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Bitcoin mining is less profitable than selling power for Stronghold Digital

Call it the new economics of Bitcoin.

In its August 16 earnings call, Stronghold Digital Mining announced two major strategic shifts designed to slow down the Bitcoin price plunge. First, Stronghold has returned at least two-thirds of his mining machines back to the original lenders. This is similar to how homeowners in some states hand their homes back to the bank during a foreclosure, eliminating mortgage debt in the process. Second, Pennsylvania companies are now operating not by pursuing their original mission of producing a flagship cryptocurrency, but by selling electricity to the grid that serves local homes and businesses. We plan to generate the majority of our revenue.

If Bitcoin remains beaten, many miners may survive following at least some of Stronghold’s strategies. In Texas, various miners are battling the crisis by closing data centers and selling unused power to Lone Star Grid. “We’re the first company to do a restructuring in a truly massive way,” said Stronghold CEO Greg Beard. luck The date of announcement of financial results. “But many miners do not have the flexibility to return the machines that are currently in the water. Many risk bankruptcy as they may not be able to make payments on these computers. are exposed to.”

Stronghold’s Unusual Bitcoin Mining Model

Unlike Texas miners who utilize the state grid to run their data centers, Stronghold provides its own power. This explains the “flexibility” that Beard referred to. Under Pennsylvania’s environmental program, the company collects piles of coal that were dumped decades ago, damaging the black hill-standing countryside that pollutes streams and groundwater. Stronghold burns the black stuff to generate all the power that drives the data center. These cord churning facilities are installed alongside the boilers of the two plants. One is near Pittsburgh and the other is in the eastern part of the state, north of Allentown.

Stronghold is therefore a rare “vertically integrated” player. The miner, which went public in October 2021, had planned to install enough machines to achieve more than 4 exahash of computing power by the end of this year. At that level, it could be around 6,600 bitcoins per year. And its founders, Beard, former head of natural resource investments at Apollo Global, and Bill Spence, a scrap coal veteran and business overseer, set the blueprint for rapid growth from there. I was holding

However, that plan was thwarted when the price of Bitcoin fell from around $70,000 late last year to the low $20,000s since mid-June. (The coin traded at just under $24,000 for him at noon on Tuesday.) In the just-released second quarter, Stronghold posted his $40 million net loss. Since the IPO, the stock has plummeted from $27 to $3.50, mirroring the trajectory of nearly every miner, taking the market cap down from $600 million to $72 million.

return of computer

The two facilities currently have a capacity of 165 megawatts. This is enough to reach his first goal of the year to stamp his 6,600 bitcoins past 4 exahash.Stronghold went on sale in April at a price of about $50,000. luck’estimates would have made about $330 million a year in revenue. Stronghold had most of the computers needed to meet their big year-end goals on-site or on-site. However, the Bitcoin price drop was so severe that by June only about a third of those machines were in operation.

Stronghold borrowed $67 million from Nydig, a platform that finances equipment purchases for miners, to assemble 26,000 of its roughly 40,000 computers. As a point of negotiation, the listed company did not guarantee the credit, but secured only the facilities. With bitcoin mining becoming unprofitable, Stronghold no longer needs his Nydig-backed computer.

“Additionally, the market was flooded with machines, and the same machine that had $67 million in debt could now be bought for less than $50 million,” says Beard. So Stronghold immediately sends the machine back to Nydig, and the lender cancels all his $67 million debt. This will be a lifeline for Stronghold. The principal and interest on his $10 million were all due within the next 18 months. Beard eased the pressure further by restructuring his $40 million loan from his second lender, WhiteHawk, extending the term from his remaining 14 months to three years. Did. WhiteHawk also agreed to provide an additional line of credit of $20 million.

Shifting bases to sales force

Stronghold plans to keep 15,000 machines running for Bitcoin mining. However, it can only absorb about a third of the megawatt-hours produced by the two power plants. For months, Stronghold has diverted most of its electricity to the PJM grid, which covers 13 states, including parts of Pennsylvania, New Jersey and Ohio. The market price of electricity is much higher than in recent years as the transition to renewable energy makes supply more volatile. “It’s the best environment ever,” he says Beard.

However, “capacity” deals with PJM have significantly hampered the extent to which Stronghold sells megawatt-hours at these generous “spot” rates. The agreement required the miner to provide a guaranteed amount of power to his PJM, but if the power was openly traded, payments were limited to: Stronghold recently ended its PJM arrangement, freeing up hot bids for megawatt-hours.

According to Beard, the “forward curve” of future prices for electricity suggests an average price of about $100 per mWh over the next six months. During the day when electricity prices are highest, Stronghold sells to the grid. However, at night, rates can drop to $30-$40 per mWh. As such, the company is doing better during the hours it is mining Bitcoin. Overall, assuming current rates stay around $100, about two-thirds of Stronghold’s electricity for the rest of the year should go into spot sales. The old model was virtually 100% bitcoin mining. The balance improves margins more than the numbers he just mines Bitcoin 24 hours a day.

In fact, Stronghold’s average power cost is just $40 per mWh. $80 per mWh of bitcoin mined is not nearly enough to cover the amortization of all expensive machines. However, with less debt and most computers gone, less mining and more electricity sales should generate safe and moderately positive cash flow.

For Beard, Stronghold’s ability to generate its own power gives it an edge over its rivals in combating a Bitcoin price collapse. “I wouldn’t have had the courage to unplug 26,000 computers and sell their own power as a backup his business to replace the power they were using,” he says. Beard also wants to rebuild the Bitcoin business. “He has 26,000 open slots for miners, but luckily he doesn’t pay for them,” he says. “We have a $20 million line of credit, much less leverage and positive cash flow. We can use that liquidity to buy a computer for much less than we originally paid. No. We do it right slowly.”

Beard has taken a different path for Stronghold’s future. “Stronghold could be an acquisition target,” he notes. “If you’re a public company and you have a lot of machines and you need a place to hook them up to get a bargain, Stronghold could be the place. And now it’s deleveraged. Or you can buy someone who has a lot of unused machines, and you can get equipment for a good price through a deal.”

All of this makes for a new chapter in our handbook for living through the crypto winter.

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