Price Drop Exposes Bitcoin Mining’s Dependence on Leverage

  • Bitcoin miners across the US have taken out loans to fund their rapid expansion over the past year as crypto prices hit record highs
  • The current low price of BTC means that miners are operating with extremely thin margins, which puts them at risk of default.

Whole swaths of bitcoin miners are at risk of being liquidated after taking out high-interest loans to fund their bull market spending habits, rather than selling their bitcoin – which, according to industry players industry, is likely to trigger a cascade of crypto lenders and hedge fund firms with bankrupt exposures.

Bitcoin miners rely on three dynamics of profitability: the price of bitcoin (BTC), electricity prices, and access to specialized high-performance mining rigs called ASICs (application-specific integrated circuits). ).

All three are now troubled miners – along with their creditors and other counterparties.

BTC is down around 30% in the past month from $31,000 to below $21,000. Summer electricity prices are expected to double year on year in the northeastern United States, which is home to a good number of miners.

Rather than selling their mined bitcoin, US operations have typically taken out loans at fairly high interest rates, Blockworks has learned, when the price of bitcoin was double what it is today.

Estimates suggest that nearly 40% of all bitcoin mining occurs in the United States. Crypto lenders such as BlockFi, NYDIG, and Babel Finance in China have helped facilitate the growth of ASIC inventories. The operation was working – before the collapse of Stablecoin UST and the insolvency of digital asset lender Celsius.

Although energy costs are a concern, the price of bitcoin is the main source of pain for miners, especially those with high leverage.

“The sentiment is really bad,” said Todd Esse, co-founder of mining hedge fund firm HashWorks. “At this price, margins are very slim, especially heading into summer with power prices expected to rise in Texas and PJM [Pennsylvania, New Jersey and Maryland].”

Prior to the latest widespread market downturn, miners found creative loopholes to drop deposits – between 30% and 50% – to manufacturers to receive a new batch of machines, pledging to pay the balance with funds yet to be mined. bitcoins.

Operators even borrowed money to cover overhead costs using their ASICs as collateral – believing the price of bitcoin would continue to rise, allowing them to mine profitably. A number of lenders, including recently submarine Babel Finance, have taken on such loans, risking the creditor getting stuck with cumbersome, illiquid machines that lose money every second without power. And that’s not to mention the companies that voluntarily shut down their rigs – some can’t break even as the price of electricity soars.

Some will seek to offload their entire ASIC supply to secondary markets, already awash with second-hand rigs from Chinese miners, according to mining consultant Alejandro De La Torre, who said it would be “chaos there. “.

In fact, HashWorks was recently offered high-end Bitmain S19j Pros for $4,400, which is 65% off the retail price.

“The market is looking for a supply right now,” Esse said.

Lenders could repossess bitcoin miners to recover

Regardless of where a trader has set up their platforms, if there is a line of credit going, “no matter when you entered” it is impossible to “generate enough revenue through mining to make those loan obligations,” according to Jurica Bulovic, mining manager at Foundry Digital, which lends to crypto miners and engages in crypto staking.

Defaults on the loans – which already carry a relatively high interest rate of around 11% per year – are expected to weigh heavily on creditors with large balance sheets.

However, most miners are unlikely to start defaulting anytime soon, Bulovic told Blockworks. Some have built up balance sheets and other income to at least pay the interest.

But if the current economy continues, miners who have bought and sold BTC over time will start to dip into their cash reserves.

If they have cash reserves.

“Obviously nobody wants to sell bitcoin, especially at these low prices, but they will have to to avoid defaults on their loans,” Bulovic said.

When possible, Foundry structures its loan between three parties – themselves, the miners, and the rigs hosting facilities.

If the miner defaults, Foundry would take over the operation and continue mining until it recovers. But not all lenders have this expertise.

The last resort is to repossess the platforms and try to sell.

“It’s a challenge for all lenders because the markets are not very liquid,” Bulovic said. “It is much easier to sell bitcoin than to sell an ASIC. I think some lenders in the space who came from traditional lending, or lending against bitcoin, are now going to realize that the collateral they hold may not be as liquid or as valuable as they thought .

Bitcoin hashrate expected to drop further

Evidence of pain can already be found in bitcoin’s hashrate, which measures processing power on the network. Over the past week, the hashrate has fallen around 17% and bitcoin itself has fallen over 20%.

Esse and De La Torre expect a significant drop in the hash rate, although the Bitcoin network can withstand a significant drop in the hash rate and remain secure.

The Crypto collapse has exposed immense leverage risk in bitcoin mining.

“If the miners weren’t mobilized, they would either be mining or not, and they wouldn’t have any debt to pay off,” Esse said. “This company is like any other commodity company: how much do you want to profit from oil? You should operate within cash flow limits.

The notion of “free money” has disappeared in mining, De La Torre said, for those who haven’t considered a potential price drop.

“And maybe funding $13,000 ASIC machines was a dumb move – and now they’re paying for that stupidity,” he said.

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  • David Canellis



    David Canellis is an Amsterdam-based editor and journalist who has covered the crypto industry full-time since 2018. He has a strong focus on data-driven reporting to identify and map trends within the ecosystem, from bitcoin to DeFi, from crypto stocks to NFTs and beyond. Contact David by email at [email protected]
  • Michael Bodley

    Chief Editor

    Michael Bodley is a New York-based editor for Blockworks, where he focuses on the intersection of Wall Street and digital assets. He previously worked for the institutional investor newsletter Hedge Fund Alert. His work has appeared in The Boston Globe, NBC News, The San Francisco Chronicle and The Washington Post. Contact Michael by email at [email protected]