Crypto Miner Consolidation Imminent As Some Industry Players Struggle

As more miners report severe financial pressures related to low crypto prices, high energy costs and debt, an increase in consolidation is inevitable, industry watchers said.

After Core Scientific disclosed in filings last week that it was considering bankruptcy, Argo Blockchain became the latest major bitcoin miner to reveal financial pressure, saying an expected $27 million capital injection had fallen through.

A spokesperson for the company declined to comment.

While small to mid-sized companies struggle, larger mining rig operators have expressed interest in acquisition opportunities. Among the possible acquirers is Marathon Digital, which previously said it was more focused on building organically than buying.

“We like to have an agile strategy … and capitalization to be able to take advantage of opportunities like this,” Marathon Digital CEO Fred Thiel told Blockworks.

Thiel declined to comment on whether the firm has engaged with Core Scientific or Argo, but he said Marathon would keep an eye on cheap hosting resources.

“Would Marathon possibly participate in the purchase of a hosting site?” Thiel said. “Yes, if the price is absolutely attractive. Or whether it made strategic sense.”

Argo Blockchain the last miner under stress

Argo Blockchain said Monday that it no longer expects to receive the $27 million capital infusion it had expected from a “strategic” investor, which it declined to name. The capital was to be used in part for capital expenditures for the continued development of the flagship Helios facility in Dickens County, Texas. It is not clear why the funding fell.

While Argo Blockchain explores other funding opportunities, the company sold nearly 4,000 new Bitmain S19J Pro machines to raise $5.6 million.

“Should Argo not be successful in completing additional financing, Argo would be cash-flow negative in the short term and would have to curtail or cease operations,” the company said.

NYDIG agreed in May to lend Argo up to $70.6 million to recapitalize the purchase of digital mining equipment for the Texas facility. It is not clear whether NYDIG was set to deliver the additional $27 million.

A spokesperson for NYDIG did not immediately return a request for comment.

The move comes after Core Scientific said in filings last week that it would skip upcoming payments as it faces liquidity and operational problems. The miner said it was hiring advisers while it considers options, including seeking relief through bankruptcy.

Crypto mining data center operator Compute North filed for bankruptcy in Texas in September. The firm owes as much as $500 million to at least 200 creditors, according to a petition filed in the US Southern District of Texas bankruptcy court.

Will miners survive the ‘perfect storm’ of pressure?

Chase White, an analyst at Compass Research & Trading, said in a research note published on Tuesday that the firm lowered its price target on Argo from $4.50 to $1.

Shares were at $0.90 at 3:00 PM ET Tuesday, plunging about 93% year-to-date and down 19% on the day.

“While we believe [Argo] likely has enough liquidity to stay afloat for the next couple of quarters, White said. “Part of the reason we believed [Argo] was to raise share capital should have enough cash to enter into a fixed price power purchase agreement (PPA) for its [Texas] facilities to rein in electricity costs, which now appear to be off the table.”

Glyn Jones, chief executive of Icebreaker Finance, said too much of the industry was focusing solely on debt-fueled growth in 2020 and 2021 – while paying less attention to production costs.

Icebreaker in September launched a lending pool for miners it called “vertically integrated and positioned for success.” The loans, with interest rates between 15% and 20%, have a term of 12 to 18 months and are secured by assets such as mining rigs, power transformers and digital assets.

“We estimate that less than 25% of the US hash rate operates with the financial resilience necessary to handle the full range of credible scenarios, including a further deterioration of the hash price,” Jones told Blockworks. “More than perhaps any other industry, the economics dictate that only the most efficient operators will survive in the long run. No miner has greater pricing power, so it’s all about cost of production.”

Increasing difficulty of bitcoin mining and associated costs — as well as looming debt — have created “a perfect storm” for many miners, Thiel said. He added that around 20 public miners may be at risk of bankruptcy due to current market conditions.

“If you were to look across the industry and [see] that have equipment financing, those are the ones with the highest risk today, Thiel said. “Or those who have a lot of debt to service.”

Fresher miners seek buying opportunities

Bill Cannon, head of portfolio management for digital asset fund manager Valkyrie Investments, said the mining area’s stronger firms are likely to strengthen their position through acquisitions at reduced rates.

Cannon expects mergers and acquisitions to pick up this quarter and early next year, as companies on the brink of insolvency struggle to retain at least some shareholder value — and keep their doors open.

“Consolidation is inevitable,” Cannon said. “All industries are going through it, and we think that the remaining miners will benefit from this period, just as the Amazons and Googles of the world did after they emerged from the ashes of the dot-com boom.”

Riot Blockchain CEO Jason Les told Blockworks that his firm was one of the “best positioned acquirers” in the sector. A number of companies, Les added, will go bankrupt or use private markets and associated leveraged buyouts.

Those considering bankruptcy may want to go that route sooner rather than later, Thiel said.

“If you’re close to the risk of doing that, you should hurry,” he said. “Buyers for your assets are going to run out of money because there are so many people ahead of you in line who are bankrupt.”

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