How Beijing's Bitmain gets the overwhelming majority of the money from the Usk bitcoin facility

Understanding the relationship between Beijing's Bitmain and Allrise Capital can be confusing given Allrise's efforts to publicly downplay Bitmain's role and the labyrinthine corporate structure featuring a multiplicity of subordinate limited-liability corporations including Cascade Digital Mining and Merkle Standard. But here is what you need to know:

1. Bitmain is the by far the majority investor
2. Bitmain controls the bitcoin mining process and the related cash flow
3. Bitmain receives or will receive the overwhelming majority of the revenue

This report will review the three main ways that Bitmain cashes in their joint bitcoin mining facility in Usk, WA. 

1. Bitmain will get repayment for the 18,000 bitcoin mining computers currently installed at the Usk site. 

The market value of these machines when they shipped last year was $227 million dollars plus up to $63 million in shipping fees and tariffs. When you compare that to the $18 million Allrise contributed to the purchase of the facility at bankruptcy auction, it is easy to see that Allrise is the junior partner. The amount that Allrise owes Bitmain is likely less than the market value given that size of the purchase and the other ways Bitmain gets cash flow out of the deal. Merkle Standard COO Monty Stahl described their partnership as a "hundred million dollar joint venture," whcih would still put Bitmain's relative contribution that needed to be paid back at 5-6 times more than Allrise's own investment in the facility.

But Allrise did not pay Bitmain up front for the machines. As one of the county's crypto insiders explained to me:
"In finance you'll see partnerships formed between asset holders and management. So Bitmain is the industry leader in making block chain mining equipment so Merkle Standard went to them for the purchase. Instead of writing a check for that, businesses will form a partnership based on the return of investment, i,e. purchase of the asset with that contractual obligation being the horizon for the partnership. This way the buying company retains liquidity for other projects and needs while still acquiring the necessary funding for equipment and the selling company sees [not] only a repayment for the purchase but a rate of return in addition usually a few basis points."

In other words, Allrise will need to repay Bitmain the $100-300 million back over time. But Bitcoin mining computers only last a few years at most, meaning that the bill from Bitmain will be coming due soon.

2. Bitmain gets an additional percentage of all mining revenues in the form of mining fees.

Almost all bitcoin miners basically contract their machines to one of the seven main "mining pools" which actually control the bitcoin mining process remotely. Bitmain controls roughly one-third of global bitcoin mining through its mining pools. The facility in Usk represents between 2 to 3 percent of Bitmains' total mining capacity. The mining computers they build come with preinstalled software that connects them to mine for Bitmain's own pools. 

Bitmain controls the mining process, receives all the bitcoin, and controls all the related bitcoin transactions. Bitmain then pays the miners a relative share of their total mining revenue after keeping between 4 to 25 percent of the revenue for themselves as a "pool fee." For example, yesterday Bitmain received 300 bitcoin from its global mining empire. They would then pay Cascade Digital Mining around 6 of those bitcoin representing CDM's 2-3 percent contribution to Bitmain's total effort while keeping up to 2 bitcoin for itself as a "pool fee." 

See our previous report on mining pools: Bitcoin's Big Bluff: 3 companies control super majority of bitcoin transactions-- 2 of them from the PRC - PROTECT PEND OREILLE

Cascade Digital Mining then uses it's six bitcoin (converted to cash) to pay the PUD for electricity and reimburse Allrise Capital for employee salaries, taxes, the purchase price of the former PNC mill, etc. 

3. Bitmain gets revenue from its equity share in the joint venture company.

Cascade Digital Mining is the actual joint venture company between Bitmain and Allrise. According to public documents submitted to our PUD, Allrise claims that Bitmain has one-third of the equity in Cascade Digital Mining. So Bitmain has the right to one-third of any of the remaining revenue AFTER they have been reimbursed for the cost of their mining computers and AFTER they have already received their pool fees. 

While Merkle Standard, which is wholly owned by Allrise Capital and manages the facility (but not the bitcoin mining process and resulting revenue), acts as the public face for the facility, it doesn't meet the Golden Rule-- he who has the gold makes the rules. Bitmain is both the overwhelming majority investor and directly controls the daily revenue generated by the facility. 

If that sounds like a bad deal for Allrise Capital, it probably is. See our report "Why the Usk Bitcoin Mine is a Financial Disaster for Bitmain and Allrise Capital" POC Cryptonomics - PROTECT PEND OREILLE