Call it the new economics of Bitcoin.
In its earnings release on August 16th, Stronghold Digital Mining announced two major strategy changes designed to blunt the sharp decline in Bitcoin prices. First, Stronghold is paying back less than two-thirds of its mining proceeds to lenders—not the same way homeowners are paying their homes back to the bank, but canceling their mortgages in the process. Second, the Pennsylvania outfit now plans to generate most of its revenue, not by following its original mission of producing the original cryptocurrency, but by selling power — at a very thick margin — to the electricity grid that serves the region’s homes and businesses.
If Bitcoin continues to take a hit, we’ll see more miners follow Stronghold’s playbook, at least for survival. In Texas, various miners are bracing for the crisis by shutting down their data centers and selling unused power to Lone Star Grid. “We’re the first to really restructure in a massive way,” said Stronghold CEO Greg Beard. Chance Income notification date. “But many miners don’t have our flexibility to restore machines that are now underwater. Many cannot make the payment on those computers, so they are facing losses.
The strongest unconventional Bitcoin mining model
Unlike Texas miners who tap into the state’s grid to run their data centers, Stronghold supplies its own power. That shows the “flexibility” that Beard mentions. Under the Pennsylvania State Environmental Protection Program, the company collects decades of waste coal left behind that scar the countryside, standing on black hills that pollute streams and groundwater. The energy burns dark matter to generate the electricity that drives the data centers. Those cod hatching facilities, along with the boilers, are housed in two plants, one near Pittsburgh and the other on the state’s eastern tier north of Allentown.
Therefore, Stronghold is rare as a “vertically integrated” player. In the year Going public in October 2021, the miner plans to install enough machines to achieve more than four times the computing power by the end of this year. At that level, it can be converted to 6,600 Bitcoin per year. And its founders, Beard, the former head of Apollo Global Natural Resources Investments and coal veteran Bill Spence, who oversees operations, had plans to grow quickly from there.
But the fall in Bitcoin’s price from nearly $70,000 at the end of last year to nearly $20,000 since mid-June has upended the plan. (The coin traded below $24,000 on Tuesday.) For the second quarter, Stronghold posted a net loss of $40 million. Since the IPO, the share price has risen from $27 to $3.50, reflecting the appearance of all miners, reducing its market cap from $600 million to $72 million.
Sending the computers back
Today, the two facilities have a combined capacity of 165 MW. That’s more than four exahash and 6,600 Bitcoin stamp to reach this year’s first goal. In April at a cost of nearly $50,000, Stronghold by luck’Estimates are that if it hits those goals, it would post about $330 million in annual revenue with superrich margins. Stronghold had most of the computers it needed on site or was about to hit its big year-end target. But the fall in Bitcoin’s price was so severe that by June only a third of those machines were operating.
Stronghold borrowed $67 million to assemble about 26,000 computers. As a point of negotiation, the publicly traded company has not confirmed the credit: it is only secured by the instrument. Because Bitcoin mining is no longer profitable, Stronghold no longer requires computers powered by Nidig.
“Also, the market was flooded with machines, and those who were carrying $67 million in debt could buy them for less than $50 million,” says Beard. So Stronghold will soon ship the machines to Niedig, and the lender will write off the entire $67 million loan. That will be a lifeline for Stronghold: The principal, along with $10 million in interest, must all be repaid within the next 18 months. Beard eased the pressure by restructuring a $40 million loan from second-tier lender Whitehawk, extending the term from 14 months to three years. Whitehawk also agreed to provide an additional line of credit for $20 million.
Strong poles for selling power
Stronghold plans to operate only 15,000 machines to mine Bitcoin. But they consume only about a third of the megawatt-hours generated by the two plants. For months, Stronghold has been circling the PJM grid for sale, including 13 states, Pennsylvania and parts of New Jersey and Ohio. Energy market prices were significantly higher than in recent years, in part because the transition to renewables makes supplies more volatile. “This is a high-class environment,” Beard said.
But the “capacity” deal with PJM severely limited Stronghold’s scope for selling megawatt-hours at those lucrative “spot” prices. The deal calls for the miner to supply PJM with a guaranteed amount of power, but caps fees below what electricity is openly traded for. Stronghold recently withdrew from the PJM arrangement, freeing it up to use in a heated auction for megawatt hours.
The “forward curve,” which refers to the future cost of electricity, will average about $100 per MWh over the next six months, says Beard. During the day, when power prices are high, Stronghold sells to the grid. But at night, prices can drop to $30 to $40 per mwh. So the company does better in mining Bitcoin during those hours. All told, two-thirds of Stronghold’s electricity output for the rest of the year should go to sales, assuming prices stay around $100. The old model was 100% Bitcoin mining. The balance updates the margin on the bitcoin mining number 24 hours a day.
In fact, Stronghold’s average energy cost is only $40 per mwh. At $80 a month Bitcoin mining, that’s not nearly enough to cover the fees on all those expensive machines. But with the debt down and most of the computers gone, less mining and more power sales should create a safe, modestly positive cash flow.
For Beard, Stronghold’s ability to generate its own power gives it an edge over its rivals in fending off a fall in bitcoin’s price. “We wouldn’t have the guts to unplug 26,000 computers if we couldn’t replace the power they use by selling our own power as a backup business,” he said. Beard wants to rebuild the Bitcoin business. “We have 26,000 empty spaces that we are not paying for,” he said. “We have a $20 million line of credit, very low leverage and positive cash flow. We can use that liquidity to buy computers at a cheaper price than we originally paid. We are in no rush. We do it slowly and precisely.
Beard floated another way forward to the Stronghold. “Strength can be a buying target,” he commented. If you’re a publicly traded company with a lot of machines and need a place to plug in for bargaining power, Stronghold might be the place. And now that we’re useless, we’ll be even more attractive. Or we can buy someone who has a lot of unused machines, with a deal we can get the equipment at the right price.
All this adds up to a new chapter in the guide to surviving beyond the crypto winter.
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