Bitcoin miners took on billions in debt to ‘pump their stocks’ – leading to a crypto disaster
The phone just won’t stop ringing, beamed Zach Bradford, CEO of Bitcoin mining company CleanSpark. The calls come from other mine managers – and they panic. After Bitcoin crashed and energy costs rose over the summer, mining companies that took out expensive short-term loans to buy hardware during the bull run are now going bankrupt. Lenders are breathing down their necks, and the miners need quick cash. But only a handful of companies are buying mining rigs these days – and Bradford’s CleanSpark, which only took on a small amount of debt during the bull run, is one of them.
Having always sold 70% of the Bitcoin it mined with mostly cheap core power, CleanSpark is in the enviable position of being rich enough to turn around to buy fresh-from-the-box, state-of-the-art machines from near-bankrupt miners at sane. prices. At the beginning of the month, CleanSpark spent $5.9 million on 3,843 miners that Bradford says cost about $1,500 each — down from $13,000 last November during the peak of Bitcoin mania. Crypto finance giant Grayscale also had hopes of buying miners cheaply, but then pulled out amid financial problems at its parent company, while Bitdeer set up a $250 million fund to capitalize on the crisis.
Meanwhile, the pressure has only continued to build on companies that have botched the Bitcoin crash. Core Scientific, the US’s largest Bitcoin miner, took on a debt-to-equity ratio nearly 12 times that of CleanSpark during the bull run and now faces bankruptcy if it doesn’t raise money by the end of the year, after losing $1.7 billion in 2022 alone. Another miner, Argo, told investors it will shut down if it can’t sell miners it hasn’t even taken out of the box. Another, Iris, defaulted on a $108 million loan.
And there’s the state of Texas, whose bold experiment to welcome Bitcoin miners to help balance grid risk turned into a disaster the size of the Lone Star State. In the wake of rising energy prices and debt burdens among miners, one state leader lamented a situation where “transformers, gearshifts and mobile data centers and containers for mining … are just sitting there.”
So how did this mess develop? One would expect that miners, who had to wait months for sold-out rigs to arrive, would have played it safe in a market known for volatility. But Guzman Pintos, co-founder of mining company Luxor, says these mining companies were encouraged to load up on debt to “pump up their stocks”. The premise is simple enough: the more mining rigs a company operates, the more Bitcoin they can produce, the bigger the revenue, the higher the stock’s value – as long as Bitcoin’s price continues to soar.
During the bull run, publicly traded Core Scientific increased mining revenue by 3,440% to $210.8 million, having increased Bitcoin mining power by 4.5x to 13.5 EH/s by the end of 2021 (EH/s is a measure of ” hash rate” or distributed computing power). Bitcoin miner Hut8 added 9,592 machines in the first quarter of this year, increasing capacity by nearly a third. The sudden increase in capacity “was crazy, it was ridiculous — but that’s what public markets paid for,” says Pintos.
Miners used their debt to stretch their money even further, holding onto the Bitcoin they produced and speculating on its value. To cover their rising costs, Pintos says some miners were collecting premiums on futures contracts. He says the industry’s financiers were practically “giving money away,” relaxing the amount of collateral required for loans and even accepting deposits of Bitcoin as the cryptocurrency’s price continued to soar.
And then the party came to an abrupt end. For the riskier miners, things took a turn for the worse when energy prices spiked over the summer and Bitcoin crashed. “No one expected both,” says Pintos. Power costs for Argo’s Texas operations were nearly three times average rates for August, due to an overwhelmed grid and an energy deal that priced power at market rates.
Pintos estimates that margins fell from 70% to 20% – not nearly enough to pay for energy costs and repay loans. “The economic return on investment became almost impossible for miners,” says Dan Ives, CEO of Wedbush Securities. “It’s been a short-term gut punch for the industry — no different than the bursting of the dot-com bubble.”
Indebted miners are now in a tight spot. For those who held Bitcoin mined during the bull run, sales of it will now reach a quarter of the all-time high, while mining rigs, whose prices are highly correlated with Bitcoin’s own price, have collapsed in value. Pintos says secondary sales of unused individual miners are cheaper than the list price of their wholesale manufacturers – and they even come with the same warranty. The share prices of all mining companies have almost universally plunged as skyrocketing operating costs squeeze the mass from their margins.
Lenders now have all the power. Financiers have already started taking back mining equipment – lender NYDIG took back 26,200 machines from miner Stronghold. Generate Capital has bought a $5 million stake in its bankrupt debtor, mining company Compute North. Compass Point, an investment firm, wrote in an investment note that lenders should lower the monthly payments they extract from miners to prevent them from returning rigs and using the money to buy new computers at a lower price.
Still, Pintos says the worst is over. When miners disconnect, the Bitcoin blockchain will make it easier to mine new coins, thereby increasing the income of the miners who survive. But if the price of Bitcoin rises, the cycle of short-term loans and bearish crashes could continue again. CleanSpark’s Bradford believes that none of the current list of lenders will issue long-term debt – with repayment terms of at least three years, and ideally five to seven – that could prevent another liquidity crisis. But it will be years before that happens, he says. After the collapse of FTX shakes the industry to its core, it will be a long time before institutional lenders trust crypto again.
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