What Bitcoin miners are doing to survive the bear market

Cryptocurrency miners have many fixed costs, such as energy, real estate, and rigged computers, or plants, that do actual mining.

That’s why it can be hell for their margins when the market swoops and drastically drops the value of the funds they held in cryptocurrencies, such as Bitcoin. And now that the cryptocurrency market finds itself in what appears to be a protracted bear market, miners are being forced to adjust.

The global cryptocurrency market cap is around $ 1 trillion today, half that of April, according to CoinMarketCap. Markets took their first big plunge when Terra began tumbling in May, then again in June when Celsius became the first major cryptocurrency lender to freeze customer withdrawals to avoid a bank run.

In June, Arcane Research released a report that revealed that publicly traded Bitcoin mining companies were selling more Bitcoin than they mined in May. At the time, it was a shocking statistic.

But now, in July, data shows that public miners have sold 400% of their production in June and reduced their overall holdings in BTC by 25%, according to Arcane Research analyst Jaran Mellerud.

The companies they sold included Core Scientific, which sold $ 165 million of its Bitcoin holdings to “improve liquidity”And Bitfarms, which it liquidated more than half of its BTC offering to repay the debt.

One reason for the squeeze was the lack of space to connect and operate mining rigs, said Phil Harvey, CEO of Saber 56. From what he saw, the bear market adage it’s time to build was a sad irony.

His project management and management firm explores data center locations and works with local utility companies to make sure they can host cryptocurrency companies. But with markets collapsing, it has seen companies that last year went to great lengths to buy mining rigs, suspend or abandon construction projects.

“In the back of the [Bitmain Antminer S17] epoch and then the [Antminer S19], there was just an excess where obviously Bitmain had hit supply and demand and that was flooding the market. But people still had the old thought, ‘Oh, you know, we have to get the cars. This is our key to mine, ‘”he said Decrypt on a call from the Mining Disrupt conference in Miami. “But then no one realized that if they don’t have any infrastructure, these machines will stay in the warehouses and make no income. And unfortunately that’s what’s happening. “

The lack of planning has had a ripple effect in the used rig market. Mining companies that have ordered more machines than they have space to run are selling their hardware as new along with plants that ran 24/7. This has been a problem for miners who could count on selling used rigs. to generate some revenue.

“So when kids now want to sell their secondary cars, it’s a shit show because no one needs a secondary car that has been knocked down when they can buy second hand cars that have never even been used,” he said. said Harvey.

The problem has also spread to hardware manufacturers, such as NVIDIA, who have seen the prices of their graphics cards drop by 50%. Bloomberg reported in June.

It’s a tough time for large publicly traded companies, said Chris Bae, CEO of Enhanced Digital Group.

His company, founded and operated by former Wall Street derivatives traders from UBS Goldman Sachs, Merrill Lynch and JPMorgan Chase, spoke with cryptocurrency firms, including miners, about how to better plan for market downturns.

“I think what we’re finding is that the cash flow needs, break-even conversations about Bitcoin have really exploded. And we’re not at the beginning with this stuff anymore. Many miners have investors who just want to invest, “Bae said Decrypt. “They are not doing this pro bono.”

This means convincing companies to commit to selling a portion of their reserves at a fixed price in six months, rather than liquidating before a profit call and leaving themselves at the mercy of price volatility.

“What we do is find paths in the coming months to allow a miner to sell above the spot rate,” he said. “The question we are often asked is whether there is enough liquidity. There is always enough liquidity to plan. There is never enough liquidity when you need it right now. “

To do this, Bae and the Enhanced Digital Group team lock rates on the futures or futures markets. Forward and futures contracts are types of derivatives that allow investors to buy or sell an asset at an agreed price in the future.

For example, a miner may have entered into a 6-month futures contract to sell a portion of his Bitcoins in January. That would have meant they could have sold for a fixed price in June, when markets were in free fall on what were then rumors that cryptocurrency lenders Celsius and Voyager, and hedge fund Three Arrow Capital, were insolvent.

There have been some bright spots in what has otherwise been a tough time for cryptocurrencies en masse. For example, it’s a good time to be a hosting company, like Applied Blockchain, which already has an infrastructure.

The Dallas-based hosting company just signed an undisclosed deal with Marathon Digital to provide 200 megawatts of hosted capacity in its owned and operated data centers.

Applied Blockchain CEO Wes Cummins treats the cryptocurrency years as the dog years – it’s the fastest and most volatile space he’s been in in over 20 years of tech investing, he said. Decrypt on a call from Paris, where he had gone for a board meeting.

“We are building data centers exclusively and providing some sort of white glove hosting service for our customers. This has become the bottleneck where, a year ago, he was definitely getting ASIC, that was the bottleneck, “Collins said.” There are a lot of people who either have the equipment they paid for that will be delivered in future, or they already have mining hardware that they need to plug in somewhere. “

For now, he said, Bitcoin’s lower prices could put mining companies out of balance, meaning the odds that companies can earn at least as much as they paid for mining rigs are low in the first place.

This could slow the growth of the mining industry in North America, which has otherwise suffered a big increase since China banned cryptocurrency miners last year. Cummins said there is a lot of hardware in the US, which will eventually increase the country’s overall hashrate, but it may be a while before a lot goes online.

He also expects the mining industry to see the kind of consolidation already in place with lenders, with Sam Bankman-Fried’s Alameda Research taking a stake in Voyager Digital and FTX doing the same with BlockFi; or cryptocurrency lender Nexo acquiring its rival, Vauld.

“Mining companies, no matter where you are in the supply chain, just goes slower. You may still have exposure on your Bitcoin balance sheet. You may have loans from some of the big lenders in space, but it will take multiple months before you don’t default on the loans, maybe you’ll work something out with the lender, “he said.” It’s not just an overnight thing. other where you are dealing with a huge amount of people who are trying to withdraw funds or cryptocurrencies from your platform. “

Last month in Texas, where Allied Blockchain will host the Marathon facilities, Swedish mining company White Rock Management made its US debut.

White Rock CEO Andy Long said the company, which controls 55 MW of mining capacity in Sweden and now the United States, plans to continue expanding in 2023.

“People who are in trouble have run out of their credit cards in the purchasing machines,” Long said Decrypt. They went to the market, they had access to a lot of capital, they placed big orders at the top of the market when the price of the machines was three times what it is today, and now they have to pay the piper. “

Long said part of the company’s six-year strategy to survive bear markets, particularly for its Texas facility, was to choose its energy sources wisely.

For example, its facility in Texas runs on flare gas, or natural gas that is released during oil production, which is diverted into generators and used to run mining rigs.

“When the governor asked everyone to shut down the miners a few weeks ago, there was no need because we are not on the grid,” he said. “So this is only part of our diversification. Hydropower in Sweden, gas burned in Texas and something else in another state. In this way we have simply distributed our risk ”.

Despite all the bear market bite, Long said he expects the Bitcoin network hashrate to rise by nearly a third by the end of the year. Hashrate is a measure of the total computer power on a blockchain. Each hash represents a “guess” about a cryptographic string. On proof-of-work blockchain networks, such as Bitcoin, the miner who guesses correctly gets the right to verify a block of transactions and receives a reward.

“It slowed down. But this retracement we’ve had, unless the bear market really takes a bad turn, I think we’re going to see 30%. “

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