Bitcoin’s prolonged slump is making it harder for some miners to repay up to $4 billion in loans they’ve backed with their equipment, posing a potential risk for major crypto lenders.
Analysts say a growing number of loans are now underwater as many mining rig lenders accepted as collateral have now halved in value, along with the price of the world’s largest digital token.
So far, few miners have defaulted on their loans, but recent sales are showing signs of distress. Core Scientific Inc. sold over 2,000 Bitcoins in May to help cover operational costs. Meanwhile, Bitfarms Ltd. unloaded nearly half of its mined tokens earlier this month to repay part of its $100 million loan with Galaxy Digital Holdings Ltd. He also took out another machine-backed loan from New York Digital Investment Group LLC.
If the market does not improve, analysts warn that this could be a bad scenario. The sale of Bitcoin reserves is putting further pressure on prices, and the cost of equipment could fall further if lenders, seeking to recoup their losses in the event of default, begin to liquidate the machines they repossess. The value of Bitmain’s popular S19 mining rig is down around 47% from a high of around $10,000 in November, according to data from Luxor Technologies Corp.
“Bitcoin miners, generally speaking, are in pain,” said Luka Jankovic, Head of Lending at Galaxy Digital. “A lot of trades have turned negative net IRR at these levels. Machine values have fallen and are still in price discovery mode, which is compounded by energy price volatility and limited supply of rack space.
Bitcoin mining, which uses powerful computers to process transaction records and earn rewards in the token, was one of the most lucrative businesses in the historic crypto bull run. Margins could reach 90%. But loans for machine upgrades through traditional finance might be hard to come by or include high interest rates given the volatility of the market.
To fill the void, native crypto lenders such as Galaxy Digital, NYDIG, BlockFi Inc., Celsius Network Ltd., Foundry Networks LLC, and Babel Finance have started accepting platforms as collateral in addition to cash installments. But now those lenders could be significantly undersecured, said Ethan Vera, co-founder of Seattle-based mining company Luxor Technologies. “They’re nervous about their loan books, especially those with high collateral ratios.”
Vera estimates that there are up to $4 billion in machine-backed loans, adding to even more token-backed loans first popularized in Asia with lenders like Babel.
BlockFi chief risk officer Yuri Mushkin said in an email to Bloomberg that mining-backed loans are “only a portion of our larger loan portfolio” and follow the same risk practices. and underwriting implemented in all of its institutional activities.
Foundry declined to comment while NYDIG, Babel and Celsius did not respond to a request.
Many Bitcoin miners still enjoy decent profit margins. According to Jaran Mellerud, mining analyst at Arcane Crypto, the cost of production for a large mining company is around $8,000 per token, assuming average electricity prices and relatively new mining machinery.
“But the drop in revenue is still impacting their business as some of them have loans to repay and collateral to post for their machine purchases,” Mellerud said. “They might struggle to make those payments without selling a significant portion of their Bitcoin holdings.”
An industry shake-up could be imminent, especially for cash-flow-negative smaller operators who bought expensive equipment months ago thinking it would go up in value.
If you take into account overhead for infrastructure and interest rates, total costs for some miners can already exceed $20,000, which is roughly in line with Bitcoin’s current price, said Wilfred Daye, chief executive. of Securitize Capital.
“Miners thought they would be in a better capital raising environment today,” Vera said. “They bought tens of thousands of machines, signed up for hosting, put down the deposits and now they can’t fulfill” their obligations, he said.
Will Foxley, chief content officer at Compass Mining Inc., said the cost of raising capital has risen dramatically as opportunities in the debt and equity markets for miners become scarcer.
“Bitcoin walks off the cliff and then the value of the machines goes down even more because people don’t really want to use it for anything else,” he said. “There are just a ton of machine orders that are still pending.”
David Pan reports for Bloomberg News.