The Year Boom Turned To Bust
- December 23, 2022
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For bitcoin miners, 2022 was the year that the gold rush became panned out. Year-over-year:
In North America at least, plenty of investment capital that poured into the sector last year did so without appreciating the complexity of the industry. Additionally, operators who should have known better opted for a growth-at-all-costs approach in 2021, glutting themselves on debt while margins were high.
In 2022, the grow at all costs approach gave way to gutting as profitability dwindled and expenses rose. Miners who took on debt to expand operations the year before bought equipment at sky-high prices, and now they are facing rock-bottom margins, rising costs and high-interest payments.
This year began a washout of the miners who hastily joined the industry in 2021 tempted by the exceptional margins of that year. The washout will continue into 2023, as there are basically zero signs that bitcoin (BTC) mining margins will grow.
Before taking a look at 2022 by the numbers, let’s take a step back to the most consequential event in bitcoin mining to date: China’s ban in the summer of 2021.
Historically, Chinese miners cornered every inch of the industry, from machine manufacturing to industrial-scale mining operations. This all changed with multiple Chinese Communist Party mandates in May and June of 2021 that effectively outlawed the practice. Even so, 10-20% of the Bitcoin network’s hashrate (the total computing power employed for bitcoin mining) is still in China, depending on what data you consult.
Even so, the overwhelming majority of China’s bitcoin mining business fled the country. A lot of it migrated to the U.S., which now houses roughly 40% worth of the industry.
This shift spurred investments particularly into North America’s mining sector at a time when interest rates were low and bitcoin’s price was surging. China’s mining ban also took roughly half of all the network’s bitcoin miners offline, meaning that the remainder faced half as much competition. (Imagine, for instance, that 100 entities were mining the same gold plot, and overnight, 50 of those quit, leaving more gold for those who stayed).
Bitcoin’s hashprice (a measure of how much revenue miners can earn from their hashrate) illustrates this profitability increase best.
The gray window in the chart below highlights the boost miners enjoyed in the aftermath of China’s ban. Even though bitcoin’s price was down 50% from its then all-time high, hashprice surged as Chinese miners turned off their machines and relocated. When network computing power drops, bitcoin’s mining difficulty (a unique metric that dictates how hard it is to mine a block) drops; when computing power joins the network, the difficulty rises.
Bitcoin’s difficulty fell 35% after China’s ban, making the summer of 2021 one of the most lucrative periods ever for the cryptocurrency’s miners
Even without the draconian Chinese measure, 2021 was an exceptionally profitable year for bitcoin miners. The average hashprice for the year was $300 per petahash per day (a petahash, or PH, is a measurement of how many hashes a mining machine produces each second in an effort to mine the next block in the blockchain). This means that, if a miner were running 10 new-generation machines like the S19J Pro, they would have generated $300 a day on average in 2021; meanwhile, their daily electricity cost, assuming the average rate U.S. industrial rate of 7.61 cents a kilowatt hour in 2021, would be $55, making their margin a healthy 82%.
Fast forward to 2022, and the average hashprice on the year has been $128/PH/day. Electricity costs have risen, so factoring the average industrial rate of 9.34 cents/kWh, margins were compressed to 48%. That’s not terrible, but when we zoom in to the end of the year, the situation becomes more dire.
Hashprice hit an all-time low of $55/PH/day on November 22 in the aftermath of FTX’s collapse, and hashprice is roughly $61/PH/day at the time of writing, which makes for a -6% margin assuming the average industrial cost for electricity in the U.S. for the year. Basically any miner that is operating with electricity above 8 cents/kWh isn’t turning a profit (unless they have the most recent Antminer machine, the S19 XP).
Now, of course every miner has a different cost profile for their energy, but prices are up across the board for popular bitcoin mining states.
As these power prices rise, companies that host bitcoin miners are raising their rates accordingly. It’s very common for bitcoin miners to have their machines hosted at other companies’ facilities that include brokered power-purchasing agreements (PPAs). Many of these hosting companies failed to negotiate fixed, long-term PPAs in 2021, so rates have risen in 2022 – so much so, they have put miners near breakeven costs given current mining economics, if not putting them underwater.
The Bigger They Are, the Harder They Fall
With margins crushed and power costs rising, some of the largest miners in the U.S. ran into financial trouble this year.
Perhaps most consequently, Compute North, the second largest bitcoin mining host in the U.S., filed for Chapter 11 bankruptcy in September. Compute North hosted machines for dozens of companies, including Marathon Digital, the second-largest public miner by market capitalization at the time of writing.
Compute North auctioned off its assets in a sale under section 363 of the U.S. Bankruptcy Code in an effort to pay back roughly $146 million of debt. In addition, Compute North used two of its five active bitcoin mining facilities to collateralize $101 million of secured debt to its primary lender, Generate Capital, which took possession of the properties and extinguished the loan. With those transactions, Compute North has covered most of its debt. But after the proceeds of the sale, Compute North still has $40 million in unsecured debt to settle with the $14.7 million in cash it raised.
Compute North’s mining farms, the most coveted assets in the auction, ended up in the hands of three of its creditors: Generate Capital, Foundry, and U.S. Data Group.
Debt-Burdened Public Miners Are on the Brink
Compute North is a private company, but its bankruptcy presaged similar trouble for the handful of public bitcoin miners active in North America.
Toward the end of this year, the largest public miners in the bunch, Core Scientific, filed for Chapter 11 bankruptcy, becoming the first to do so. Argo Blockchain, in an inadvertent leak to investors, signaled signs of near-bankruptcy, though the company is trying to avoid this by restructuring its debt. Both of these stocks are trading below the $1 share price requirement of NASDAQ, as are a number of other miners including Bitfarms, Hut 8, Bit Digital, Stronghold.
Core Scientific and Argo’s financial troubles could serve as a stand-in for the wider public mining stock landscape. Many of these miners took on debt in 2021 to finance operations while the market was hot, all while selling little-to-none of the bitcoin they mined last year. Now, with margins evaporating and payments due on these loans, these miners sold significant portions of their mined BTC at increasingly lower prices as the year progressed.
Public bitcoin miners’ combined losses in 2022 were in the ballpark of $15 billion. Not a single public mining stock is down less than 80% year-over-year. Here’s how much leading public miners fell in 2022:
- Greenidge (-98.41%)
- Core Scientific (-97.72%)
- Argo (-96.63%)
- Stronghold (-95.68%)
- Bitfarms (-88.96%)
- Marathon (-88.05%)
- Hut 8 (-87.68)
- Hive (-84.88%)
- Riot (-83.13%)
- Cleanspark (-82.53%)
At a time when stock prices were trending ever downward, public miners turned to equity sales to bolster liquidity, and they raised nearly $1.1 billion in the first three quarters of the year.
Many miners increasingly issued at-the-market offerings, a stock sale that is like a revolving line of credit that is open to buyers for a specific period. Through Q3, public miners put out a total of $1.5 billion worth of at-the-market equity offerings. However, they likely only raised a fraction of this amount; we won’t know for sure until they report Q4 numbers in January.
Even though stock prices were crushed this year, public miners turned to equity fundraises out of necessity. As the above chart shows, debt financing dried up completely by Q3. The loans that miners became accustomed to in the low interest rate, bullish market of 2021 were unavailable in a bear market with increased borrowing costs.
Of the debt raised in 2021, equipment financing became perhaps the most detrimental in 2022. Bitcoin miners would take out these loans from companies like NYDIG, BlockFi, Galaxy Digital, Silvergate, Trinity Capital, and WhiteHawk,, with interest rates from 10-20%. They used this financing to purchase machines at highly elevated prices, sometimes as much as $10,000 each. Now, these machines are worth 85% less than they were at their peak in April of last year..
In many cases, miners secured these loans with the mining machines themselves, which as the above chart suggests, are as volatile (if not more so) than BTC. As the market punished machine prices this year, the value of the collateral for equipment financing shrank, forcing miners who held these loans to collateralize additional machines to cover the margin.
Many miners were unable to service the debt for their loans as market conditions worsened, and the sector experienced a wave of defaults from private and public miners alike in 2022. On the public side, Stronghold Digital defaulted on $67.4 million worth of debt to NYDIG by relinquishing 26,000 Bitcoin mining machines to the lender. Similarly, NYDIG sent Iris Energy a default notice on November 4 for $101 million worth of debt that is secured by 11,980 bitcoin miners.
Outside of public companies like the ones above, there are plenty of private miners with spoiled equipment-financing deals. It’s impossible to know for sure, but there could be at least $1-2 billion worth of financed units that are underwater.
Crypto Winter Gives Miners a Chance to Consolidate, Grow If They Survive
As we close out the first year of crypto’s most historic bear market to date, bitcoin miners will have a single mantra: survive.
Bitcoin’s price is in the dumpster and shows little sign of a substantive recovery anytime soon. Moreover, even though it will grow more slowly than it would if economic conditions were better, the hashrate will continue to increase over the next year, and bitcoin mining difficulty with it. Assuming the coin’s price stagnates or drops farther and hashrate increases even marginally next year, mining margins will continue to spiral lower.
That said, miners who have cash on the sidelines and low-cost operations have the chance to capitalize on the downturn. Current bitcoin mining machines, for instance, are cheap compared with 2021 and early 2022. Miners can find listings of the S19J Pro, one of the more beloved workhorses of the industry for ~$1,500.
In addition to cheap equipment, some companies will have favorable opportunities to acquire bitcoin mining facilities via acquisitions and distressed asset sales. Compute North’s bankruptcy was a harbinger of what’s to come in the New Year, and I expect that mining assets will consolidate into the hands of cash heavy, prudent operators and away from debt-ladened firms.
Speaking of debt-laden, I expect more than one public bitcoin miner to declare bankruptcy in the new year. It may not even be a stretch to suggest that industry economics in 2023 will be a death knell for many public miners.
Those miners with low debt and healthy balance sheets, though, will be positioned to survive the bear market and thrive in the next bull.
For investors seeking value, the bear market will be an opportune time to acquire cheap shares of well-oiled miners. Next year will be a defining time for North America’s bitcoin mining sector, separating the competitors who are in it for the long run versus the pedestrian operators who joined when times were good but were unprepared for the brutal realities of a bear market.