How Riot Blockchain capitalized on a hot Texas summer to make more money selling power than mining crypto

It was a rough time for Bitcoin. But it didn’t look that way from Riot’s banner performance. The flagship token’s price had dropped from over $40,000 in April to hover in the low $20,000s during most of July. You’d think that fall would have hammered Riot’s revenues. But not so: Riot benefited from what’s effectively a second, backup business that doubled its sales over what it posted making its own Bitcoin––the same outcome as if Bitcoin were still selling for $40,000! That lucrative sideline consists of curtailing output and getting paid for releasing the “standby” power to stabilize the famously-stressed Texas grid. Among the rich benefits: selling that liberated electricity back to the network at such super-high prices that the during the hours of closure, miners can make multiples the money from hawking megawatts that they’d get minting 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 fellow miners can choose to shut down and rechannel their freed-up megawatts to the grid at “spot” or market prices. In July, a heatwave scorched the Lone Star state, forming a “dome” that stilled the air over the windmill farms that furnish a huge share of the state’s energy. At the same time, electrical usage hit all-time highs as Texans cranked up their AC units. For many hours, spot prices soared so high that Riot could sell power to Ercot for 50 or more times the low fixed price it was paying for juice to spawn Bitcoin.

Riot and other producers also mine dollars from no fewer than three other Texas “demand response” plans that either pay for curtailing electricity in emergencies, or reduce its transmissions costs. By darkening its data centers for thousands of hours this summer, Riot pocketed a windfall from those programs that reward miners handsomely for providing reserve power that helps ensure that the grid runs smoothly.

Due to the stoppages, Riot produced just 318 Bitcoin Bitcoin in July, one-fifth fewer than the 402 it would have generated running at full blast. Hence, revenue from the Bitcoin that Riot produces for 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 a bonanza via $9.5 million in “power credits,” payments that reduce the cost of electricity that constitutes the vast bulk of its gross mining bill. Riot doesn’t specify which “demand response” programs clinched the credits. But Lucas Pipes, an analyst for B. Riley, reckons that selling megawatts back to the grid at those big spot rates under “price response” accounts for most of the gains.

During those 31 days, Riot got that extra money for closing production for 11,717 megawatt hours, or around 14% of its usual running time. All told, between its Bitcoin output and energy sales, Riot logged revenue of $16.4 million for July. Keep in mind that Riot also sacrificed Bitcoin output in exchange for selling power. Had Riot pumped 24-7 and hatched those additional 84 Bitcoin, it would have amassed $8.7 million from mining instead of the $6.9 million it notched. So by shutting down and diverting electricity instead, Riot registered a net gain of $8.1 million (the $16.4 million it made minus the $8.7 it would have garnered from not selling power and just making Bitcoin), or over 90%.

In effect, the $8.1 million boost from the electricity sales equates to $964 for each of the 84 foregone Bitcoin. That’s 42% above its all-time high of around $680. From another perspective, its total revenue of $16.4 million for the month yields average price of $40,700 per coin based on the 402 it would have made sans the closures. Put simply, by producing less and selling power at huge prices instead, Riot (symbol: RIOT, market cap $1.3 billion) effectively reaped twice the price per coin, based on its potential output, than if it had minted at full capacity. Everything’s big in Texas, including ten-gallon hats full of dollars-for-powering-down its Bitcoin-friendly programs hand the miners.

Texas is now the world’s Bitcoin capital, and its programs richly benefit the miners

Though the July stunner demonstrates how much the Texas energy system can boost profitability, the additional dollars gained are deceptively small versus what Riot and other miners can harvest going forward. Riot is leading a crypto-rush that’s making Texas the world capital for Bitcoin mining. A big part of the state’s appeal rests on the sundry programs that make miners lots of money over and above the take from producing Bitcoin, in exchange for shifting power to help stabilize the grid. The recent drop in Bitcoin prices make those demand response bonuses much more valuable to the miners. The more Bitcoin slides, the more hours putting megawatts on the market yield higher revenue than minting Bitcoin––providing the miners a great means of diversification, the wonder we just witnessed at Riot.

Much of Riot’s production went off-line recently due to disruptions from its giant expansion initiative at its Whinstone facility north of Austin. That data center is believed to reign as the largest mining hub in North America. In July, Whinstone’s “self-mining” capacity, the production for its own account as opposed to “hosting” at a fee for outside clients that provide their own equipment, was around 110 megawatts. By early next year, Riot expects that in-house scale to triple to 350mw as part of a goal to achieve total capacity, including hosting, of 750 megawatts.

Riot’s also building a second, even more gargantuan, $333 million facility on a 265 acre site in Corsicana north of Dallas. Expected to open in July of next year, Corsicana will surpass Whinstone at a size one gigawatt or 1000 megawatts. Today, Cambridge University puts global network at 10 gigawatts. If that number remains constant, Riot alone would control 17% of all the world’s Bitcoin capacity by mid-2023. Many of the biggest names in Bitcoin are homesteading as longhorns. Privately-held Bitdeer, controlled by crypto pioneer Jihan Wu of China, is mining at a giant, repurposed former Alcoa plant across the street from Whinstone. Core Scientific (CORZ; market cap: $1.1 billion) is building a new data 300mw center in Denton north of Dallas-Ft Worth slated for completion in December. In May, Argo Blockchain of London (NASDAQ: ARBK, market cap: $300 million) started 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 years ahead.

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

At this time of falling Bitcoin prices, the Lone Star state’s mega-bucks-for-miners programs is rewarding miners as if the boom times never ended.