Home Bitcoin News Bitcoin Mining Sam Bankman-Fried's Huge Funding: Bitcoin Mining in Kazakhstan – The Journal. – WSJ Podcasts – The Wall Road Journal

Sam Bankman-Fried's Huge Funding: Bitcoin Mining in Kazakhstan – The Journal. – WSJ Podcasts – The Wall Road Journal

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This transcript was ready by a transcription service. This model will not be in its ultimate kind and could also be up to date.

Kate Linebaugh: After the collapse of Crypto Trade, FTX, Wall Road Journal reporter, Eliot Brown and his colleagues, began trying into an enormous query, the place did all the cash go?

Eliot Brown: After we had been sort of within the throes of the FTX protection? In November, a colleague, Caitlin Ostroff received a spreadsheet that listed the entire enterprise capital and startup investments that Sam Bankman-Fried from FTX Made. And once we sorted it by quantity, the highest one by far was this firm I had by no means heard of known as Genesis Digital Property.

Kate Linebaugh: Discovering out what Genesis Digital Property was and why FTX founding father of Bankman-Fried had invested in it, would take Elliot on a month’s lengthy journey main him all over the world to Kazakhstan.

Eliot Brown: Genesis. Digital Property is a spot that they spent some huge cash. He had one thing like 150 plus startup investments and the overwhelming majority of these had been $600,000, one million {dollars}, 4 million, and you then take a look at the spreadsheet and this is this factor for 1.1 billion {dollars}, which is now one of many largest belongings left within the chapter property.

Kate Linebaugh: Welcome to The Journal, our present about cash, enterprise and energy. I am Kate Linebaugh, it is Thursday, January nineteenth. Arising on the present, Sam Bankman-Fried’s, huge guess on Bitcoin mining in Kazakhstan.
In December 2021, as Sam Bankman-Fried was gaining a status as crypto’s golden boy, he went on a visit to Kazakhstan and whereas he was there he visited the presidential Palace.

Eliot Brown: Which is this sort of humorous trying constructing that appears like a glassy model of the White Home, however then with a Faberge egg on the highest after which a golden spike on prime of that. And so he goes there, has this sort of massive, semi-formal assembly with the president and these different traders.

Kate Linebaugh: Elliot dug up a photograph from this assembly.

Eliot Brown: Sam Bankman-Fried has this frizzy hair. He is in a swimsuit.

Kate Linebaugh: Not shorts?

Eliot Brown: Not shorts. This was a query we appeared into, truly.

Kate Linebaugh: What was your query?

Eliot Brown: Effectively, we would heard a rumor that he was in shorts.

Kate Linebaugh: Oh.

Eliot Brown: As a result of it was December and that may’ve been notable.

Kate Linebaugh: Bankman-Fried was in Kazakhstan as a result of he’d guess huge on a rising trade within the nation.
All proper, so let’s dig in right here. Bitcoin mining, are you able to clarify what Bitcoin mining is?

Eliot Brown: If you’re mining Bitcoin, the principle operate there’s you might be processing transactions for different people who find themselves sending Bitcoin to one another. And the best way they do that’s by fixing mathematical puzzles. After which the one which solves it will get just a little reward. And so for those who’re working sufficient laptop servers, you get a number of reward and that reward is chunks of Bitcoin.

Kate Linebaugh: Are you able to describe what a Bitcoin mine seems and seems like?

Eliot Brown: Oh, they’re simply so extremely boring. It is only a warehouse or usually a delivery container that simply has a number of laptop servers in there. So it is type of like in case your laptop computer, if the fan’s on, however you might have a number of these, I imply hundreds with followers working.

Kate Linebaugh: The images are someplace between sort of Star Wars and Severance.

Eliot Brown: Yeah. You already know, Star Wars is nice. Yeah, I assume it is type of like, or possibly when in Star Wars, once they’re going by way of the bowels of the Demise Star.

Kate Linebaugh: Yeah, precisely.

Eliot Brown: Besides you are in all probability loads hotter as a result of these items emit a number of warmth.

Kate Linebaugh: To run a Bitcoin mine, you want a number of energy. And some years in the past, Kazakhstan, a significant vitality producer, had a surplus of its coal fired electrical energy.

Eliot Brown: Kazakhstan has extremely low cost energy and a number of different attributes that type of make it good for Bitcoin mining largely that it may be actually chilly. In order that’s sort of good for these items as a result of they’ll overheat. And low cost actual property. It is simple to construct.

Kate Linebaugh: Bankman-Fried was in Kazakhstan to satisfy with Genesis Digital Property. The corporate was based in 2017 by three Kazakh entrepreneurs and two German Bitcoin miners who by the way are each named Marco.

Eliot Brown: So you might have these guys who’ve, I assume, native connections and native know-how becoming a member of with individuals who know the best way to Bitcoin mine after which they begin to construct huge Bitcoin mines. And the best way they find yourself advertising themselves is as actually low cost bitcoin miners. They are going to do that on an enormous scale. They will purchase issues for cheaper and so they get energy for cheaper.

Kate Linebaugh: So for those who’re in Bitcoin mining, you’ll’ve heard of Genesis Digital Property?

Eliot Brown: For those who’re deep within the Bitcoin mining scene, you’ll know GDA as they name themselves.

Kate Linebaugh: On the time, Kazakhstan’s Bitcoin mining trade was rising, however it was nonetheless dwarfed by neighboring China, which was a haven for this trade. That was, till Could, 2021.

Eliot Brown: However then China cracked down after China was experiencing its personal strains on its energy grid. They lower off Bitcoin mining and everybody simply sort of left. You possibly can transfer these items comparatively straightforward, you possibly can simply put them on a truck and Kazakhstan occurs to frame China. And nearly in a single day Kazakhstan grew to become by one measure, the world’s second largest Bitcoin miner by way of nations.

Kate Linebaugh: And the way huge was Genesis within the Kazakh Bitcoin mining scene?

Eliot Brown: These guys are huge. They’re huge on this planet and cash type of begins to move in. Inside Kazakhstan, the quantity that they ended up being licensed for by the federal government was 280 megawatts. For context, it may energy within the U.S., that is like 100 thousand houses that could possibly be powered by 280 megawatts, in order that’s how a lot energy that Genesis is type of allowed to eat in Kazakhstan.

Kate Linebaugh: When did Genesis actually begin elevating cash from outdoors traders?

Eliot Brown: In mid 2021, as the worth of Bitcoin goes up, they take a big spherical of funding from an array of largely crypto traders, however certainly one of them placing a big trunk towards that fundraising spherical is Sam Bankman-Fried. So, he places in about 100 million from Alameda Analysis, which is actually his hedge fund.

Kate Linebaugh: And what about Genesis appealed to Bankman-Fried?

Eliot Brown: What we perceive is Sam Bankman-Fried advised different traders that he simply noticed this as a unique technique to guess on Bitcoin. And simply to emphasise the enterprise mannequin right here, all you are doing as a Bitcoin miner like Genesis, is shopping for computer systems, setting them up, spending cash on electrical energy, and the result’s Bitcoin. And so if Bitcoin is at 40,000, 60,000 and also you began this complete factor when it was loads decrease, you then’re trying fairly good. And also you could be a actually worthwhile firm and a precious firm. And so in 2021, this appeared like a a lot better guess.

Kate Linebaugh: However now, Genesis Digital does not appear to be such a certain guess. Why? And what which means for FTX traders is subsequent.
When Sam Bankman Fried visited Kazakhstan, he’d invested greater than 100 million {dollars} in Genesis Digital, however that was just the start.

Eliot Brown: By the tip of the 12 months, his urge for food seems to be rising for this firm, he is on the brink of put an entire lot extra money in. He has joined the board in October, 2021

Kate Linebaugh: And he saved investing.

Eliot Brown: He places 550 million {dollars} or so into shopping for shares within the firm. Not solely is that this only a completely huge examine for a startup, it is one of many, if not the most important particular person funding in a crypto startup by a person or hedge fund ever.

Kate Linebaugh: In complete, Bankman-Fried invested 1.1 billion {dollars} in Genesis Digital by way of Alameda. And in accordance with folks Elliot spoke with, when Bankman-Fried met with Kazakh President, Kassym-Jomart Tokayev, he shared his enthusiasm about the way forward for Bitcoin mining.

Eliot Brown: The President responded with skepticism as a result of that is on the very time that Bitcoin mining was beginning to pressure the electrical grid there.

Kate Linebaugh: The expansion of Bitcoin mining within the nation was taking a toll. Folks had been experiencing blackouts after which enormous anti-government protests broke out.

Newscaster: Tonight, Kazakhstan’s violent protests spiral even additional uncontrolled as hundreds take to the streets livid over rising gas costs and authorities corruption.

Kate Linebaugh: Demonstrators weren’t concentrating on Bitcoin particularly, however within the wake of those protests, the Kazakh authorities cracked down on the trade.

Eliot Brown: The federal government of Kazakhstan clearly sees that an issue is Bitcoin mining, so that they mainly make it very laborious to be a registered Bitcoin miner and so they have raids on folks illegally mining Bitcoin. So Bitcoin mining turns into a reasonably large goal of the state, each within the unlawful sense and likewise the authorized sense which Genesis Digital was doing, in that they only make it actually economically tough or unimaginable to mine Bitcoin there.

Kate Linebaugh: Final July, the Kazakh authorities launched a tax levy for vitality utilized by crypto mining, chopping in on firm’s earnings.
Across the similar time, the trade was dealing with one other risk. The falling worth of Bitcoin. Securities filings from one investor confirmed what that did to the worth of Genesis Digital.

Eliot Brown: They reported that their very own worth of their shares in Genesis Digital fell by 59% between its peak, type of in mid 2022, after which September. So it was a sort of bumpy fall.

Kate Linebaugh: Then in November, FTX began to break down and traders in Genesis Digital pressured Bankman-Fried to resign from the board, in accordance with Elliot’s reporting. FTX is in chapter after dropping 8 billion of buyer cash, the corporate is now seeking to promote belongings in a bid to repay these clients and collectors. Property, like Genesis Digital, however proper now, Bitcoin mining, the entire trade is in tough form.

Eliot Brown: The explanation it is dangerous is essentially a operate of the worth of Bitcoin, which is down someplace round 70% from peak.

Kate Linebaugh: Which suggests if you’re an FTX investor who’s on the market hoping to get a few of their a reimbursement and you might be like there’s 1.1 billion over right here in Genesis Digital Property, it would truly be laborious to get that cash again from Genesis?

Eliot Brown: Completely. For those who take a look at the full quantity on the time of the chapter that FTX and Alameda and Sam Bankman-Fried’s different entities had in startups and enterprise, it was about 5 billion {dollars} of value. Of that 5 billion, Genesis was 20%. I imply, it is a fifth of your complete startup portfolio, and now it is price one thing much less, in all probability loads much less. However determining simply how a lot much less is an enormous piece of the puzzle to determining how a lot cash individuals are going to get again in the entire FTX chapter.

Kate Linebaugh: And so at this stage, how a lot does it appear to be FTX clients may get again?

Eliot Brown: It is definitely not zero. There’s some cash there, however we do not know just a few issues. We do not know precisely what number of claims are there, how many individuals say they’re owed cash by this factor? How many individuals are owed cash by this factor? After which we do not know the way a lot every part left is price. However the basic thought is that ballpark is that individuals are going to get someplace between 20 and 60% of their a reimbursement on the finish of the day. However the finish of the day will be 5, 10 years sooner or later.

Kate Linebaugh: In the meantime, Genesis Digital has largely moved on from Kazakhstan. It used among the cash it received from Alameda to arrange new information facilities in Texas and South Carolina. Most of its mining now takes place within the US in accordance with firm traders.
That is all for at the moment, Thursday, January nineteenth. The Journal is a co-production of Gimlet and the Wall Road Journal. Extra reporting on this episode by Caitlin Ostroff and Yuliya Chernova.
Thanks for listening. See you tomorrow.

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