Bitcoin’s price drop puts miners on a brink of default on their loans

2 years ago

A domino effect? What’s that?

Mining companies around the world are suffering from a major Bitcoin slump in the recent weeks. And it’s not only because of the direct reasons — e.g. decreased profits. No, at least $4 billion in loans backed by the mining equipment are under stress, and the mining companies may have to default on them.

The reasons? Deteriorating situation on the crypto market and — perhaps, more importantly — decreasing prices of the ASIC devices that are used to mine Bitcoin and other similar cryptocurrencies.

So far, only a few miners have defaulted on their loans. But the situation has a prospect to further deteriorate in the near future. According to Bloomberg, the mined Bitcoins sales data demonstrates this. For example, mining company Core Scientific sold 2,000 BTC to cover operating expenses. Bitfarms had to sell 3,000 BTC to repay part of the Galaxy Digital Holdings Ltd loan for $100 million.

Coupled with the Bitcoin’s price decrease, this leads to mining equipment losing its value. And this potentially means that miners soon couldn’t be able to repay their loans by selling their devices. According to Luxor Technologies Corp., the price of the popular Antminer S19 is down about 47% from $10,000 in November.

“Bitcoin miners, broadly speaking, are feeling pain. A lot of operations have become net IRR negative at these levels. Machine values have plummeted and are still in price discovery mode, which is compounded by volatile energy prices and limited supply for rack space,” said Luka Jankovic, head of lending at Galaxy Digital.

The latter company, as well as NYDIG, BlockFi, Celsius Network, Foundry Networks and Babel Finance, have been actively lending money and accepting equipment as a collateral. But now these loans seem under-collateralized due to the reasons listed above.

And, to add fuel to the fire, mining costs seem to rise, as Bitcoin price falls. Arcane Research analyst Yaran Mellerud estimates that the cost of mining 1 BTC could be around $8,000. Even though, strictly speaking, it generates profit, it will be difficult for some companies to operate without selling Bitcoins to repay their loans.

Securitize Capital CEO Wilfred Daye made an assumption that, for some mining companies, the total price of mining 1 BTC has already surpassed $20,000. Which means they are generating no profit. So, he continued, a number of players may leave the space soon due to inability to operate under these circumstances.

Will Foxley, director of content at Compass Mining, said that the cost of raising capital is rising due to deteriorating risk appetite among the players.

Source: Bloomberg

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