As Bitcoin Falters, Crypto Miners Brace for a Crash
Electricity costs more, Bitcoin is worth less. What can possibly go wrong?
“Many miners are struggling to pay for their machines because they first invested heavily in infrastructure, with the hope that they could then raise the money to pay for machines that would fill that infrastructure,” Schumacher says. “We don't have to worry about paying to construct infrastructure before we pay for our miners.”
Observers say that miners’ ASIC-buying spree was mostly funded by debt. Doctor, while declining to name any specific company, says that “certain miners have unfunded expenses. They have ordered a whole bunch of machines, they paid a deposit, but they don't necessarily have the funding already secured, or they may be losing some of that funding to pay the second balance to receive the rigs.” That burden alongside bitcoin price’s slump and costlier energy could impact companies’ bottom lines, says Jurica Bulovic, head of mining at Foundry, a lender to mining outfits. “Anyone who bought equipment at the height of the cycle when bitcoin's price was 65,000 and took a loan to do so—which is a lot of the industry—they are not cash-flow positive today,” Bulovic says.
In the wake of the crypto crash, there are signs that miners need cash, and quickly— and given the current market sentiment they cannot just turn to investors for help. This month, Riot Blockchain, a major US miner, raised $10 million from the sale of 250 bitcoins (out of a trove of 6,320) to fund further expansion; two days later Marathon announced it was considering selling some of its bitcoins, albeit not “in the near term.” That bucked a well-established tendency among miners to hold—in crypto parlance, “HODL” (a typo later reinterpreted as “hold on for dear life”)—to their cryptocurrencies. The sell-off isn’t restricted to bitcoin: Brammer says that Luxor Mining is receiving “frantic calls'” from publicly traded companies trying to sell ASICs below book value. “We're starting to see fire sales,” he says. That might further depress ASIC prices, even if Robert Van Kirk, managing director of mining equipment marketplace Kaboomracks, says that sellers “don't want to lower their pricing any more,” despite tepid demand.
The question is whether that spiral will start to make lenders worried. In the past two years of prosperity, some mining companies have borrowed money against their bitcoin reserves, or even entered so-called “equipment-backed debt” agreements where the loan was collateralized with the mining rigs themselves. Now that the price of both bitcoin and ASICs is going down, that collateral has lost value. “If the miners are over-leveraged, the pain could trickle down to other parts of the industry. For example, lenders, given that the value of collateral has been dropping,” says Bulovic. “Even if not every lender is the same, and not every loan is the same.”
Talk of consolidation in the bitcoin mining industry and a wave of mergers and acquisitions has grown increasingly loud. “Over the next 12 to 18 months, there's going to be evidence coming out on which companies are run really well and are operationally efficient and have healthy levels of debt,” says Brammer. “These companies will be resilient to very tight margins after miners get used to 100 percent margins—which are about to be squeezed down.”
“Inside of our industry, we're seeing a lot of signs of stress right now.
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