As Bitcoin Fluctuates, Crypto Miners Prepare to Crash

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Last year like The price of bitcoin rose to $68,000, the miners were delighted. Their profit, according to some estimateshovered just below 90 percent, and many of them decided to expand at a furious pace, preparing for even more wealth in 2022.

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This unexpected success did not come true. Cryptocurrency markets have plummeted over the past few months, with the price of bitcoin hovering around $30,630 at the time of writing. At the same time, electricity prices have skyrocketed around the world due to restore demand and war in Ukraine. This is a problem for bitcoin miners, who use energy-hungry mining computers called ASICs to create cryptocurrencies by solving complex mathematical problems. Energy can account for 90 to 95 percent of a miner’s overhead. Bitfury CEO Valery Vavilov in an interview with Reuters in 2016.

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In parts of Europe, electricity rates have jumped so dramatically that it can cost up to $25,000 to mine a single bitcoin, says Daniel Jogg, CEO of Enerhash, a company that runs blockchain data centers. “Some operations were not profitable,” he says. Texas, a cryptocurrency mining hotspot, is struggling with intense heat wave leading to higher energy prices jump by 70 percent– from 10.6 cents to 18.4 cents per kilowatt-hour – for the last twelve months. The US currently accounts for 37.84% of global cryptocurrency mining activity. according to the University of Cambridge, after the mining ban in 2021 in the previous crypto center of China. “Now the issue is the gross price of energy as well as energy price volatility,” says Alex Brammer, vice president of business development at crypto mining infrastructure firm Luxor Mining. “It’s very difficult to predict what energy prices will be.”

This problem is exacerbated by the growing number of miners who have joined the network since last summer, which in turn has led to a decrease in the performance of individual miners. In short, miners pay more to mint fewer bitcoins, and their coins are less valuable. While miners are still making profits, they are shrinking, says Sam Doctor, chief strategy officer at digital asset investment bank BitOoda, who currently estimates margins in the 60 to 73 percent range. “Even miners using newer mining farms that bring in comfortable profits are making less money than before,” he says. The doctor adds that the older S9 generation ASICs, which still make up a third of mining rigs in use worldwide, are no longer profitable in most cases. “Now that energy prices are rising, miners who do not have a fixed-price energy contract may find themselves squeezed on both sides.” Doctor says most miners, including major mining companies, don’t have such contracts because they require “stronger credit” to secure them than most of them currently have.

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Despite still mind-blowing margins, miners are in a tough spot. The market capitalization of most public mining companies, including industry leaders Riot, Marathon and Core Scientific, has fallen by more than 50 percent. Both Riot as well as Basic scientific skipped their upbeat earnings estimates and conservatively revised their expansion plans.

There are fears that if these negative trends do not change, this could only be the beginning of an industry-wide malaise. In the two years before the crash, miners struggled to buy up ASIC carts to produce more bitcoin. 78,000 ASICs from manufacturer Bitmain in December 2021 for a record $879 million; who came in hot pursuit another purchase of 30,000 ASIC Bitmain for $120 million in August 2021. it was planned to launch 133,000 drilling rigs by the first half of 2022, but as of May the company total 36,830 ASICs in operationfaced with installation snags, adverse weather conditions on one of his facilities in Montanaas well as delays power contract with Texas power grid. The value of idle or undelivered ASICs could soon fall below the price Marathon and other mining companies paid for them at the height of the Bitcoin bull market, as ASIC prices typically correlate with Bitcoin prices. Charlie Schumacher, a spokesman for Marathon, says the company has paid for most of its new mining rigs “well below the current market price” with the exception of the latest generation rigs, such as the 78,000 it ordered in December. He says that Marathon’s “asset lightening model”, in which the company partners with hosting services rather than building its own infrastructure, protects the company from the challenges the industry faces.

“Many miners struggle to pay for their machines because they first invested heavily in infrastructure in the hope that they could then raise money to pay for the machines that would populate that infrastructure,” Schumacher says. “We don’t have to worry about paying for infrastructure construction before we pay for our miners.”

Observers say that the active purchase of ASICs by miners was mainly financed by debt. The doctor, declining to name any specific company, says that “some miners have unsecured expenses. They’ve ordered a whole bunch of machines, they’ve put down a deposit, but they haven’t necessarily got the funding yet, or they could lose some of that funding to pay the other balance to get the rigs.” This burden, along with the fall in the price of bitcoin and the rise in the cost of energy, could affect the profits of companies, says Yurika Bulovich, head of mining at Foundry, a mining lender. “Anyone who bought hardware at the height of the cycle when the price of bitcoin was 65,000 and took out a loan to do so — which is a big part of the industry — doesn’t have positive cash flow today,” says Bulovich.

After the collapse of cryptocurrencies, there are signs that miners need money, and urgently, and given the current market sentiment, they cannot simply turn to investors for help. This month, Riot Blockchain, a major American miner, raised $10 million from selling 250 bitcoins (out of 6,320) to fund further expansion; marathon in two days announced that he was considering sells some of its bitcoins, although not “in the near term”. This broke the established trend among miners to hold — in cryptography parlance, “HODL” (a typo later reinterpreted as “hold on dear life”) — their cryptocurrencies. The selloff isn’t limited to bitcoin: Brammer says Luxor Mining is getting “frantic calls” from publicly traded companies trying to sell ASICs below book value. “We are starting to see sales,” he says. This could drive down ASIC prices even further, even if Robert Van Kirk, managing director of mining hardware marketplace Kaboomracks, says sellers are “not willing to cut prices any further” despite moderate demand.

The question is whether this spiral will start worrying creditors. In the past two years of prosperity, some mining companies have borrowed money against their bitcoin reserves, or even entered so-called “debt secured by equipmentagreements under which the loan was secured by the collateral of the mining installations themselves. Now that the price of both Bitcoin and ASICs are falling, this collateral has become worthless. “If miners are overwhelmed, the pain can spread to other parts of the industry. For example, lenders, given that the value of collateral is falling,” says Bulovich. “Even if not all lenders are the same and not all loans are the same.”

Talk of consolidation in the bitcoin mining industry and a wave of mergers and acquisitions is getting louder. “Over the next 12 to 18 months, there will be data on which companies are performing really well, operating efficiently and have sustainable levels of debt,” Brammer says. “These companies will be tolerant of very low margins once miners get used to 100 percent margins that are about to shrink.”

“Within our industry, we are seeing a lot of signs of stress right now.”

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