Adapt or perish: How Bitcoin miners need to prepare for halving – Stronghold CEO Greg Beard

(Kitco News) – Bitcoin’s (BTC) rally since the start of 2023 has brought renewed interest to the cryptocurrency ecosystem as the launch of multiple spot BTC ETF helped the top crypto establish a new record high on March 14, more than 45 days before its next halving – a never-before-achieved feat in Bitcoin history. 

 

With the crypto market now experiencing its first major correction since hitting a new all-time high, traders are looking for the next catalyst that propels prices higher, and most analysts are pointing to the approaching halving as the next rally-inducing development. 

 

But halvings can be double-edged swords, as the 50% reduction in new BTC emissions cuts the revenue generated by miners in half, leading many to turn off inefficient equipment once the halving transpires. This in turn can lead to a reduction in the Bitcoin hashrate

 

To get a boots-on-the-ground perspective of the halving and how miners will respond, Kitco Crypto spoke with Greg Beard, CEO of Stronghold Digital Mining, the first mining company to launch an IPO with the approval of the Securities and Exchange Commission (SEC). 

 

Before starting Stronghold, Beard worked as the Head of Energy at the private equity firm Apollo after previously starting his career in the energy sector working for Goldman Sachs. 

 

Beard started the conversation by noting that rather than viewing crypto mining as an end-all business proposition, he sees it more as “power arbitrage,” and as such, Stronghold “owns our own power plants and our own data centers.” 

 

As noted by Michael Saylor in the past, Bitcoin offers a way to store the value of energy that we can’t use currently and then reclaim that value in the future. 

 

“He’s not wrong, that’s what it is,” Beard said. “The halving is going to be interesting for us and it’s going to show how we differ pretty quickly – why owning your own power is important.”

 

Beard went on to lay out the changing face of the crypto-mining industry and how miners have to consider energy demand on local power grids. 

 

“Our value proposition is if power is expensive, we can quickly turn the Bitcoin mining data centers off because it’s not an essential service,” he said. “No one is going to miss us if we turn our data center off. It’s not like running a hospital or CIA data center. It’s okay if we turn it off.” 

 

“So when the power prices are high, we turn our data center off and sell the energy directly to the grid,” he said, noting that in 2023, they “turned the data centers off a couple hundred times, briefly during the day, as power prices spiked.” 

 

Beard noted that of the two power plants they operate, only one is currently generating because “power prices are so low that it makes sense to turn the plant off until summertime and just buy power from the grid because the grid can provide us that power cheaper than we can make it. So in the end, whether it’s expensive power or super cheap power, we’re making more margin than other Bitcoin miners because we have ways to benefit from both higher and lower energy prices.” 

 

He noted that the shift to renewable energy sources, such as solar and wind, is adding to the volatility seen in energy prices as “we’re taking a base load source of power offline and replacing it with intermittent power, which is making it super cheap sometimes and super expensive other times.” 

 

”So if the sun isn’t shining, and the wind’s not blowing, expect to have expensive power,” he said. “Conversely, if it’s super sunny and windy, expect energy to be super cheap. For that reason, I really view Bitcoin mines as grid-scale batteries without the expense.” 

 

“If you want to do the right thing by energy consumers, it’s important to acknowledge that adding solar and wind is going to result in a more expensive average power cost, especially when it comes to trying to keep the grid stable,” he said. “The only way to add all the solar and wind, and have a stable grid, is to add grid-scale batteries, which typically wind up being just as pollutive as if they had stuck with natural gas because batteries are dirty and don’t even last that long when they’re needed.” 

 

“So Bitcoin mines can look a lot like a battery to the grid because we can quickly turn them off and on,” Beard said. “Now a region doesn’t need a grid-scale battery because they have a Bitcoin mining data center that takes its place, offering the benefit of not having to spend a boatload of money on a grid-scale battery that is not worth much anyways.” 

 

“We need people to understand what we’re doing to the grid, which isn’t popular to talk about,” he noted. “Everyone wants a greener planet, and people don’t like to say bad things about solar and wind, but it’s also not a popular thing to say, ‘hey guys, we’re gonna make the power a lot more expensive, a lot less reliable, and a lot more volatile pricing wise… why don’t we use Bitcoin mining data centers to help even it out?’”

 

“You just get kicked out of the playground if you say that,” he highlighted, “but that’s the truth. To me, the right answer, which we are going to get to in 10 or 15 years, is nuclear energy.”

 

He noted that in January, he asked the operator of a 20-megawatt solar field how much they were generating on a cloudy day, and they said “A megawatt and a half.”  

 

“I want to be a believer, but it doesn’t really work economically,” he said. “As soon as we go nuclear, I’ll be pleased. Plus, it’s carbon-free.” 

 

Why crypto mining?

 

When asked about what lured him away from the world of finance to cryptocurrency mining, Beard noted that he had previously partnered with 50 CEOs in the energy business over 30 years, and after he left Apollo, a man named Bill Spence, who owned one of the power plants that eventually became Stronghold, asked him to come provide his insights into how to make the transition from a power plant into a crypto mine work. 

 

“So I ended up going to look at it and these crazy Bitcoin miners were constantly calling the plant asking, ‘Hey, can we buy power from you?’” he said. “And because people tend not to do stuff that’s money-losing, I modeled out myself what it would take to buy these machines to outfit the plant with a data center. So because of the interest of others, we did our own study and determined that we were better off just owning the machines instead of selling the power.” 

 

“We just decided to do it ourselves and then bought another plant, raised private capital, took the company public, and now we’re one of around 20 public Bitcoin miners, which is way too many,” he said. “I think that’ll get washed out this year. I think we’ll see that field get thinned out some because it needs to.”   

 

Beard said this is where the halving comes into play. 

 

“I think one of the implications of the having is everyone’s going to figure out there are two ways to stay alive,” he said. “One is by driving your cost way down.”

 

“So if your cost of power is super cheap, you can then have a positive margin because it’s just power arbitrage,” Beard said. “If your power is costing you 70 bucks a megawatt and you’re making 200, fantastic. You have a nice margin.”

 

“But the 200 is about to go to 100 because of the having,” he noted. “So miners are saying, ‘Well, how can I get my margin back?’ The best way is to take costs out.”

 

“The second best way is to spend a lot of new money to buy new machines that are more efficient,” he said. “Those are the only two options miners really have.” 

 

When asked about Stronghold’s approach to the halving, Beard reiterated “We own our own power, so it turns out we can sell energy if mining gets horrible. If power is cheaper than it costs us to make the power, we can save money and have a bigger margin by buying from the grid to mine Bitcoin. If selling power is more economical than making Bitcoin out of it, we’ll just sell that power.” 

 

“So we have a multivariable equation rather than a singular one,” he said. “We can still very much suffer, but we have more opportunities to succeed than others have given that we own our assets.”

 

Beard also noted other avenues of revenue he is currently exploring, including carbon sequestration, selling coal ash, and utilizing different fuel sources. 

 

“I think if you are a Bitcoin miner and don’t own your own facilities, you are worried about things like printing more shares to get more cash to buy more machines,” he said. “For us, we are focused on creating a better product, like additional industrial applications, rather than just mining Bitcoin. But it’s hard, what we are doing is difficult.” 

 

Bitcoin hate overshadows ESG applications

 

Governments around the world have shifted to focusing on more green-friendly industrial applications in recent years, which has brought added criticism to the Bitcoin mining industry due to the energy required to secure the Bitcoin network. 

 

These criticisms have overshadowed the work that Bitcoin miners have done to help improve energy efficiency and clean up the pollution of the past. 

 

“We’re actually cleaning up the landscape, and the byproduct of that effort is making power,” Beard said. “It just so happens that the best use of that power is Bitcoin, from a margin perspective. It’s not all of us that are just power hungry.” 

 

He went on to explain that 200 years of coal mining in Pennsylvania has led to the buildup of hundreds of mounds of “nasty, unusable coal on the surface next to mine openings.” 

 

“It was legal to leave these mounds there for 150 of those years, while the good coal was used to make power and steel,” he said. “So now we’ve got a couple billion tons of waste that is above the water table, while the coal mines have long been shuttered.” 

 

As an aside, he said that a documentary should be made about topics like this because this sort of thing “continues to happen in unregulated, growing economies in regions like Africa and Asia. We did it here for 150 years, and we created an environmental disaster.” 

 

But with every problem comes an opportunity, he noted. “30 years ago, the state of Pennsylvania incentivized the construction of specialized power plants that can burn this stuff that a regular coal plant can’t burn. Our business model is to clean up that waste.”

 

“We’ve partnered with the EEP, the EEC, and the Pennsylvania Game Commission to clean up all these nasty piles, and the byproduct of that effort is power,” he said. “So power generation isn’t even our main activity, it’s just a byproduct of cleaning up this waste. It just so happens that the best thing to do with that power is mine Bitcoin.” 

 

“We’ve cleaned up more than 1000 acres and millions of tons of this crap is now gone,” Beard said. “The water in Pennsylvania – the rivers run red with the equivalent of battery acid because of all the sulfur that’s in it. I’m ashamed, as an American, because this is something the Federal government should have dealt with a long time ago. There are something like 800 known piles and 80 of them are on fire as we speak, so it’s a fire burning highly toxic chemicals with no emission controls.” 

 

He noted that while Stronghold burns this coal, it’s still a carbon-neutral activity “because while the piles remain in place, they emit methane, which is 40 times more impacting on the greenhouse effect than carbon dioxide. So the state incentivizes us to clean it up.” 

 

While it would seem like this business model is an ESG investor’s dream, Beard said “The ESG guys just see that we’re burning waste coal, even though we are cleaning up pollution that was left behind centuries ago.”

 

He said this highlights the disconnect between the mindset of investors and the mindset of people who actually care about cleaning up the environment.  

 

“Many of the people who are raising money and making the argument that burning waste coal is bad – they just want to raise money,” he said. “Are they cleaning the environment? No. Our youngest pile is over 50 years old, so if there is another way, I’d be thrilled. I’d love to do something else. I’m enthusiastic about the work we’re doing, but I’m a little bit frustrated that it seems like we end up in the crosshairs no matter what.”

 

“We’re criticized for cleaning up waste coal. We’re criticized for mining Bitcoin. We’re doing the right thing, but we’re not popular,” he said.

 

Bitcoin mining centralization

 

When asked if there was any risk to Bitcoin with much of the hashrate now coming from U.S.-based miners, Beard said that while it’s possible we could “see consolidation among the public miners, it’s never going to be so concentrated with just a few outfits that people have to worry about a fork in Bitcoin being initiated by the biggest miners.” 

 

“The biggest threat of that could be through a pool, like Foundry, which is the biggest pool with something like 30% of the miners using that platform,” he said. “So that could be considered the biggest threat to Bitcoin – if someone tried to vote in a fork that could potentially change the algorithm and end up with more Bitcoin.” 

 

“I think you want to stay as far from that. You want to never have that fear reach consciousness because Bitcoin’s utility is its decentralized nature,” Beard said. “That said, I think it’s possible that, if we got to 600 exahash globally, we might see an outfit hit 100 exahash through mergers and growth. That could easily happen in a year or two.” 

 

“But at the same time, if you study what the industry as a whole is saying is going to happen in terms of growth, it’s not happening, because if everyone is going their own way on growth, it will take 3 gigawatts of power and a few billion dollars of machines that don’t exist yet at the efficiency need to make it happen,” he said. “I have no doubt that some will hit their projected growth rates, but I also have no doubt that not everyone will hit their targets because it’s not possible.”

 

“You can’t have everyone win here,” he added. “It’s tough to make a data center. You can’t just show up and spike the football and say, ‘Hey, I’m here.’ It’s permitting, excavators and transformers. It’s hard to do this, especially at the industrial scale.”  

 

The future of Bitcoin mining

 

When asked about the future of Bitcoin mining as it increasingly looks like the industry is moving away from mom-and-pop miners to industrial settings, Beard said he thinks that post-halving, there will be a significant amount of consolidation. 

 

“We should see the inefficient machines come offline, so I would hope to see at least 100 exahash go offline just from that, which should relieve pressure on the difficulty level, at least for a couple of months,” he said. 

 

Beard sees new mining machines as the main way that companies will be able to increase their hash rate “with the least amount of pain,” and said mining equipment will get more efficient over time. “If the whole network is around 40 joules per terahash today, by the time we get to the next halving, it will probably be sub-30, so unplugging an old, inefficient miner, and plugging in the latest one will be the easiest way to get more.” 

 

He said that while Stronghold currently boasts 4 exahashes of mining power, “we could get up to 7 if we bought all S21s. We have enough power to get to 7 exahashes without changing our power consumption, so our current power consumption can almost double our hash rate with newer machines.” 

 

For this reason, he sees BitMain and MicroBTC, two of the most popular mining machine producers, having a “busy time selling machines post-halving.” 

 

“During the last bull market for machines, you had to pay a hundred dollars a terahash. Now, the best machines are $20 a terahash,” he noted. “So efficiency is up, and costs are down. There is a rumor that Intel tried to dabble in mining machines but couldn’t really make it work. I don’t love the hardware business, but the way they have it set up currently, they have everyone on a treadmill of having to re-up on machines because the inefficient ones no longer have a positive return, which is a lucrative business model currently.” 

 

Noting the recent budget proposal from President Biden that included a 30% tax on power for Bitcoin miners, Beard called the move a “slippery slope.” 

 

“As a society, we haven’t yet decided to tag who we think are favorable for society by giving them a lower power rate or lower power tax, and who is bad for society by giving them a higher tax rate,” he said. “To me, that’s a slipper slope. Are you going to tax data centers that run Facebook and promote negative things to kids? Are you going to tax distilleries because alcohol isn’t good for people? What about casinos? So the idea that we are going to specifically target Bitcoin miners is dangerous.” 

 

He said the recommendation to tax Bitcoin miners “is like picking on someone who is an easy target, but ultimately, things like this don’t really go anywhere and are more just a part of the 24-hour news cycle.” 

 

“The capitalist society that our government is overseeing may sometimes pick on certain industries, but it usually doesn’t really go anywhere,” he said. 

 

Beard noted that some in the industry are saying that the Bitcoin mining network will increase in size by a third over the next 12 months, and said he “doesn’t think it’s going to happen, but it’s going to be close.” 

 

“This is an industrial-scale activity now where it was once it’s probably designed to be running people’s laptops at home, but the margins are too big to ignore. So it became industrial scale,” he said. 

 

“I think if I had to bet, I would bet that we’re going to find out over time that Russia will end up as a pretty big miner,” Beard said. “The same goes for the Middle East, despite their hot temperatures. Any place where you see a very low cost of power, cheap energy, or an energy-long economy that doesn’t want to transact in U.S. dollars. If they want to convert their natural gas to something other than dollars or euros, they’ll convert it to Bitcoin. I bet it’s already happening a lot more than we know.” 

 

The one thing Beard said would make him wrong on a lot of machines going offline after the halving is if Bitcoin’s price “goes to $150,000 and mining economics go through the roof.” 

 

“If we’re mining 900 Bitcoin a day but the demand from ETFs is 10,000 per day, the price is going to go up,” he said. “And if there are enough believers that didn’t sell at $70,000, there’s a good chance they won’t sell at $100,000 either, and mathematically, you can’t get around the supply and demand mismatch.” 

 

“The big play I’m hearing about is people going long Bitcoin and shorting the miners, but if Bitcoin rips higher enough, that will change, and miners will have all the leverage,” he said. “If that happens, I will be happy to be proven wrong on my prediction that machines will go offline. Miners will just spend more money for machines, spend more money for power, and it’ll work.”

 

Bitcoin ETFs could drive prices higher

 

As the conversation began to wind down, Beard noted that the spot Bitcoin ETFs could play a big role in driving a blow-off-top rally. 

 

“The way the ETFs are designed, if you make a buy order, they are required to go into the open market and buy that underlying asset,” he said. “It’s not a machine that can decide to wait and see if the price comes down in the next couple of days or check to see if the fundamentals are wrong. If they need 10,000 Bitcoin on that day, they’re going to buy 10,000 that day, and the price will move until they get those coins.” 

 

“I think we’re going to see some interesting volatility,” he said. 

 

Noting a recent trip he took to Egypt, Beard said, “In a weird way, Bitcoin was designed because of the recklessness of American dollar printing, but we’re one of the most responsible countries. If you compare the U.S. to everybody else, we’re looking pretty good. But if you’re an Egyptian, or from another country that has massive amounts of inflation, what are you going to do? Most of them don’t let people have a U.S. stock portfolio. So it’s a defensive position for populations to be able to hold the wealth that they work for.”  

 

Addressing skyrocketing global debt, and how governments can escape the negative trajectory they are on, Beard said “You print the money to pay the debt back. That’s inflation. We’re not paying it back, we’re printing it back.” 

 

“It’s upsetting, but I would say that in a way I feel lucky because I got to have the bulk of my career at a time when the U.S. was just pumping money in the system like they were filling up a balloon, and that’s lucky. My kids, I think they are going to unfortunately wake up to realize one day that the balloon is deflating. I wish weren’t true, but that’s the way it looks currently.”