Bitcoin Energy Market: Custody and Off-Grid Mining

Introduction

Miners participate in the wholesale electricity market in various ways—from spot and fixed pricing to hash rate spreads and ancillary services. However, not all miners are exposed to the dynamics of the grid market. Many operate on the fringes of the market (or even completely outside of it), obtaining power directly from specific generators or producing their own electricity.

Offline and "Pay-as-you-go" Custody Model

Not all miners rely on the public power grid to operate. Many miners deploy their sites around power generation facilities—such as wind farms, solar power stations, gas units, or flare gas systems—even completely independent of organized wholesale markets, obtaining electricity directly from specific power generators or generating it themselves.

These operational models are commonly referred to as "instant use" model (As Gen), "behind the meter" model (Behind the Meter), "unit contingent" model (Unit Contingent), or simply as "off-grid" model (Off-Grid). Their common feature is that the data center either shares the same address with the power generation facility or is contractually bound to a specific power source, without connecting to the wholesale electricity market.

In this mode, the electricity consumption behavior of miners is entirely dependent on the actual output of the generator, rather than external electricity prices. For example, if a wind farm currently generates only 10MW of electricity, even if the miner's contract allows for the use of 20MW, they can only consume 10MW in reality. The unused electricity is wasted because it cannot be fed back into the grid. This principle applies universally to various off-grid scenarios—whether using natural gas, isolated renewable energy, or flare gas, miners are constrained by the availability of physical resources rather than market prices.

Therefore, the operating logic of off-grid or "on-demand" mode mining farms is fundamentally different from that of grid-connected mining farms: the latter adjusts computing power according to real-time electricity prices, while the former only considers "whether there is electricity or not," regardless of the electricity price. Even if the current electricity price is far above the breakeven point for mining, miners will continue to operate because the electricity cannot be used for other purposes. Profitability is thus decoupled from the broader energy market and is instead dependent on the operating time, volatility, and fixed costs of the generation equipment (or energy contracts).

Such models often provide lower overall electricity costs—especially when utilizing constrained or commercially isolated energy sources. However, the trade-off is often a decrease in operational flexibility and shorter operating hours, particularly when relying on intermittent resources such as wind and solar power. The economic model focuses not on maximizing operating time, but on optimizing profit margins as much as possible during periods of electricity availability. In fact, while such resource structures shield against external market fluctuations, they also expose operations to the inherent risks of local power supply.

Off-grid mining projects come in various forms structurally: including fixed-price natural gas contracts, profit-sharing agreements with power generators, joint venture models, and fully owned operations. They are usually smaller in scale, located in remote areas, have lower variable costs, but require a higher initial capital investment—especially when infrastructure needs to be built from scratch. However, compared to grid-connected operations, off-grid deployments are generally quicker and more flexible, as they often bypass the approval process for grid interconnection and can be adjusted according to local conditions.

In practice, off-grid and "pay-as-you-go" mining models are most suitable for scenarios where electricity resources are abundant but cannot be grid-connected, operational time may be unstable, and operators are more focused on cost control and profit optimization. If applied properly, such strategies can achieve operational independence with lower energy costs and be immune to fluctuations in the power grid.

Hybrid Strategy

1. Grid Backfill

An evolution of the pure custody model is the "grid backfill" model. The base load of miners is supplied by dedicated generators, but when power generation is insufficient, it supplements the operational capacity with grid electricity.

Basic power supply - from generators - operates continuously without considering market prices; the backfill part is similar to spot electricity, increasing load when electricity prices are low, and reducing consumption when prices exceed the breakeven point.

From an economic perspective, this hybrid structure combines:

• Stable low-cost contract electricity from generators
• The incremental electricity usage part responds flexibly to electricity prices.

Compared to pure off-grid solutions, this model can improve uptime while retaining a certain degree of resistance to market volatility, making it particularly suitable for data centers with intermittent power generation or insufficient scale.

2. External Natural Gas Market

For gas miners connected to the pipeline network, their economics are similar to the spot/fixed electricity pricing model of the power grid. If fuel is procured at market prices, the electricity costs are similar to spot price fluctuations; if fuel prices are locked in advance, the cost characteristics are akin to a Power Purchase Agreement (PPA), at which point miners can also choose to resell natural gas to the market. In either case, when the spot price of natural gas exceeds the break-even margin for mining, miners will shut down their equipment.

In these two types of hybrid strategies, the key driving factor is no longer the wholesale electricity price, but rather the structure of fuel input costs.

Conclusion

Custody and off-grid strategies enable miners to avoid the fluctuations of the electricity wholesale market (while also giving up related opportunities), allowing for the release of stranded or underutilized power generation resources, providing an intrinsic hedging mechanism against market price surges, and offering more flexibility in trading structures.

However, these advantages come with corresponding costs: operating time is constrained by the generation mechanism, the ability to respond to market signals is limited, and capital costs may be higher.

For some operators (especially those who can obtain cheap restricted energy and are willing to adjust production based on resource availability), hosting and off-grid may be the most competitive mining methods. For other operators, adopting a grid-backfill hybrid model can capture most of the low-cost advantages while retaining flexibility.

In summary, whether you are connected to the power grid or binding a single power generation device, the key to profitability lies in accurately matching the energy supply model with financial and operational strategies.