Crypto Miners Prepare for Crash:Bitcoin costs less and electricity is more expensive. What could possibly go wrong? Last year, when the price of bitcoin rose to $68,000, the miners were having fun. Their profits, by some estimates, were only around 90%, and many of them decided to quickly grow their business in anticipation of a bigger windfall in 2022. This unexpected profit did not materialize. Cryptocurrency markets have crashed lately; at the time of writing, the price of one bitcoin is $30,630.
At the same time, electricity prices have risen worldwide due to a resurgence in demand and conflict in Ukraine. For bitcoin miners who use high power mining computers called ASICs to produce bitcoins by solving complex mathematical puzzles, this presents a challenge.
Bitcoin miners:Crypto Miners Prepare for Crash as Bitcoin
In an interview with Reuters in 2016, Bitfury CEO Valery Vavilov stated that up to 90% of a miner’s overhead could be electricity costs. Energy costs in parts of Europe have risen so dramatically that it can cost up to $25,000 to mine a single bitcoin in some places. This was announced by Daniel Jogg, CEO of Enerhash, a company that operates blockchain data centers.
He claims that some of the operations brought losses. The heatwave experienced by bitcoin mining hub Texas over the past year has driven electricity prices up 70%, from 10.6 cents to 18.4 cents per kilowatt hour.
The United States now accounts for 37.84% of global cryptocurrency mining activity following a mining ban in predecessor crypto superpower China in 2021, according to the University of Cambridge. the crypto mining infrastructure of Luxor Mining is not only the price of electricity on a gross basis, but also price volatility.
“Forecasting future energy prices is quite difficult.” Since last summer, more miners have entered the network, resulting in a decrease in the performance of individual miners.
In other words, the value of bitcoins goes down as miners spend more on their production. According to Sam Doctor, director of strategy at digital asset investment bank BitOoda, margins are between 60 and 73 percent, and while miners are still making money, they are declining.
He says: “Even miners who use successful modern mining rigs are making less money than they used to. The doctor continues by saying that the old S9 generation ASICs, which still make up a third of all mining rigs in use in the world, are rarely still economically viable. viable.
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dip when bitcoin falls:
“Miners without a fixed-price energy contract could come under pressure from both sides now that energy prices are rising.” Most miners, especially large mining companies, don’t have such contracts, Doktor said, as they require “stronger credit” than most of them currently have.
Despite the very outstanding margin, the situation for miners is difficult. The market value of most publicly traded mining companies has declined by more than 50%, including Riot, Marathon and Core Scientific, the sector’s three titans. Both Riot and Core Scientific scaled back their expansion plans after falling short of their high sales forecasts.
The risk is that if these unfavorable trends continue, it could be the start of a larger downturn for the industry. In the two years leading up to the crash, miners rushed to buy lots of ASICs in order to mine more bitcoins. One of the top three US miners, Marathon, purchased 78,000 ASICs from manufacturer Bitmain in December 2021 for a record $879 million. In August 2021, Marathon made a second purchase of 30,000 Bitmain ASICs for $120 million.
Due to installation problems, bad weather at one of its Montana operations, and delays in securing a power contract with the Texas power grid, Marathon had only 36,830 ASICs operating as of May, well short of the 133,000 rigs scheduled to come online by first month. half of 2022.
The value of idle or not-yet-delivered ASICs could soon fall below the price Marathon and other mining companies paid for them in the midst of bitcoin’s rise because ASIC prices often correlate with bitcoin prices.
Charlie Schumacher, a spokesman for Marathon, claims that the company has paid “well below current market value” for most of its newest mining rigs, with the exception of older, previous generation rigs such as the 78,000 it purchased in December. . He argues that Marathon’s “minimum asset approach”, in which the business contracts with hosting providers rather than building its own infrastructure, protects the business from the challenges facing the sector.ahera, “many miners struggle to pay for their machines as they first invested heavily in infrastructure in hopes of someday making money to pay for machines to populate that infrastructure.” The infrastructure will not need to be paid before the miners are paid. Observers claim that debt financing accounted for the majority of ASIC purchases by miners. The doctor says that “some miners have unpaid expenses”, but he does not name the company. They’ve placed an order for a lot of machines and paid a deposit, but they may not have the money – or they may lose some of it – to pay the balance and get the rigs.
According to Yuritsa Bulovic, head of mining company Foundry, a mining lender bought equipment at the top of the cycle when bitcoin was worth $65,000 and took out a loan to do so — which is a big part of the industry — they no longer have positive cash flow.”
There are signs that miners are in dire need of money after the crypto disaster and that they will not be able to count on the help of investors. Earlier this month, a major US miner called Riot Blockchain sold 250 bitcoins (out of 6,320 reserves) for $10 million to fund further development. Two days later, Marathon reported that it was thinking about selling some of its bitcoin, but not “. Close.” This disrupted a longstanding mining practice known as “HODLing”, which was later mistranslated as “holding on to life”.
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The selling frenzy isn’t just happening to bitcoin; Luxor Mining is getting “frantic calls” from public companies looking to sell ASICs at below book value, Brammer said. He claims that sales are starting to appear.
This could drive down ASIC costs even more, even as vendors “don’t want to cut their prices any further,” according to Robert Van Kirk, managing director of the mining equipment market at Kaboom Racks. The question is whether such an escalation will worry creditors. In the last two years of the boom, several mining companies took out loans against their bitcoin holdings or even entered into “equipment-backed debt” agreements, where the loan was guaranteed by the mining equipment itself.
Due to the decline in the value of Bitcoin and ASICs, such collateral is no longer of value. “The misfortune could spread across the sector if miners are over-indebted.” In light of declining collateral values, lenders are one example, Bulovich said. Even if no two lenders or loans are the same. The bitcoin mining industry has seen an increase in mergers and acquisitions as well as consolidation. Over the next 12-18 months, information will become available on how well enterprises are managed, whether they are operationally efficient and have debt sustainability.