On August 3, Riot Blockchain – one of the world’s largest Bitcoin miners – released an update on its operations for July that produced an astonishing result: Riot generated as much or more money not produce coins as by embossing the staple product.
It was a tough time for Bitcoin. But it didn’t look that way from Riot’s banner performance. The flagship token’s price had fallen from over $40,000 in April to hovering in the low $20,000s for most of July. You’d think the fall would have hammered Riot’s revenue. But not so: Riot profited from what is actually a second backup business that doubled the sales of what it posted and made its own Bitcoin – the same result as if Bitcoin was still selling for $40,000! The lucrative sideline consists of reducing production and getting paid to free up “standby” power to stabilize the notoriously stressed Texas grid. Among the rich benefits: selling the freed-up electricity back into the grid at such super-high prices that during the shutdown hours, miners can make more money buying megawatts that they mint coins.
Here’s how the process worked for Riot in July. Under a regime called “price response” administered by ERCOT, the agency that manages the flow of electricity for Texas, Riot and other miners can choose to shut down and rechannel their freed-up megawatts to the grid at “spot” or market prices. In July, a heat wave scorched the Lone Star State, forming a “dome” that stilled the air over the wind farms that supply much of the state’s energy. At the same time, electric use hit all-time highs as Texans cranked up their AC units. For many hours, spot prices rose so high that Riot could sell power to Ercot for 50 or more times the low fixed price it paid for juice to create Bitcoin.
Riot and other manufacturers are also mining dollars from no fewer than three other Texas “demand response” plans that either pay to reduce electricity in emergencies, or reduce transmission costs. By blacking out its data centers for thousands of hours this summer, Riot got a windfall from those programs that reward miners handsomely for providing backup power that helps keep the network running smoothly.
Because of the outages, Riot only produced 318 Bitcoin Bitcoin in July, a fifth less than the 402 it would have generated at full speed. Therefore, the income from the Bitcoin that Riot produces on its own account amounted to $6.9 million at the signature cryptocurrency’s average price of $21,634. But Riot received far more dollars from shutting down. The demand response programs contributed to a bonanza via $9.5 million in “power credits,” payments that reduce the cost of electricity that makes up the bulk of the gross mining bill. Riot does not specify which “demand response” programs received the credits. But Lucas Pipes, an analyst for B. Riley, reckons that selling megawatts back to the grid at the big spot prices during “price response” accounts for most of the gains.
During those 31 days, Riot received the extra money to shut down production for 11,717 megawatt hours, or about 14% of normal operating hours. All told, between Bitcoin production and energy sales, Riot recorded $16.4 million in revenue for July. Remember that Riot also sacrificed Bitcoin output in exchange for selling power. Had Riot pumped 24-7 and hatched the extra 84 Bitcoin, it would have collected $8.7 million from mining instead of the $6.9 million it invested. So by shutting down and diverting electricity instead, Riot recorded a net profit of $8.1 million (the $16.4 million it made minus the $8.7 it would have gotten from not selling power and just making Bitcoin), or over 90%.
In fact, the $8.1 million increase from the power sale equates to $964 for each of the 84 Bitcoins lost. That’s 42% above the all-time high of around $680. From another perspective, its total turnover of $16.4 million for the month gives an average price of $40,700 per coin based on the 402 it would have made. sense the closures. Simply put, by producing less and selling power at massive prices instead, Riot (symbol: RIOT, market cap $1.3 billion) actually reaped twice the price per coin, based on potential output, than if it had minted full capacity. Everything is big in Texas, including ten-gallon hats full of dollars to knock down the Bitcoin-friendly programs, the miners provide.
Texas is now the Bitcoin capital of the world and their programs benefit the miners
Although July’s stunning showing of how much the Texas energy system can increase profitability, the extra dollars gained are deceptively small compared to what Riot and other miners could reap going forward. Riot is leading a crypto rush that is making Texas the Bitcoin mining capital of the world. A large part of the state’s appeal rests on the various programs that earn miners a lot of money beyond producing Bitcoin, in exchange for shifting power to stabilize the network. The recent drop in Bitcoin prices makes these demand response bonuses much more valuable to the miners. The more Bitcoin slides, the more hours putting megawatts on the market brings higher revenue than minting Bitcoin – giving miners an excellent means of diversification, the wonder we just witnessed at Riot.
Much of Riot’s production went offline recently due to disruptions from the giant expansion initiative at the Whinstone facility north of Austin. The data center is believed to reign as the largest mining center in North America. In July, Whinstone’s “self-extraction capacity”, production on its own account as opposed to “hosting” for a fee for external customers who provide their own equipment, was around 110 megawatts. Early next year, Riot expects internal scale to triple to 350mw as part of a goal to achieve total capacity, including hosting, of 750 megawatts.
Riot is also building a second, even more gigantic $333 million facility on a 265-acre site in Corsicana, north of Dallas. Expected to open next July, Corsicana will surpass Whinstone in size by one gigawatt, or 1,000 megawatts. Today, Cambridge University sets a global network of 10 gigawatts. If this number remains constant, Riot alone will control 17% of all the world’s Bitcoin capacity by mid-2023. Many of the biggest names in Bitcoin are homesteads like longhorns. Privately held Bitdeer, controlled by crypto pioneer Jihan Wu of China, is mining at a giant, repurposed former Alcoa facility across the street from Whinstone. Core Scientific (CORZ; market cap: $1.1 billion) is building a new 300mw data center in Denton, north of Dallas-Ft Worth, due for completion in December. In May, Argo Blockchain of London (NASDAQ: ARBK , market cap: $300 million) began production at its 200mw Helios center on a 320-acre parcel in North Texas near Lubbock. Argo’s also unveiled plans to add 600mw of production in the coming years.
ERCOT predicts that total capacity in Texas could reach well over six gigawatts by 2023. Of course, the worldwide scale of mining could grow well beyond the current 10 gigawatts if the Bitcoin price rises sharply. However, if mining activity remains close to current levels, Texas would host something like half or more of the world’s Bitcoin industry less than a year and a half from today.
In this age of falling Bitcoin prices, the Lone Star State’s mega-bucks-for-miners programs are rewarding miners as if the boom times never ended.
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