Expect a surge in M&A activity following the bitcoin halving: SunnySide Digital CEO

The Bitcoin halving is fast approaching. Sunnyside Digital is a mining infrastructure provider. So I’m curious to get your take on how the key technical event will impact miners. Now. I recently put together a report on the implications on miners and many say they expect consolidation following the halving. I know that you believe there will be a surge in M&A activity within the mining sector this year and next. Why do you think that is? Yeah, I think as the industry matures and we face the economic headwinds of the halving, I think scale is going to matter, efficiency is going to matter. And candidly, as we’re becoming a much more understood sector, free cash flow and profitability is going to matter. It’s not going to be a battle for growth at all costs as we’ve seen to date. I think traditional financial metrics will certainly be much more important for the entire sector. And through that you’ll see the traditional things that industries do is they mature as they typically consolidate where you go from 50 different companies that are in the space down to call it 10 to 20 much larger companies. And I think that’s important for investors to know because that will certainly drive net income, free cash flow and EBITDA, which is likely the three most important metrics for mature companies. For an investor to be looking at the CEOs of publicly traded mining companies we spoke with believe we will see consolidation somewhere between 15 and 30% post having. Do you think that’s a realistic range? I think that’s a very realistic range. I mean we’ve seen recent consolidation with companies like Huday and USBTC Cathedra and the infrastructure company that recently did an RTO. There’s certainly many more rumours in this in the market about additional consolidation. I mean both Marathon, Cleanspark 2 of the largest publicly traded miners have been very vocal about their appetite for acquisition, hunting for new assets. So I think 15 to 30% is very reasonable and conservative for folks to be looking at the space to anticipate. On the secondary side of the market where you have solutions and infrastructure provider companies like Sunnyside Digital. I think that will also be a theme over the next, call it three to four quarters post having. And the reason being is if you’re a large publicly traded miner, you don’t want to be dealing with a mom and pop shop of five to 10 people on a company to be able to provide you services and solutions for the scale that you’re actually operating. Now companies like Core, Marathon, Cleanspark, they’re approaching management of almost a GW of power and to actually manage that and provide services for that, you need to be at scale. And so Sunnyside Digital and other folks in the services sector supporting large scale data center miners, we’ll certainly need to consolidate to be able to provide a the the, the cost of capital to really be helpful to the large scale miners, but also just the breadth of services that they need to be efficient in generating hash rate for the market. Why do you think the upcoming having might defer from past havings and why do you believe it could spark increased institutional interest in Bitcoin? Well, the upcoming halving I think is unique in that we’re actually seeing an incredible amount of development on Bitcoin, the network itself. From a protocol perspective, what that means is typically people have been thinking of Ethereum, Celana and all sorts of other call it base one layer protocols as the place where you can develop smart contract. What we’re now seeing is the development community has shown that Bitcoin as a protocol itself can be the substrate or layer one for smart contract technology for ordinals, which are a type of NFT runes which will actually create a totally new opportunity and use case for the Bitcoin network. So what that means fundamentally is driving real transaction fees to the Bitcoin network, which ultimately will be supportive of Bitcoin miners, but more importantly be much more interesting for the developer community to build on top of. So that is certainly something that has never happened before. The innovations have been happening so fast and we’ve actually seen days where transaction fees have surpassed the block reward, which is what everybody’s focused on with the halving. So that’s a key component that people really need to understand is that as transaction fees surpass the block reward, which is what is impacted by the halving, the Bitcoin network itself and mining as a business becomes much more economically sustainable into the future. Now you touched on this, but in a nutshell, how will the upcoming having affect your business given you are a mining infrastructure provider and how have you been preparing, right? That’s a great question. We’ve actually been working with most of the publicly traded miners to help them with what we call the fleet refresh program as some of the equipment that they’ve been using for the past two to three years becomes not necessarily obsolete, but not as efficient as the new generation coming out. We’re actually working with them to be able to take the computer servers off rack, plug in the new equipment, clean the old equipment, diagnose it, make sure it’s actually in great operational condition and then sell it into the secondary market. Typically into jurisdictions where cost of power is much lower than in North America, but where they can actually use these machines into the foreseeable future. Whereas the, you know, public miners like to have the newest and most efficient hardware being plugged in. So that’s been a huge amount of our business and we’re really fortunate to be working with some of the big public companies to help them with that. And we should have some news in the near term with some of the public players around that this type of program that we’ve launched. And hopefully you’ll come back on Crypto World and you’ll let them know that news when the time comes. Love to, love to thank you. But before founding Sunnyside Digital, you served in several senior positions within the digital mining sector. That includes a role as Senior Vice President of Growth at Core Scientific, which of course filed for Chapter 11 bankruptcy back in December 2022. What was your reaction to that bankruptcy and what did you learn from your time in these roles that ultimately helped you shape your current business? And what did you learn from these bankruptcies, especially in the lead up to the halving great questions. I’ll try to take them on one at a time. The key learning I learned from the court Chapter 11 filing is really about risk management and treasury management. Make sure that you’re not betting the house if you’re over leveraged and making sure you have the ability to pay down your your debt when you need to. And I think the sector itself has has had that very difficult lesson learned now because core Scientific wasn’t the only one. You saw Block Fi, Celsius, compute N, Numerous large scale data center operators were over leveraged, made promises they couldn’t keep and unfortunately went through very structured solvency processes. And and what we’ve seen with core Scientific is that they’ve actually emerged as a stronger, better company. And I’m very long on core scientific to be honest, not just because I was a former employee, but Adam Sullivan’s done a great job in turning that ship around and it’s it’s certainly an undervalued play in the market today in my opinion. What what we’ve actually applied from Sunnyside Digital perspective is that at the end of the day, even if there’s a distressed asset, they need a trusted, reliable partner to help them with asset disposition or asset procurement at the end of the day when they’re in a better position. So we were actually very fortunate to be able to work on several of these solvency cases to help the committees that were formed sell assets into the market to be able to get the cash back to then pay down the debt. So we chop wood every day is the way I look at it. We’re not looking to make the biggest dollars and the biggest deals. We’re looking to be consistent, reliable partner for the large data center operators so that if they ever have a phone call, they know they can call me, my team and get the answer that they need and get the job done. And before I let you go, I want to shift gears for a second. But last month, President Biden unveiled his proposed fiscal year 2025 budget proposal, which included a crypto mining excise tax similar to what was proposed last year, which ultimately wasn’t taken up by Congress. But how do you think this tax could impact miners here in the US? And could it have implications for miners around the world as well? Yeah. Well, I would say that the White House has been very aggressive, particularly spearheaded by Elizabeth Warren, as to how they view digital mining. One has to take a step back and say what’s the difference between an HPC data center and a digital mining data center. Candidly, there isn’t much of a difference going into the future because what we’ve seen with NVIDIA is power densities are approaching digital mining. So what is the, what is the appropriate use of an electron? That’s not a question that Congress should be deciding. That should be decided by the market a a 30% excise tax on digital mining in the United States will essentially be a major death toll death knell for digital mining. And what that would do is it would lose thousands of jobs across the country and force a lot of these large scale data center operators to move to jurisdictions that are much more friendly. And we’ve got a very interesting precedent with what happened with China. The Chinese government tried to shut down mining in in China. What happened? Well, they actually all went abroad. All of that capital left the country. Those jobs left the country. And now what? What’s happened since then? Well, they’ve actually quietly started to reallowing digital mining to occur in China. Because what they’ve come to understand is that digital mining is a net net positive for utilities. It’s a load balancing factor for power generation and the utility sector itself. So the net positives definitely outweigh the power consumption that’s there. Because what’s important is digital mining is a power user of first resort, meaning if you build the power, you have a digital mining partner, they can take the power down when the grid doesn’t need it and then turn off when the grid needs it. And that’s something we’ve seen in Texas with Riot platforms over the last summer where if Ryan had, if Riot hadn’t been the negative battery that it has been, there would have been hundreds of millions of dollars of actual infrastructure expenses that the ratepayers would have to pay, which means higher utility bills for people, not lower. Interesting perspective, that’s cool. Like CEO and founder of Sunnyside Digital, thank you for that comprehensive insight on the upcoming having and the mining sector as a whole. Thank you for the invitation. Appreciate that.