Bitcoin Miners Are Depleting Their Reserves — What Are Their Options?
Enterprise miners are desperate for capital as they liquidate their Bitcoin to cover debt
It’s undeniable that the mining industry is hanging by a thread. Bitcoin’s price action and the unresting growth in hashrate have delivered a heavy blow to most miners.
Yet, the industry also needs to take responsibility. There’s a reason why some mining operations are not only surviving these tough conditions without any hiccups, but even benefiting from it by acquiring distressed assets at a discount.
The truth is that besides hashrate growth or Bitcoin’s price, the main reason for the critical situation most miners are in is the lack of long-term business strategies and risk management.
Let’s dig a little deeper into what led miners to the tough spot they’re in, and what options they have to escape it.
Debt is the deadweight sinking Bitcoin miners into bankruptcy
During the last bull run, most miners contracted significant debt obligations to expand their operations. It seems so long ago, but it was only last year.
Back then, Bitcoin was trading above $60K and the revenue per TH/s was at an all-time high of $0.4. Everybody wanted to get their hands on an ASIC miner at the time, and those who already had wanted more.
Here’s the thing in a nutshell: miners were making massive amounts of money, but they didn’t want to sell their Bitcoin. So, in order to carry out their expansion plans, they contracted debt.
Not only did they commit to buying thousands of new ASIC miners from manufacturers, they did so at all-time high prices. Remember, mining hardware prices tend to follow profitability, and mining was very, very profitable then.
Logically, they weren’t assuming the market would take the downturn it took entering 2022, and then again halfway through the year.
Now, miners are barely making any profits, and their debt obligations are coming back to haunt them. Obligations they can’t honor under their current conditions.
Bitcoin miners’ next big challenge
The first drastic measure most miners turned to was selling their Bitcoin. Reluctantly, they started liquidating their reserves to cover their debt. A short-term solution based on the optimistic thought that things would soon improve.
But they didn’t. In fact, quite the opposite. With new hardware being finally delivered and plugged in, and price falling below the previous cycle all-time high of $20K, miners not only couldn’t afford paying their debts. They couldn’t cover their operating costs.
Soon enough, the mining industry became a mess. Some miners managed to refinance their debts, although they’re still in a tough position. Others had to liquidate not only their Bitcoin reserves, but also their equipment and, in the most extreme cases, entire mining facilities. We also saw many mining organizations entered into litigation with service providers, such as hosting facilities.
And finally, those whose situation was too complicated to manage had to declare bankruptcy.
Seeing the current state of things, corporate lenders like Binance and Maple Finance have stepped up to offer Bitcoin miners a line of credit to help them navigate these tough times. Yet, this is another short-term and risky solution. How sustainable is it to cover debt with more debt?
The problem afflicting the mining industry is apparent and still unsolved: how can miners source capital to face their debts and obligations under the current market conditions?
Our proposal: peer-to-peer hashrate trading
Let’s recap. We’ve addressed the problem, which is, in layman’s terms, that miners have too much debt and not enough money nor profit margins to pay it.
We’ve also seen the damage control tactics they’ve implemented so far. Liquidating Bitcoin reserves, selling capital goods, and fighting debt with more debt. It’s clear that these aren’t viable options in the long term, and that an alternative is needed.
In that regard: What if miners could source liquidity, not from selling their capital (BTC, facilities, equipment), but the actual product of their work?
Think about it. Miners do not produce Bitcoin, they produce hashrate. Then, they “sell” that hashrate to mining pools in exchange for Bitcoin payments.
But here’s the problem. Bitcoin payments are inconsistent, both in frequency and value. They are determined by unpredictable factors such as luck, price, and difficulty; which makes it cumbersome for miners to predict performance in the long term. That’s essentially what led to this crisis, isn’t it?
Now, imagine that instead of selling their hashrate to mining pools, miners could offer it in the open market under their own conditions; namely price, duration, and amount. Such a tool would allow miners to adjust their strategy according to their obligations and goals, granting them considerable predictability and versatility.
How miners can sell hashrate to pay their obligations
Let’s explain this with a practical example: Suppose a miner has debt obligations coming up that reach $25,000 in total.
This miner produces 42 PH/s (or about 300 Antminer S19 XPs), which makes around $30.5K a month on average — $95,5K minus $65K in electricity costs. All good, right? They can cover the $25K obligation and secure $5.5K in profits.
Yet, there’s no guarantee that this will be the exact figure this miner will earn. Bitcoin price could fall, difficulty may increase, or the mining pool they’re mining against could come across a streak of bad luck.
For example, if Bitcoin dropped 25%, they would go from earning $30.5K to $22.5K, and now they have to default on their debt.
Does this example sound too far-fetched? From November 2021 to January 2022, Bitcoin dropped 48.17%. This hypothetical situation is in fact very close to what happened in reality.
Now, assume that this same miner could offer their hashrate in the open market under their own conditions. So, they decide to sell it for a duration of 30 days at a fixed price of $92K, so a little lower than the revenue estimation.
After 30 days, the miner will receive a guaranteed payment of $92K, unaffected by Bitcoin’s price action or difficulty. This will enable them to pay their debt obligations ($25K), electricity costs ($65K), and secure a small profit of $2K.
Most importantly, they were able to successfully navigate through tough market conditions without having to liquidate any capital goods, reserves, or contract any additional debt.
You might be wondering how this would be possible. Lumerin is building a decentralized hashpower marketplace that will enable Bitcoin miners to do exactly what we described above. All in a completely decentralized, remote, and peer-to-peer manner.
The Bitcoin market is unpredictable
Bitcoin miners have received an inescapable wake-up call. We can’t recover what is already lost, but we can implement new, more reliable strategies that prevent any financially catastrophic event from happening again.
We believe that the Lumerin Hashpower Marketplace will be a precious resource for miners in that regard, enabling them to unlock new forms of revenue designed specifically for each unique situation.
The mining industry needs reliable liquidity without debt, and through peer-to-peer hashrate trading, it can finally achieve it.
Do you want to learn more? Sign up for the Lumerin Explorer Program to enjoy early access and be among the first people in the world to mine Bitcoin with decentralized hashrate contracts!
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