Recently released public data indicates that the bitcoin-mining joint venture between Beijing's Bitmain and Vladimir's Allrise Capital has been a financial disaster of epic proportions. The data indicates that after its first two years, the operation is over $100 million underwater with little prospect of making up the loss through further operations in Usk. In the last two years, the operation has generated around $37 million in after-power-cost revenue against a total investment in the site of approximately $150 million.  The $37 million number represents total revenue after power costs but does not include any other expenses such as taxes, personnel costs, or other fees, so the actual amount of revenue that can be applied against investment costs is actually smaller.

The joint venture, along with Bitmain's partner company Bitfufu, have been operating a massive bitcoin mining operation at the former Ponderay Newsprint Company paper mill site in Usk, Washington. Bitmain, Bitfufu, and Allrise each operate miners at the Usk site through a dozen different limited liability corporations. The LLC Merkle Standard operates as the front-office for the joint venture while the LLC Cascade Digital Mining contracts for the facility's power with the Pend Oreille Public Utility District.

Bitfufu, operating through the LLC Ethereal Tech US Corporation, reported last November that it was near bankruptcy due to the site's "highest in the world" bitcoin mining costs. Usk Bitcoin Miner reported being near bankruptcy: “We’re completely negative” - PROTECT PEND OREILLE

How we calculated revenue. Using public data on the amount of power the facility has used each month and the amount they paid for that power, we are able to calculate the approximate amount of revenue the bitcoin mining operation has generated over the last two years. Determining mining revenue is a relatively simple mathematical function. Bitcoin "mining" consists of using large numbers of highly specialized computers to guess a 64-digit code. Different models of these computers can each make a certain number of guesses-- usually more than 100 trillion per second. At its peak, the Usk facility operated about 20,500 of these computers and used 83 MW of power. The difficulty of guessing the code is adjusted every two weeks (on average) so that some computer somewhere correctly guesses the code once every ten minutes (on average). To increase the probability of being the miner guessing the code, only a small number of companies can actually conduct the "mining." The Beijing-based Bitmain is one of those companies and it conducts roughly 30-40 percent of the global bitcoin mining (the percent varies from week to week). These major companies pay smaller companies, like Allrise Capital, a portion of their daily take in bitcoin to operate mining operations on their behalf. 

Since we know the amount of power used, the number of computers that can operate with that amount of power, the number of guesses all the computers in Usk can make (e.g. the Hashrate), the number of guesses it takes on average to earn bitcoin (the difficulty level), the number of bitcoin the facility can earn each day, and the value of bitcoin, we can calculate the revenue. Revenue is calculated over 2-week periods to account for the changes in mining difficulty. See the table below. 

When they "win" bitcoin, miners also get to earn a small amount of additional bitcoin from charging fees to process a "block" of transactions on the "blockchain." This amount is typically less than 5% of the value of the bitcoin they win. The rate for these fees is currently 3.6% of bitcoin winnings, so this would add around $1-2 million to total revenue, which is why we listed $37 million instead of the $35 on the chart above. We should also note that actual earnings may be lower than our estimate because we favored the miners in any assumptions we had to make and always assumed they were operating their most efficient mining computers.

How we estimated their investment costs. Again, we relied on public data and news reporting. Allrise capital paid a little over $18 million for the PNC mill site. Representatives have publicly stated that they made $4 million in improvements to convert the mill to a bitcoin mining facility. Finally, we used the personal property accounts for each company at the site to determine the cost they paid for their mining computers. The Personal Property accounts show a value last year of $88,168,437, but this value includes at least one year of depreciation. When we adjust for the depreciation of computers, the value of the equipment is $117.5 million. This number is roughly half of the $227million market value of the computers when they were first delivered to Usk in the spring of 2022. An additional 2,500 computers were added to the facility later were not likely counted in last year's personal property calculations. These computers likely had a value of around $10 million. 

This gives an all-in investment for the facility of $149.5 million. 

The Chinese/Allrise joint venture have poor prospects for recovering more of their investment cost from continuing operations at the Usk facility. Bitcoin mining computers typically only last two to three years and many of the machines initially installed in Usk are obsolete models that can no longer generate positive revenue. After the "Halving" last April, an every-four-year event in which the amount of bitcoin miners can earn is cut in half, bitcoin mining profitability is currently at all-time lows and Bitcoin coin prices have stubbornly refused to breakout to the moon. Power prices are increasing as cold weather approaches. In past years, the operations have relied heavily on getting large amounts of federally subsidized power from the Bonneville Power Administration to operate through winter months, but the BPA has become increasingly reluctant to their subsidized power to foreign crypto operations instead of Washingtonians struggling with high heating bills. It appears that the BPA will continue to reduce the amount of power they provide this winter as well. 

The best bet for Chinese/Allrise joint venture is to move their operations from Usk to faculties in other states with less expensive power as they appear to be doing. ​Merkle Standard prepares to move crypto mining operations from Usk, WA, to new sites in Tennessee, Oregon - PROTECT PEND OREILLE

Merkle Standard, the front office LLC for the joint venture bitcoin mining operation by Beijing's Vladimir's and Vladimir's Allrise Capital, is preparing to move most of its Bitcoin mining operations from its current facility in Usk, WA, to new sites in Memphis, Tennessee, and Christmas Valley, Oregon. 

Merkle is currently completing the installation of a number of Bitmain's "Ant Boxes"-- 40ft shipping containers each modified to house around 200 highly specialized bitcoin-mining computers. Once the electrical installation of the Ant Boxes is completed, Merkle will likely begin moving thousands of its computers from Usk to Memphis. There are over four dozen 20ft shipping containers and several 40ft shipping trailers parked at the former PNC paper mill site waiting to be loaded and shipped. 

The Memphis location can support up to 45 megawatts of mining operations, or about 75% of the 60 megawatts  Merkle has been contracting for over the last year. The joint venture used up to a maximum of 78 megawatts at its operational peak in late Spring 2023, but many of its computers have become obsolete and can no longer earn more in bitcoin than the cost of the electricity to run them. According to local news reports, Merkle's five-year power contract with Memphis Light, Gas & Water went into effect August 1.  Bitcoin mines coming to Memphis and Tennessee (wuot.org) 

The crypto mining operation in Usk has been a financial disaster for Allirse, Bitmain, and the Chinese miner Bitfufu which also operated bitcoin mining computers in Usk. Last August, Merkle Standard CEO Steve Wood told Pend Oreille PUD that they would need to reconsider their operations. A few months later they purchased the new locations with access to cheaper electricity in Memphis and Christmas Valley. In a press release printed in the Newport Miner last February, Merkle Standard announced that they would be moving most of their bitcoin mining operations to other locations. At the same time, they told the PUD they planned on only keeping 26 megawatts of their river-water-cooled machines. The rest of their computers are air-cooled.

The water-cooled machines are difficult to relocate because they require a massive supply of fresh water to operate.  However, it is not clear if Merkle will be able to continue to operate their water-cooled machines in Usk because that model of machine is nearly obsolete and requires power rates lower than 6.5 cents per kw/h jsut to break even on their power bill under current conditions. Merkle's plan was based on the assumption that they would receive 26 MW of federally subsidized power from the Bonneville Power Administration in the winter of 2024-2025-- power that is much cheaper than what Pend Oreille County residents pay for their power. However, the BPA has been reducing the amount of subsidized power it provides to Pend Oreille County, and the Chinese-sponsored joint venture might not get the amount of power it was planning on last February. 

Last November, the Usk bitcoin miner Ethereal Tech US Corporation—a LLC subsidiary of the Chinese bitcoin mining company Bitfufu (the name sounds less ridiculous in Chinese)—filed appeal to the Pend Oreille County Board of Equalization asking for a massive 50 percent deduction in the personal property taxes they owed the county on the grounds that their business was failing. 

Bitfufu is one of three companies operating thousands of highly specialized computers to “mine” bitcoin at the former Pend Oreille Newsprint Company paper mill site in Usk, WA. The other companies are the Beijing-based Bitmain and the California-based Allrise Capital owned by Russian businessman Vladimir Evseev (operating as a number of subsidiary LLCs). 

In the appeal, Bitfufu’s representative Olga Kochmar stated, “As you know in 2022, there were quite a few public [bitcoin] miners who went bankrupt. We are in a similar situation….” She continued, “In a nutshell, this model is not generating any positive cash flow any longer.” She later added, “We’re completely negative…. We’re actually not generating good revenue….”

She explained that their bitcoin mining operation at the mill site in Usk “does not make any money and has the highest hosting rate in the world. That is the argument explaining why it doesn’t generate positive cashflow.” Bifufu operates bitcoin mining facilities across the United States and around the world. In total, the company manages ten times more bitcoin mining capacity as the maximum mining capacity of the Usk facility, so Kochmar’s statement that the Usk facility most expensive mining facility in the world is highly significant and indicative that Pend Oreille County is not a good location for large-scale cryptocurrency mining. 

Kochmar continued to outline their challenges. In March 2022, the company purchased $19 million of bitcoin computers at Usk. The value of the bitcoin they were money wasn’t enough to cover their costs. 

Furthermore, there was no pathway to avoid future financial losses. Kochmar said they couldn’t sell the mining computers “because no one is willing to buy it.” She explained, “the useful life of miner… is usually two years or at max three years.”
And they were contractually locked into their money-losing Usk operation. “In this location we can’t just terminate the contract because we will be liable for it. We can’t stop running the machines because we still have to pay for the hosting services and electricity.”

Like the canary in the proverbial coal mine, Bitfufu’s financial woes reflect Bitmain’s and Allrise Capital’s financial challenges of conducting large-scale bitcoin mining in Pend Oreille County. Bitcoin mining profitability is at record lows (i.e. the amount of bitcoin miners can earn from a given amount of computing power) and power prices are ramping up.
​
Bitfufu was started by a former Bitmain executive and is a partner of Bitmain, the world’s most dominant bitcoin mining company based in Beijing. Bitfufu is headquartered in Singapore and provides “cloud mining” services to customers on behalf of Bitmain. “Cloud Mining” is a somewhat misleading term for bitcoin miners selling you bitcoin today that they hope to mine in the future (at a small discount). It is a way for bitcoin mining companies to transfer financial risks to investors and to raise immediate capital after the collapse of the largest crypto-friendly banks last year limited miners’ ability to obtain loans. 

​County Commissioner John Gentle plays dirty.

During his initial 2020 campaign to become commissioner, Gentle’s surrogates, Messsrs. Norman Smith and Christian Meador conspired to publicly embarrass Gentle’s opponent, Devin Beach. Smith and Meador apparently made at least one anonymous donation to Beach and then filed a campaign finance violation complaint with the Public Disclosure Commission against Beach over their donation!

 In a letter to Smith dated August 4, 2020, the State Public Disclosure Commission stated: “Based on staff’s review, we found the following:” and then citing information provided by Beach’s attorney in one of the seven following bullet points, outlined the scheme,“Mr. Beach is being targeted, with knowing falsity, by a few people (some of them public servants also) who have intentionally concealed their names and contributions so as to manufacture a false claim against Mr. Beach. The people who have acted and whom we can identify are Christian Meador and Norm Smith. Between them, Messrs. Meador and Smith have concealed their identities while making contributions of  $25.01, $25.02 and $25.81, over the past three weeks or so, to Mr. Beach’s Campaign. Then to compound their atrocious misconduct and out of an apparent misapprehension of the law, Meador and Smith falsely reported to the Commission that Mr. Beach violated the law by accepting anonymous campaign contributions. The actions of Meador and Smith went far beyond that. RCW 42.17A.435. We have videotape from Spokane Teachers Credit Union showing Mr. Meador doing exactly that. This is both malfeasance and malfeasance in office….”

 The PDC exonerated Beach. Smith and Meador each donated $100 to Gentle and actively promoted his campaign. By refusing to condemn the egregious misconduct by his surrogates, Gentle shows he lacks the personal character to serve in public office in Pend Oreille County.

Pend Oreille County Commissioners,

Our wise Founding Fathers created a system of government remarkable for a system of checks and balances distributed among its branches. As County Commissioners you have the opportunity through the budget process to exercise these checks and balances of the County’s executive departments to assure proper accountability of our County government. As I have detailed below, there needs to be some accountability for our county assessor and his office.

Home values in Pend Oreille County DROPPED last year, so what explains this year’s MASSIVE increase in assessed values?

 In a recent statement to the Board of Equalization, the assessor’s office claimed the Washington State Housing Market Report showed that property values have increased 55% from 2019-2022. However, that report also shows that median home prices dropped last year. The average price of four-bedroom homes DECLINED by $57,000. Furthermore, state law requires the assessor to fairly assess the true value of every property each year, not every five years.

Deputy Assessor Nathan Longly blamed assessor Jim McCroskey. In a evidentiary document recently submitted to the County Board of Equalization, Longly told the Board that the assessor had not done his job for the last five years, so they needed to apply a massive increase this year. He stated, “While the Assessor’s Office does its best effort to keep up with the mandate placed upon the office to value all property at 100% of fair and true market value, due to staffing shortages and tremendous movement in the real estate market, the Assessor’s office has not been able to keep up with that mandate.”

“As such, values have increased rather dramatically, accounting for the last 5 years of market conditions. While the state does allow for the Assessor’s Office to go back and correct such manifest errors, due to the number of properties effected by the office’s inability to make proper adjustments, the blame has been placed on our office and as such has not applied such a burden upon property owners, which would result in owed back taxes. Therefore, the total needed adjustment has been applied for these missed years in this year's valuation and is applied going forward instead.”

 There are at least three problems with the Assessor Office’s statement:

1) The assessor has increased property values in each of the last five years based on market data.

2) According to information provided to and publicly reported by the State DOR by the Assessor, the Assessor’s office has been fully staffed with its authorized 5 full-time employees every year except in 2021, when it had 4.45.

3) The county assessors have one of the smallest workloads in the State. According to DOR, their workload is 25% smaller than the average county assessor and 40% lower than the average in Spokane, Stevens, and Ferry counties.

 The Assessor’s excuses do not hold water. Property values are dropping. He has a full staff and one of the lowest workloads in the state. The Assessor owes us an honest answer which the commissioners should demand during the upcoming budget discussions.

 You have each publicly stated you support robust accountability in government. We look forward to seeing if you intend to live up to your campaign slogans.

​If you were upset by the massive increase in property tax values levied by the County Assessor, you’ll be even more upset to find out that while county officers have been dishing out massive tax increases to everyone else, they have been giving themselves HUGE discounts on their own property tax assessments.

County Commissioner John Gentle has avoided paying tens of thousands of dollars in property taxes on his 21-acre hilltop estate overlooking Diamond Lake. His 3,561 sqft, three-level home with three-car garage, 1,200 sqft shop, and separate barn is assessed at only $369,419—ten thousand dollars less than he purchased the home for eleven years ago in 2013 and far less than the million dollars that real estate websites estimate is current market value

County Commissioner Brian Smiley’s 3,416 sqft home with two shops (484 sqft and 1800 sqft) on 26.5 river-front acres along the Pend Oreille River only increased 4.5 percent this year while his nearby neighbors received increases of up to 60 percent. Total assessed value: only $415,693.

Auditor Marianne Nichols’ 2,200 sqft home 26.5 wooded acres overlooking the Pend Oreille River saw only a 3.9 percent increase on an inexplicably low assessment of $213,123.

On his website, the Assessor states that he is required by law to value property “at 100% of market value.” Five months ago, Deputy Assessor Nathan Longly listed his 3,035 sqft, 4-bedroom Newport home for sale at a market price of $398,000. Three months later he “officially” assessed his same home at $317,213 for tax purposes-- $81,000 or more than 20 percent less than what his asking price indicated he believed was the true market value of his home.

It appears that county officials are using their office to avoid the same heavy tax burdens they are happily placing on their neighbors. 

Our citizen-owned PUD reached a new contract agreement today with Cascade Digital Mining, the joint venture between Beijing's Bitmain and Russian businessman Vladimir Evseev's Allrise Capital.

As we explain below, the new contract is not good news for Cascade's massive bitcoin mining facility in Usk, WA-- the largest crypto facility in the Western United States. 

Last month, Cascade's CEO Steve Wood, the former CFO of the Ponderay Newsprint Company, told our PUD, “I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He concludes by threatening, “Absent the District’s willingness to engage in these critical terms, Cascade will be forced to evaluate other options for electric service, which may include relocating all or a portion of its operations currently in Usk.”

Our PUD largely declined to acquiesce to Bitmain/Allrrise contract demands that would have effectively forced POC residents to subsidize the crypto facilities power bill while assuming all of their business risk. This morning he told our PUD staff after the staff briefed the public on the details of the new contract that will only last for six more months, "“We are committed to this county, but we also need to make some strategic business decisions on really what we are going to do and this allows us a little more time to think about what is going to happen in the next six months.” 

The key takeaways from the contract briefing were:

1) The PUD largely stood its ground on protecting its ratepayers from the substantial financial risk the failing crypto business could expose them to.

2) The contract is only for an additional six months. It will expire on March 31, 2024.

3) The maximum amount of power that Bitmain/Allrise can purchase each month is reduced from 100 megawatts to 55 megawatts, well below the ~77 mw amount of electricity required to run the facility at full capacity.  This doesn't mean that Cascade will purchase 55 mw each month, it only means that can only purchase up to 55 mw. By reducing the maximum load, our PUD reduced its monthly service fee by one-third and the size of the letter of credit Cascade needs to maintain.

4) The PUD will receive less than half of the amount of federally subsidized power from the Bonneville Power Administration this winter than it did last winter-- this may be worst part of the contract for Cascade. 

Let's look at some of the most important parts of the new contract in greater detail. 

WHY A 6-MONTH CONTRACT: The selection of a six-month term by Cascade was likely no accident. It coincides precisely with the Bitcoin "halving"-- a change in the bitcoin algorithm that happens roughly every four years in which the number of bitcoin miners can potentially earn is cut in half. This doubles the amount and cost of electricity to earn each individual bitcoin. As we have previously reported, unless the price of bitcoin more than doubles by April (an unlikely scenario), Cascade will not be able to generate enough revenue from bitcoin mining to pay for the amount of electricity required to mine bitcoin-- even with its most efficient machines. Already, Cascade cannot afford to run its machines at daytime market power rates and market rates will be higher over the winter months. 

WHY 55 MEGAWATTS: 55 mw seems like a random number to pick. The likely reasons why Cascade picked 55 mw is that 55 mw is the amount of power the Bonneville Power Administration provided to them last January and February and by dropping to 55 mw from 100 mw they could reduce their monthly service fee and letter of credit requirements. Our PUD effectively resold this federally subsidized power to Cascade at cost of around 5.5 to 6 cents per kilowatt hour (well below the effective rate our PUD charged its residential customers). 

Last year our PUD received an average of 24 MW a month from the BPA but this power was "shaped" meaning that it was mostly delivered over winter months (55 mw in January in February) while the BPA provided no power in May or June.  Last winter, Cascade operated solely on this 55mw of BPA power because they could not afford power at the market price to power the remainder of their machines. 

So, the Cascade likely asked for the 55 mw limit based on the maximum amount of power they expected to get from BPA. However, after they had requested this amount, the PUD learned that the BPA had cut the allocation of power to Pend Oreille County by a little more than half. Instead of getting 55 mw of electricity from the BPA over winter months, our PUD will only receive 26 mw-- only enough power to operate one-third of Cascade's bitcoin mining computers, and, even using their most efficient machines, only enough to earn less than 2.5 bitcoin each day. This was terrible news for Cascade. 

This effectively limits the maximum after-power-costs revenue for the next six months to under $5 million, but probably closer to $3 million.  Since Cascade earned less than $10 million in its 13 months of operation, this additional $3-5 million will leave a shortfall of around $85 million in losses compared to the over $100 million Bitmain and Allrise invested in the facility. 

So, here is what we think this all means:

1) Bitmain and Allrise Capital will close their bitcoin mining facility in Usk within the next months.

2) Bitmain and Allrise will move their most modern machines to their 40 MW facility in Spartanburg, South Carolina, or another site outside of the Pacific Northwest where they may be able to continue to operate economically due to much lower power prices. The remaining 12,000 or so machines will be fully obsolete by next spring and will just be scrap will little to no value to be recouped. However, if they sell them now, they may be able to recoup some of the value the machines. We think they will have a hard time selling that many nearly obsolete and out of warranty machines.

3) Allrise Capital will either sell their 900-acre Usk property or declare bankruptcy, depending on who is on the hook for the massive financial loss from this ill-conceived venture. Allrise Captial markets itself as a venture capital company-- a business model focused on short-term financial returns. They do not have the capital, access to large loans, or the business expertise to convert the former PNC paper mill into some other type of industry with long-horizon return on investment.  Assuming they can benefit more from selling the facility than declaring bankruptcy, we expect them to begin marketing it for sale in the near future. 

4) Ultimately, someone (Evseev, Bitmain, possible Allrise investors) will eat between $50 and $70 million in losses (assuming Allrise can sell the former mill site and continue to utilize their most efficient machines at other sites) after the Usk facility failed to recoup anywhere near the amount of money spent on setting it up. 

All in all, not a good day for Crypto in Pend Oreille County.

With only two weeks to go before their current power contract with the Pend Oreille Public Utility District (PUD) expires, Beijing's Bitmain and Vladimir's Allrise Capital continue to reject our PUD's generous contract terms while demanding that the citizens of Pend Oreille County subsidize their power bills and assume the incredibly high financial risk of their bitcoin gamble. 

Will they sue our citizen-owned PUD to in a desperate attempt to force residents to subsidize their power and pay for their risk?

Here are four reasons why they will:

1. As we have previously reported, Bitmain and Allrise have been threatening to litigate our PUD almost from the moment they purchased the former PNC paper mill in Usk, WA, and converted it into a bitcoin mining facility. 

2. Bitmain's and Allrise's attorney's at Stoel RIvves LLP -- the same lawyers who helped current Merkle Standard CEO Steve Wood and his c-suite associates at PNC skip out on paying millions of dollars in debts owed to the residents of Pend Oreille County and their employees when Wood was the Chief Financial Officer at the PNC -- have already taken initial steps to prepare for a lawsuit including request thousands of pages documenting PUD contract discussions. 

3. Allrise Capital and especially their local executives at Allrise front company Merkle Standard are getting desperate. In a letter to our PUD dated August 7, Merkle Standard CEO Steve Wood began by addressing the current contract negotiations, “I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He concludes by threatening, “Absent the District’s willingness to engage in these critical terms, Cascade will be forced to evaluate other options for electric service, which may include relocating all or a portion of its operations currently in Usk.”

Merkle COO Monty Stahl public claimed that the Usk facility was a $100 million joint venture between Beijing's Bitmain and Vladimir's Allrise. The facility cost Allrise $18 million plus $4 million in electrical upgrades. The bitcoin mining computers installed at the facility had a market value of $227 million at the time they were installed, although the agreement between Bitmain and Allrise likely reduced the price on the books. 

By comparing the Usk's facilities monthly power bills against the expected value of the bitcoin it could earn each day, Bitmain/Allrise's after-power-costs revenue during their first 13 months of operation has been less than $10 million If we take Stahl's number of $100 million and assume that Allrise could sell the Usk property for what they paid for it, that still leaves Bitmain/Allrise with $70 million in losses and no viable pathway for making substantially more money from their Usk facility.  Furthermore, most of the machines in Usk are nearly obsolete and are past their warranty dates so have little resell value. 

Allrise has not been able to afford the electricity to turn on the bitcoin mining computers at their facility for the last three months and futures prices for the Pacific Northwest indicate the prices will remain too high for crypto mining until next Spring. But next Spring a change in the way bitcoin miners are awarded bitcoin called "the halving" will double the cost of mining making the Usk facility completely untenable at likely market electricity prices. 

4. As we previously reported, PUD Commissioners Joe Onley and Dave Rick have been meeting individually with Bitmain/Allrise executives. During these meetings Messrs. Onley and Rick may have inadvertently compromised our PUD by making statements that Bitmain/Allrise's attorney's could use in court against our PUD. 

But here are four reasons why they won't sue:

1. They have an extremely weak case. The legal theories they have advanced in their threats to our PUD rely on very creative interpretations of Washington RCWs that tend to ignore most of the language of the statute itself or claims that our PUD is being "unfair" in its business practices. To the contrary, the terms offered by our PUD are well within the average of industry practice and our PUD has demonstrated time and again efforts to help Bitmain/Allrise succeed-- steps that our PUD was not contractually obligated to make. Furthermore, other crypto companies have sued other PUDs in the state and their claims have been decisively rejected by the courts.

2. Litigation cannot solve the fundamental problems that Bitmain and Allrise created for themselves. The fundamental problems are that their Usk bitcoin facility requires three times more power than the rest of the county put together, that this requirement is well beyond the District's ability to service with the power available to the district, and that bulk of Bitmain/Allrise cost are for market power which has become too expensive for them to operate profitably. Only a tiny fraction of their power bill actually goes to our PUD. Reducing that fraction will not meaningfully impact their bottom line.

Furthermore, with the halving coming only six months from now, Bitmain and Allrise would only be litigating to marginally improve their revenue for another six months before the bulk of the bitcoin miners in  Usk become fully obsolete. By the time litigation could be resovlved, even if Bitmain/Allrise somehow achieved a favorable outcome, it would be too litlle, too late. 

3. Allrise has better alternatives. Bitcoin mining computers really only have a life span of two years before the next generation of machines makes them no longer economical to operate. Roughly two-thirds of the computers in Usk are already largely uneconomically (Allrise currently can't affort to turn them on) and will be completely obsolete next spring. Allrise has the option of moving their more efficient machines to their other facility near Spartanburg, South Carolina, where market power prices are substantially lower than in the Pacific Northwest. By consolidating their most efficient machines at a lower-cost location they could at least reduce their total losses from their Usk facility. 

4. Litigating our PUD would cause significant reputational harm to Bitmain. As one of the largest bitcoin miners in the world (Bitmain controls approximately one third of global bitcoin mining), the USk facility is not nearly as important to Bitmain as it is to Allrise. Even at full operation (which has really happened), the Usk facility represents only 1-2% of Bitmain's global bitcoin mining portfolio-- and one of its least efficient segments. The cost to Bitmain (as opposed to Allrise) from the reputational harm that would make it more difficult to do business in other parts of the US is much higher than any benefit they could possibly accrue from litigation.

In conclusion, we would not expect a rational actor to litigate our PUD. Unfortunately, Allrise/Merkle has been acting more like a wounded animal than a rational actor. That makes their behavior difficult to predict, but our assessment is that the threat of litigation is more of a bluff than a plan. 

Maybe it's time for Allrise and Bitmain to just rip the bandaid off now and move on while they still have other options. 

Beijing’s Bitmain, Vladimir’s Allrise, and their local surrogates are launching yet another public misinformation campaign seeking to blame our citizen-owned PUD for their financial woes. In a recent letter to our PUD, Bitmain/Allrise local front man, Steve Wood said, ““I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He then demanded that our PUD slash the Chinese/Russian joint venture’s rates, make the citizens of Pend Oreille County pay for their exclusive power infrastructure, and accept all of the crypto company’s risk in a way that they would leave our PUD’s ratepayers owing over $10 million should they declare bankruptcy.
 
The blame game is part of pattern by Wood, Chief Operating Officer Monty Stahl and his previous crypto business partners former Newport City Manager and current EDC chairman Russ Pelleberg, and Kim Gentle, spouse of county commissioner John Gentle who stood to financially benefit from their crypto business plans.
 
In 2020, Stahl owned a small crypto company called 117 West. When our PUD was forced to raise rates for all of its customers after losing over $20 million due to the PNC bankruptcy, Stahl, in a public letter dated December 15, 2020, accused our PUD of “effectively choosing to kill my business,” a move he argued “could financially sink the entire County.” The PUD
 
Our PUD responded in letter dated February 4, 2021: ““While West 117 may not like the terms presented in the current form of contract, this does not mean PUD must offer West 117 a deal at the expense of our other customers. Similarly, the PUD is not required to and will not allow West 117 or some third-party provider to independently leverage or lean on the PUD’s infrastructure for the purpose of serving West 117’s load at the expense of our other ratepayers.”
 
At that time Stahl was in a business relationship with Pelleberg and Gentle seeking turn Pend Oreille County into a crypto hub. Part of the plan included taking down our PUD to create a Newport PUD that would power multiple crypto companies what Gentle called, “The Washington Computational Corridor.” When our PUD declined to provide special rates substantially cheaper to their prospective crypto partners, Gentle and Pelleberg co-wrote a public letter accusing our PUD as being anti-business for protecting its ratepayers.
 
In March and April of last year, Bitmain/Allrise falsely accused our PUD for blocking them restarting the papermill. However, public documents clearly show that Bitmain/Allrise had been fully aware that power infrastructure at the site would only permit either the mill or the crypto facility to operate. It was Allrise’s decision not to reopen the mill. 
 
Bitmain/Allrise’s claims are merely Chinese/Russian propaganda. 

In a letter to our PUD dated August 7, Merkle Standard CEO Steve Wood began by addressing the current contract negotiations, “I want to be clear that the District’s proposed terms on a few key areas threaten Cascade’s economic viability and are simply not workable.”
 
He concludes by threatening, “Absent the District’s willingness to engage in these critical terms, Cascade will be forced to evaluate other options for electric service, which may include relocating all or a portion of its operations currently in Usk.”
 
This report analyzes the ramifications of this important document letter and examines Bitmain/Allrise’s demands and how they could cost the residents of Pend Oreille County.
 
A couple of points to start off with:
 
First, this letter is a glaring admission of financial distress. It is an explicit confirmation of our previous analysis.
 
Second, it is unambiguously indicating that the Usk bitcoin facility is at an even higher level of bankruptcy risk than even we previously assessed and therefore creates an enormous risk to the financial future not only of our PUD but also the financial future of the Pend Oreille County should our PUD leaders to manage that risk well. It signals that our PUD should double down on risk management, not abandon it.
 
Third, the changes to the contract that Bitmain/Allrise are demanding represent only a few percent of their total annual operating costs (not including debt) and represents less than a quarter of one percent of the $100-300 million Bitmain and Allrise have invested into this project. That they are claiming that these fees consume their revenue margin to the point that they cannot stay in business is an indicator of how little revenue they expect to be able to generate (and that the small fees our PUD charges aren't really the reason they are in trouble). It also confirms our previous analysis that the Usk facility will never be able to generate enough revenue to recoup even a fraction of the money invested. Bitmain and Allrise are simply trying to minimize their losses at this point.
 
Fourth, in context this letter amounted to an “F*** You” ultimatum. This letter was sent during the negotiation process for a new power contract because Cascade’s current contract expires in September. Our PUD had been in the process of negotiating the language of contract called “red lining” in which the PUD provided Wood with a proposed contract, then Bitmain makes desired additions or deletions in red ink. The parties then discuss the proposed changes, and it goes back and forth. Instead of responding with red-line version, Wood responded with this ultimatum, signaling that he did not intend to participate in further discussion or accept our PUD’s position.
 
Fifth, Bitcoin mining has not been a benefit to our PUD or to the county. Converting the former mill to a bitcoin facility reduced its taxable property value by 75 percent. Bitmain and Allrise appear to have effectively defrauded the County of at least $2 million by paying less than one quarter of the sales and use tax due to the county by obfuscating the value of the equipment deployed there (the market value of the equipment at the time it was located to the county was $227 million). The facility employs only five people. And this letter affirms that Allrise does not have the financial wherewithal to resource the $50-100 million that would be required to restart the paper mill—something we have long assessed was beyond their financial resources and a clear ploy to use as leverage for a new power contract. Furthermore the facility has had a high opportunity cost by blocking more productive, more sustainable, and more beneficial economic development.
 
Finally, Bitmain and Allrise’s financial problems are their own fault. This letter is part of an ongoing misinformation campaign to blame our PUD, but Bitmain and Allrise are stuck in a money pit of their digging.  Pend Oreille County was never a good match for conditions needed for a successful bitcoin mining business which was only compounded by failure after failure to do due diligence or hedge their own substantial risk. They were confident men that they and their surrogates could sell the costs to County. County residents should not be asked to bail them out.
 
Next, Wood made four demands which we will examine.
 
It is important to know that terms Wood is referring are more favorable to Bitmain/Allrise than their current contract and what Wood is actually seeking is for our PUD to make the residents of Pend Oreille County financially subsidize Beijing’s and Vladimir’s crypto operations and absorb all their risk (which is very high). Furthermore, our PUD has already repeatedly bent over backwards to help them stay afloat.
 
One, Bitmain/Allrise do not want to pay the four tenths of cent ($0.004) per kilowatt hour service fee. This fee is equivalent to the monthly service fee that we all pay. For the average residential customer, the service fee represents 20-25% of their monthly bill, while for Bitmain/Allrise it represents only around 5% so it is hardly unfair. 
 
There are two components to this demand.
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1)Bitmain/Allrise is demanding that our PUD dramatically cut its service fee. Our PUD gets only $295,000 a month from the Usk facility. The rest of the money Bitmain/Allrise pays in their bill (typically $5-6 million when at full operation) passes through our PUD to entities outside of our County. This would reduce our PUDs general operating revenue that would be having to made up by its other rate payers.

2) They are demanding that our PUD remove the “take or pay” provision for the current contract. Like our residential service fees, the “take or pay” provision means that Bitmain/Allrise have to pay our PUD it’s $295,000 service fee even in months when they can’t afford any electricity. In return our PUD maintains the largest substation in the county and extensive transmission lines almost exclusively for use by Bitmain/Allrise. Waiving the “take or pay” requirement would transfer the cost for maintaining this extensive infrastructure that no other customers can use directly onto the residents of the county.
 
Two, Bitmain/Allrise is demanding that our PUD change its process for purchasing Market and District power. Wood’s discussion in the letter is somewhat esoteric, but the important thing to know is that changes that he is demanding would substantially increase both the costs to our PUD in servicing the crypto facility and the transactional risks to our PUD. So, this demand would transfer both costs and risks to the residents of the county.
 
Three, Bitmain/Allrise is demanding that our PUD abandon its risk management measures that protect it and its citizen-owners from losing over $10 million should Cascade Digital Mining breach its contract or declare bankruptcy. Currently, our PUD requires Allrise Capital to provide a $16 million letter of credit from a high-quality financial institution. In a major concession, PUD general managers April Owen and Sarah Holderman have agreed to reduce the guaranteed amount to $10.8 million, but Allrise doesn’t want to have to provide a letter of credit at all.
 
Instead, Allrise wants to make a cash deposit that will be held by our PUD. This is extremely problematic for two reasons. First, unlike a letter of credit from a bank, the deposit would be immediately frozen should Cascade declare bankruptcy and then could be clawed back by other creditors after years of bankruptcy proceedings. And to add insult to injury, Bitmain/Allrise have set up labyrinthine structure of shell companies who are themselves creditors to Cascade. This could allow Bitmain/Allrise to take back their own deposit! Second, when a bank issues a letter of credit, it assumes legal responsibility for assuring that Bitmain/Allrise will pay funds drawn from the letter or credit or the bank has to pay them itself. This provides a very important extra level of protection, especially given Wood’s admission of their precarious financial situation. Our PUD should forfeit its risk protection to bail out a high-risk business.
 
It is important to note that Allrise has been unable to find a qualified financial institution that is willing to provide a letter of credit which is an indication that Allrise is unable to pass even the basic due diligence reviews conducted by these institutions and stands next to Wood’s confession as evidence of Cascade’s financial distress.
 
Although not specifically addressed in this letter, in earlier letters Wood has demanded that our PUD reduce Cascade’s financial penalty in case of a breach of contract.
 
Four, Bitmain/Allrise want to be able to profit for reselling federally subsided power it buys back to Washington residents. During winter months, our PUD receives up to 54 megawatts of subsidized electricity from the Bonneville Power Administration, a federal government corporation. It gets this power at a little over 3 cents per kilowatt hour. All of this power is excess to the needs of the residents and businesses, so our PUD sells this power to Bitmain/Allrise at cost at price much lower than what our PUD charges its residential customers. This power from the BPA is what Wood calls “system power” in his letter.  Bitmain/Allrise want to be able to take this “system power” and resell it back to Washington consumers at a profit. A similar practice by bitcoin miners in Texas has cost consumers there millions of dollars in higher electricity bills and is being attacked by regulators and political leaders there.
 
So, to clarify, a Chinese and Russian owned joint venture wants take electricity subsidized by the residents of Washington, and then sell it back to them at a higher price for a profit! This will undoubtedly draw the attention of regulators, state and national political leaders, and regional and national media and cause substantial reputation harm to our PUD and its leadership as well as transferring costs to Washington’s residents.
 
Bitmain and Allrise Capital are in a money pit of their own digging. It would be irresponsible and immoral for our PUD Commissioner and Management to make their own neighbors bail out a foreign joint venture owned by a Beijing-based company and a Russian businessman. 

A complete copy of the letter is available for download below: