Cryptocurrency miners have a lot of fixed costs, like power, real estate, and the souped-up computers, or rigs, that do the actual mining.
That’s why it can be hell for their margins when the market takes a nosedive and dramatically drops the value of whatever funds they were holding in crypto, such as Bitcoin. And now that the crypto market is in what appears to be a prolonged bear market, miners are being forced to adjust.
The global market capitalization of crypto is roughly $1 trillion today—half what it was in April, according to CoinMarketCap. Markets took their first big dive when Terra began to meltdown in May, then again in June when Celsius became the first big crypto lender to freeze customer withdrawals to stave off a bank run.
In June, Arcane Research published a report that revealed publicly-traded Bitcoin mining companies sold more Bitcoin than they mined in May. At the time, it was a shocking statistic.
But now, in July, the data shows that public miners sold 400% of their production in June and have reduced their overall BTC holdings by 25%, according to Arcane Research analyst Jaran Mellerud.
The companies selling included Core Scientific, which sold $165 million worth of its Bitcoin holdings to “enhance liquidity,” and Bitfarms, which liquidated more than half its BTC supply to pay down debt.
One of the reasons for the squeeze has been the lack of space to plug in and run mining rigs, said Sabre 56 CEO Phil Harvey. From what he’s seen, the adage about bear markets being the time to build has been a sad irony.
His project management and operations firm scouts datacenter locations and works with local utility companies to make sure they can accommodate crypto mining companies. But as markets have slumped, he’s seen companies that last year went to great lengths to buy mining rigs, pausing or abandoning construction projects.
“At the back end of the [Bitmain Antminer S17] era and then the [Antminer S19], there was just a glut where obviously Bitmain had caught up to the supply and demand and that was flooding the market. But people still had the old thought of, ‘Oh, you know, we need to get the machines. This is our key to mine,’” he told Decrypt on a call from the Mining Disrupt conference in Miami. “But then no one figured out that if they haven’t got any infrastructure, these machines are going to sit in warehouses and not make any revenue. And unfortunately, that’s what’s happening.”
The lack of planning has had a knock-on effect in the second-hand market for rigs. Mining companies that ordered more machines than they have space to run are selling their like-new hardware alongside rigs that have been operating around the clock. That’s been an issue for miners that used to be able to count on selling used rigs to generate a bit of revenue.
“So when guys now want to sell their secondary machines, it’s a shit show because nobody needs a secondary machine that’s been run into the ground when they can buy second hand machines that have never even been used,” Harvey said.
The trouble has even spread to hardware manufacturers, like NVIDIA, who have seen prices for their graphics cards drop by 50%, Bloomberg reported in June.
It’s a rough spot to be in for large, publicly-traded companies, said Chris Bae, CEO of Enhanced Digital Group.
His firm, founded and staffed by former Wall Street derivatives traders from UBS, Goldman Sachs, Merrill Lynch and JPMorgan Chase, has been talking to crypto companies, including miners, about how to better plan for market downturns.
“I think what we’re discovering is the cash flow needs, the breakeven conversations around Bitcoin, have really bubbled up. And we’re not early stage with this stuff anymore. A lot of miners have investors who just want to invest,” Bae told Decrypt. “They’re not doing this pro bono.”
That means getting companies to commit to selling a portion of their reserves at a locked-in price six months from now, rather than liquidating ahead of an earnings call and leaving themselves at the mercy of price volatility.
“What we do is find paths over the next few months for a miner to sell above spot rate,” he said. “The question we get asked a lot is whether there’s enough liquidity. There’s always enough liquidity to plan. There’s never enough liquidity when you need it at that moment.”
To do that, Bae and the Enhanced Digital Group team lock in rates on the forward or futures markets. Forward and future contracts are types of derivatives that allow investors to buy or sell an asset at an agreed upon price in the future.
For example, a miner could have entered a 6-month futures contract to sell a portion of their Bitcoin in January. That would have meant they could have sold at a set price in June, when markets were in free fall on what were then rumors that crypto lenders Celsius and Voyager, and hedge fund Three Arrow Capital, were insolvent.
There have been a few bright spots in what’s otherwise been a rough period for crypto en masse. For example, it’s a good time to be a hosting company, like Applied Blockchain, that already has infrastructure in place.
The Dallas-based hosting firm just inked a deal for an undisclosed amount with Marathon Digital to provide 200 Megawatts of hosted capacity at its owned and operated datacenters.
Applied Blockchain CEO Wes Cummins views crypto years like dog years—it’s the fastest moving and most volatile space he’s been in over 20 years of tech investing, he told Decrypt on a call from Paris, where he had traveled for a board meeting.
“We exclusively are building data centers and providing a kind of white glove hosting service for our customers. That’s become the bottleneck where, a year ago, it was definitely getting ASICs—that was the bottleneck,” Cummins said. “There's a lot of people that either have the equipment they paid for that’s being delivered in the future, or they already have mining hardware that they need to plug in somewhere.”
For now, he said, lower Bitcoin prices could be putting mining firms outside of breakeven, meaning that chances are low that companies can make at least as much as they paid for mining rigs in the first place.
That could slow the growth of the mining industry in North America, which has otherwise been experiencing a big surge since China banned crypto miners last year. Cummins said there’s lots of hardware in the U.S.—which will eventually increase the country’s overall hashrate—but it could be a while before a lot of it comes online.
He also expects the mining industry to see the kind of consolidation that’s already been taking place with lenders, with Sam Bankman-Fried’s Alameda Research taking a stake in Voyager Digital and FTX doing the same with BlockFi; or crypto lender Nexo acquiring its rival, Vauld.
“Mining companies, no matter where you are in the supply chain, it just goes slower. You could still have the exposure on your balance sheet of Bitcoin. You could have loans from some of the big lenders in the space, but it will take more months until you default on the loans, maybe work out something with the lender,” he said. “It's not just an overnight thing where you're dealing with a huge amount of people who are trying to withdraw funds or crypto from your platform.”
Last month in Texas, where Applied Blockchain will host Marathon’s rigs, Switzerland-based mining company White Rock Management made its U.S. debut.
White Rock CEO Andy Long said the company, which commands 55 MW worth of mining capacity in Sweden and now the states, plans to continue expanding into 2023.
“The people that are in trouble have run up their credit cards buying machines,” Long told Decrypt. They’ve gone to the market, got access to a lot of capital, placed big orders at the top of the market when machine pricing was triple what it is today, and now they’re having to pay the piper.”
Long said part of the six-year-old company’s strategy for surviving bear markets, particularly for its Texas facility, has been to choose its power sources wisely.
For example, its Texas facility runs on flare gas, or natural gas that’s released during oil production, that gets diverted into generators and used to run mining rigs.
“When the governor was asking everyone to turn their miners off a few weeks ago, we didn’t need to because we’re not on the grid,” he said. “So that is just part of our diversification. Hydroelectric power in Sweden, flared gas in Texas and something else in another state. In that way we’ve just kind of spread out our risk.”
Despite all the bear market’s bite, Long said he expects the Bitcoin network’s hashrate will increase by nearly one-third by the end of the year. Hashrate is a measure of total computer power on a blockchain. Each hash represents a "guess" at a cryptographic string. On proof-of-work blockchain networks, like Bitcoin, the miner that correctly guesses it wins the right to verify a block worth of transactions and receives a reward.
“It's slowed down. But this retracement that we've had, unless the bear market really takes a turn for the worse, I think we’re going to see 30%.”