Constant dollars

How Riot Blockchain took advantage of a hot summer in Texas to make more money selling than mining crypto

On August 3, Riot Blockchain – one of the largest Bitcoin miners in the world – released an operations update for July that featured a stunning result: Riot generated the same or more money. do not produce coins as by minting its commodity.

It was a tough time for Bitcoin. But it didn’t look like Riot’s banner performance. The price of the flagship token had fallen from over $40,000 in April to hover in the $20,000 range for most of July. You would think that this fall would have hammered Riot’s revenue. But that’s not the case: Riot benefited from what is effectively a second backup company that doubled its sales from what it released by making its own Bitcoin – the same result as if Bitcoin was still selling for $40,000! This lucrative side business involves cutting production and getting paid to free up “backup” power to stabilize Texas’ famously tense grid. Among the rich benefits: reselling that liberated electricity to the grid at prices so high that during off-hours miners can earn multiples of the money hawking megawatts they would get from minting coins.

Here’s how the process worked for Riot in July. Under a scheme called “price response” administered by ERCOT, the agency that manages the flow of electricity for Texas, Riot and fellow miners can choose to shut down and reroute their freed-up megawatts back to the grid at the “spot” or at market prices. In July, a heatwave scorched the Lone Star State, forming a “dome” that calmed the air above the wind farms that provide a huge chunk of the state’s energy. At the same time, electricity consumption soared to all-time highs as Texans ramped up their air conditioning units. For many hours, spot prices soared so high that Riot was able to sell power to Ercot for 50 times or more the low fixed price it was paying for the juice to generate Bitcoin.

Riot and other producers also pull dollars from no less than three other Texas “demand response” plans that pay to reduce power in emergencies or reduce its transmission costs. By darkening its data centers for thousands of hours this summer, Riot pocketed a bonanza from these programs that generously reward miners for providing backup power that helps keep the network running smoothly.

Due to the shutdowns, Riot only produced 318 bitcoins in July, a fifth less than the 402 it would have produced at full throttle. Thus, the revenue from the Bitcoin that Riot produces for its own account amounted to $6.9 million at the average price of the signature cryptocurrency of $21,634. But Riot received a lot more dollars by shutting down. Demand-response programs brought a windfall via $9.5 million in “electricity credits,” payments that reduce the cost of electricity that makes up the vast majority of its gross mining bill. Riot does not specify which “demand response” programs won the credits. But Lucas Pipes, a B. Riley analyst, believes reselling megawatts to the grid at those big spot rates under “price response” accounts for most of the gains.

In those 31 days, Riot got that extra cash to shut down production for 11,717 megawatt hours, or about 14% of its typical running time. In total, between its Bitcoin production and energy sales, Riot recorded revenue of $16.4 million for July. Keep in mind that Riot also sacrificed Bitcoin production in exchange for selling power. If Riot had been pumping 24/7 and hatching those extra 84 Bitcoins, it would have raised $8.7 million from mining instead of the $6.9 million it raised. . So, by shutting down and diverting power instead, Riot recorded a net gain of $8.1 million (the $16.4 million it earned minus the $8.7 it would have obtained by not selling electricity and only making Bitcoin), i.e. more than 90%.

Indeed, the $8.1 million increase in electricity sales equates to $964 for each of the 84 Bitcoins lost. That’s 42% above its all-time high of around $680. From another perspective, his total revenue of $16.4 million for the month fetches an average price of $40,700 per coin based on the 402 he would have made. without the closures. Put simply, by producing less and selling power at huge prices instead, Riot (ticker: RIOT, $1.3 billion market cap) effectively reaped twice the price per coin, based on of his potential production, than if he had hit at full capacity. Everything is big in Texas, including ten-gallon hats full of dollars to power off its bitcoin-enabled programs handed out to miners.

Texas is now the bitcoin capital of the world and its programs largely benefit miners

Although the July stun demonstrates just how much the Texas energy system can increase profitability, the extra dollars earned are deceptively small compared to what Riot and other miners can reap in the future. Riot is leading a crypto rush that is making Texas the Bitcoin mining capital of the world. Much of the state’s appeal is based on various programs that make miners a lot of money on top of producing Bitcoin, in exchange for transferring power to help stabilize the network. The recent drop in Bitcoin prices makes these demand response bonuses much more valuable to miners. The more Bitcoin slides, the more hours spent putting megawatts on the market generates higher revenue than Bitcoin minting – giving miners a great way to diversify, the wonder we just witnessed at Riot.

Much of Riot’s production was recently halted due to disruptions related to its giant expansion initiative at its Whinstone factory north of Austin. This data center is believed to reign as the largest mining center in North America. In July, Whinstone’s “self-mining” capacity, production for its own account as opposed to paid “hosting” for outside customers who provide their own equipment, was about 110 megawatts. Early next year, Riot expects that internal scale to triple to 350mw as part of a goal to reach a total capacity, including hosting, of 750 megawatts.

Riot is also building a second, even more gargantuan $333 million facility on a 265-acre site in Corsicana north of Dallas. Scheduled to open in July next year, Corsicana will overtake Whinstone at a size of one gigawatt or 1000 megawatts. Today, the University of Cambridge puts the global grid at 10 gigawatts. If this number remains constant, Riot alone would control 17% of all global Bitcoin capacity by mid-2023. Many of the biggest names in Bitcoin are homesteads as longhorns. Private company Bitdeer, controlled by crypto pioneer Jihan Wu of China, operates a giant, repurposed former Alcoa factory opposite Whinstone. Core Scientific (CORZ; market cap: $1.1 billion) is building a new 300 mW data center in Denton, north of Dallas-Ft Worth, slated for completion in December. In May, London-based Argo Blockchain (NASDAQ:ARBK, market cap: $300m) began production at its 200MW Helios center on a 320-acre plot in North Texas near Lubbock. Argo also disclosed plans to add 600 MW of generation in the coming years.

ERCOT predicts that total capacity in Texas could reach well over six gigawatts in 2023. Of course, the global scale of mining could well exceed the current 10 gigawatts if the price of Bitcoin rebounds strongly. But if mining activity remains near today’s levels, Texas would welcome something like half or more of the global bitcoin industry in less than a year and a half from today.

In this time of falling Bitcoin prices, the Lone Star State’s mega-bucks miner programs are rewarding miners like the boom times never end.

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