Call it the new Bitcoin economy.
In its August 16 earnings release, Stronghold Digital Mining announced two major strategic changes intended to mitigate the sharp drop in Bitcoin prices. First, Stronghold returns no less than two-thirds of its mining machinery to the lender who financed it, much like homeowners in some states can return their home to the bank during a foreclosure, thereby erasing their mortgage debt. process. Second, the Pennsylvania team now plans to generate the bulk of its revenue not by continuing its original mission of producing the flagship cryptocurrency, but by selling electricity – at much higher margins – to the grid. electricity supplying homes and businesses in the region.
If Bitcoin remains depressed, we are likely to see many miners follow at least parts of Stronghold’s playbook to survive. In Texas, various miners are weathering the slump by shutting down their data centers and selling unused power to the Lone Star Network, a secondary line that makes more money than Bitcoin’s outbreak at current prices. “We’re the first to really massively restructure,” said Stronghold CEO Greg Beard. Fortune the day of the announcement of the results. “But many miners don’t have our flexibility to return machines that are now underwater. Many may not be able to make payments on these computers, so they risk insolvency.
Stronghold’s Unusual Bitcoin Mining Model
Unlike Texas miners who tap into the state grid to run their data centers, Stronghold provides its own power. This explains the “flexibility” that Beard refers to. As part of a Pennsylvania state environmental program, the company is collecting piles of coal waste dumped decades ago that mark the countryside, rising in black hills that pollute streams and groundwater . Stronghold burns the black stuff to generate all the electricity that runs its data centers. These code churning facilities sit adjacent to the boilers of two plants, one near Pittsburgh and the other in the eastern part of the state, north of Allentown.
Therefore, Stronghold is a rarity as a “vertically integrated” player. When it went public in October 2021, the miner planned to install enough machines to reach more than four exahashes in computing power by the end of this year. At this level, it could yield around 6,600 Bitcoins per year. And its founders, Beard, a former head of natural resources investments at Apollo Global, and Bill Spence, a waste coal veteran who oversees operations, had a plan to grow rapidly from there.
But Bitcoin’s price crash from nearly $70,000 at the end of last year to $20,000 since mid-June upended the plan. (The coin traded at just under $24,000 midday Tuesday.) For the just-reported second quarter, Stronghold reported a net loss of $40 million. Since the IPO, its share price has fallen from $27 to $3.50, in a fade that mirrors the trajectory of nearly every miner, reducing its market capitalization from $600 million to $72 million. .
Today, the two facilities have a capacity of 165 megawatts. That’s a lot to meet this year’s original goal of over four exahashes and buffer 6,600 Bitcoin. At its price of nearly $50,000 in April, Stronghold by Fortune’s estimates would have posted about $330 million in revenue per year, at super rich margins, had it hit those targets. Stronghold had most of the computers it needed either on site or on order to meet its big year-end goal. But the Bitcoin price crash was so severe that by June only about a third of those machines were running.
Stronghold had borrowed $67 million to raise 26,000 of its roughly 40,000 computers from Nydig, a platform that funds the purchase of equipment for miners. As a negotiated point, the listed company did not guarantee the credit: it was only guaranteed by the equipment. Since Bitcoin mining became unprofitable, Stronghold no longer needed Nydig-backed computers.
“Plus, the market was flooded with machines, and the very ones that carried the $67 million in debt could be bought for less than $50 million,” Beard says. Stronghold will therefore soon return the machines to Nydig, and the lender eliminates the entire $67 million loan. It will be a lifeline for Stronghold: the principal amount, plus $10 million in interest, was due over the next 18 months. Beard further eased the pressure by restructuring a $40 million loan with a second lender, WhiteHawk, which extended its term from the remaining 14 months to three years. WhiteHawk also agreed to provide a line of credit for an additional $20 million.
Stronghold pivots to selling power
Stronghold plans to continue operating just 15,000 bitcoin mining machines. But they will only absorb about a third of the megawatt hours generated by the two plants. For months, Stronghold diverted much of that electricity to sell to the PJM grid, which spans 13 states, including Pennsylvania and parts of New Jersey and Ohio. Market prices for electricity have been extremely high compared to recent years, in part because the shift to renewables is making supplies much more variable. “It’s a record environment,” Beard says.
But a “capacity” deal with PJM has significantly hampered Stronghold’s ability to sell megawatt-hours at those rich “spot” rates. The pact required the miner to provide guaranteed amounts of electricity to PJM, but capped payments below where electricity was openly traded. Stronghold recently exited the PJM arrangement, leaving it free to capitalize on hot megawatt-hour auctions.
The “forward curve” showing future electricity prices, Beard says, suggests average prices of around $100 per MWh over the next six months. During the day, when electricity prices are highest, Stronghold will sell to the grid. But at night, rates can drop by $30 to $40 per mwh. Thus, the company does better during these bitcoin mining hours. In total, about two-thirds of Stronghold’s power for the rest of the year is expected to go to spot sales, assuming prevailing rates stay around $100. The old model was virtually 100% Bitcoin mining. Equipoise would improve its margins compared to the number coming from 24-hour Bitcoin mining.
“Before planning all the cuts, we were forecasting revenue for the next six months at $72 million at $24,000 per bitcoin,” says Beard. “Moving into selling power, we now expect to be $63 million, just $9 million lower,” he adds, while generating much lower operating costs.
Indeed, the average cost of electricity in Stronghold is only $40 per mwh. At $80 per mwh of bitcoin mining, that’s not nearly enough to cover the depreciation of all those expensive machines. But with the debt down and most computers gone, less mining and more power sales should generate safe, slightly positive cash flow.
For Beard, Stronghold’s ability to generate its own energy gives it an edge over its rivals in countering the Bitcoin price crash. “We wouldn’t have the guts to unplug 26,000 computers if we couldn’t replace the electricity they use by selling our own electricity as a backup business,” he says. Beard also wants to rebuild the Bitcoin business. “We have 26,000 empty slots for minors that we thankfully don’t pay for,” he says. “We have the $20 million line of credit, much less leverage and positive cash flow. We could use this cash to purchase computers at prices far below what we originally paid. We are in no rush. We’re going to do it slowly and do it right.
Beard paved another path for the future of Stronghold. “Stronghold could be an acquisition target,” he notes. “If you’re a publicly traded company with lots of machines and need somewhere to plug them in to get a good deal, Stronghold might be the place to be. And now we are much more attractive because we are out of debt. Or we could buy someone who has a lot of idle machinery, through the deal we can acquire the equipment at the right price.
This all adds up to a new chapter in the playbook for living beyond the crypto winter.