Last year, as bitcoin’s price rose as high as $68,000, miners were having a blast. Their profits, according to some estimates, were hovering just under 90 percent, and many of them decided to expand their operations at a frantic pace, bracing for an even larger 2022 bonanza.
That windfall has not come to pass. Over the past few months, cryptocurrency markets have slid, with bitcoin’s price hovering at $30,630 at the time of writing. At the same time, the price of electricity shot up across the world because of a bounce-back in demand and the war in Ukraine. That is a problem for bitcoin miners, who use energy-chugging mining computers, called ASICs, to coin cryptocurrency by solving complex mathematical problems. Energy can account for up to 90 to 95 percent of a miner’s overhead, according to Bitfury CEO Valery Vavilov in an interview with Reuters in 2016.
In some parts of Europe, energy rates have shot up so dramatically that mining one bitcoin can cost up to $25,000, says Daniel Jogg, CEO of Enerhash, a company running blockchain data centers. “Some operations were running without profits,” he says. Texas, a cryptocurrency mining hot spot, has been grappling with an intense heat wave that caused the price of energy to jump by 70 percent—from 10.6 cents to 18.4 cents per kilowatt hour—over the past twelve months. The US currently makes up 37.84 percent of global crypto-mining activity, according to the University of Cambridge, following a 2021 mining ban in previous crypto powerhouse China. “The problem now is the price of energy on a gross basis, but also the volatility in energy price,” says Alex Brammer, vice president for business development at crypto-mining infrastructure company Luxor Mining. “It’s really hard to model forward what energy prices are going to be.”
That problem is compounded by a growing number of miners joining the network since last summer, which in turn has reduced individual miners’ outputs. In short, miners are paying more to mint fewer bitcoins, and their coins are less valuable. While miners are still turning a profit, it is shrinking, says Sam Doctor, chief strategy officer at digital asset investment bank BitOoda, who estimates margins are now in the range of 60 to 73 percent. “Even miners who are using newer mining rigs—which are comfortably profitable—are making less money than before,” he says. Older ASICs from the S9 generation, which still constitute a third of mining rigs in use worldwide, are no longer profitable in most cases, Doctor adds. “Now with the price of energy going up, miners that don’t have a fixed-price energy contract can get squeezed on both sides.” Doctor says that most miners, including larger mining companies, don’t have such contracts, because securing one requires “stronger credit” than most of them have at the moment.
Despite the still eye-popping margins, miners are in a tough spot. Most publicly listed mining companies—including industry leaders Riot, Marathon, and Core Scientific—have seen their market capitalization plummet by well over 50 percent. Both Riot and Core Scientific have missed their bullish revenue estimates and have conservatively revised their expansion plans.
The fear is that if these negative trends do not reverse, this might be just the start of an industry-wide malaise. In the two years before the crash, miners were scrambling to buy cartloads of ASICs to churn out more bitcoin.The epitome of this buying bonanza is Marathon—one of the top three miners in the US—which purchased 78,000 ASICs from manufacturer Bitmain in December 2021 for a record $879 million; that came hot on the heels of another purchase of 30,000 Bitmain ASICs for $120 million in August 2021. Marathon’s plan was to run 133,000 rigs by the first half of 2022, but as of May the company had only 36,830 operational ASICs, after facing installation snags, adverse weather events at one of its facilities in Montana, and delays securing an energy contract with Texas’ power grid. The value of idle or still-to-be-delivered ASICs might soon fall below the price that Marathon—and other mining companies—paid for them near the peak of bitcoin’s bull run, as ASIC prices are generally correlated with that of bitcoin. Charlie Schumacher, a spokesperson for Marathon, says the company paid for most of its newer mining rigs “far below the current market rate”—except for last-generation rigs like the 78,000 it ordered in December. He says that Marathon’s “asset-light model,” by which it partners with hosting services rather than building its own infrastructure, protects the company from the issues the industry is experiencing.
“Many miners are struggling to pay for their machines because they first invested heavily in infrastructure, with the hope that they could then raise the money to pay for machines that would fill that infrastructure,” Schumacher says. “We don’t have to worry about paying to construct infrastructure before we pay for our miners.”
Observers say that miners’ ASIC-buying spree was mostly funded by debt. Doctor, while declining to name any specific company, says that “certain miners have unfunded expenses. They have ordered a whole bunch of machines, they paid a deposit, but they don’t necessarily have the funding already secured, or they may be losing some of that funding to pay the second balance to receive the rigs.” That burden alongside bitcoin price’s slump and costlier energy could impact companies’ bottom lines, says Jurica Bulovic, head of mining at Foundry, a lender to mining outfits. “Anyone who bought equipment at the height of the cycle when bitcoin’s price was 65,000 and took a loan to do so—which is a lot of the industry—they are not cash-flow positive today,” Bulovic says.
In the wake of the crypto crash, there are signs that miners need cash, and quickly— and given the current market sentiment they cannot just turn to investors for help. This month, Riot Blockchain, a major US miner, raised $10 million from the sale of 250 bitcoins (out of a trove of 6,320) to fund further expansion; two days later Marathon announced it was considering selling some of its bitcoins, albeit not “in the near term.” That bucked a well-established tendency among miners to hold—in crypto parlance, “HODL” (a typo later reinterpreted as “hold on for dear life”)—to their cryptocurrencies. The sell-off isn’t restricted to bitcoin: Brammer says that Luxor Mining is receiving “frantic calls’” from publicly traded companies trying to sell ASICs below book value. “We’re starting to see fire sales,” he says. That might further depress ASIC prices, even if Robert Van Kirk, managing director of mining equipment marketplace Kaboomracks, says that sellers “don’t want to lower their pricing any more,” despite tepid demand.
The question is whether that spiral will start to make lenders worried. In the past two years of prosperity, some mining companies have borrowed money against their bitcoin reserves, or even entered so-called “equipment-backed debt” agreements where the loan was collateralized with the mining rigs themselves. Now that the price of both bitcoin and ASICs is going down, that collateral has lost value. “If the miners are over-leveraged, the pain could trickle down to other parts of the industry. For example, lenders, given that the value of collateral has been dropping,” says Bulovic. “Even if not every lender is the same, and not every loan is the same.”
Talk of consolidation in the bitcoin mining industry and a wave of mergers and acquisitions has grown increasingly loud. “Over the next 12 to 18 months, there’s going to be evidence coming out on which companies are run really well and are operationally efficient and have healthy levels of debt,” says Brammer. “These companies will be resilient to very tight margins after miners get used to 100 percent margins—which are about to be squeezed down.”
“Inside of our industry, we’re seeing a lot of signs of stress right now.”