocurrency?

Neil Van Huis (01:44):

Yeah, absolutely. So as far back as, uh, 2012, um, one of my developers, uh, on the algorithmic trading side was kind of pounding his fist on the table, yelling about Bitcoin and, uh, said he had been trading it since 2011. And I said, you know, look, we we've got far too many things to be worrying about on the liquid trading side. I can't be trading something that's so illiquid and I know nothing about <laugh>. And so, uh, for, for years he pestered me and said, you're, you're crazy. You need to be looking at this stuff. And actually in 2015, um, traditional futures markets, we're getting pretty saturated, um, and, and a little bit boring. Uh, and so we were kind of looking for volatile assets to, to kind of dive into. And so we started taking a look and, and by 2016 we started, uh, the end of 2016. We started divesting, uh, out of the traditional, uh, futures and option space and traditional asset classes. Um, and we, uh, we decided to start getting into crypto. So at the time I was living, uh, abroad in Europe, uh, trading a lot on European exchanges. And, uh, we came, uh, I was asked to come back so that we could kind of talk about what was next in digital assets and that's how we formed fills.

Will Szamosszegi (03:00):

Got it. So when you were making that transition, was that something that you had to go and learn a lot about in terms of the mining side? Or were you starting more so with just trading of Bitcoin?

Neil Van Huis (03:14):

Yeah, so, I mean, we really, uh, started with a fundamental understanding of, of what, where Bitcoin came from. So we kind of knew what, how mining worked and, uh, it kind of looked a lot like a commodity to us, uh, you know, just like someone's, uh, producing a crop. We're just some guys producing a Bitcoin on a computer. And so that's how we kind of looked at it from the early days. And, um, and so really, we've only focused on the trading side once we had the fundamentals down and, and it wasn't until much later we got deep into the mining side.

Will Szamosszegi (03:47):

Yeah. And this is one of the things that you guys have been doing. That's been getting a lot of media attention recently is your involvement in cryptocurrency mining and particularly in north America. So can you talk a little bit about how that's started? I think it's within just the past year or so and what you guys have been focusing on.

Neil Van Huis (04:07):

Yeah, sure. So, uh, last year, about the middle of the year, April or may of last year, we started doing traditional collateralized lending, uh, with Bitcoin minors where they would post their Bitcoin up as collateral to get dollar funding, to expand their business. And, and they pay, you know, interest rates on, on that collateral. Right. And so, uh, in September of last year, a couple of those clients came to us and said, Hey, thanks. This lending is going great, but you know, we're thinking ahead and may of next year is the Bitcoin having, uh, and it's also gonna be a new hardware cycle. You know, we're hearing from Bitmain micro, BT cannon, et cetera, that we're gonna be seeing new types of hardware out there. That's computing, you know, maybe at six to 10 times what the previous generation S nine machine was, was mining at.

Neil Van Huis (04:54):

And so we're gonna need to like change how we, um, manage our balance sheet to grow our business, uh, going forward after the having. And so is there anything that you could come up with that would be attractive to, you know, your capital partners, as well as the mining sector to help us, you know, buy these new machines on the market, um, you know, and, and use that on our balance sheet. So that's how we came up with a, uh, basically a hash rate, structured product. We basically fund, uh, the purchase of the equipment and it's paid back, uh, through the production of the Bitcoin that's mine. So, uh, they basically mine Bitcoin. They send it back to us and if we owe our capital partners dollars, we convert it from Bitcoin to dollars and pay them dollars if they want it in Bitcoin, we pay it to em in Bitcoin.

Neil Van Huis (05:40):

They want a little bit of both. We can do that as well. So, uh, that's been like the hot take, uh, of the, the final part of the year in, in 2019 and now, uh, big in 2020 post having. And so right now, we're, we've seen an unprecedented amount of demand for this. Uh, the equipment market is a little bit finicky right now. There's just not a lot out there. Um, and, and there's really only a couple machine types that everyone's most interested in, but we're navigating that with, uh, our partners, the hardware manufacturers and in the mining firms. And so I think that in the very near future, uh, the little bit of capitulation may occur in the hardware market. Um, once wet season is over and we'll start to see things open up a little bit. And, you know, I think that that's gonna be a, a huge business for

Will Szamosszegi (06:27):

Us. Yeah. And this is one thing that I, I really wanna unpack with you, and there's a lot to, to go over there. So initially you're talking about a certain type of financing structure that you guys take in approaching these financing of different minors. Um, you mentioned how you'll provide the financing for the purchase of all the equipment, and then the BTC that's being mined is acting as collateral as well as the actual hardware that's purchased. Correct?

Neil Van Huis (06:57):

Yeah, that's correct. So through the entirety of the term of the financing, um, uh, well, I'll, I'll call it. It's, it's really a lease, right? We're, we're purchasing the equipment on your behalf and we're leasing it back to you until you pay, pay it back what's interest. And so, um, through the entirety of the lease, we own the equipment. So that's a form of collateral for us, right. And then as you pay us principle and interest payments from your Bitcoin production on those machines, essentially, we look at it like it's being paid back. Right. But we also, from our terminology, because we also owe the equipment, we're looking at it as a form of some sort of collateral substance. So yeah, in, in this case, uh, the, the payment of principle and interest, as well as the machines are, are backing the, the financing that's at hand.

Will Szamosszegi (07:45):

Yeah. And I think that this just going further is something that's really important for the crypto mining industry to continue to mature and grow over time. And your firm is one of the few firms that's actually willing to go in and play around with the different types of structures to make something work. Because you look at mining as a business in the way that it works. You have to a certain degree, predictable level of cash flow. That's going to be generated by these equipment. And you have hard assets, as well as the BTC, uh, that's being mined as collateral for the investment. So, uh, I think that a lot of times investors and larger investment firms are afraid to really get involved because they don't understand all the nuances of mining. So with that said, when you look at the landscape today with the firm financing, these minors, what are you seeing in terms of options for crypto miners who are out there, who are trying to scale, maybe they have five megawatts running and they're trying to go and scale up and become a 5,000 megawatt firm over the next few years.

Neil Van Huis (08:50):

Yeah. So I think number one, their, their struggle is real. They, they can't go to a, a, a bank and get, you know, fi you know, traditional loans and financing, um, you know, in, in a normal world, if you were, if your business was computers and you were a very profitable business and you wanted to go get a loan to grow your business in computers, in computer hardware, you'd be able to do that. No problem. Uh, so it's, it's shocking that, uh, we still have to have these conversations, uh, in this marketplace where, you know, guys, can't go get funded from traditional venues at lower cost of capital. So what we really specialize in is sourcing that capital and explaining the detail on how we protect the portfolios and explaining why our, uh, our team and our firm is in a good position to manage that risk because our careers are, are all in risk management and in trading, in managing, um, the ebbs and flows of markets.

Neil Van Huis (09:48):

So for us, um, we really worked together with our partners to get that right form of, of capital, uh, both at scale and at, at cost that, um, that understands the minors and says, look, we don't wanna just write you alone, because if we write you alone and it's a crappy deal, you're gonna turn around and you're gonna default. And that looks bad for us, but it doesn't do anything for the business. Doesn't do anything for you. Doesn't do anything for the sector. It just, uh, causes more scrutiny on the sector. So our focus is on delivering you the lowest cost interest rate that we possibly can, um, so that you can be successful and then we're successful. And so after we do that, we also, the majority of our, our loans, um, on this side of our book, um, has some form of hedging tactic to it as well in, um, crypto derivatives.

Neil Van Huis (10:40):

So we, we protect the portfolio in a number of different ways so that, you know, the, the biggest risk to the minor, uh, is the price of BTC. Um, once, once they're running their machines, right? Uh, you know, some other risks are delivery risk on the equipment. If bit pain is, is, uh, <laugh> is delayed in delivery. Like we're seeing on a lot of cases now. Um, but once that equipment is turned on, unless there's a failure rate, you know, your hope is that once you've got past all the other hurdles and your machines are running and they humming nice, and you're making money, your biggest risk is that the Bitcoin price goes down. And so we can't foresee all those other risks, and we try to mitigate them, you know, the best we can through negotiations, but once these things are running, we need to focus on your price risk.

Neil Van Huis (11:26):

And so we'll hedge, um, the portfolio and the minors position, uh, with derivatives. So that any event that Bitcoin drops below, you know, their cost of production, you know, they're hopefully protected to navigate at least six months of, uh, of those, those types of storms that we've seen before. And on the upside, you know, we'll, we'll limit their upside just slightly, um, by saying, listen, guys, you know, you don't have a, a free call to the upside to let this thing go to the moon. Like you want it to, but, uh, you know, if you're willing to sell, you know, the next two months of your production at 15,000, and we're at 11 or 11 five, you know, we can do that for you. And most everybody says, yeah. I mean, if the worst case scenario is in the next two months, I've gotta sell my Bitcoin in 15,000. I'm actually okay with that. And so, um, it doesn't really put them in a bad position, long term, uh, to cap their upside. And so it's, it's been working really well. And, and we think that that whole strategy together is what we pitch to our capital partners. And that is what we pitch to our clients. And, and everybody seems to be kind of working harmoniously currently.

Will Szamosszegi (12:36):

Yeah. And it really seems like this approach, especially from a minor's point of view, you're your company's found quote unquote product market fit in the sense that there's capital that can really benefit from investing in mining. There are minors who need access to that capital. You gave the example of how, in any other type of business, you can more easily grow and scale the scale at reasonable interest rates to grow and expand your mining operations. When you guys go about trying to price the interest rates on the capital, how do you go about doing that for the minors that are trying to borrow to expand their business?

Neil Van Huis (13:12):

Yeah, that's a great question, actually. So, you know, by doing these types of deals, it's a lot like you're giving equity to, uh, to a company, right. Because, um, you're basically buying an asset. That's gonna be on their balance sheet in the future. Right. And so, um, we, we look at like, what, you know, you can go get dollars at today if you're a reputable firm. So number one, we look at their balance sheet and we're not funding guys that just don't have any money. Don't have any assets. They're just saying, oh yeah, I used to mine, somes nines, but now those S nines are turned off and I don't have any money and I don't have any assets, but can you give, but can you give me a $5 million line of credit? No, I can't do that. It's just outside the realm of possibilities.

Neil Van Huis (13:55):

I'm trying to scale guys that, uh, are scalable. And so, um, we first look at the balance sheet and if we say boy in a, in a regular world, these guys would easily be able to get two and a half, 5 million, whatever, uh, to, to get in, in loan. We're gonna give 'em that. And we're gonna say, okay, in a real world, what would the rate be? Uh, putting crypto completely aside. And we think we're really in the right place on rates. And then if you look at, you know, what people today are able to put up, you know, dollars or, you know, stable coins, or, you know, in the form of dollars into, you know, deposit schemes in the lending world and crypto, you know, we're just a touch above those rates. And so I think that, you know, this is a, this is what we're seeing in the market.

Neil Van Huis (14:42):

We think it's really competitive. The feedback that we're getting is we're the best rates in the market. Um, sure. There's other guys that can come in and play at those rates if they choose to, to, but some of those guys are also saying, well, look, I'm gonna give you a rate. It's gonna be 25 to 50% higher than block fills, and you can take it and I'll fund you today and that's worth it for me. If you don't take it, I'm gonna go buy that equipment. And I'm gonna do the mining myself because the returns are right. And so I think that that's the difference for us is what we're trying to do is we're trying to con you know, continually be an agency business that supports the people in the sector rather than compete with them. We're not looking to go compete with you in mind against you. We're looking at like the worst case scenario is if you default, we become a Bitcoin minor <laugh>. And so, uh, we we're okay with that, but it's not like our business is supporting trading capital markets, investment banking in this sector.

Will Szamosszegi (15:39):

And is your main focus right now? I know that you're not just in mining, mining is what we've been talking about, and you have a great product for mining, but outside of mining, what are the other areas of the business that you guys are, are still focused on?

Neil Van Huis (15:54):

Yeah, so I mean, our core business that is liquid and heavily operating all day every day is, is a trading business. Uh, you know, we're, we're not a retail exchange, like a, like a Cracken or a coin base where anybody can just onboard and buy and sell crypto and shit coins and whatever else they wanna do. <laugh> we, we only do institutional and professional business. So, you know, think of us a lot, like a brokerage, uh, a futures clearing merchant, and, you know, a very, very, very small, you know, digital asset bank, you know, uh, right now, um, you know, everyone that comes to us does active large scale trading. Um, we've got hedge funds, banks, asset managers, institutional trading firms, market makers, you know, all those types, OTC traders, lenders that trade with us on a regular basis. Yeah.

Will Szamosszegi (16:49):

And can you actually define OTC and how it differs between the traditional financial world and how it, how it acts right now today in crypto?

Neil Van Huis (16:59):

Yeah. So OTC trading, as it started in crypto was just a place for like professionals or institutions to go to a vetted counterparty that they knew and said, okay, um, you're an actual business. You're not just some crypto exchange that just popped up on the map that we know nothing about. You know, we can look you up, you're a vetted business, and you're gonna give us a transparent bid offer on the quantity that we wanna buy our sell in Bitcoin. Right. And that's how it kind of all started. Um, and that was an on ramp for high net worth professionals institutions, right. But that's a really clunky process in a digital world. And so we were really the first firm to take OTC trading electronic. And we basically paired up, um, our institutional market makers, uh, who were providing OTC quotes. Right. And we just asked them to do it in electronic fashion.

Neil Van Huis (17:52):

So then we aggregate all of those quotes from institutional market makers in a live streaming market that you can execute on the buy and sell side for all the top digital assets against all of the major GA Fiat currencies, as well as other cryptos and stable coins. So really our product is come and, and work with a business, which is a bunch of X traders, a bunch of people that know markets rather than, you know, a guy who just likes Bitcoin and decide to start a crypto exchange with a, with a exchange out of the box, you know, that they purchased in white label. So our technology is, uh, an order of magnitude greater than that, of most exchanges. Uh, we're, co-located at all major Equinox data center facilities, uh, in New York, London, and Tokyo. So it's a great way to access the market for liquidity transparency and proper technology in a market where, you know, a couple years ago, any time it got volatile, every single on ramp to crypto just shut down. And so, um, our real job is to focus on institutions and professionals that need better access, better price, liquidity, and full service, uh, operations. We're not an exchange that just says, look, sign up and we'll never talk to you. You've gotta figure it out on your own. No, we have 24 hour support for our traders and, and you can call us chat with us, whatever it may be to get access to all the cryptos on both deposits, which alls and executions

Will Szamosszegi (19:23):

Got it right now. It seems like you guys are in all areas of the space. We touched on mining. We just talked about how you guys have your own OTC, and you're not focused on retail type investors. You're focused on those larger institutional investors who want to have that, that level of sophistication that comes from, for example, the traditional financial world. When you look at all these other exchanges, like for example, Coinbase, crack, and other exchanges that do provide those types of trading services to retail investors, how do you think that the, the market's going to evolve in terms of all these different exchanges growing over time, some being retail and institutional focused, some others being solely institutional focused like block fills. How do you think that ends up playing out in the future? 10, 20 years down the line when we're looking at the services that are offered from OTC, as well as trading for institution for non-institutional retail investors.

Neil Van Huis (20:28):

Yeah. I think that's a really great, great question. I think a lot of people, including myself expected, um, consolidation of exchanges, much sooner than we've seen mm-hmm <affirmative>, but I think the reason why there hasn't been consolidation is because just until recently, uh, no one has really commented on the regulatory side in the us, and now we're gonna allow banks to do crypto custody. Right. So I think that, um, when it's all said and done banks do not wanna operate a lot of like crypto executions. So I think that crypto exchanges can still be there. Um, but what I think that we'll see in the future is that, you know, that savvy bank, uh, that more digital bank, that investment bank, that asset manager, that family office, that private wealth office, those are the guys that are gonna come into this space, in my opinion, and ask for the technology, uh, services that we have, we're gonna be able to put something on their desk that allows them to book trades and executions for clients that call in that want Bitcoin, they're gonna be able to custody crypto, uh, in a, in let's say a fire blocks wallet, uh, through, you know, by signing up the fire blocks.

Neil Van Huis (21:37):

And it being linked entirely to our system, they're gonna be able to, you know, work seamlessly with us rather than move things on and off exchanges. We're gonna be able to do all of that with, you know, the, the tier one banks in, in crypto and as banking evolves, maybe much bigger entities come into the space, but I think that's what you're gonna see in the future is that the, those Savier players, those high net worth, uh, on ramps, the, the private wealth, the family office, cetera, you're gonna find those guys that need a, a solution. And that solution is not gonna be a crypto exchange. Um, so my hope is that, you know, firms like us will be able to support, uh, those participants, um, the crypto exchanges, like Coinbase that are trying to go more institutional after. I think having a little bit of a tough time with that client base for a couple of years, it's probably more about that.

Neil Van Huis (22:31):

They know something in the regulatory climate that's about to change, hence, you know, their announcement to go public before that, uh, crypto custody announcement happened. Um, but I think that they're, they're making plans for it. Um, but most of these exchanges are not set up, uh, to handle institutional business properly. And so I think only a few handful of them will, will be able to service that the rest I think is gonna be focused on just, just simple on-ramps into crypto. Um, but that exchange that has an on-ramp is not gonna be any different to me than the same app that was created, or the wallet company that was created that allows you to buy and sell crypto, you know, through your wallet. Now, I think that's why you've seen so many of these wallets pop up that are allowing you to buy and sell crypto now. Um, I think that seems to be much that seems like it might be much more prevalent, successful than more exchanges in the future. Um, so, you know, that's my take on that, but, uh, I don't think there will be too many exchanges that are gonna be good at both retail and institutional. It'll be tough.

Will Szamosszegi (23:40):

Wow. That that's the most interesting answer I've received when asking that type of a question. Cause I have heard that people are thinking that there was gonna be consolidation and that that would be happening sooner. But it's interesting to hear that with all these other factors that are playing out from a regulatory perspective, how that really does influence how fast all these other dominoes begin to fall, from your perspective on the regulatory approach that these different governments are going to take over time, each country has been taking a different approach. You look at how quickly we are able to come out with options and futures in the us versus other countries around the world. How do you think that it's going to continue to progress in the us over the next few years? I mean, you mentioned the, the recent announcement of how the O C C now is promoting, uh, oh, well now is headed by someone who used to be a Coinbase actually, and is a huge Bitcoin supporter and believes in the future of cryptocurrency and blockchain technology. How do you think that regulation is going to end up progressing these next few years in the United States and abroad?

Neil Van Huis (24:53):

Yeah, so I think, um, every year that goes by, uh, in crypto is like five years in a traditional space. <laugh> so, you know, every year that crypto doesn't die, you know, someone leaves a major firm to go, you know, work for another major firm that says, Hey, you know, we're thinking about digital. Can you come over here and, and tell us how we get there. I think that will continue. Um, and, and right now, just remember that the only reason there's options in futures in the United States is because CME group and back said, we'll do it. And, and, and really that stuff didn't, you know, and back really hasn't taken off. But, you know, for example, the only reason CME has, well, I, I don't wanna say the only reason CME has only recently really taken off. It took quite some time. They basically pushed C E out of the space early on.

Neil Van Huis (25:48):

Right. And now, um, you know, with back back still hasn't really caught on. Um, and so the only reason there's stuff like that in the cuz CME was willing to do it. They, but they remember they still don't touch physical. They only touch the derivative. Right? So to me, what I would be really excited about if we could ever get there would be someone with a serious balance sheet that does crypto physical and, and, and derivatives at all in one place, because the next best thing that you've got to see in me in the options world is dare bit, which is way, way, way offshore. And the fact that matter is that big us institutions with very robust balance sheets are simply never going to wanna trade in a domicile of that nature, unless they're really extremely open minded firm. And I just, that's not gonna be the overwhelming majority of them.

Neil Van Huis (26:43):

So, you know, us being domiciled, uh, in between two entities between the Caans and, uh, and the UK under FCA registration, you know, I think that puts us in an interesting position for, you know, building derivatives platforms next, uh, rather than just OTC. And so that's something that we're almost done with is introducing liquid derivatives in both, uh, futures and options. And so, uh, under our registration in the UK that puts us, you know, nowhere near comparable to CME or backed in terms of balance sheet, but in terms of, or regulation and in scrutiny, the FCA has been much more vocal than the CFTC and C and they're considerable, they're the considerable watchdog outside of the us.

Will Szamosszegi (27:34):

Yeah. And one of the things that I wanted to, to bring back kind of going back to the mining conversation that we're talking about earlier, when I've been speaking with some of these large mining companies, executives, they mention how they've been evaluating, potentially getting involved with, uh, hedging strategies using these derivative financial products, but they haven't necessarily taken that next step forward to do it. And, and these are companies that are publicly traded companies, large mining companies, that if you think of any mining company who's going to get involved with utilizing these derivatives, it would be these companies. So I was really fascinated earlier when you had mentioned that you guys, as part of your strategy are utilizing some of these financial products to hedge the risk of something, uh, of something happening with the price of Bitcoin that could negatively impact a minor's profitability. So diving into how you guys are using these financial derivatives or financial products, is there, can you talk about how you guys approach that problem and how you hedge your risk properly?

Neil Van Huis (28:43):

Yeah, so I think, um, there's really two strategies, uh, that I, I look at that are most prevalent right now for the minors. Um, one is a pre-planned strategy using options where they're basically managing the risk to the downside while also managing their production expectancy, uh, in terms of profit. Right? And so that, that strategy is getting more and more common because, um, it, it really encompasses how someone with a, a very, uh, a very predefined set of cash flows would manage their risk. Right. And then there's guys in the mining space that, you know, part of their mandate is to, to hold onto some crypto. And they, they don't really deal in dollars, right. If that's how they do things, then some of them are, are savvy enough to pick up the phone when the market spikes and say, I don't wanna sell Bitcoin right now, but what I wanna do is I wanna sell calls, or I wanna, I wanna put on that, that option hedge now as the market spikes and have a volatility play, or some of them will say, you know, and this is a little bit different, uh, hedge, but some of 'em might say, look, the funding rates have explode in, in perpetual futures.

Neil Van Huis (30:05):

And because Bitcoin is rallied $2,000, again, I don't wanna sell my Bitcoin, but I'm, but I'm okay with selling it. If I had to, I'd rather say, I think Bitcoin's gonna come down from here. So I'm gonna be on the sell side of the perpetual future, gonna get paid funding while I hold that. And I think Bitcoin's gonna go lower worst case scenario is when the time comes, if this doesn't go my direction, I sell my Bitcoin and I pay for my perpetual, I move on. Right? So, um, those, those are a little bit savvyer strategies, depending on who wants to move really fast and who's got crypto in their balance sheet. Um, but that, that takes a little bit of execution savvy that takes a lot of readiness. Um, the, the more, the more standard structure I expect to see in the future is guys holding crypto, using call options to generate yield, um, or, or putting a, a, a strategy on an options to, to generate dollar borrowing, um, at low cost or guys protecting their production, uh, upside and downside.

Will Szamosszegi (31:13):

Yeah. And it's really interesting to hear you run through all those potential strategies like the, the most glaring obvious one that would make sense potentially for a minor is if you know that your operation is going to spit out, generate a certain num amount of Bitcoin, and you're trying to protect your downside, you understand your cost basis to produce that Bitcoin. Then you could buy, for example, a put option where you're locking in a certain amount of profit to sell that Bitcoin at a certain price in the future. But the thing is, is that many mins just inherently of being in the mining space, you're bullish on the, uh, on the future of Bitcoin. So if you're protecting your downside risk, but you're naturally bullish on the future of Bitcoin, then if price goes up, you completely lost the upside. Um, or you, you lost your maximum upside because you spent money to buy that put option.

Will Szamosszegi (32:11):

But on the other hand, if price goes down, you were able to lock in that price earlier on, and you protected yourself from a catastrophic, catastrophic drop in the price of Bitcoin. So with all that said, I know that there's been some talk about how expensive some of these financial products have been for crypto as compared to some other traditional asset classes. Is this something that you think is going to prevent minors from getting, getting involved with, or do you think that the cost of these particular types of, uh, financial products is going to come down over time?

Neil Van Huis (32:51):

Yeah. So one particular strategy with puts in calls that we work on, um, is considerably low cost, you know, typically zero cost. And so we actually market them as zero cost options. And the only way they can remain zero cost, if you pick the right strikes. But generally, if you want to give, you know, to, to earn a little bit more, you might pay a little bit more and, and, and, uh, and from the zero cost option, right. But if you, if you pick strikes and you're pretty fine with it, we can usually navigate this as a very low cost or zero cost option. Um, now the, I think the guys that, that are willing to take all the risk, unless they're a cowboy, they're usually guys that like have their own sites have really, really low cost of power, heavy, some of the best margins in the space.

Neil Van Huis (33:39):

And that's a very small amount of participants today. The guys that, um, that I think that we're gonna continue to see in the space scaling or the guys that we're scaling are guys that are like, look, I got a pretty good, strong balance sheet. I wanna geographically diversify my hash power. So I don't wanna be just in one geography. I wanna come into north America in some places I get good energy rates in other places. It's just, okay. And so I'm not interested in paying to reduce some of my margin. I'm just interested in protecting my existing margin. And so if I can do that, my shareholders are happy, you know, everybody's happy and we stay in business and we continue to grow. Um, those guys that, that pay for the put are guys that are really, really in a good, uh, financial position, um, because they've taken a lot of risk elsewhere, uh, or they own their operation.

Neil Van Huis (34:35):

They've been, they've been in the game really early. And so they're, they're on, I, I don't wanna call it free money cuz they paid for it, but they're on, they're on some serious gains to be able to allow them to take that. But I don't, I don't see a lot of those guys, uh, maybe that business is elsewhere or maybe they're just doing it themselves, but I don't see a lot of guys coming in and just saying, Hey, gimme the put, I want all the upside. I, I see a lot of the guys that are like, look, I've got cash flows. They're predictable. Help me manage my cash flows.

Will Szamosszegi (35:06):

Yeah. And going off of that, what do you think is the biggest challenge today for crypto mining companies as they begin to scale and also protecting their downside as scale?

Neil Van Huis (35:23):

So the biggest, uh, hurdles to guys going at scale that don't have all their own money, right. Is sourcing capital, uh, and deciding whether financing or equity capital is the better route, one being more expensive than the other. Right. And so some in some decisions they, uh, they go with the equity because it's the right move at the time. And some decisions they might go with the financing cause it's better at the time. Right. But, uh, having, um, access the capital when it counts is critical for guys, uh, I've heard that over and over and over again, say, how can we strike a deal with you where we don't just do this one deal, but you basically agree that we're gonna have a 10 million line that we can draw on at any time. You know, we, we can't really do that. Right. But what we've said is we think we have really good pipelines of capital and we think that we can deploy capital in near real time.

Neil Van Huis (36:24):

And you know, we think that that's good enough because if you look at the hardware market, I know that everybody's goal is to draw on capital when they need it. So they can buy equipment when no one else can buy it. But at the end of the day, like I've, I worked with the hardware manufacturers really closely the last few months and it's all a game. It's, it's all a game, you know, one, one minute they don't have equipment. All of a sudden the next minute they do. And one day it's this rate. Now it's another rate. It's all just a game of like popping up equipment on the market based on supply and demand. And I think that the one thing that many people would love to see is someone other than China or Taiwan producing chips, because that will make the game different. Uh, right now with all the issues that are gone going on over there internally with these firms, um, the consistency in getting available equipment, it is, is tough. And I think that if, if there was consistency in capital, in consistency, in hardware, uh, that would change the game and it would allow it to scale much, much faster. Um, but right now, other than that, it's a game of opportunity. Uh, and so it's still challenging and it's still, uh, open for opportunity for players.

Will Szamosszegi (37:37):

That's fascinating. Yeah. I think that, that, that really is you have the capital and then the, the actual access to the hardware, there are two major hurdles. I mean, you look at some of the pricing on the equipment and it's not like a lot of other industries where it's based upon the cost of how much it costs produced. There's a certain level of competition and margins are fairly thin. They're basically, it seems like working off of the ROI time on some of this equipment and then they're just pricing it and upcharging at certain times. And then at those times where the equipment is at a good, fair, reasonable price, it's when a lot of the miners might not have the capital to be able to renew and get into that next cycle of, of hardware.

Neil Van Huis (38:24):

I'll, I'll tell you what I, I think, and I could be wrong about this. And so I'm kind of sticking my neck out there a little bit, but after playing around in that sandbox for a little bit, now I'm starting to get to know that like in other cycles throughout four years, there were times where brokers were able to sell equipment at big premiums because of, uh, the ebbs and the flows in the market. And, and especially in north America, because, you know, if you didn't have the relationship with someone in, you know, to get the equipment directly, your best chance was to make a relationship in north America, go shake a guy's hand, you know, make sure that he can help you. And that's how you get your business done. But today the, the transparency in relationships is growing. And so what I think is, is really gonna change in the space, going forward is brokers that have been really well positioned to get equipment from hardware manufacturers as notable brokers in the past, they're gonna get their allocation, you know, in a quarter or in a month.

Neil Van Huis (39:26):

And when they can't sell it, you're gonna find that the Bitmain in the micro BTS of the world have it allocated over here to broker ABC. And when broker ABC can't, can't sell it for a 25% premium, but I'm talking to micro BT or Bitmain, and they're telling that they don't have the equipment. They're gonna go back to the broker and say, Hey, broker, you know, I can't give you that equipment because you can't sell it at your premiums. I've got a guy over here with cash money in hand, ready to go. So, you know, yeah, we signed an agreement. How about I buy you outta that agreement for a little premium on what I gave you? You'll you'll get paid. You didn't do any work and I'm gonna go sell, you know, Neil over here, you know, at a, at a $10 premium to what my normal rates are and he's gonna pay it because he can get equipment delivered today. And so I think that's more, what you're gonna see is the participants like ourselves that are doing the work and there will be more of people like us that have cash in hand ready to go that are making the relationships direct. I think that some of those brokers will go by the wayside.

Will Szamosszegi (40:28):

Wow. Yeah. That makes sense. And do you think that from a manufacturing point of view that that more of that manufacturing of competitive equipment is going to begin happening in the us? Or do you think that China and some of these other countries are going to stay dominant in the ASIC manufacturing market?

Neil Van Huis (40:50):

Well, on, on the, the second part of that question, I, I'm not sure anybody can, uh, Intel just announced that, you know, a week or so ago that they're not gonna be able to come out with a seven nanometer chip that they thought they were, uh, in the next few months that it's gonna be the end of 20, 21 or maybe 2022. And they're not even sure if they're gonna produce it. They might basically do licensing rights with that of Samsung or someone else because they just don't know if they can do it. They're just like, you know, we're a chip maker and we're not sure that we can make that chip. We're not sure we're good enough. Wow. And so from that point of view, I, that's a tough question to answer. <laugh>, uh, I think there are a lot of people exploring production in north America, or just not in Asia, um, through a number of different groups.

Neil Van Huis (41:38):

Um, but you know, I don't know what that will mean. Will will that mean, uh, you know, 25 to 30% premiums in cost of equipment. Okay. Well then Bitcoin needs to, to, you know, go up 50%. If it doesn't go up 50%, I don't think anybody's gonna take that risk. I just don't think it's worth it. In fact. Um, so yeah, for the time being, I think that there's a lot of people exploring it, but I just don't know if it makes financial sense. Um, either one until this thing really skyrockets or, um, number two, you know, some other chip maker says, yeah, Hey, I got it. I got the job done. Here's what I can produce.

Will Szamosszegi (42:18):

Yeah. And on the, on, in terms of predictions for how the mining industry's going to evolve, there's a clear intersection between mining and the energy sector. Minors need a lot of energy. How do you think those two industries are going to emerge over time in terms of the intersection between the two?

Neil Van Huis (42:44):

I think you're gonna find less Bitcoin geeks that are, that are mining crypto as a percentage of the total. And you're gonna start finding a lot of energy guys that say, yeah, I got some money. Sure. I got some space. I'll put some servers on and I'll, I'll run some Bitcoin because otherwise it costs me money. Uh, I gotta do something with this stuff. We're also, you know, there's a lot of people talking about the Permian basis and how much there's an issue in the Permian basis, uh, to, to, to get rid of flare gas. And so there's a bunch of these unique offerings that people are trying to start to actually raise money and build infrastructure on for crypto, that's gonna solve an energy problem. So in my opinion, you're, you know, I just got off the phone earlier today with a good friend of mine in Texas.

Neil Van Huis (43:29):

He's been a, a, a fantastic, uh, line of communication in that world for the last couple of years. And he is really savvy in crypto mining. Um, and he is like, look, you know, there's projects going on down here, some quietly, some not so quietly, but you know, we're gonna, we're gonna start doing our own mining, you know, using these opportunities. And these are all oil and gas guys. So yeah, I think, I think there's gonna be more traditional guys that have access to energy that are gonna start saying, Hey, Neil, uh, I heard about your podcast with SA mining and I got a bunch of energy over here. Would you guys be willing to do like a profit sharing deal where you finance the minor? So we don't have to put up the money. We provide the facility and the low cost energy, and, uh, we pay off the machines together and we split some profits until the machines are paid off. I think you're gonna see a ton more of those deals.

Will Szamosszegi (44:23):

Yeah. And going back to your structured product, when you're looking at those types of deals, let's say an energy company comes up to you, what type of, what type of credit worthiness are you looking for? Generally speaking, in being able to work with someone who wants to get involved in mining and has the energy production side down.

Neil Van Huis (44:45):

Yeah. So, uh, I'll kind of answer that in two parts, uh, one traditional credit oversight from like, you know, crypto guys, um, we're not really financing anybody that has debt on their balance sheet with no cash or no crypto. Uh, for example, guys that have financed other equipment, uh, through profit shares or traditional financing measures, but don't have any additional crypto or cash. Uh, that's too much leverage for us. We're not interested. It's just not feasible. There's too much, uh, there's too many other deals that are much better than that for me to go spend billions of dollars on that type of deal. Right? So that's number one, they they've gotta have some sort of substance and assets on their balance sheet could be that they own 17,000 mining rigs and they don't have a lot of cash, right. This instant because they just went and bought a bunch of other machines, but they own those machines.

Neil Van Huis (45:41):

If they own those machines, I know that they're gonna produce a ton of Bitcoin with those machines. And that's something that's important to me. They'll, they'll sell it or they'll own it and they'll have it on their balance sheet. Okay. So then I'm happy to give them some leverage on financing. All right. The other guys that, that own, you know, serious assets, you know, substations, uh, energy facilities, property, whatever it may be. I think those are guys that, you know, we wanna see still some cash in their, in their, you know, in their stack. We wanna see, you know, what, what their financial statements look like to see their cash flows to see if they're purging, you know, they're purging. We probably don't wanna give 'em a loan. If they're a dying energy business, we don't wanna give 'em a loan. We do not want to make crypto their lifeline.

Neil Van Huis (46:25):

Um, but you know, if they're a, a steady, as she goes, energy company, that's got, you know, cash flows, they've got a real, you know, set of assets as well as cash flow on their balance sheets. Um, you know, we, we will definitely work out a deal with them. You know, it's not about having 20 million in cash on your balance sheet. You know, we're a firm that knows how to handle leverage. We're, we're used to that derivative markets. So, you know, it's just gotta be a healthy balance and, and we're willing to work with a lot of different guys in the space.

Will Szamosszegi (46:56):

Yeah, that's great. Well, that was absolutely fascinating onto topics that aren't necessarily specific to crypto. What is your favorite movie?

Neil Van Huis (47:06):

<laugh> uh, the, the game with Michael Douglas.

Will Szamosszegi (47:10):

The, when did that come out?

Neil Van Huis (47:12):

The eighties, man.

Will Szamosszegi (47:13):

Okay. Yeah. I was gonna say, I, I hadn't heard of that. <laugh>

Neil Van Huis (47:17):

Yeah. Uh, the game, uh, it's, uh, super it's super twisted. Uh it's it's a cool movie. If you haven't seen it, watch it.

Will Szamosszegi (47:26):

Okay. Without any spoilers. What's the premise of the movie,

Neil Van Huis (47:30):

The premise of the movie is that, um, he gets stuck in this game that he's all these things keep happening to him in life. And he's like, why are all these things happening? And he starts to like really investigate all these people that keep popping up through this, these things that are happening in his life. And he starts to see like these smoke and mirrors and all this stuff. But at the end he really finds out he was in a game and it wasn't like a, like a digital game. It was like someone had hired this company to put him in a game in his real life. Uh, and, uh, that's how it goes. And so is all these wicked things happening to him. He's like this ultra successful investment guy. And, uh, it is just these constant shakeups happening in his life and he's investigating him and it really is a, is a gift to him as a birthday person.

Will Szamosszegi (48:23):

Oh, that is awesome. Yeah. I gotta watch that movie. <laugh> yeah,

Neil Van Huis (48:26):

It's pretty cool. I mean, if you can get it in, in high Def do that, <laugh> otherwise, uh, you know, you might be watching some fuzzy programming, but, uh, it's a great movie. It's a

Will Szamosszegi (48:36):

Legend. Yeah. And do you know if that's on like prime, Netflix, any of those,

Neil Van Huis (48:40):

It's probably on some sort of streaming service because it's old school, people have seen it a hundred million times, so, you know, it's not really worth anything, how many open market <laugh>, uh, so yeah, you should be able to watch it somewhere.

Will Szamosszegi (48:52):

Awesome. Yeah, I'll check it out. And everyone listening should definitely check it out. Sounds like a good movie. Yeah. Uh, also, what has been your favorite place that you have traveled to?

Neil Van Huis (49:02):

Oh man, I'm one of those people that, uh, you know, kind of, uh, loves different places for a different vibe. So, uh, in the Caribbean, my, my spot is Aruba, uh, in Europe. Um, I'm Dutch, so I, I love Amsterdam. It's, it's a, yeah. Another, one's a fabulous country. Um, but I'm a huge fan of, of Switzerland as well. And, uh, I recently got to go to Asia for the first time last year. Um, really enjoyed Singapore. It's totally interesting. Um, but yeah, that's, that's the best way I can answer it. I don't think I have a favorite, favorite place,

Will Szamosszegi (49:35):

So yeah, you're hitting all the spots.

Neil Van Huis (49:37):

<laugh> sorry. Yeah.

Will Szamosszegi (49:39):

Yeah. Nice. Well, I guess getting specific on one, what was your favorite part about Amsterdam? Like if I going into Amsterdam tomorrow or not, maybe not tomorrow, but when, when travel and everything's back to normal, what would be like your go-to recommendation in Amsterdam?

Neil Van Huis (49:56):

Well, uh, recommendation, um, gimme a second to think about that, but the reason why I love it so much there is I'm, I'm really big on multicultural societies. And I think what the Netherlands is really prominent for is bringing people from around the world and accepting them. And so, uh, it's a really diverse culture there going back 10 years, you know, the Dutch don't really have like a cuisine. If you go back 10 years before, like, you know how bustling the city is now, you know, you could only get like, like Turkish food, Mediterranean food, like a food. Now they're known for their food scene from all around the world. So, you know, just bringing in people from around the world, I think South Africa would be very much like that. And it's like my number one place I want to go that I haven't been, uh, because of that same reason.

Neil Van Huis (50:46):

So, you know, I hear good things, uh, similar that way. So yeah, I think that's probably why I enjoy it the most is, is that, but they, they have a really great social, uh, culture. So I think, you know, the biggest recommendation I can have is just like the out and about, uh, don't stick your head in a building all day, or, you know, whatever, just be out. The people are super friendly and, uh, being out in, in bars, cafes restaurants, and, and enjoying people and listening to their stories is, is probably the best thing to do

Will Szamosszegi (51:17):

There. Yeah. I mean, that's, that's the amazing part about traveling it, it's kind of weird when you think about it, cuz you're only in different places for like maybe like three, four days at a time. If you're doing something like a Euro trip, trying to hit a lot of spots, but it really is one of those things that when you're there, you want to be out and about, you want to be seeing doing every single thing possible. It's like, you're not gonna go to Paris and, and not go to the Eiffel tower, um, or go go to any of these other countries and not do like the major landmark activity when you're in those countries.

Neil Van Huis (51:49):

Yeah, absolutely. I, I lived in Amsterdam in Hamburg, Germany, uh, between both of those cities and a couple of other, you know, smaller stops, um, for about two years. And if you go to France, it's not the same. If you try to go to Austria, it's not the same. You try to go to even Belgium. It's not the same when you're in Germany. The social scene is incredible. They're really accepting to other people. So they, they wanna hear your stories and you wanna hear theirs. The same is true in the Netherlands. Um, so, you know, I I've yet to find a lot of countries that are really like that much, many other places are much more like commonly private. And so, you know, that's what I think is so cool about those countries.

Will Szamosszegi (52:31):

Yeah. Oh, Germany's great. I haven't been to Amsterdam, but I remember in Germany I was in Munich and uh, I also had a chance to go to the, the BMW museum. And that was like right before I think it was the, I, I ate, came out and they, the featured car, I was so excited for it to come out and then it was completely different from the showroom car that they, they were shown in the museum, but just going and walking around, taking the, just even taking the train in different areas is so different.

Neil Van Huis (52:59):

Yeah, no, no doubt about it. Um, Germany's a, a fabulous country and you know, the great thing about them is they're so open-minded, but they have a lot of tradition, so you can go and explore their traditions and it will take you forever to explore them all. Um, but you still get that vibe of everybody wants to hear about what you're doing and why, and everybody, you know, wants to tell you about what they're doing. And so, uh, it's, it's awesome. It's a great country, great people. And um, like I said, if you go through a lot of other places, it's not that other places aren't great too, but the, the people are different and it's just harder to garnish those relationships and hear about all the things that you you'd love to know about that you just couldn't possibly know unless someone locally told you.

Will Szamosszegi (53:44):

Yeah, if you weren't doing what you're doing now with block fills and you could, and you were doing any other type of career, what, what do you think you'd be doing?

Neil Van Huis (53:54):

Boy? Uh, I was an athlete for a long time. I, I played, uh, some, some ball in Europe. I played, uh, semi-pro back in the us a little bit. Uh,

Will Szamosszegi (54:05):

Oh, wow.

Neil Van Huis (54:06):

The, the reason why I got into trading was because when I realized I, I probably couldn't go on much longer in, in, in athletics. It was the next, most competitive thing I could do. <laugh> <laugh> um, but if, if I could go back in time and, and stay alive in that circuit, I think that'd be great. Um, I just love, uh, starting businesses. I'm, I'm a little bit of a serial entrepreneur for many years now. So, uh, I've got some other things that I'm working on as well. And, um, yeah, I, I like, I like starting and growing things. Uh, and, and that was a big reason why, um, I kind of came in as a partner here at block fills when they founded the company. And, uh, we've all worked very diff very hard to, to get this business running and, um, and, and in the place that it is. So, you know, that stuff, no matter how, uh, draining it is on the energy side, it's totally worth it. I just love doing it. So whether it's block fills or, you know, anything in crypto trading or not crypto trading, I just love building things. I think it's, it's just a lot of fun.

Will Szamosszegi (55:12):

Yeah. And I can definitely see it now that that athlete type of mindset, you really need that type of, I guess, drive and competitiveness to, if you're gonna go and start a business or build something from scratch, cuz it is very difficult, takes a lot of time and there are many times where things aren't gonna be going your way and you just gotta find a way to solve that problem and, and get past that hurdle.

Neil Van Huis (55:36):

Yeah, sure. And, and I think, you know, I came from team sports, right. Uh, rather than like, you know, being in a tennis player, which is a singular sport. Right. Well, not always but frequently. Um, so I think that, you know, having that background of working with teams I think is super critical for growing things from the ground up too, because there's just absolutely no way you could do everything alone. It's just, it's impossible. Yeah. And you know, being able to work together with people to grow something with a, with a, a goal or multiple goals in mind and, and really like taking those visions and, and staying on the right track together, that's part of the challenge of building something in, uh, working with people on that is, is just an incredible journey.

Will Szamosszegi (56:17):

Awesome. Well, this has been so much fun. Great talking with you, you know, a lot about mining man, which is really great to hear that.

Neil Van Huis (56:25):

You're, I'm not sure that's a good thing. <laugh>

Will Szamosszegi (56:28):

Yeah. Well, someone who's going and getting involved with finance and the mining, I'm glad that someone like you is actually involved in filling that gap within the industry. So there's been a lot of fun. Last thing. Is, are there particular social media sites or places online where everyone who's listening can connect with you?

Neil Van Huis (56:47):

Yeah. I mean, you got, I push a lot of content on LinkedIn when I have it, so people can look me up on LinkedIn on Twitter, uh, at vice Roy underscore N VH, uh, a very old Twitter handle don't judge, I'm Dutch, I'm Dutch. And I pick the, the vice right tool up, uh, because I'm a trader. So, um, so anyway, yeah, at vice right underscore NBH, uh, on, on Twitter, uh, and, and on LinkedIn is where I pretty much push all my content. So.

Will Szamosszegi (57:14):

All right. Awesome. Well, thanks again for coming on. Thanks

Neil Van Huis (57:17):

All William. Appreciate having me and, uh, thanks so much. And we'll talk to you guys soon.

Speaker 3 (57:23):

Thank you for listening to this episode of the SAS mining podcast. Be sure to follow us on social media and YouTube for the latest updates and previews of upcoming episodes, full episodes and transcripts can be found on SaaS mining.com every Thursday. If you want to hear us interview a particular guest on a future episode, please reach out to us@podcastatsamining.com.

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