Bitcoin miners took on billions in debt to pump their stock leading to crypto disaster

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The phone keeps ringing, beams Zach Bradford, CEO of bitcoin mining company CleanSpark. The calls come from other mining bosses and they panic. After Bitcoin crashed and skyrocketing energy costs over the summer, mining companies that took out expensive short-term loans to buy hardware during the bull run are now bankrupt. Lenders are at their wit’s end and miners need money fast. But only a handful of companies are buying mining rigs these days and Bradfords CleanSpark, which incurred only a small amount of debt during the bull run, is one of them.

Having historically sold 70% of the Bitcoin it has mined using mostly cheap nuclear power, CleanSpark is in the enviable position of being wealthy enough to rush to buy cool high-end machines from quasi-miners. – bankrupt at reasonable prices. Earlier this month, CleanSpark spent $5.9 million on 3,843 miners which Bradford said cost around $1,500 each, down from $13,000 last November during the peak of the Bitcoin craze. Crypto-finance giant Grayscale also hoped to buy miners on the cheap, but then backed down amid economic woes at its parent company, while Bitdeer set up a $250 million fund to tap into the crisis.

Meanwhile, pressure has steadily mounted on the companies that spoiled Bitcoin’s crash. Core Scientific, the Americas’ largest Bitcoin miner, took on a debt ratio almost 12 times greater than CleanSpark during the bull run and now faces bankruptcy if it doesn’t raise money by the end of the bull run. year, after losing $1.7 billion in 2022 alone. Another miner, Argo, told investors it would shut down if it couldn’t sell miners it hadn’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 in welcoming Bitcoin miners to help balance power grid risk turned into a Lone Star state-sized disaster. In the wake of rising energy prices and miners’ debt burden, a state leader lamented a situation where transformers, switches, mobile data centers and containers for mining are just there.

So how exactly did this mess develop? One would expect that miners, who had to wait months for out-of-stock rigs to arrive, would have played it safe in a market known for its volatility. But Guzman Pintos, the co-founder of mining company Luxor, says these mining companies were enticed into debt to pump their shares. The premise is quite simple: the more mining rigs a company operates, the more Bitcoin it can produce, the greater its revenue, the higher the value of its stock as long as the price of Bitcoin continues to fly.

During the bull run, publicly traded Core Scientific increased its mining revenue by 3,440% to $210.8 million, after increasing its Bitcoin mining power by 4.5 times to 13.5 EH/s at the end of 2021 (EH/s is a measure of hash rate or deployment computing power). Bitcoin miner Hut8 added 9,592 machines in the first quarter of this year, increasing its capacity by almost a third. The sudden increase in capacity was insane, it was ridiculous, but that’s what public markets were paying for, Pintos says.

Miners used their debt to stretch their money even further, holding onto the bitcoin they produced and speculating on its value. To cover their spiraling costs, Pintos says some miners collected premiums on futures contracts. He says that industry financiers were practically giving away cash, easing the amount of collateral required for loans and even accepting Bitcoin deposits as the price of cryptocurrencies continued to soar.

And then the party came to an abrupt end. For riskier miners, things got worse when energy prices rose over the summer and Bitcoin crashed. No one expected both, says Pintos. Electricity costs for the Argos operation in Texas were almost three times higher than average prices in August, due to an overstretched grid and an energy agreement that priced electricity at market rates. market.

Pintos estimates that margins have fallen from 70% to 20%, which is nowhere near enough to pay energy costs and repay loans. Financial return on investment has become nearly impossible for miners, says Dan Ives, managing director of Wedbush Securities. It was a short-term blow to the industry, no different from the bursting of the dotcom bubble.

The indebted miners are now in a difficult situation. For those who held Bitcoin mined during the bull run, selling it now will yield a quarter of its all-time high, while mining rigs, whose prices are highly correlated to Bitcoin’s own price, have crashed in value. Pintos claims that secondary sales of unused individual miners are cheaper than their wholesale makers’ listing price and even come with the same warranty. Share prices of all mining companies have almost universally fallen as soaring operating costs squeeze the dough off their margins.

Lenders now hold all the power. The financiers have already begun to repossess the mining equipment. Lender NYDIG repossessed 26,200 machines from miner Stronghold. Generate Capital 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 reduce the monthly payments they extract from miners to prevent them from flipping rigs and using the money to buy miners. new computers at a lower price.

Still, Pintos says the worst is over. As miners go offline, the Bitcoin blockchain will make it easier to mine new coins, increasing the income of surviving miners. But if the price of Bitcoin rises, the cycle of short-term lending and cascading crashes could continue once again. CleanSparks Bradford believes that none of the current lenders would issue longer-term debt with repayment terms of at least three years, and ideally five to seven years, which could prevent another liquidity crisis. But it will be years before that happens, he says. After the collapse of FTX shook the industry, it will be a long time before institutional lenders trust crypto again.

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