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Tuesday, May 24, 2022

A Crypto Cluster Emerging in OC

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A small office in the Irvine Spectrum is where Fred Thiel—the chief executive of Marathon Digital Holdings, one of the hottest companies in the cryptocurrency industry with a $1.7 billion valuation—works.

A few miles away in Costa Mesa is the office of Jason Les, CEO of Riot Blockchain Inc., another booming bitcoin miner with a valuation near $1.2 billion as of last week.

“Riot and Marathon are two of the biggest miners in the world—it’s pretty cool from an Orange County standpoint that the CEOs of both companies are here,” Les told the Business Journal. “I’m a big fan of Costa Mesa and Orange County.”

They aren’t alone. A number of top cryptocurrency executives are quietly working locally, while their companies are headquartered in states like Nevada, Texas, Florida and Colorado.

In March, the Business Journal reported on the move from Long Beach to Irvine of iTrust Capital Inc., which touts itself as the world’s largest crypto IRA investment platform, and Digital Portfolio Advisors, a bitcoin investment fund started a few months ago by Newport Beach’s Miramontes Capital.

Those two aren’t alone: the area also counts executives who are not only building companies worth billions of dollars, they are also constructing huge power plants and evangelizing about the value of cryptocurrency everywhere from meetups in local bars to the Andean mountains of Peru.

“In Orange County, you have a lot of entrepreneurs who have been successful in other businesses who see the opportunity in blockchain, bitcoin and crypto generally,” Thiel said. “They’ve started businesses or have been recruited to run businesses.”

The following are snapshot profiles on some notable cypto executives based in Orange County.

Marathon Digital: Improving Financial Systems’ Efficiency

Fred Thiel has been working in Orange County technology circles for almost 30 years, including as CEO of Irvine-based Lantronix Inc. from 1998 to 2002 and spending more than a decade looking at companies promoted by Octane, Orange County’s main medtech and technology incubator.

The son of bankers, the CEO of Marathon Digital Holdings Inc. first became interested in cryptocurrency about a decade ago.

“I grew up on a diet of corporate finance and the regulatory framework,” he said. “With my technology background, I understood that systems are all about becoming more efficient. Financial systems are very inefficient.”

Even today, the financial systems are inefficient, such as wire transfers or stock trades that take three days to clear, he says.

“The ability to use blockchain to have instantaneous settlement was very attractive,” he said. “Blockchain promised huge efficiency gains in the financial markets. That tickled my interest.”

He says it’s very difficult for scamsters to steal cryptocurrency, and predicted ransomware will become obsolete.

“You’d need the equivalent computing power as the number of atoms in the Milky Way to try and hack it. That power doesn’t exist on the planet today.”

Thieves nowadays steal bitcoin by getting keys to wallets, what Thiel calls the “on-ramps and off-ramps.”

“I’ve always felt the bitcoin blockchain was the most secure transaction system on the planet, more so than most banks.”

A personal friend of Thiel’s became CEO of Marathon’s predecessor, and Thiel joined the board to help it recapitalize.

“In 2017, it had a negative net worth. We raised over $500 million in 2020 through public offerings,” said Thiel, who became CEO in 2021. “We went from being a tiny little miner to becoming one of the largest in the world.”

The publicly traded company (Nasdaq: MARA) reported revenue soared 3,353% to $150.4 million in 2021. It projects almost a $1 billion run rate next year.

Cryptocurrencies have a promising future like the internet did in 1995, Thiel said. However, unlike the internet where the underlying technology was free, a company can own foundational parts of cryptocurrencies, he said.

As of Feb. 28, Marathon held approximately 8,956 bitcoin, with each one valued at $43,193, or $386.8 million altogether.

He only has 15 employees and subcontracts the remaining work to third party hosting companies and power companies.

“We operate a different model than most companies in our space,” Thiel said.

The company, which lists its headquarters as Las Vegas, had a market cap of $1.7 billion last week.

“It hit a peak of $8 billion last November,” noted Thiel, a Dana Point resident. “We’re the fourth or fifth largest holder of bitcoin in the U.S.”

OC Bitcoin Network: Industry Evangelist

Brian Harrington in 2015 heard about bitcoin and decided to stick his toe in the water with a $50 investment that doubled.

“It was just a fun thing to do,” he recalled. “As time went on, I watched more videos and then started to see it as an alternative investment.”

Nowadays, he’s one of the county’s best-known evangelizers as the organizer of the OC Bitcoin Network, which has about 1,300 members and holds weekly meetings at restaurants in cities such as Costa Mesa and Anaheim.

“It’s definitely a social club,” he said. “Bitcoin is a grassroots movement. We’re passionate about helping people. Bitcoin is a better way of doing money. It’s the only cryptocurrency veritably not control by any entity.”

He works full time at Choice by KT, which advocates investing in Bitcoin in tax deferred investment accounts.

Lancium: $150M Raised for Mines

Michael McNamara, a resident of Newport Beach, in 2017 co-founded data center Lancium LLC, which is based in The Woodlands, a town 30 miles north of Houston.

Lancium uses computing to solve problems of overcapacity in energy generation, saying its computing power is up to 90% cheaper than other cloud providers. Lancium says it can increase demand in as little as five seconds to bitcoin miners, or if systemwide demand rises such as a heat wave, Lancium can also shut down quickly.

McNamara’s LinkedIn page says he was awarded three patents in 2019 regarding workloads and distributed power in data centers.

Last November, the company announced it raised $150 million to build bitcoin mines across Texas that will run on renewable energy. The funding round was led by clean energy company Hanwha Solutions, along with other power companies, Lancium said.

“We have an ambitious growth strategy with over 2,000 MW of capacity in development across our Clean Campuses, and significant capacity expected to come online in the year ahead,” McNamara said in a statement.

Riot Blockchain: UCI Degree Put to Use

Jason Les, who was born and raised in Orange County and whose father owns a shopping center in Costa Mesa, learned he was very good at poker, and played it professionally from 2004 to 2018.

“I discovered I could make a lot more money doing that, and I became one of the best in the world” at poker, he said.

While playing poker, he discovered bitcoin as a great way to move money around the world quickly and without government involvement.

Les says he understood bitcoin’s technology thanks to his 2010 degree in computer science from the University of California, Irvine.

In 2017, he joined an advisory board at Riot Blockchain Inc. (Nasdaq: RIOT), then later its board of directors. Last year, he became Riot’s CEO.

Now with a $1.2 billion market cap, its official headquarters are in Castle Rock, Colo., where 53% of its 335 employees work. The other 44% of its employees are based in Texas. After Les became CEO, he opened an office in Costa Mesa, which has about 10 employees and is growing, he said.

Riot’s revenue increased eighteenfold from $12.1 million in 2020 to $213.2 million in 2021. It reported adjusted EBITDA of $82.4 million. It has $312 million in cash on hand.

It says it owns North America’s largest bitcoin mining facility—capable of 750 megawatts—on 100 acres in Rockdale, Texas.

On April 27, the firm announced it would build another facility capable of up to 1 gigawatt in Navarro County, Texas.

The company got a big boost last year when China banned bitcoin mining, where it had an estimated 50% global share. As a result, the U.S.’s global share of bitcoin mining went from 7% to about 30%-40%, Les said.

“I’m not interested in poker anymore,” Les said. “I believe bitcoin is the future. I want to devote my entire life to the study of bitcoin.”

Motiv: Latin American Education

As part of a ministry, Laguna Beach resident Rich Swisher traveled to a remote village high in the Andean mountains of Peru to build a playground for children.

He saw many poor children suffered malnutrition and didn’t have access to shoes, which led to illnesses. When he sought donations, one anonymous offer was in bitcoin, which he didn’t know much about, but began studying it. He knew a vast number of poor Peruvians didn’t have identity records such as birth certificates and had no access to financial tools like banks.

“Bitcoin beat the banking system hands down,” Swisher said.

He decided to team with a Romanian he met in Peru, Vali Popescu, to co-found Motiv, a non-governmental organization (NGO) based in Orange County, to educate people by teaching them entrepreneurship with bitcoin as the medium of exchange. He took “the best program in the world” at the Massachusetts Institute of Technology, which he called the home of blockchain.

Swisher has plans to expand the service to other parts of Latin America. He estimated that his NGO, which has more than $5 million in assets and 40 employees, has helped 60,000 or more people use bitcoin.

“We empower them—getting them to believe they can operate on their own,” Swisher said. “The trick is getting them convinced that they are capable. It emancipates them.”

US Bitcoin: Mining Facility Firm Expands

Newport Beach resident Joel Block says he became interested in cryptocurrencies because of his experience in financial markets, including a stint as a vice president in institutional fixed income sales at Credit Suisse, and as the CEO of school advisory firm Collegewise.

“I was genuinely curious about the rise of an asset class,” he told the Business Journal.

From prior ventures, he knew Mike Ho and Asher Genoot, the two co-founders of US Bitcoin Corp. and decided to invest in their company. Genoot, who was born and raised in Orange County, now lives in the Miami area where US Bitcoin is headquartered.

US Bitcoin builds and operates some of the largest bitcoin mining facilities in North America, securing a large pipeline of bitcoin miners and power in development throughout the remainder of 2022.

Last year, Block joined as CFO and a managing director.

“In 12 months, we’ve rapidly scaled to over 1% of global market share for bitcoin hash rate,” Block said, referring to the number of calculations a miner can perform in a second as it works to solve the block (see glossary, this page). “It shows our increasing bitcoin production.”

Its board members and advisers include Stanley O’Neal, former CEO of Merrill Lynch, and Jordan Levy, founder and managing partner of Softbank New York. Other investors include Peter Thiel, who is an investor in Costa Mesa defense contractor Anduril Industries, and Justin Mateen, co-founder of Tinder.

“The talent pool in our organization is top notch,” Block said. “They are smart and talented people.”

National Bitcoin ATM: 900+ Machines and Growing

When Cailen Sullivan worked almost a decade ago at Coinbase Global Inc., a cryptocurrency exchange platform, he witnessed the launch of the first bitcoin ATM in Canada, generating $1 million a month.

“I knew the margins because I worked in Coinbase’s back office,” he recalled. “I thought ‘what the hell am I doing?’”

In 2016, he co-founded Westcliff Technologies Inc. along with CEO Andrew Jasco; the pair had met at the Westcliff Plaza center that straddles Newport Beach and Costa Mesa. They both invested $3,000 each.

Westcliff called their brand “National Bitcoin ATM” and began installing machines around the country.

He said ATM is a misnomer because about 99% of the users put cash into the machines rather than take it out.

“It’s like a digital vending machine more than an ATM, but the term Bitcoin ATM stuck,” Sullivan said.

When the pair initially tried to install their machines, retail store owners were reluctant for fear of cannibalizing their ATM sales.

“We told them that we’re going to boost your ATM sales because people are going to take cash out, walk 2 feet over to our machines and stick cash in,” he said. “Once that clicked for store owners, machines just exploded.”

Users can insert anywhere from $20 to $15,000 into the machine to buy bitcoins; credit cards are not yet accepted. Westcliff collects 5% to 30% of the size of the transaction. The company is starting another unit, Clearblock, a brokerage desk for individuals who want to place larger orders greater than $15,000 and settle via wire transfer.

Westcliff’s 900-plus machines in 26 states generated about $120 million in sales last year, he said.

“It’s become a very real business,” Sullivan said. “It’s one of the largest Bitcoin ATM networks in the world.”

The Bitcoin Glossary

A deck on Riot Blockchain Inc.’s website provides the following definitions:

Block: A file that contains a “permanent” record of transactions.

Blockchain: A system in which a record of transactions made in bitcoin or another cryptocurrency is maintained across several computers that are linked in a peer-to-peer network.

Bitcoin (BTC): A type of digital currency in which a record of transactions is maintained and new units of currency are generated by the computational solutions of mathematical problems. It operates independently of a central bank.

Mining: The processing of transactions in the digital currency system, in which the records of current bitcoin transactions, known as blocks, are added to the record of past transactions, known as the blockchain.

Hash rate: The measure of a miner’s performance; the number of calculations a miner can perform in 1 second as it works to solve the block

Block reward: The amount of bitcoin awarded for successfully mining/verifying a block.

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Peter J. Brennan
Peter J. Brennan
Peter J. Brennan has been a journalist for 40 years. He spent a decade in Latin America covering wars, narcotic traffickers, earthquakes, and business. His resume includes 15 years at Bloomberg News where his headlines and articles sometimes moved the market caps of companies he covered by hundreds of millions of dollars. His articles have been published worldwide, including the New York Times and the Washington Post; he's appeared on CNN, CBC, BBC, and Bloomberg TV. He was awarded a Kiplinger Fellowship at The Ohio State University.

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