What Bitcoin Miners Do to Survive the Bear Market

Cryptocurrency miners have many fixed costs, such as electricity, real estate, and the cranked-up computers, or rigs, that do the actual mining.

That’s why it can be hell for their margins when the market takes a dive and the value of whatever funds they had in crypto, like e.g. Bitcoin. And now that the crypto market is in what appears to be a prolonged bear market, miners are being forced to adjust.

The global market cap for crypto is roughly $1 trillion today — half of what it was in April, according to CoinMarketCap. Markets took their first big dive when Terra started to melt down in May, then again in June when Celsius became the first major crypto lender to freeze customer withdrawals to stave off a bank run.

In June, Arcane Research published a report revealing that publicly traded Bitcoin miners sold more Bitcoin than they mined in May. At the time, it was a shocking statistic.

But now, in July, the data shows that public miners sold 400% of their production in June and has reduced its overall BTC holdings by 25%, according to Arcane Research analyst Jaran Mellerud.

The companies that sold included Core Scientific, which sold $165 million of its Bitcoin holdings to “increase liquidity,” and Bitfarms, which liquidated more than half of the BTC supply to pay off debts.

One of the reasons for the squeeze has been a lack of space to plug in and run mining rigs, Saber 56 chief Phil Harvey said. From what he has seen, the adage that bear markets are the time to build has been a sad irony.

His project management and operations firm scouts data center locations and works with local energy companies to ensure they can accommodate crypto mining companies. But as markets have fallen, he has seen companies that last year went to great lengths to buy mining rigs halt or abandon construction projects.

“On the back end of [Bitmain Antminer S17] era and thereafter [Antminer S19], there was just a glut where obviously Bitmain had caught up with supply and demand and it flooded the market. But people still had the old idea of, ‘Oh, you know, we’ve got to get the machines. This is our key to mine,” he said Decrypt on a call from the Mining Disrupt conference in Miami. “But then nobody figured out that if they don’t have any infrastructure, these machines are going to sit in storage and not make any revenue. And unfortunately, that’s what’s happening.”

The lack of planning has had a knock-on effect in the second-hand market for rigs. Mining companies that have ordered more machines than they have space to run sell theirs as new hardware along with rigs that have been in operation around the clock. That has been a problem for miners who previously could rely on selling used rigs to generate some income.

“So now when guys want to sell their secondary machines, it’s a shit show because nobody needs a secondary machine that’s been run into the ground when they can buy used machines that have never been used,” Harvey said.

The problem has even spread to hardware manufacturers, such as NVIDIA, which has seen the prices of its graphics cards drop by 50%, Bloomberg reported in June.

It’s a difficult place to be in too large, publicly traded companies, said Chris Bae, CEO of Enhanced Digital Group.

His firm, founded and staffed by former Wall Street derivatives traders from UBS, Goldman Sachs, Merrill Lynch and JPMorgan Chase, has been talking to crypto companies, including miners, about how to better plan for market downturns.

“I think what we’re finding is the cash flow needs, the breakeven talks around Bitcoin, have really bubbled up. And we’re not in the early stages of these things anymore. A lot of miners have investors who just want to invest,” Bae said Decrypt. “They are not doing this pro bono.”

That means getting companies to commit to selling a portion of their reserves at a fixed price six months from now, rather than liquidating ahead of earnings and leaving themselves at the mercy of price volatility.

“What we’re doing is finding paths over the next few months for a miner to sell above the spot rate,” he said. – The question we get a lot is whether there is enough liquidity. There is always enough liquidity to plan. There is never enough liquidity when you need it at that moment.”

To do that, Bae and the Enhanced Digital Group team lock in rates on the forward or futures market. Forwards and futures contracts are types of derivatives that allow investors to buy or sell an asset at an agreed price in the future.

For example, a miner could have entered into a 6-month futures contract to sell a portion of Bitcoin in January. That would have meant they could have sold at a set price in June, when markets were in freefall following what were then rumors that crypto lenders Celsius and Voyager, and hedge fund Three Arrow Capital, were insolvent.

There have been some bright spots in what has otherwise been a tough period for crypto galore. For example, it is a good time to be a hosting company, like Applied Blockchain, that already has infrastructure in place.

The Dallas-based hosting company just inked an undisclosed amount deal with Marathon Digital to provide 200 megawatts of hosting capacity at its owned and operated data centers.

Applied Blockchain CEO Wes Cummins sees crypto years as dog years — it’s the fastest-moving and most volatile space he’s been in in over 20 years of tech investing, he told Decrypt on the phone from Paris, where he had traveled to a board meeting.

“We exclusively build data centers and provide a sort of white-glove hosting service for our customers. It’s become the bottleneck where a year ago it definitely got ASICs — that was the bottleneck,” Collins said. “There’s a lot of people who have either equipped them have paid for that will be delivered in the future, or they already have mining hardware that they need to connect somewhere.”

For now, he said, lower Bitcoin prices could put mining companies beyond breakeven, meaning the chances are low that companies can earn at least as much as they paid for mining rigs in the first place.

It could slow the growth of the mining industry in North America, which has otherwise experienced a huge increase since China banned crypto miners last year. Cummins said there is a lot of hardware in the U.S. — which will eventually increase the country’s overall hashrate — but it may take a while for much of it to come online.

He also expects the mining industry to see the kind of consolidation that has already taken place with lenders, with Sam Bankman-Fried’s Alameda Research taking a stake in Voyager Digital and FTX doing the same with BlockFi; or crypto lender Nexo buying its rival, Vauld.

“Mining companies, wherever you are in the supply chain, it just slows down. You can still have the exposure on your balance of Bitcoin. You can have loans from some of the big lenders in the area, but it will take several months before you default on the loans, maybe figure something out with the lender,” he said. “It’s not just an overnight thing where you’re dealing with a large amount of people trying to withdraw money or crypto from your platform.”

Last month in Texas, where Allied Blockchain will host Marathon’s rigs, Swedish-based mining company White Rock Management made its US debut.

White Rock CEO Andy Long said the company, which commands 55MW of mining capacity in Sweden and now the States, plans to continue expanding into 2023.

“The people who are in trouble have run up credit card buying machines,” Long said Decrypt. They have gone to the market, got access to a lot of capital, placed large orders at the top of the market when machine prices were triple what they are today, and now they have to pay the piper.”

Long said part of the six-year-old company’s strategy for surviving bear markets, especially for the Texas facility, has been choosing its power sources carefully.

For example, the Texas facility runs on flare gas, or natural gas released during oil production, which is diverted to generators and used to power mining rigs.

“When the governor told everyone to turn off their miners a few weeks ago, we didn’t have to because we’re not online,” he said. “So that’s just part of our diversification. Hydropower in Sweden, flared gas in Texas and something else in another state. That way we’ve simply spread our risk.”

Despite all the bear market bits, Long said he expects the Bitcoin network’s hashrate to increase by nearly a third by the end of the year. Hashrate is a measure of total computing power on a blockchain. Each hash represents a “guess” on a cryptographic string. On proof-of-work blockchain networks, such as Bitcoin, the miner who guesses it correctly wins the right to verify a block value of transactions and receives a reward.

“It has slowed down. But this retracement that we’ve had, unless the bear market really takes a turn for the worse, I think we’re going to see 30%.”