Associate Director of Derivatives at Luxor Technologies | Ben Harper
foreign hey y'all welcome to the Texas blockcast we're here today with Ben Harper associate director of derivatives at Luxor Technologies he's calling in from Calgary Alberta Alberta sent a trade delegation down to the summit a few months ago to uh to just brainstorm participate engage in the industry they are the Texas of Canada or as some might say Texas is the Canada or the Alberta of Canada so then tell us a little bit about your background I know you studied finance and economics um you've got extensive experience in that space how did you end up where you are at Luxor today yeah well first of all Lee thanks uh thanks so much for having me on on the podcast here uh it's great to speak with you as you mentioned we were we were down in in Austin it was my my first time down there I've been to Dallas a few times but first time to Austin with that trade delegation you mentioned and we had a fantastic time and tons of brainstorming and really learned it a lot from what from what you guys are doing as you mentioned and just for everyone listening my my title at Luxor Technologies is I'm associate director of derivatives uh which is a new business line we've just recently launched and we can touch on that later I'm also uh on the mining and policy committee for the Canadian blockchain Consortium uh so you know trying to replicate some of the good work that you've done down Texas up north here and in terms of my background a little bit all over the place I try to do a little bit of everything but it's mostly been finance and economics focused like you said that studied finance and economics in school out of school I did the the investment banking thing I worked for National Bank Financial in Toronto as part of Diversified Investment Banking team where we covered power and utilities consumer products Industrial Products and real estate and then after that was on the equity Capital markets floor briefly working on equity issuances for for different public companies on the on the Toronto Stock Exchange then flipped over from the private sector into the the public sector I did a master's degree at Columbia University in New York I did a brief stint over in the Middle East working in the Jordanian Royal Court in the economic and fiscal Affairs team there I did a brief stint for consulting firm back here in Alberta uh before joining uh the government here in Alberta the provincial government which would be the equivalent of your state government I I served uh in that government uh it would have been uh last year and the year before uh served as a policy advisor for the minister of Treasury board and finance which would be the the equivalent of your Treasurer and the premier which is the equivalent of the governor in the United States and and uh you know had enough of the political thing uh got some good experience particularly during the covet crisis Alberta was was uniquely impacted not just because of of the virus itself and the economic activity that they took with it because the oil price crashed so there were some very particular uh fiscal pressures on the province uh and go to the political side want to come back to the private sector was looking at uh you know maybe going to Consulting back into banking a bunch of different things and and I had an old friend uh Ethan Barrett who people from the mining Community might be familiar with reach out and tell me about Luxor and what they were doing and and what they were looking to do to build up their derivatives desk so I was brought on board to help to help build the others desk and also do a couple other things at Luxor but now I'm working at the uh the derivatives Destiny Luxor which is really the first of its kind and excited to tell you more about that and uh working with our head of derivatives Matt Williams who is a third generation uh Trader out of Chicago he worked for the CME the NFA has a past in in options trading and energy trading and he even helped launch the Bitcoin Futures uh product on CME exchange so extensive background and the two of us and we're currently looking expanding our team are really running the uh the driver's desk at Luxor and excited about this this new product and and really the the maturation of the the Bitcoin mining industry uh but that's really my story and how I got involved in this and we want to get into more details about y'all's derivatives products but before we do I think most listeners will be familiar with Luxor but just in case they're not uh Luxor is a Bitcoin mining software and services company they operate a mining pool I personally have my machines uh few that they are I wish they were in the thousands they are not but I have my s19s um you know sending their hash power to the Luxor pool and I get uh obviously I'm stacking SATs through uh through that method and just generally well thought of company doing it the right way doing it and maybe a way that would seem methodical but that's how you have to be in this industry this is Hash rate as a commodity machines are a commodity and you can't just get out over your skis and so luxor's earned a lot of respect by being very methodical in their processes okay so this this derivatives um product that you guys are developing is very important for the industry you know I was Steve Canard the tbc's director of Bitcoin mining analytics is quick to tell me and remind me that in the oil and gas industry you don't get investment Capital unless you're hedged and in the Bitcoin mining industry it should be the same way right we should see lenders start to require hedging for as a precondition for investment uh so do you expect that we are close to that have you heard Rumblings of that is that why you guys started this product because you eventually it's going to be a requirement or not maybe not a uh official requirement but but a de facto requirement yeah so I mean first of all um Arc like the way we view this and just kind of take a step back but like the way we look at this like I think you mentioned is commodity at Luxor we see hash rate as a commodity um it is a new native digital commodity yeah Bitcoin miners we see it as producers of that commodity and we believe it Luxor that they should have access to the same Suite of financial products that allow them to de-risk and to optimize their operations the producers of other Commodities have and like you said Lee and like Steve from TBC has often pointed out uh this is the standard they want the gas industry in agriculture and electricity and so you know we're not Reinventing the wheel here but we do have a new asset class and we believe that just you know basic first principles is we want to be the ones that that build those financial products for minors specifically uh so that they're able to employ hedging strategies they're able to have some certainty into their business planning and then hopefully that will help facilitate access to Capital we just you know as we see this this industry mature the operations get larger and more sophisticated the integration with the energy sector becomes becomes greater you know that's that's the direction we see this going and and that's why we really launched this product is is we think this is a commodity producing business and like any other commodity producing business they should have access to the financial products that that help them you know make their make their make their uh make their operations more efficient amazing um it's tough to launch a product like this in a market where people just wish they had been hedging you know a year ago and now they're some of them are in a position where they don't think they can afford to hedge what would you say to that kind of if that comes up in a conversation yeah well you know obviously Capital constraints are a big Topic in the industry uh and particularly right now and and you're at you're absolutely right you know of course you know looking in hindsight and hindsight's always 20 20 would have been you know better to hedge out you know before before the draw down than after but the reality is is a lot of these products didn't exist uh before the before the big drop down in particular our product uh which was only launched in beta phase in October and and in standardized kind of non-beta phase in January 1st only 20 days ago so I you know I don't think miners really had the had the opportunity to employ some of these strategies and to hedge the way that they would I know that there's you know for example Bitcoin Futures which which are which are a valuable hedging instrument but of course uh miners on the revenue side are exposed to more than just the price of Bitcoin right miners are exposed to what we call it Luxor hash price which takes into account four variables right there's your bitcoin price that you're exposed to there's your network difficulty you're exposed to and also transaction fees in the block subsidy and so you know when we looked at the market we saw that there was Bitcoin Futures but it's really not a product that's specific to miners that looks at the risk exposures they have on their on their at least Revenue side you know they have power purchase agreements they can hedge their cost side the Bitcoin Futures are great for hedging part of your revenue and and definitely your balance sheet but we wanted to launch a product that allowed miners to to Really lock in on the cash flow portion of their businesses and and so you know we're as a mining pool and as as our content site we call Hash rate index I should I should say or plug it plug it there as well we really see hashary as a commodity Elixir um and and we have an index where we value it's called our hash price index we we take you know if you have one pet a hash or hash rate how much can you how much can you expect to earn in a 24-hour period that's that's up live on our website and as a mining pool we're really the spot market for for hash rate and so that's the way that we view it that's the way that we see it uh and and so you know hopefully with this product now you know hindsight's 2020 capital is considering those are obvious concerns and and and totally get that but it you know our view is that uh looking to facilitate that access to Capital in the future uh like you said hedging strategies I think will be will be very important and particularly with the with the you know you could say it's even Carnage in the in the blockchain space there's not a lot of capital I think Capital coming you know going forward at least for the next little bit will have to come from from outside the sector you know one one area that that looks promising to me is the energy sector particularly with the with the higher energy prices that we're seeing in our Jeep bull market there's more capital in in that space and we think that a hedging product like this which is analogous to to what people in that industry are used to seeing and being a really a prerequisite for for facilitating access the capital I think that you know a product like like this that we have that allows you to de-risk your operations in such a volatile Market well ultimately you know help bring capital in but of course you know like there is tough times out there and and you know we want to we want to build products so that in the next bull market uh we can be in a better position and hopefully you know kind of lessen lessen the hurt that's out there in the next bear Market it makes sense I I've heard you describe what how this works and I think for those that are not traders that haven't grown up with understanding commodity markets that might be helpful um and secretly I kind of want to hear you explain it again because uh it's not the most digestible of Concepts could you explain how it works from start to finish on the buy side on the sell side what it looks like yeah so uh just kind of take a step back again starting and just kind of looking at the product again we see hatch racing commodity excuse me we don't want to build the entire Suite of products that miners can use and and when we looked at what was available right there's power purchase agreements on your cost side you have Bitcoin derivatives that help you hedge your Treasury and your Holdings but there wasn't really much on the revenue or cash flow side uh you know you we saw a small Patchwork of what's called physically delivered forwards that were out there there was there was Bitcoin Futures which existed and so we want to do something hash rate and and minor specific so like I said I we have this hash price index already as as part of our site and that's kind of the first thing to understand is that there's an index for what you're earning as as you're Mining and that's what you can expect to earn from your mining pool and so our derivatives products are based around that index uh the first product that we decided to launch was called it's called a non-deliverable forward okay and so a forward is really your most simple type of derivative although derives of course are are a complicated topic um and what a forward is is it's just an agreement between a buyer and a seller to deliver a pre-agreed quantity of a commodity on a future date at a fixed price and there are typically two types of forwards one is called a physically delivered forward uh which you actually deliver the commodity physically to the seller and then the other type is called the non-deliverable forward where instead of actually delivering and paying the full purchase price for the commodity what you do is you pay the difference between the final market price of that commodity and the pre-agreed fixed price that Delta that difference between those two prices is paid from the buyer to the seller if the price of the commodity uh Falls and from the seller to the buyer if the price of the commodity Rises and so you know there's there's pros and cons to physically delivered and cash settle uh we we decided to stick with cash Kettle just because it's the kind of simplest easy to use and we believe it'll bring more liquidity into the sector you know part of the problem with a physically delivered forward and these have been tried before in the mining space is external Capital doesn't quite know what to do uh with with physically delivered hash rate you know imagine you're an investment firm in New York or or London uh you would much rather not have to actually take delivery of hash rate and that's what you see in in derivatives markets just kind of generally the cash flow markets tend to tend to be much larger but of course there are drawbacks and you know in terms of upfront financing and things like that which physically delivered forwards can can meet but but for us we started with what's called a non-deliverable forward and that's sort of a complicated explanation apologize but this is kind of the background now our product is fairly simple we match buyers and sellers along three variables our contracts are really just three variables there's what we call your unit hash price which is that pre-agreed fixed price that we were talking about so if you're a minor you're able to sell forward at a pre-agreed fixed price there is the daily hash rate that you're putting under the contract and then there's the number of days that you want that contract to run um in terms of the hash price that you can pre-agree to we have two different classes of products we have our US dollar denominated product and we have our BTC denominated uh product the BTC denominated product protects you in terms of your exposure on the network difficulty and transaction fee side whereas the US dollar uh contract sees uh protection as well on the on the Bitcoin denominated price and different miners with different obligations and different strategies to use those products differently in terms of the durations we have standardized monthly contracts that run one two and three months forward but we also have the ability to to put together Custom Custom contracts the only real limiting factor is our ability to match buyers and sellers amongst those three variables that I mentioned and then of course at Luxor on top of matching buyers and sellers we also manage counterparty risk so you face Luxor when you're trading these products you don't have to worry about tracking down uh the buyer the seller on the other side of the trade all parties face Luxor we also have a position manager tool where you can monitor all your trades your profit loss keep track of charts and things like that we act as the settlement agent as it's settled to our index and we also take care of all regulatory reporting this is a cftc regulated product so we take we take care of all reporting on on the Luxor side and and that's kind of the the broad overview of the product you know we can get into how you know Miners and investors are using these products but that's that's kind of the broad overview and the rationale of how the product came to be that's amazing it's it's incredible that level of sophistication that we're getting to in the Bitcoin mining space and we need to be there it's just happening much more quickly than in commodity markets in decades past and that's probably just a function of the compression of time you know there's that great book uh thank you for being late about this the amount of change that we see um in a year is the same amount of change that are the greatest Generation saw in a decade so we do have a compression of time due to this technological advances and to Moore's Law and all sorts of other things so it doesn't surprise me that we're advancing this fast but it's really cool to see that that Luxor is the one that's leading the charge here so let me just go back you said something that you could uh settle in dollars or Bitcoin so if somebody has like a Bitcoin denominated loan as a minor would in that case would they want to hedge in Bitcoin yeah so that's typically where we're you know if you're seeing a minor use and and when I say you know minor and hedger typically what we're seeing is if you're hedging your revenues you're you're selling these products and so typically what we would see right is is miners are are hedging in the currency of their obligations right and so like just like you said why would someone use the Bitcoin sir there are miners that have Bitcoin denominated obligations and so what our product allows you to do is sell forward at a locked in uh hash price yeah in terms of Bitcoin and so you can get certainty in terms of your your production of Bitcoin regardless of what transaction fees and network difficult end up difficulty end up being amazing and that's really yeah and that's really the mechanism where it helps you facilitate access to Capital right is because if you can have certainty about what you can produce and the price that you're going to produce it for uh then lenders investors are more likely to participate it's absolute Game Changer now who's taking the other side of the trade usually yeah so uh we have a very diverse set of of Market participants and and and and like you're alluding to and for people that might not know and a traditional uh derivatives Market you have two sides you have your hedgers and you have your your investors or speculators sometimes they're called um we're seeing on the buy side some really interesting things happen so like you said you have your traditional kind of uh buy side Finance firms crypto hedge funds different kinds of investors coming in uh we're also seeing quite a bit and this is I think might be interesting for Texas specifically is we're seeing quite a bit of biaside liquidity come from hosting companies uh and that's a really interesting use case that we didn't necessarily see when we designed this product but yeah if you're a whole thing company what you have to remember is that you have instead of your Revenue uh being denominated in hash rate and hash price that's your obligation your yeah your your your obligations are in hash price and hash rate and so some of these companies will make uptime commitments to to their hosted clients uh and and when they're you know shutting down because of uh because of the spike in Energy prices and participating in demand response for example what our product allows them you to do is is hedge out your costs and by becoming in on the buy side the opposite side of a traditional mining hedge the buy side you're hedging your costs and and while they're shut down right they're they're exposed to run-ups in the price of Bitcoin or drops in network difficulty and so our product allows them to to lock in their costs and and be a hedger but on the other side of the trade from from a regular Miner that's amazing so so put that in the context of like a Texas why is that more important in Texas because you mentioned some words there that I want to call out you know demand response if someone's got some ancillary Services obligations um talk a little bit more about how this provides them more certainty as a Hoster yeah so um like like you said one of the and just taking a step back one of the advantages of Bitcoin mining and why it has so much potential to stabilize the grid incentivize Renewables uh even when we're you know talking off-grid and and capturing methane emissions is that it's a completely location agnostic interruptible mode and particularly that interruptible side is really important because it has flexibility that other loader resources just just don't have uh and and so you know some hosted miners for example will make commitments to their clients in terms of how much uptime uh they will have uh for their their Bitcoin production but of course as you know there are times when when miners in Texas need to shut down so that the rest of the grid can can make use of that in uh energy particularly around the winter when everyone's using the air conditioning in the summer uh it can become uneconomic or there might be better economics in participating in demand response programs for for the hosted for the hosted company but however what you have to remember is is if you're shutting down your mining operations you you do have an obligation to your client in terms of paying them what would have expect they would have expected to earn in terms of what all trade economics are and so by buying and so by buying our product uh it essentially Hedges you head you're taking a long position on hash price and so since a cash price is a cost for these hosted operators by buying our product you take partake in the upside of hash price so if hash price goes up your obligations to your mining clients also go up however you would be profiting off of our contract and that's how it that's how it acts as a hedge is it kind of layers on top of your operations uh and as long as you you know set the parameters right to what you need it can act as uh it's essentially a swap you're saying look I'm willing to give up I'm willing to give up downside uh in terms of my hash price to be able to capture the upside so that I can make sure that while I'm shut down and I'm you know participating in demand response I'm still able to meet all my obligations to my hosted mining clients yeah I I want to make sure everybody understands how much of a game changer this is because the conversation has always been if you're aggressive and bullish you go into mining if you're conservative and you have conservative investors you go into hosting and so this really flips that narrative on its head and saying you can do either you can be a Hoster and be bullish and be long and take part of that upside and that volatility or you can be a minor and be just commodity commodity Centric hedged modest you know returns or you could be somewhere in between absolutely right this is this is just a tool and I think what we'll see is that the strategies that miners able employee will become more and more sophisticated I mean as these are you know you spend a lot of time with the miners these are brilliant brilliant people and they'll find even more complicated even more efficient better strategies I think with a tool like this to to employ than than we can think of but it definitely unlocks you know what's what's available to other sectors allows you to to employ a bunch of different hedging strategies and and really optimize your operations in a way that wasn't uh available before a product like this existed so what's on the horizon what's next um well like I said I mean I can't say too much uh but uh just like our thesis here rightly is it's pretty simple um we think this is a new commodity uh and you know it needs all the same Financial products exist that in other Commodities so uh we're not Reinventing the wheel we believe this is a new asset class and and we want to provide the same tools that other commodity producers have and so you know whether that's physically delivered you know whether that's options uh they're all on the the the table right now and we're having conversations with minors in Texas and Canada all around the world I try to get a sense of what works best for them and and that'll be what's next but but really I mean we want to have the whole Suite of products here we want it to be hash rate specific so that miners miners have a tool available that's specific for their operations so it's amazing it's it's absolutely amazing and I think um you guys are on the bleeding edge of this I wonder what the TBC can do and what others can do on the front because obviously we've got these lenders that have extended themselves that are that are Bitcoin native lenders that they're probably not um looking at making new loans new sizable loans but there's going to be uh traditional lenders that come in that are are going to be providing financing to this industry and I'm thinking that's who we need to convince right is the traditional lenders because I doubt that any and I don't want to say any names but we all know kind of who I'm talking about there's some companies out there that are not going to get burned again all right they're probably already talking to you but they don't have as much Capital deploy right now because they've been burned over the last nine months I'm wondering if the next conversation and you guys are probably 10 steps ahead of this you're already talking to these Banks but the traditional lenders uh probably don't need a lot of convincing because you've just shown the Playbook of why this is needed yeah and you know we've gotten very positive feedback from those conversations that we that we've had and I also should mention like those are the type of companies that are also participants in the in this market right because this is a tool for them as well right they're making loans they have you know positions in companies that are long hash rate uh and so a product that allows them to go short hash rate uh allows them to effectively you know hedge some of their exposure to those lending contracts as well so it's it's not only a tool for minors that I think you know lenders and financers will see that it's attractive but it's also a tool that that lenders and financers are using and looking at using as well to de-risk their own Investments so you know hopefully that helps bring more capital in the industry because because really that's what's needed right now yeah it is well let's let's add a little levity here uh and think about kind of this rival this friendly rival we have between Alberta and Texas uh it's more of a coopetition I think yes if if Alberta and Texas were to get into a boxing match who do you take uh well it uh I'll say okay well I'll give a politically correct answer I'll say if if it was just everyone in Texas first everyone in Alberta I'll give it to you guys because of the the population difference that we text about 29 30 million or I guess maybe what 20 25 million about about there yes word is only four and a half million uh but uh anything per capita I feel pretty confident that Alberta would would pull out on there you go that's a great answer that's a great answer okay so as the mining industry faces I guess what I'll call unprecedented challenges because they're probably press there's precedent for it but we're at a much bigger scale right now than we were when these challenges arose you know four five six years ago um what are you seeing in Canada that we need to look out for here I I was reading an article the other day about I think it was one of the it was one of those southeastern states I don't know Kentucky or South Carolina or something like that where there was citizens of the state that were organizing against a mining Farm because and they were like local people you know they weren't just like people driving in from the city you know saying oh we should they were local people and they were arguing they were they're organizing against the mining Farm because of the noise and we know that a lot of mining in at least south of you know call it South of Nebraska is going to go to immersion uh and probably even in the colder climates too just because of the the way you can regulate the temperature of the machines so that's not as much of a factor but are you seeing that kind of opposition from like the Grassroots because we haven't really seen much of that in Texas um most of it has been kind of just journalists or Elites in different parts of the country stirring up but this was the first time that I saw it from like a rural constituents because normally the rural constituents are like heck yeah we're bringing we're bringing new jobs we're bringing tax revenue we're bringing New Roads new infrastructure bring it on um but are you seeing that a little bit in Canada in Alberta yeah oh I I mean nothing particular nothing specific like that that I'm seeing but I think like the the broad conversation that we're having in Canada is very similar to what you're having in the United States uh you have a really different perspective state to state uh you have National governments that are uh let's just call it a little more skeptical and I think we have a little more work to to do there um you know in terms of it's almost a mere story really you have States like Alberta and Texas which are really trying to embrace the sector finding ways to take advantage of this new technology make their energy systems more efficient capture stranded methane and then there are you know states that are taking the complete opposite approach uh like New York or a Quebec uh which are placing moratoriums on on new mining new mining operations I think like when I look at this I I don't I think there's a there's a in the in the sector there's just an actual inclination that criticize the government which I think obviously is fair enough I could sit here and criticize uh particularly the Canadian governments all day but I do think it's incumbent on us as an industry right to to make sure that that we're doing things the right way you know like we we all know that if you're placing a mind in the middle of a residential area and of course nobody's really doing that but if you are then there are real noise concerns and things like that that can impact other people and I think it's incumbent on us to to to really do things the right way to engage with Regulators to to engage with people to to tell people that the the uh the the the potential for this uh but I think it's a it's incumbent on us as an industry to do things the right way make sure we're getting our message out there make sure we're selling our benefits uh and make sure we're addressing some of people's real real concerns uh that you know and annoys noise concerns are not just specific to Bitcoin mining but uh you know one one bad actor can can make a bad name for an industry so I think it's incumbent on us to you know develop ways to do things the right way work with industry associations like yourself that do a fantastic job representing the industry talking to communities talking to local regulators and legislature uh legislators um I I do think that you know we have to make sure we're doing things the right way and I think that's by and by far the case uh but you know we can always do better and I just I always like to you know not not place blame on on others but you know kind of internalize and improve ourselves and I you know I think that we can do a little bit better as an industry and and I think you know things ideas you know these are just brainstorming but ideas like you know maybe developing what we've talked about in Alberta is an operator's code of conduct you know having some you know self-imposed uh regulations in terms of you know decibels in terms of noise uh so we're not impacting local communities and that can be something that we can do as an industry we don't have to wait for government to do wise words yeah it's always better to self-regulate than have a regulator who means well but doesn't have the same Nuance come down and bring the hammer absolutely and as you know on the on noise and you've probably been to a bunch of Mines there are ways to reduce noise uh there are ways to do things properly and most minors are already doing it yep yep well Ben this has been a fascinating conversation I kept you longer than uh normal and not longer than I should have I know you've got things to do but thanks for sharing this with our audience um where can they go I'm assuming we just send them to to y'all's website luxurious website to find more about these products yep luxor.tech is where you find more about Luxor if you're interested in learning about our our mining pool or our uh you know newly launched firmware that's going to be coming out if you're interested in just Bitcoin mining content generally uh hash rate index is the place to find that it's our content website and then if you want to learn more about derivatives it's luxor.tech derivatives and you can find me on Twitter at Ben underscore s underscore Harper perfect thanks man yeah thanks so much Lee really appreciate it you want to be part of the future that we are crafting here in Texas join the TBC today hey it's Amy click over here to subscribe click over here for more content and we'll see you next time
2023-01-31 14:59
