(Bloomberg) – The prolonged decline in Bitcoin makes it difficult for some miners to repay loans of up to $4 billion backed by their equipment, posing a potential risk to major crypto lenders.
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A growing number of loans are now underwater, with most mining rig lenders accepting collateral halving in value with the price of the world’s largest digital token, according to analysts.
Few miners have defaulted on their loans so far, but recent sales are showing signs of distress. Core Scientific Inc. sold more than 2,000 Bitcoins in May to help cover operating costs. Meanwhile, Bitfarms Ltd., Galaxy Digital Holdings Ltd. It dumped nearly half of its tokens issued earlier this month to pay off part of its $100 million loan with He also obtained another machine-backed loan from New York Digital Investment Group LLC.
If the market doesn’t improve, analysts warn this could be an ugly scenario. Selling bitcoin reserves puts more pressure on prices, and the cost of equipment could fall further if lenders – wanting to recoup their losses in defaults – start liquidating their holdings. Bitmain’s popular S19 mining rig is valued by Luxor Technologies Corp.
“Bitcoin miners generally feel pain,” said Luka Jankovic, head of credit at Galaxy Digital. “Many operations have had a negative net IRR at these levels. Machine values have dropped and are still in price discovery mode combined with volatile energy prices and limited supply for shelf space.”
Using powerful computers to process transaction records and earn rewards in tokens, Bitcoin mining was among the most lucrative businesses during crypto’s historical bull run. Margins can go up to 90%. However, loans for machines upgraded through traditional finance can be difficult to find or involve high interest rates given the volatility of the market.
To fill the gap, local crypto credit institutions such as Galaxy Digital, NYDIG, BlockFi Inc., Celsius Network Ltd., Foundry Networks LLC, and Babel Finance have started accepting platforms as collateral in addition to cash payments. But now these lenders can be significantly secured, said Ethan Vera, co-founder of Seattle-based mining company Luxor Technologies. “Especially those with high collateral ratios are nervous about their loan books.”
Vera estimates up to $4 billion in machine-backed loans, surpassing the token-backed loans that first became popular with lenders like Babel in Asia.
BlockFi Chief Risk Officer Yuri Mushkin said in an email to Bloomberg that mining-backed loans are “just a part of our broader loan portfolio” and follow the same risk and insurance practices that apply to their corporate business.
Foundry declined to comment, while NYDIG, Babel and Celsius did not respond to a request.
Many Bitcoin miners are still enjoying good profit margins. According to Arcane Crypto mining analyst Jaran Mellerud, assuming average electricity prices and fairly new mining machines, the production cost of a large mining company is around $8,000 per token.
“But the declining income is still affecting their business, as some have loans to repay and collateral to send for machine purchases,” Mellerud said. “It can be difficult for them to make these payments without selling a significant portion of their Bitcoin holdings.”
Read more: Bitcoin Miners Face Industry’s ‘Shakeout’ as Prices Stay Depressed
An industry shake-up could be imminent, especially for smaller, negative cash flow operators who buy expensive equipment months ago thinking it will appreciate in value.
Securitize Capital CEO Wilfred Daye said that if you factor in the overall costs for infrastructure and interest rates, the total cost of some miners could already be over $20,000, which could be around the current price of Bitcoin.
“The miners thought they would be in a better capital raising environment today,” Vera said. “They bought tens of thousands of machines, signed up for hosting, made deposits and now they can’t fulfill it,” he said.
Will Foxley, content director for Compass Mining Inc., said the cost of raising capital has increased dramatically as debt and equity market opportunities for miners dry up.
“Bitcoin goes off the cliff, then the value of the machines drops even more because people don’t want to use it for anything else,” he said. “There’s still a ton of machine orders pending.”
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