1. BYShawn Tully
2. August 16, 2022, 8:19 PM UTC
3. A man uses a rope to pull a large Bitcoin up the side of a mountain.A man uses a rope to pull a large Bitcoin up the side of a mountain.
4. For many companies, mining Bitcoin no longer means making a profit.
5. Photo illustration by Fortune; original photos by Getty Images
6. Call it the new economics of Bitcoin.
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8. In its earnings release on Aug. 16, Stronghold Digital Mining announced two major strategic shifts designed to blunt the steep fall in Bitcoin prices. First, Stronghold is returning no fewer than two-thirds of its mining machines to the lender that financed them—not unlike the way homeowners in some states can give their house back to the bank in a foreclosure, erasing their mortgage debt in the process. Second, the Pennsylvania outfit now plans to generate the bulk of its revenue not by pursuing its original mission of producing the flagship cryptocurrency, but by selling power—at far fatter margins—to the electrical grid that serves the region’s homes and businesses.
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10. If Bitcoin stays beaten down, we’re likely to see many miners following at least parts of Stronghold’s playbook for survival. In Texas, sundry Bitcoin producers are bucking the crisis by shuttering their data centers and selling unused power to the Lone Star grid, a sideline that makes more money than hatching Bitcoin at current prices. “We’re the first to restructure in a really massive way,” Stronghold CEO Greg Beard told Fortune the day of the earnings announcement. “But many miners don’t have our flexibility to return the machines that are now underwater. Many may not be able to make the payments on those computers, so they’re risking insolvency.”
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12. Stronghold’s unusual Bitcoin mining model
13. Unlike the Texas miners that tap the state grid to run their data centers, Stronghold furnishes its own power. That accounts for the “flexibility“ that Beard referenced. Under a Pennsylvania state environmental program, the company collects piles of waste coal dumped decades ago that scar the countryside, standing in black hills that pollute streams and groundwater. Stronghold burns the black stuff to generate all the electricity that runs its data centers. Those code-churning facilities sit alongside the boilers at two plants, one near Pittsburgh, and the other in the state’s eastern tier, north of Allentown.
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15. Hence, Stronghold’s a rarity as a “vertically integrated” player. Upon going public in October 2021, the miner planned to install enough machines to achieve over four exahash in computing power by the close of this year. At that level, it could turn out around 6,600 Bitcoin a year. And its founders, Beard, former chief of natural resources investments at Apollo Global, and Bill Spence, a refuse coal veteran who oversees operations, harbored a blueprint to grow fast from there.
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17. But the collapse in Bitcoin’s price, from nearly $70,000 late last year to the low-$20,000s since mid-June, upended the plan. (The coin traded at just under $24,000 midday Tuesday.) For the just-announced second quarter, Stronghold logged a net loss of $40 million. Since the IPO, its share price has cratered from $27 to $3.50, in a swoon that mirrors the trajectory of almost all miners, cutting its market cap from $600 million to $72 million.
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19. Sending back the computers
20. Today, the two facilities feature 165 megawatts in capacity. That’s plenty to reach this year’s initial goal of over four exahash and stamp 6,600 Bitcoin. At its price of almost $50,000 in April, Stronghold by Fortune’s estimates would have been posting about $330 million a year in revenue, at superrich margins, had it hit those goals. Stronghold had most of the computers it needed either on-site or on order to reach its big year-end target. But the collapse in Bitcoin prices was so severe that by June, it was running only around one-third of those machines.
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22. Stronghold had borrowed $67 million to amass 26,000 computers of its roughly 40,000 from Nydig, a platform that finances equipment purchases for miners. As a negotiated point, the publicly traded company didn’t guarantee the credit: It was secured only by the equipment. Since mining Bitcoin has turned unprofitable, Stronghold no longer needed the Nydig-backed computers.
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24. “In addition, the market was flooded with machines, and the same ones that carried the $67 million in debt could be bought for less than $50 million,” says Beard. So Stronghold will soon send the machines back to Nydig, and the lender is eliminating the full $67 million in borrowings. That will be a lifeline to Stronghold: The principal amount, plus $10 million in interest, was all due over the next 18 months. Beard further eased the pressure by restructuring a $40 million loan from a second lender, WhiteHawk, that extended its term from a remaining 14 months to three years. WhiteHawk also agreed to provide a line of credit for an extra $20 million.
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26. Stronghold pivots to selling power
27. Stronghold plans to keep running just 15,000 machines for mining Bitcoin. But they’ll absorb only about one-third of the megawatt-hours generated by the two plants. For months, Stronghold has been diverting a huge part of that power for sale to the PJM grid, which covers 13 states, including Pennsylvania and parts of New Jersey and Ohio. Market prices for power have been extremely high versus recent years, in part because the shift to renewables makes supplies much more variable. “It’s a record-high environment,” says Beard.
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29. But a “capacity” agreement with PJM greatly hindered Stronghold’s scope for selling megawatt-hours at those rich “spot” rates. The pact required that the miner provide guaranteed amounts of power to PJM, but capped payments at below where electricity openly traded. Stronghold recently exited the PJM arrangement, leaving it free to capitalize on the hot bidding for megawatt-hours.
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31. The “forward curve” indicating future rates for electricity, says Beard, suggests average prices of around $100 per mwh over the next six months. During the day, when power prices are highest, Stronghold will sell to the grid. But at night, rates can fall by $30 to $40 per mwh. So the company does better in those hours mining Bitcoin. All told, about two-thirds of Stronghold’s electricity for the rest of the year should go to spot sales, assuming the prevailing rates stay around $100. The old model was virtually 100% Bitcoin mining. The balance would improve its margins over the number from just mining Bitcoin 24 hours a day.
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33. “Before we planned all the cutbacks, we were projecting revenue for the next six months at $72 million at $24,000 per Bitcoin,” Beard says. “By switching to selling power, we now expect to hit $63 million, or just $9 million less,” he adds, while generating far lower operating costs.
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35. Indeed, Stronghold’s average cost of power is just $40 per mwh. At $80 per mwh mining Bitcoin, that’s not enough to nearly cover the amortization on all those costly machines. But with the debt way down and most of the computers gone, less mining and more power sales should generate safe, modestly positive cash flow.
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37. For Beard, Stronghold’s ability to generate its own power gives it an edge over rivals in countering the collapse in Bitcoin prices. “We wouldn’t have the guts to unplug 26,000 computers if we couldn’t replace the power they were using by selling our own power as a backup business,” he says. Beard also wants to rebuild the Bitcoin business. “We have 26,000 empty slots for miners that fortunately we aren’t paying for,” he says. “We have the $20 million line of credit, much less leverage, and positive cash flow. We could use that liquidity to buy computers at much cheaper prices than we originally paid. We’re not in a giant hurry. We’ll do it slow and do it right.”
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39. Beard floated another path for Stronghold’s future. “Stronghold could be an acquisition target,” he notes. “If you’re a publicly traded company that has lots of machines and needs a place to plug them in to get bargain power, Stronghold could be the place. And now we’re much more attractive because we’re de-leveraged. Or we could buy someone who has a lot of unused machines, via the deal we can acquire the equipment at the right prices.”
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41. It all adds up to a new chapter in the handbook for living beyond the crypto winter.