Potential for Bitcoin Miner Capitulation – Bitcoin Magazine
Below is an excerpt from a recent issue of Bitcoin Magazine Pro, Bitcoin Magazine premium market’s newsletter. To be among the first to receive this insight and other market analysis on the bitcoin chain straight to your inbox, Subscribe now.
Latest public miner developments
After writing about the potential for public miner capitulation and covering Core Scientific’s possible bankruptcy route, there has been a flurry of miner announcements and developments that show industry-wide risks are taking more shape. The biggest risk is the miners’ accumulated debt and lack of cash flow to afford the interest on that debt when profit margins are squeezed. The other risk is the hash rate (ASIC mining machines) which has been used as collateral to secure this debt financing.
Public miners across the board continue to significantly underperform bitcoin this year to date. It is not a new trend, but now, as the miners begin to fall and the survivors emerge, the performance gap begins to widen significantly. Miners on the brink of going under are down over 90%, while the market’s chosen “stronger” miners are more in the 60-70% range.
Public miner shares priced in bitcoin
Starting with Core Scientific, there’s a laundry list of firms that owe money, including BlockFi, NYDIG, and Anchor Labs. In total, creditors are owed about $1 billion, and even MassMutual Barings (an investment company owned by Mutual Life Insurance Co.) is on the shortlist.
Source: Nuclear Science Quarterly Archiving
Argo Blockchain is one of those at the bottom, now down 93.23% this year. They released the biggest mining news of the week after announcing that a planned $27 million fundraiser did not go through. Earlier this year, NYDIG agreed to a loan of 70.6 million dollars with Argo. Argo also used some of its bitcoin holdings in August to reduce its BTC-backed loan obligations from Galaxy Digital as well.
Iris Energy highlighted in a funding update this week that the company is “currently able to generate an indicative $2 million of Bitcoin mining monthly gross profit, compared to a total required monthly principal and interest payment obligations of $7 million.” Having borrowed $71 million from NYDIG which was secured by ASIC machines for one of their outstanding loans and in danger of needing a debt restructuring, Iris has almost 36,000 machines that can change hands quite quickly. The company will default on these loans unless they can find a new deal by November 8.
Stronghold Digital Mining this week ended its debt restructuring deal with NYDIG, delivering a fleet of 26,200 miners in exchange for writing off $67.4 million in debt. Stronghold also extended a new tranche of debt to be repaid over 36 months instead of 13 to buy more cash runway. The moves have been a strategic move to “rapidly unwind our balance sheet and improve liquidity”.
CleanSpark, which has been in a place of growth and able to buy ASICs at lower prices recently, ended up selling more of its bitcoin holdings (mined 532 BTC and spent 836) last month to support growth and operation. Although many large miners still maintain their HODL strategies and bitcoin balances, strong miners will tap into these holdings for growth opportunities or financing operations when absolutely necessary.
TeraWulf, another bitcoin miner down 92.38% year-to-date, has a relatively high debt-to-equity ratio compared to other miners (86%) and has 120 million dollars in debt to start being repaid in the spring of 2023 with an interest rate of 11.5%.
As major private lenders such as BlockFi and NYDIG do not disclose how much mining debt is on their balance sheets, it is impossible to know for sure how exposed any of these lenders are to the wider mining industry bankruptcy risk on the horizon. These loans may be a reasonable part of broader financing activities and well equipped to manage the default risk, but it is a dynamic worth highlighting and better understanding as we expect more miners to face the pressures of debt defaults and/or restructuring during the next months.
An opinion from Marathon Digital Holdings CEO Fred Thiel shows that 20 or so public miners could be at risk of bankruptcy in what he considers a perfect storm for the industry. There is no doubt that larger, better-positioned miners are looking for potential, favorable acquisition deals to occur very soon. Like all industries before, large industry consolidation is inevitable, and public bitcoin mining appears to be going through the next phase of its life cycle. It is likely that we will move to a world where there are only a few large bitcoin miners with a handful of much smaller miners behind them.
Likewise, it’s entirely possible that as this cycle moves from the lower right quadrant to the lower left, cash-rich energy producers at both the public and private levels begin stockpiling ASICs to deploy in preparation for the next bull phase.
Source: Alkimiya
Last note
The biggest risk associated with the bitcoin market today is still the weak actors hanging by a thread below the surface. The lack of meaningful price volatility in this $20,000 range is certainly encouraging from the standpoint of buyers and sellers finding a temporary equilibrium. However, as the rate of miner problems continues to increase, along with the possibility of more fund-based leverage still in the market, the maximum pain is unequivocally lower for industry participants. The bulk of the selling has occurred with bitcoin now at $20,000, but one has to question whether the marginal buyer is of sufficient size to stem the potential selling pressure on the horizon.
We suspect that the pressure is starting to increase on the crypto borrowers who survived the summer contagion, due to the increasing headwinds some miners face in this environment.
