Crypto mining companies are coming under heavy pressure from this year’s digital asset downturn as the high cost of energy and the flatlining price of coins pushes more names close to the financial cliff edge.
Nasdaq-listed Core Scientific warned last week it could file for bankruptcy protection as its cash resources would be depleted by the end of the year. On Monday, London-listed Argo Blockchain echoed that gloomy outlook, saying it may be forced to cease operations after a critical fundraising fell through.
Those warnings came only weeks after US’s Computer North, which operated data centre services for miners, filed for bankruptcy, owing up to $500mn and blaming tough market conditions.
Their dire financial situations show how crypto mining — the process by which coins are generated and transactions are verified — is next in line to feel the impact of the crash in the price of popular cryptocurrencies such as bitcoin over the past 12 months.
What is crypto mining?
The act of employing a large network of computers to work together to solve cryptographic calculations that verify cryptocurrency transactions. Typically, one party will solve the puzzle, known as a hash, that creates the next block in the chain. The others will verify it. In return for maintaining the blockchain, miners are rewarded with new tokens for being the first to solve the cryptographic proof. They also collect transaction fees.
Read more in the FT crypto glossary.
The downturn has already claimed a series of once-prominent crypto firms such as lending platform Celsius Network and Three Arrows Capital, the hedge fund.
“The crypto winter is having negative ramifications for the overall ecosystem, including the miners. It’s a chain reaction as this long cold crypto winter continues,” said Dan Ives, managing director of Wedbush Securities.
Industry analysts and executives have questioned the sustainability of mining especially after prices of leading tokens have been rangebound since June. Bitcoin has rarely risen above $21,000 after reaching a high of almost $70,000 late last year.
Miners play a crucial role in the operation of so-called “proof of work” tokens such as bitcoin. They verify new blocks on blockchains, effectively taking on the role as guarantor that deals are trustworthy in a system that bypasses third parties such as banks and exchanges. In return for mining, they are rewarded with new tokens. Ether, the world’s second-biggest crypto token, recently moved away from the type of system that requires miners.
Many miners were enticed by ever-rising prices for coins. When the price of bitcoin crashed in 2021, companies poured money into buying mining equipment, including fast computers that suck up large amounts of power. Hut 8, a mining company, added 9,592 machines for mining in the first quarter of 2022, increasing its capacity by nearly a third.
The extra mining capacity has arrived on the market just as the price has tumbled, meaning miners are racing harder to win the token. Bitcoin’s total hashrate, the computing power directed towards mining, has increased by 57 per cent in the last year to a record 260 exahash — or quintillion — operations a second, according to Hashrate Index.
The high cost of energy has also caught many out and punctured miners’ ambitions. Miners race against each other to solve complex mathematical puzzles and earn bitcoin. They expend large amounts of energy regardless of whether or not they claim the bitcoin before their competitors. Argo admitted that energy costs for its Texas facility were nearly three times the average price for August.
That has been exacerbated by the threat of energy blackouts in the US. In July, Argo, Core Scientific and Riot Blockchain scaled back their Texas operations, as demand for energy threatened to overwhelm the power grid.
“The bottom line is the competition has been increasing recently, even though power costs are high and the bitcoin price is kind of stable . . . I think they are still profitable, but the profit spreads are shrinking,” said Chris Brendler, a senior research analyst at DA Davidson, an investment bank. He remains positive on some miners, including Stronghold Digital Mining, which has shed more than 95 per cent of its value in the past year.
Conditions may not improve in the short term. Since the Ethereum “Merge” in September made Ethereum mining effectively obsolete by switching to a different system for transaction verification, companies such as Hive and Hut 8 said they planned to fill their capacity with bitcoin mining.
Moreover, in less than two years the rewards for mining bitcoin is expected to halve, in a four-yearly event that is preset into bitcoin’s code.
“The only way for miners to increase their bitcoin production through the upcoming halving is to grow capacity much faster than their competitors,” said Jaran Mellerud, an independent crypto mining analyst.
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