Crypto mining companies are coming under intense pressure due to this year’s digital asset downturn, as the high cost of energy and the flatline price of coins push more names close to the financial cliff edge.
Nasdaq-listed Core Scientific warned last week it may file for bankruptcy protection as its cash resources will be exhausted by the end of the year. On Monday, London-listed Argo Blockchain echoed that gloomy outlook, saying it could be forced to cease operations after a critical fundraising fell through.
Those warnings came just weeks after SU’s Computer North, which operated data center services for miners, filed for bankruptcy, blaming up to $500 million in debt and difficult market conditions.
Their dire financial situations show how cryptomining – the process by which coins are generated and transactions verified – is next in line to feel the impact of the collapse in the price of popular cryptocurrencies such as bitcoin over the past 12 months.
What is crypto mining?
The act of using 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, which creates the next block in the chain. The others will verify it. In exchange 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 range of once-prominent crypto firms, such as the lending platform Celsius Network and the hedge fund Three Arrows Capital.
“The crypto winter has negative consequences for the entire 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 skyrocketed since June. Bitcoin has rarely risen above $21,000 after peaking near $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 of guaranteeing that transactions are reliable in a system that bypasses third parties like banks and exchanges. In exchange for mining, they are rewarded with new tokens. Ether, the world’s second largest crypto token, has recently moved away from the type of system that miners require.
Many miners have been tempted 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 huge amounts of power. Hut 8, a mining company, added 9,592 machines for mining in the first quarter of 2022, increasing its capacity by almost a third.
The extra mining capacity hit the market just as the price tumbled, meaning miners raced harder to win the token. Bitcoin’s total hashrate, the computing power devoted to mining, has increased by 57 percent in the past year to a record 260 exahash — or quintillion — operations per second, according to Hashrate Index.
The high cost of energy also caught many off guard and dashed miners’ ambitions. Miners race against each other to solve complex mathematical puzzles and earn bitcoin. They spend huge amounts of energy regardless of whether they claim the bitcoin before their competitors or not. Argo acknowledged that energy costs for its Texas facility were nearly three times the average price for August.
This was exacerbated by the threat of power outages in the US. In July, Argo, Core Scientific and Riot Blockchain scaled back their Texas operations as energy demand threatened to overwhelm the power grid.
“The bottom line is that the competition has increased recently, even though power costs are high and the bitcoin price is kind of stable . . . I think they’re still profitable, but the profit spreads are shrinking,” said Chris Brendler, a senior research analyst at DA Davidson. , an investment bank, remains bullish on some miners, including Stronghold Digital Mining, which has lost more than 95 percent of its value in the past year.
Conditions may not improve in the short term. Since the Ethereum “Merge” in September effectively rendered Ethereum mining obsolete by switching to a different system for transaction verification, companies such as Hive and Hut 8 have said they plan to fill their capacity with bitcoin mining.
Additionally, the rewards for mining bitcoin are expected to halve in less than two years, in a quadrennial event pre-set in 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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