The Bitcoin network is in a strange place right now, as the price is at a local low while the hash rate is at an all-time high. The network is more secure than ever, yet macroeconomic factors are keeping the price down, subsequently putting a massive strain on Bitcoin miners.
With profitability at a low, competition among miners has intensified, leading to a slew of acquisitions and capital raises. Pressure is coming as miners struggle to cover the costs of rigs they ordered last year. Firms are on a tear, picking up companies and rigs at a discount. Miners need to get more of a liquidity buffer in order to survive this unfriendly environment.
The financial condition of publicly traded miners has worsened, although some are doing worse than ever. This explains why at Secure Digital Markets we are seeing more appetite for lending services.
Current Conditions Are Keeping Miners On Edge
Mining profitability has cratered in the second half of 2022 due to rising energy costs, the low price of Bitcoin, and increased mining difficulty.
Bitcoin has dropped over 70% from its highs, which is why daily revenue for the Bitcoin mining industry has cratered from $62 million in November to $18 million today.
The world is in a crisis due to the price of oil going through the roof and many European countries are considering controlled blackouts this winter. As a result, it is also politically unpopular to let miners clog up the grid, which is boosting the energy expense for miners and making them more desperate.
All these issues are exacerbated by the rapid expansion miners went through in 2021. They were expecting continued success and overextended themselves. Now, this is putting their operations at risk.
All their recent capital expenditures helped push hash rate to an all-time high, as shown in the 1-year chart below:
Hash rate is hyper-volatile, but the trend is clearly going upwards, especially looking at the full historical chart below:
And as hash rate increases, mining difficulty has increased, making it far more competitive to earn mining rewards.
Finally, there are new entrants like Binance’s cloud mining operation, which will bring even more hash power to the network. In short, the industry has lost revenue, gotten more competitive, and seen its biggest cost center spike. Now, many miners are unprofitable and fighting a war for their survival.
Consolidation and Other Mining Trends
As crypto winter stretches on, an even higher degree of consolidation within the industry looks likely. Acquirers are looking for cheap ways to get ahold of mining rigs, whether they purchase them from distressed miners or purchase the companies outright.
Higher mining difficulty is leading to new capitulation by miners, and we’re already seeing M&A activity pick up. For example, Colorado-based Bitcoin miner Crusoe Energy Systems has just announced the acquisition of the operating assets of mining operator Great American Mining.
Lending from some firms has dried up, with BlockFi recently stating no mining loans have originated since Q1 2022. This is why miners are lining up to borrow from Maple Finance, a newcomer in the DeFi space who is already working on a pipeline of 10 mining companies.
At the same time, there are looming governmental threads. Already the European Union is readying to block crypto mining in order to ensure energy security going into the winter.
Additionally, Canaan Inc. just announced a new generation of high-performance Bitcoin mining machines, powered by advanced ASIC technologies, further increasing the competitiveness of the industry.
A Scary Financial Environment for Miners
Analysis of the financial statements of publicly traded mining companies shows that cash balances have declined. However, some companies have a much stronger cash coverage ratio (cash balance over current liabilities), which indicates who is going to be most at risk in the coming months.
CompanyRiotHut8 MiningGreenridgeHiveMarathon2021 Ending Cash Balance312,315140,12782,59963,647268,522Current Cash Balance270,48360,13266,3824,02086,461% Drop13.39%57.09%19.63%93.68%67.80%Current Liabilities100,56724,02698,84029,24090,145Cash Coverage Ratio2.69x2.50x0.67x0.14x0.96xQuarterly Revenue (Last Year)34,34833,54916,17637,24029,322Quarterly Revenue (Current)72,94743,84531,33944,17924,922
Crypto winter has investors nervous about the chances of these companies surviving until Bitcoin recovers.
Across the board, the investment perspective on miners has soured. Bitcoin miner Core Scientific (CORZ) and Argo Blockchain (ARBK) were recently downgraded from “buy” to “neutral”, and that is just the beginning.
In September, major crypto-mining data center company Compute North filed for Chapter 11 bankruptcy. Cryptocurrency prices dropping left it in a precarious position and post-bankruptcy filings show that they owe ~$500 million to more than 200 creditors.
Argo just attempted a $27M raise, in an effort to remediate their liquidity problems, but the raise fell through on October 31, 2022. They also just announced the $7M sale of 3,400 Antminer mining rigs to a third-party, but at this rate, they may need to scale down operations until mining dynamics change.
Riot Blockchain (RIOT) and Marathon Digital (MARA), are perceived as slightly better due to their low power costs and well-funded growth plans. Their financial health makes them much more likely to survive any downturn.
Stock performance for some of these companies is at a low point that Nasdaq is threatening to delist them. Digihost received a warning after their stock traded under a dollar for 30+ days, and even though this won’t affect their business operations, losing their spot on a major U.S. exchange would be a huge step backward.
Being low on cash reserves is the worst possible sign miners could give in their Q3 earnings updates. Just a few days ago, Core Scientific warned that it was nearing bankruptcy and may not be a going concern past 2022. Core Scientific owes about $1 billion to several creditors including MassMutual and BlockFi.
It seems like the Celsius contagion continues to send business partners into insolvency as it has been revealed that Celsius owes Core Scientific over $2 million for mining services.
How Miners Will Survive Crypto Winter
It is a tough time for miners, but the opportunity has not disappeared. Secure Digital Markets offers lending services to miners at competitive rates. Our lending partner is a large UK-based, fully regulated family office with robust risk controls.
Additionally, Secure Digital Markets is experienced in helping miners manage their liquidity. Our brokerage service is streamlined to work with mining operations and relieve stress for miners during liquidity crunches.
Interested in learning how SDM can help during these volatile times? Book a free consultation today.