Layer1, a Texas Bitcoin mining startup, is a classic Thiel monopoly investment

“Mining is basically about turning electricity into bitcoins”

— Alex Liegl, founder of Layer1

In October 2019, Peter Thiel invested in another German-born, Stanford Philosophy educated founder, named Alex Liegl. Liegl, along with Jakov Dolic, are the founders of bitcoin mining startup Layer1. The Series A round last fall raised a $50M Series A at a $200M valuation.

Most bitcoin mining takes place in China today. The country accounts for 65% of world Bitcoin hashing power according to the University of Cambridge Centre for Alternative Finance.

Most domestic US mining operations are set up in the Pacific Northwest and upstate New York, because of access to cheap hydro power.

Iceland has attracted mining operations as well because of their cheap geothermal power.

The other advantage of Iceland, Upstate New York, and the Pacific Northwest is the relatively cool climates. This is important to help keep processing rigs in data centers cool. Overheating causes servers and processors to perform less efficiently and break down sooner.

So it would seem very strange that Layer1 would decide to set up shop to mine Bitcoin in West Texas. But they did.

Liegl and Layer1 have recognized that these two vectors — cheap electricity and cooling efficiency — are the 2 biggest drivers of bitcoin mining efficiency today.

“Chips have little differentiation now; cheaper electricity and more efficient cooling is most important.”

Layer1’s solution to the electricity cost side is West Texas wind power, which is among the cheapest in the world. That’s a good start.

But their solution to the cooling side is their secret sauce.

Layer1 houses their mining processor machines in 20' x 8' containers, and fills the containers with a proprietary mineral liquid which keeps them cool (and doesn’t ruin them). Compare this to most data centers and mining centers, which use the aforementiond climate, as well as central cooling and fan-based technology to manage machine temperatures.

The liquid cooling allows Layer1’s processors to work up to twice as fast as those in traditional mining centers. That’s major.

But wait there’s more.

Layer1 has also vertically integrated to produce its own containers and chips, so that supplier price hikes that may vary with the price of Bitcoin (or otherwise) don’t add any risk. Risk mitigation, check.

But this might be the most clever part.

They also gain from having the ability to turn off their operation, and funnel their 100 mw capacity back to the grid during peak times. They have a contract in place that pays them a premium for that option, regardless of whether they have to actually do it or not. Acting as a “price insurer” in this regard takes their effective cost of electricity down to about 10% of what a local Texas consumer pays per unit.

Selling energy back to the grid as an insurer against big spikes in energy prices during peak demand times in summer has yielded Layer1 up to 700% profits.

Cheap electricity, creatively made even cheaper. That helps that key equation Liegl talked about — turning electricity into Bitcoins.

Liegl’s ambition is to grow his West Texas bitcoin mining village capacity from 100 MW to 1 GW. That’s a 1000X increase in capacity. He is considering an IPO to make the scale-up happen faster.

He also dreams of having a nuclear power plant in the future. He said they are continuing to build out their energy trading desk operation to leverage their position as a power plant.

So the power plant element is not only profitable, but an integral part of the long term strategy. It looks like they could have a dominating position in a two sided marketplace.

In 2020, home mining is basically dead, according to Liegl.

“I can’t think of something more irrational at this point. It’s like if I wanted to dig a hole in my backyard and try to get oil out of the ground.”

As anyone who has followed Thiel’s investing career or read his book Zero to One knows, he always aims to invest in monopoly businesses.

By being the most efficient at turning electricity into bitcoins, while making immense profits selling energy back to the grid and scaling up quickly, Layer1 seems poised to be a 1 of 1 business.

It will be interesting to see if the “secret sauce” cooling mineral liquid spreads to other companies and use cases quickly.

A fascinating company, and one to watch going forward.