Mining for Opportunity: A New Way to Invest in Crypto

Dara and Randy Rivera of FinTEx talk to Jimmy Odom, co-founder of Bit Capital Group, to discuss crypto markets and Qualified Opportunity Zones.

• 2021 is arguably the year of cryptocurrencies going mainstream. But there’s still pushback from legacy financial institutions and a learning curve for consumers.
• Jimmy Odom, co-founder of Bit Capital Group, is confident that crypto is the future of economic growth. His new fund is raising capital to finance cryptocurrency mining and cloud computing businesses in Qualified Opportunity Zones, which allow qualified partners to offset capital gains taxes by investing in underdeveloped areas.
• Jimmy shares his take on the cryptocurrency market and how data compute centers can become regional hubs for economic growth. 

Crypto is so hot right now, you can fry an egg on your digital wallet.

The value of the cryptocurrency market just hit $2 trillion (with Bitcoin accounting for about half of that market capitalization). Ether, the second-largest crypto, is up more than 180% this year so far. 

But currency isn’t the only application that’s been upended by blockchain technology. Industries of all kinds are looking for ways to enhance business operations processes. It’s not hyperbole to say blockchain is accelerating digital transformation around the world. 

The pace of innovation is dizzying both from an economic development point of view and in the realm of computer science, says Jimmy Odom, co-founder of Bit Capital Group.

“This is probably the most exciting time since I’ve been alive –– this technology has provided so many areas of improvement for society and for humanity.”

And just as technology sparks progress, so does Jimmy’s other passion, the Qualified Opportunity Zone (QOZ). He describes QOZs as “economic development tools that allow people to invest in distressed areas, which spurs job creation.” Plus, there are plenty of tax benefits to sweeten the deal.

“This is the most massive program in the history of the U.S. –– bigger than the New Deal. From a structural standpoint, that’s how much impact Opportunity Zones (OZs) have.”

With Bit Capital’s new Opportunity Zone Fund, he hopes to help shape that impact. The fund aims to raise capital to finance cryptocurrency mining and cloud computing businesses in QOZs, beginning with a planned development in rural Washington state.

On this episode of Tech on Reg, I’m joined by guest host Randy Rivera, executive director of FinTEx and co-founder of Keen Advisors, to talk with Jimmy about the current state of the cryptocurrency market, the future of blockchain, and how crypto mining can present new investment opportunities in QOZs.

Zones of genius

Qualified Opportunity Zones exist in thousands of low-income communities in all 50 states, the District of Columbia and five U.S. territories. “Essentially the IRS created an incentive for private investors to fund the development of America,” Jimmy says.

Along with business partner Jimmy Thommes (yes, two Jimmys!) have been working in the crypto space for years. They launched the Bit Capital Opportunity Zone Fund in March 2021 as the very first opportunity zone fund dedicated to developing digital asset/cryptocurrency mining and cloud computing.

The goal is to develop “emergent computational clusters” (essentially, compute data centers) in places that are in need of investment and primed for economic growth. They’re currently raising funds from accredited investors with an initial goal of $50 million for a cluster in East Wenatchee, Washington that will mine cryptocurrency for the funds’ limited partners (aka investors).

Technology and ‘time dilation’

Lately it seems that every day there’s a rollercoaster of headlines (and sometimes volatility) in the crypto space. How does Jimmy stay focused amidst all the twists and turns?

It’s essential to find your “true north,” he says. “My co-founder and I focus holistically around the emergence of a term called proof of work, meaning the evolution of a system that’s based solely on competition. Free markets: That’s it. This is competition.” 

But he has a big-picture view that stretches even beyond capitalism. Jimmy and his team view cryptocurrency, and blockchain technology in general, as an “evolution of societal interaction –– this contract between humans.”

That leads to some fundamental questions: What is money? What is technology? What defines markets? What are economics? How do governments apply those principles? 

And once that’s all sorted out … Where do we go from here? 

That’s why Bit Capital projects “where humanity will end up … and then we jump out ahead,” Jimmy says.

But right now, we’re experiencing “time dilation,” he says, using the movie “Interstellar” as an example.

“As Matthew McConaughey gets closer to a black hole, time changes for him more than it does for everyone on Earth,” Jimmy explains. “His day was equivalent to 20 years back home.”

Likewise, the closer we get to Bitcoin (the center of gravity in this scenario), “time just operates differently,” he says. 

“We’ve been able to see things a lot more clearly, so we just build with that in mind and know that the rest of the society will eventually catch up.”

Overtaking the naysayers

For a long time, both state and federal regulators were silent on crypto (and blockchain too). That’s changing fast.

But change is hard. Banks don’t like it. After all, inertia is the enemy of large financial institutions. Jimmy is wholly unbothered by legacy financiers like Jamie Dimon and Charlie Munger, who are skeptical and even dismissive of crypto.

It’s important to question the motives of those who rail against technological advancements, he says. They range from the mundane (wanting to stay comfortable instead of learning or trying something new) to deep-seated fears of “being usurped” when a company’s (or leader’s) authority wanes over decades or even centuries.

“They want to protect the system they’ve come to dominate,” Jimmy notes. 

It’s all about incentives

As he points out, investors, whether they’re private companies or individuals, can only reap the rewards of these programs after the Opportunity Zones have been developed for a minimum of 10 years. 

The best way to understand Bit Capital Opportunity Zone Fund is as a “long-term incentive program” for community capital –– “in communities where change has not been their friend,” says Jimmy. 

To naysayers who haven’t yet seen the effects of OZs in these communities, he counters by arguing that “that investments have not been flowing in their direction … Remember, only 11% of land in the U.S. is coordinated as an Opportunity Zone tract, determined by each state’s governor, who identifies those underdeveloped areas,” he says. “That’s a very small portion of America.”

And anybody who talks about Opportunity Zones being tax havens is “very short-sighted, and not understanding how investors are deploying capital,” Jimmy adds.

“The alternative was that investors who may have had a capital gains tax benefit could just deploy that capital back into the market immediately. What incentive did they have to invest on the far South Side of Chicago, or rural America?”

For its part, Bit Capital is investing “only in those places that have seen zero economic development, period,” he adds. “What other companies were coming in and partnering with those counties, city councils and residents –– spending $40 million to do a development? It just wasn’t happening.”

That’s what he wants every skeptic to consider –– without effective and appealing incentives, investors invest elsewhere. 

“I challenge you: Show me where their money went over the last 25 years,” he says. “Where was that money going in rural America? Then we can have a conversation about whether we are valuable. Until then, allow us to work. Allow entrepreneurs to create value. Allow us to stimulate the regions of the country that have not experienced this kind of money.”

Three key ways to make economic change

So how does Bit Capital choose opportunity zones in which to invest? 

The key question, says Jimmy, is: “Does a community experience economic growth, development and long-term maturation because of us being there?”

There are three crucial markers they seek to develop, he explains. 

1. Job growth 

“We have to create more jobs in our cycle of deployment than all projects that had been previously activated there,” Jimmy notes. “That’s one of our personal stipulations.”

2. Collaboration

Partnering with communities is crucial, says Jimmy. “It’s a collaborative process.”

He learned that by working at Intersect Illinois, an economic development organization that partners with government and industry to drive statewide innovation and job creation.

“You also can’t have edicts from the legislature determining what success looks like,” he adds.

3. Regional impact

Bit Capital makes sure it will be able to turn a given rural area into what it calls a “computational corridor,” Jimmy explains.  

If you are at the front of an emergent industry, and the industry has not defined –– meaning every day a new evolution takes place –– there’s no boundaries on what you can create,” he says. 

“Imagine a scenario where the underdeveloped region of rural central Central Washington essentially turns into an economic hub, where entrepreneurship surrounds it and the universities are connected to the city councils, private companies and citizens,” Jimmy adds.

“We can create these renewable opportunity structures everywhere across the United States.”

What’s in it for investors? A win-win

So if it’s not a tax haven, what’s the upside of investing in Opportunity Zones –– particularly one with technology like Bit Capital? 

“Our limited partners (LPs) experience massive economic benefits because of this program,” says Jimmy. 

“Their job is to deploy the capital. We partner with the city, the county and the residents. Our technology then fosters economic development for their benefit as well as long-lasting benefits for the communities we serve.”

This article is based on an episode of Tech on Reg, a podcast that explores all things at the intersection of law, technology, and highly regulated industries. Be sure to subscribe for future episodes.