A veritable epidemic.
For the past few months, bitcoin miners have been experiencing difficulties one after the other. At the end of December, one of the biggest players in the sector, American Core Scientific, filed for bankruptcy in the United States under the now infamous "Chapter 11" regime ⚖️
Brief reminder: miners are those who secure a cryptocurrency's blockchain with the computing power of their machines. Since Ethereum's switch to proof-of-stake in 2022 , Bitcoin has been the only "big" cryptocurrency on the market to operate with proof-of-work and therefore mining.
The "chapter 11" does not mean that Core Scientific, whose machines account for around 5% of Bitcoin's hashrate (the computing power needed to secure the protocol), will file for bankruptcy, but that the company will restructure to get back on its feet. The fact remains that the difficulties of one of the heavyweights in mining show just how much pressure the industry is under. At least in part.
The reasons for these difficulties are well known: with falling prices and rising energy costs, many players are hanging on by their fingernails. Above all, and this is something new, some of them are also faced with... massive over-indebtedness.
Following the rise in prices in 2020 and baited by the soaring prices, many companies took on large debts to buy machines and therefore mining capacity. Some borrowed at rates of up to 25% a year (because mining is a risky business). "Pure madness", stresses one banker.
The phenomenon is biggest in the United States, by far.
In Europe, there are virtually no miners because of regulations and electricity prices that are too high, which is a problem in terms of sovereignty for our ecosystem.
According to specialist firm Hashrate Index, US miners are in debt to the tune of $4 billion. Core Scientific alone accounts for more than 25% of this debt ($1.3 billion) 😬
"The new generation of American miners has made massive use of credit, whereas our sector historically had no access to it," confirms Sébastien Gouspillou, founder of BigBlock Datacenter, a French miner with a particularly strong presence in Africa.
"Those who abused it now find themselves caught out by the markets and have to answer to their creditors", he continues, adding, rather critically: "All miners know very well that the markets don't just go up, it's cyclical, they should have anticipated it."
Investors have, in any case, not been mistaken. In 2022, Core Scientific's share price collapsed by 98% with a capitalisation that fell from almost $500 million to... $30 million 😳. Complicated to manage with a debt of over a billion dollars!
Marathon is also in deep trouble, even if the company is not "game over". While its share price has been falling steadily (-90% in 2022), the group has managed to honour its debts by massively selling off some of its bitcoins. It's not certain that this strategy will still work in 2023 if the largest cryptocurrency remains permanently below $20,000.
Not all the major US players are affected, however. Riot Platforms has hardly borrowed any money, as a result, it is floating in the ecosystem. "Riot has not resorted to debt, or else only on the margins, and that's what makes the difference today," stresses Sébastien Gouspillou.
👉 The big sell-off in mining machines
Meanwhile, one man's misfortune makes another man's happiness, and with the collapse of some miners, many machines are finding themselves available on the market. Some machines (also known as 'asics') are owned by groups that are downsizing, and others are being sold by companies that are disappearing.
But not everyone is happy about it. "The problem is that when machines had a face value of 100 just a few months ago, they are often worth much less, up to 10 times less, because of market conditions," explains Romain Nouzareth, founder of Sato, a mining company based in Quebec.
👉 Healthy miners ready to rake in the cash... with Wall Street
It's not all doom and gloom for miners either. While the situation is catastrophic for some, others see the period as a real opportunity and potential acquisitions "For us, it's very interesting, we're looking at all the deals," says Romain Nouzareth. "There are a huge number of opportunities at the moment, the machines are very affordable and it's perfect for continuing to grow", he explains.
Several "bargains" such as Celsius are making the sector salivate . The crypto lending platform, which got caught up in the Terra-Luna collapse in the spring of 2022, will soon be putting 32,000 miners up for sale at a bargain price. And it's not just miners who are interested in this opportunity. For some months now, crypto investment firms with close ties to Wall Street have been looking at these deals.
Galaxy Digital is one such player. The American group recently bought a Texas mining site from Argo Blockchain for $65 million.
Another American, NYDIG, which is one of the biggest investors in bitcoin, is also shopping around. The group is currently completing the purchase of the machines of Greenidge, an over-indebted North American miner. With this acquisition, NYDIG would recover around 1% of the Bitcoin hashrate for $74 million.
More interestingly, the world's largest asset manager, BlackRock, is also in the starting blocks. The giant has positioned itself on Core Scientific 😏.
Larry Fink's group, which no longer hides its interest in cryptos, has just lent €17 million to the company under bankruptcy alongside other investors. If Core Scientific does not pull through, BlackRock could recover some of the company's assets, in particular its mining machines...
"For financiers, the mining sector represents a very good opportunity," explains Romain Nouzareth. "As it's a very risky business, they grant credit at very high rates and, in the event of default, they can recover equipment at little cost that they can resell at a very high price when prices recover," he explains.
What you need to understand, however, is that mining is not going to stop despite the bankruptcies of many companies. The assets have just changed hands. The situation can also be seen in the hashrate: it is peaking at historic levels despite the fall in prices.
"The real risk," breathes Sébastien Gouspillou, "is that we are seeing a concentration of the sector in the hands of a small number of financially dominant players.
👉 What is the long-term future for miners?
So far, the strategy that has paid off has been for companies to do two things:
Limit their debt levels (what a surprise!), even though debt can also be used to invest and grow. Prioritise access to cheap electricity over the long term. "We are very well placed for the future," explains Romain Nouzareth. "We are connected without intermediaries to the Quebec power grid, and our electricity rates are very affordable and fixed, which is not the case for many other miners," he continues.
In the United States, many miners have in fact seen their bills explode with the rise in energy prices, which has helped to weaken their model. This is the case for Argo Blockchain, whose price per kilowatt-hour has risen from 2 to 1 US cents over the course of 2022. This has increased the mining price for one bitcoin from $4,000 to $12,600 (not including its debts), according to analysts at Hashrate Index.
Quebec-based Sato's strategy is currently designed to break even with a bitcoin price of between $9,000 and $12,000. "The only annoyance is that we are currently making less profit than a few months ago, but that's part of the cycle," insists Romain Nouzareth.
The company assures that it is robust enough to handle an even sharper market downturn. "We are confident that bitcoin will continue to rise over the long term," he adds. For some, it would take more than that in the "short term".
