CleanSpark’s CEO, Zach Bradford, is beaming because the phone won’t stop ringing with potential customers interested in Bitcoin mining. There has been an uptick in the number of calls from other mining company executives, and they sound panicked. Mining companies that took out expensive short-term loans to buy hardware during the bull run are now on the brink of bankruptcy as a result of the Bitcoin crash and the subsequent rise in energy costs over the summer. The miners need cash fast, but their lenders are on their necks. There are only a couple companies that are investing in mining rigs at the moment, and one of them is Bradford’s CleanSpark.
CleanSpark is in a privileged position to buy brand new, top-of-the-line machines from nearly bankrupt miners at reasonable prices because it has always sold 70% of the Bitcoin it mined using mostly cheap nuclear energy. CleanSpark spent $5.9 million on 3,843 miners at the beginning of the month, which Bradford estimates cost about $1,500 each, down from $13,000 in November 2017 at the height of Bitcoin mania. While Bitdeer established a $250 million fund to capitalise on the crisis, Grayscale, another crypto finance giant, abandoned plans to buy cheap miners due to financial difficulties at its parent company.
The pressure on businesses that mishandled the Bitcoin crash has only increased in the meantime. The largest American Bitcoin miner, Core Scientific, lost $1.7 billion in 2022 alone and is now in danger of filing for bankruptcy if it can’t raise money by the end of the year because its debt-to-equity ratio during the bull run was almost 12 times higher than CleanSpark’s. Argo, another miner, has warned investors that it will shut down if it is unable to sell miners it has not even opened. Iris, another company, stopped paying on a loan of $108 million.
Also, there’s Texas, whose attempt to mitigate the effects of Bitcoin mining on the state’s power grid backfired spectacularly. One state executive lamented that “transformers, switch gears, and mobile data centres and containers for mining…are just sitting there” as a result of rising energy prices and debt loads among miners.
To what end, then, did this shambles arise? It stands to reason that miners would play it safe in a volatile market after waiting months for out-of-stock rigs to arrive. Mining firms, according to Luxor’s co-founder Guzman Pintos, were incentivized to “pump their stock” by taking on more debt because the more mining rigs they run, the more Bitcoin they can produce, the greater their revenue, and the higher their stock’s value will be as long as Bitcoin’s price continues to soar.
Core Scientific, which is traded on public markets, increased its Bitcoin mining power by 4.5 times by the end of 2021, to 13.5 EH/s (EH/s is a measure of “hash rate” or deployed computing power), resulting in a 3,440% increase in mining income to $210.8 million. As of the end of the first quarter of 2018, Bitcoin miner Hut8 had increased its capacity by nearly a third thanks to the addition of 9,592 machines. It was “insane, it was ridiculous,” but Pintos says that’s what the public markets were paying for when they boosted capacity suddenly.
Debt was a way for miners to increase their financial leverage, allowing them to keep more of the Bitcoin they had mined and use it for speculation. Pintos claims that some miners gathered futures contract premiums to help pay for their rapidly increasing operating expenses. According to him, as the price of Bitcoin rose, industry financiers were essentially “giving money away” by lowering the required collateral for loans and even accepting deposits in Bitcoin.
Sadly, the celebration was cut short there. When summertime energy costs increased and Bitcoin dropped in value, things turned sour for the more speculative miners. Pintos says, “No one was expecting both.” Due to an overloaded grid and an energy agreement that priced electricity at market rates, Argo’s Texas operation experienced nearly three times the average prices for the month of August.
According to Pintos, profits dropped from 70% to 20%, which is far from enough to cover rising utility bills and loan repayments. According to Dan Ives, managing director of Wedbush Securities, “the financial return on investment became almost impossible for miners.” Just like the bursting of the dot-com bubble, it has dealt a devastating blow to the industry in the short term.
The mining industry’s debt-ridden workforce is in a jam. Those who held Bitcoin mined during the bull run can get only about 25% of their investment back now, and the value of mining rigs, which moves in tandem with Bitcoin’s price, has plummeted. Pintos claims that resold unused miners can save buyers up to 70% off the retail price of new miners while still providing the same warranty. Mining company share prices have fallen across the board as rising operating costs eat away at profit margins.
Currently, all authority rests with the lending institutions. Lender NYDIG reclaimed 26,200 machines from Stronghold, a miner, earlier this month. Investment firm Generate Capital has acquired a $5 million stake in defunct debtor Compute North, a Canadian mining company. To prevent miners from selling their rigs and using the money to buy new computers at a lower price, investment firm Compass Point suggested in an investment note that lenders reduce the monthly payments they extract from them.
In spite of this, Pintos claims the worst is behind us. The Bitcoin blockchain will make it easier to mine new coins as miners disconnect, benefiting the remaining miners financially. However, the cycle of short-term loans and subsequent crashes could resume if the price of Bitcoin increases. Bradford, from CleanSpark, believes that none of the current group of lenders would issue the longer-term debt (with repayment terms of at least three years, and ideally five to seven) that would be necessary to avert another liquidity crisis. He estimates that it will be many years before anything like that occurs. It will be a long time before institutional lenders trust crypto again after the FTX collapse shakes the industry to its foundations.
This article was first published on Fortune.com