In the recent weeks we’ve seen a public purge of overleveraged and underprepared Bitcoin miners.
Included in this wash out are some of the largest names in the Bitcoin mining industry such as Core Scientific, Compute North, Iris Energy, Argo, Poolin, and Compass Mining, among others both named and unknown.
This is due to the increase of Bitcoin’s hashrate and mining difficulty paired with escalating energy costs, causing a steep drop in miner revenues.
Though most were already overleveraged heading into this bear market, some are now resorting to adding even more debt in a last-ditch effort to save their operations from having to fully cease.
As a result, we’ve seen even more loans move into the mining industry in recent weeks, as these desperate miners now seek to exasperate every avenue of capital they still have available to them.
Like any good degen on tilt, broke miners are going all in trying to make it back in one trade…..with other people’s money:
Binance announcing a $500M lending facility available for distressed mining operations to tap into, which will allow some to sustain operations until market conditions are more mining favorable
DeFi platform, Maple Finance, has announced the opening of a lending pool for miners which has ~$10M of commitments at present, but aims to reach up to ~$300M, which will help it serve over 35 pre-registered miner with secured debt financing at rates at near 20% (!)
Crypto billionaire, Jihan Wu – the founder Bitmain which manufactures mining rigs – is reported to be setting up a $250 million fund which will purchase distressed assets from insolvent mining firms. Essentially repurchasing most of his own equipment for pennies on the dollar.
Industry leaders such as Mr. Wu stepping in to buy the capitulation of inefficient miners is potentially an encouraging signal that this distress is reaching its climax.
As JJ mentioned in his article, these distressed miners are so cash poor that they’ve become a net negative for BTC and its price. This is because their capital needs have forced them to capitulate out of the entirety of their BTC holdings and they now have to sell their newly mined BTC ASAP daily regardless of price to remain solvent.
As a result: We’re witnessing the lowest miner BTC reserves since early 2010 when BTC was under $1
This means that there is a minimal amount of BTC that can be sold in case of capitulation of one or more of these companies. Another bullish sign that the worst may already be passed.
On the flipside of this, there is the elephant in the room that all this emergency funding appears doomed for catastrophe.
DeFi protocols lending to already distressed miners at 20% APY is not sustainable, and likely will end up doing more harm than good to the industry in the long run.
High loan amounts to already insolvent zombie mining companies greatly increase the risk of a bankruptcy contagion spreading throughout not just miners, but also crypto lending companies who place their faith and resources into them.
We don’t have to think too far back to remember what happened to all of 3AC’s lenders once their fund collapsed… the domino effect of this washout could make that small by comparison.
In June, Bloomberg reported that there were already over $4 Billion in loans outstanding to miners. This recent influx of new cash at higher rates will only add to that snowball of toxic debt, putting the industry at risk of yet another contagion event.
Going forward we will be keeping a careful eye on headlines relating to loan amounts and disclosures, hashrate, mining difficulty, miner BTC reserve holding, miner exchange inflows, and other indicators to see if this dire situation can reconcile itself calmly without much further downside.
We will keep you updated as things progress,
The Boys of MCC