A situation that could add downward pressure to the price of Bitcoin.
The Bitcoin crash we have been experiencing for several weeks now puts many Bitcoin miners at risk. As you know, their role is essential to ensure the smooth running of the world’s most secure decentralized network.
Since Bitcoin has fallen back below $30K, and now below $20K, their business has been turned upside down. Of course, there is a crash in the price of Bitcoin. It is down -72% since the ATH reached $69K in November 2021. This means an obvious loss of income for Bitcoin miners. However, this is not catastrophic given their complete confidence in the future of Bitcoin.
While their income is down, Bitcoin miners are also faced with rising energy prices. Less income, more costs, obviously the equation is not good.
This will only be a bad time to pass. However, some mining companies have placed their mining equipment as collateral to obtain loans from specialized companies, from Galaxy Digital to New York Digital Investment Group (NYDIG) to the lending platforms BlockFi and Celsius.
BlockFi and Celsius are in turmoil.
In the context of falling Bitcoin prices and mining equipment prices, “these lending platforms could be significantly undercollateralized,” Ethan Vera, co-founder of mining company Luxor Technologies, told Bloomberg.
Put another way, the price of their equipment would have fallen below the outstanding principal on their loans. Ethan Vera estimates that $4 billion in loans secured by mining equipment would be affected. This represents a “potential risk to major cryptocurrency lenders,” Bloomberg considers.
“So far, few miners have defaulted on their loans, but recent sales show signs of distress,” the news outlet adds. American mining company Core Scientific sold 2,000 BTC in May 2022 “to cover operational costs,” while Canada’s Bitfarms sold half of its BTC stockpile in early June 2022 to “repay part of its $100 million loans” to Galaxy Digital.
The sale of miners’ Bitcoin holdings puts further pressure on prices, and the cost of equipment could fall even further if lenders — looking to recoup their losses on defaults — start liquidating the machines they take back.
Because not all mining companies are in the same boat: while it is now accepted that it is not profitable to mine alone at home, mining companies that have been established for several years were able to achieve margins of up to 90% when Bitcoin was at its peak.
The crash we have been witnessing for several months is likely to put a strain on the business of the more established, or newer, companies.
A shakeout in the industry could be imminent, especially for small, cash-negative operators who bought expensive equipment several months ago, thinking it would increase in value.
If you factor in infrastructure overhead and interest rates, the total cost to mine Bitcoin for some miners may already exceed $20,000, which is roughly the current price of Bitcoin.
This situation should be observed in the coming weeks, as it could further depress the price of Bitcoin, while simultaneously (temporarily) hurting the Bitcoin Hash Rate, as Bitcoin miners would be forced to give up their equipment and thus disconnect from the network.
This will be an opportunity for the most powerful Bitcoin miners to strengthen their market share in the Bitcoin Hash Rate by buying back mining equipment at a reduced price. As always in life, one man’s loss is another man’s gain.