Crypto lenders turn into miners

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Crypto lenders have repossessed so many Bitcoin mining rigs that they resort to plugging them in and mining tokens themselves.

Lenders are getting creative about what to do with the mining machines they accepted as collateral for the roughly $4 billion in rig-backed loans they took out when Bitcoin’s rally looked unstoppable . With the recent spike in defaults and the fall in cryptocurrencies, the value of next-gen machines has fallen by 85%, according to data from Luxor Technologies.

While some machines are simply in warehouses, waiting for prices to recover, lenders like the New York Digital Investment Group (NYDIG) are using debt negotiations to find alternative solutions. In December, NYDIG agreed to pay Greenidge Generation Holdings not only for its mining rigs, but also to operate them in exchange for debt relief. The deal effectively made Greenidge one of the biggest Bitcoin miners a hosting company while NYDIG became the miner.

Lenders are inundated with mining rigs, said Wolfie Zhao, head of research at TheMinerMag, a research arm of mining consultancy BlocksBridge. One way for lenders to avoid further losses from defaulted loans is to keep collateral machines running and generate revenue.

It’s an option that lenders are taking more seriously, especially those that already have mining capabilities to draw on, including Galaxy Digital LP and Digital Currency Groups Foundry.

Bitcoin mining which uses specialized computers known as rigs to validate transactions on the blockchain in exchange for rewards in the token was one of the most lucrative businesses in crypto. Miners had sought to take advantage of this value during the build-up of Bitcoin’s historic rally. But with soaring energy prices and Bitcoin down 58% on the year, a number of loans are now underwater. A Valkyrie index of Bitcoin miners is down 75% from a year ago, even after this week a 30% jump on optimism a US economic recovery could support crypto prices.

NYDIG issued approximately $378 million in platform-backed loans to miners between October 2020 and May 2022, according to data compiled by TheMinerMag. It has already received around 26,200 machines from Stronghold Digital Mining to clear miners of $67m in debt, and is likely to take back another batch of machines from Iris Energy after defaulting on $103m in loans guaranteed by machines.

Lenders have moved more rigs out of storage, said Mason Jappa, chief executive of crypto-mining services firm Blockware Solutions. Some lenders are already looking for high-quality hosting sites, he said. Lenders can recoup some losses if they can find reliable Bitcoin mining facilities with cheap electricity, but they are hard to come by.

Of course, lenders can still choose to sell some of the machines, even at a steep discount, Jappa said. But they may not want to sell a large quantity. As more miners such as Core Scientific go bankrupt, even more machines are expected to hit the market. If it drives prices down further, it means even bigger losses for lenders.

Read: Crypto exchange Kraken closes Abu Dhabi office, lays off 8 employees

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