I know I’m stepping away from things I have knowledge and experience with when I comment on stories like this, but sometimes I just can’t help myself.
Beleaguered crypto lenders are being dealt another blow from Bitcoin miners as they weather the aftermath of the FTX collapse.
Miners, who raised as much as $4 billion from mining-equipment financing when profit margins were as high as 90%, are defaulting on loans and sending hundreds of thousands of machines that served as collateral back to lenders. New York Digital Investment Group, Celsius Network, BlockFi Inc., Galaxy Digital, and the Foundry unit of Digital Currency Group were among the biggest providers of funding to finance computer equipment and build data centers.
The liquidity crunch hitting digital-asset markets after FTX failed comes as low Bitcoin prices, soaring energy costs and more competition weigh on miners. Loans backed by the computer equipment, known as rigs, had become one of the industry’s most popular financing tools. Many lenders are now likely facing substantial losses since they can’t seize any other assets besides the machines, whose value has dropped by as much as 85% since last November.
“People were pouring dollars into the mining space,” said Ethan Vera, chief operations officer at crypto-mining services firm Luxor Technologies. “Miners ended up dictating a lot of the loan terms, so the financiers moved ahead with a lot of the deals where only the machines were collateral.”
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There is likely to be more defaults. Compared to the publicly-listed miners, private companies currently contribute about 75% of the computing power for the entire Bitcoin network and most of their rig-backed loans with the lenders remain undisclosed, according to data from Luxor. Additional loans will likely come under stress if more private large-scale miners such as Compute North file for bankruptcy.
“There hasn’t necessarily been the best due diligence on whether a miner was credit worthy or not,” said Matthew Kimmell, digital asset analyst at crypto investment firm CoinShares.
While miners tend to default when they are cash-depleted, some companies may have decided to stop paying the loans even if they still have cash on balance sheets, according to Luxor’s Vera. The collateral can be worth less now than the remaining payments for some miners.
“It could be an economic decision to walk away from the financing deals,” Vera said. “Miners are focused on how to survive the next six months rather than if they need the lender for the next five years.”
The miners use powerful energy-guzzling computers to secure the Bitcoin blockchain by validating transaction data and earn rewards in the form of the token. Bitcoin has tumbled about 75% since reaching an all-time high in November 2021.
I swear, I’m not going to start blogging about cryptocurrency on the regular, and I don’t know any more about it than the average idiot does. It’s just that when I read a story like this, I think about the rapid growth of cryptocurrency mining in Texas, which is happening primarily in rural areas, and I wonder if they’re about to see their bubble burst. I’m very much a crypto skeptic and this kind of news is right in line with my priors, so I need to be wary of reading too much into it. If there is a crash in the cryptomining business, which would have negative effects in Texas, then at least we can say we had some warning. If not, I’ll know better than to blog about stuff like this in the future.