Bitcoin miners before the debt spiral

At the end of 2021, when the price Bitcoin reaching the level of 68,000 USD, the miners made a significant profit. Many people are constantly expanding their mining scale, preparing for a booming 2022. But that has not happened so far.

Since the beginning of the year, the price of Bitcoin (BTC) has continuously bottomed. On the evening of June 7, each BTC dropped to $29,500, down more than half from the peak at the end of last year. One factor that miners are interested in is the price of electricity for mining rigs. Despite the low price of BTC, miners can still bear the burden if the cost is cheap. But the conflict between Russia and Ukraine exacerbated the energy problem, the price of electricity in many places increased and miners were directly affected. Reuters Quoting Valery Vavilov, CEO of Bitfury – a company specializing in manufacturing specialized Bitcoin miners: “The energy to operate the miner can account for 90-95% of the total cost of Bitcoin mining.”

Daniel Jogg, CEO of Enerhash – a blockchain data analysis company, said that many Bitcoin miners are losing money. In some parts of Europe, the estimated electricity price to mine one BTC is up to $25,000, while the price of BTC is currently $29,000. If the cost of machines, operations, and yards is deducted, miners may run into deficits and risk bankruptcy if the price of this digital currency continues to fall.

Over the past 12 months, electricity prices in Texas, a hot spot for crypto mining, have surged 70% as the heat persists, prompting many miners to quit. According to a Cambridge University study, following the 2021 crypto mining ban in China, the US now accounts for 37.84% of global mining activity. According to experts, Bitcoin miners seem to be balancing on the wire, the difference between the rising electricity price on the one hand and the decreasing BTC price on the other.

Another problem is difficulty of the algorithm increasing, leading to a decrease in mining output. In other words, miners are paying more to mine less Bitcoins, and the digital currency they earn is depreciating.

According to Sam Doctor, Chief Strategy Officer at digital asset investment bank BitOoda, even miners using modern mining systems are earning less than before. He said older generation ASICs (specialized Bitcoin miners), from S9 and earlier, still account for a third of the total number of global Bitcoin miners but are almost no longer profitable. “With current energy prices, miners without fixed electricity supply contracts face a lot of pressure,” said a BitOoda representative.

The market capitalization of major Bitcoin miners such as Riot, Marathon, and Core Scientific are all down more than 50% this year. Follow Wired, without a reversal in the BTC price, this could be seen as the beginning of the crisis in the Bitcoin mining world. Two years ago, large-scale miners scrambled to buy ASICs. Marathon, one of the top three miners in the US, buys 78,000 ASICs for a record $879 million. Before that, they bought 30,000 Bitmain ASICs for $120 million in August 2021. In the first half of this year, Marathon planned to operate 133,000 miners, but by May, they had only 36,830 ASICs in operation due to installation problems and unfavorable weather conditions at some of the miners.

Charlie Schumacher, a spokesman for Marathon, said: “Many miners are struggling in debt, having to find a way to recover the money to buy the machine, the money to build, the farm, the rent. The only way to make up for it. Loans are to plug in the machine to run and wait for BTC to increase in price and then sell it for a profit.

Schumacher said his company has not been able to pay back the batch of miners at the end of last year. They have just paid a deposit, the remaining capital is used to operate and there is no guarantee that they will be able to repay the debts to continue maintaining the large Bitcoin mining camp.

“Debt burden, rising electricity prices and falling Bitcoin prices are directly affecting profitability. Anyone who bought a excavator late last year or borrowed a loan to invest has not seen the day when profits will come back. The return was significantly lower than initially expected,” said Jurica Bulovic, head of the division at investment firm Foundry.

According to statistics of cryptocurrency research platform Into The Block in March, the role of miners is decreasing when the number of BTC they own is currently 1.95 million VND, the lowest since 2010. At the end of 2019, the number is 2.4 million BTC. In May, Riot Blockchain, a large US mining company, sold 250 BTC of the total 6,320 BTC hoarded to get money to maintain operations. A few days later, Marathon said it was also considering selling some Bitcoin despite the low price.

In the cryptomining world, much of the debt is collateralized by the Bitcoin miners themselves and based on the amount of BTC the miner holds. But these collaterals are increasingly depreciating in value. Experts warn that if miners default, the market will see a crisis spreading to the rest of the crypto industry.

Thao Hien (follow Wired)