Billions In Bitcoin Mining Loans Likely Underwater

Financing for bitcoin miners is one of the quiet casualties of the bear market, with billions in outstanding loans now shot to pieces as a result of the downturn. As the bitcoin price continued to fall through 2022, many bitcoin miners that financed aggressive expansions in their operational capacity by borrowing against bitcoin on their balance sheets or other assets are facing acute stress. In the Q2-2022 report for Hashrate Index, a data and research platform built by my employer Luxor Technologies, we estimate that there are currently $3-4 billion in outstanding loans. As a result, several have been forced to liquidate assets to meet debt obligations or pay service contracts despite the fact that their pure mining operations remain profitable on an EBITA basis. This uncertainty is creating opportunities for companies with better financial footing to expand by capitalizing on others’ misfortune, but it could also prove problematic for lenders with poor underwriting and risk management skills.2021’s bull market–and the migration of Bitcoin’s mining industry from the East to the West after China’s Bitcoin mining ban–created a frenzy in the ASIC market, essentially the picks and shovels for bitcoin mining. ASIC stands for Application Specific Integrated Circuit, a bespoke computer chip that is designed to perform a single function with high degrees of efficiency. Custom ASICs have been built to mine bitcoin, with hundreds of these chips grouped together in boxes that when stacked together resemble massive server farms. These machines are very expensive, and their prices rose exponentially last year before dropping when the market turned. A top of the line miner like the Antminer S19 sold for roughly $4,800 at the advent of the New Year in 2021. At the peak of last year’s market mania, the same model could fetch $11,900–a 148% increase. Now, the S19 is going for roughly $3,600 (a 70% decrease from last year’s peak, which marked an all-time high for this model). When the market was going up, ASIC purchases with 100% premiums over their original price were reasonable based on financial projections created by many purchasers. After China’s mining ban, there was a big reduction in network competition; couple this drop with Bitcoin’s booming price, and 2021 was an immensely profitable year for Bitcoin miners. As a result, many of the machines purchased on spot last year were at top-of-market prices. They have lost 66% of their profitability during the current bear market. Last year, for example, the average revenue potential (hashprice) for a bitcoin mining machine was $0.30/terahash/day (so a 100 terahash machine like the S19 could reasonably rake in $30). Now, hashprice is $0.10/TH/day, so that same machine is producing only $10 a day). Of course, specific profitability varies by miner, depending on its specific setup, energy costs, and other forms of overhead. The financial pain for miners does not just end with decreased profitability.

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