In May I wrote Generally Accepted Accounting Principles
, based on Paul Butler's The problem with bitcoin miners
. Butler pointed out that mining company financials were based on depreciating their hardware in a straight line over five years, where in reality "The average time to become unprofitable sums up to less than 1.29 years"
. I summarized the problem
In simple terms, this excess depreciation means that the company's real cost for creating income is much higher than they report, and thus their real profit as a continuing business is much less than they report, because they are not putting aside the money they will need to replace obsolete hardware.
This was written a couple of weeks after the Terra/Luna crash started on May 7th
, triggering the current "crypto winter", too early to see the effect on miners. Now, as the contagion spreads and successive cryptocurrency companies file for bankruptcy, we are starting to see the knock-on effects.
Below the fold, a collection of news about mining.
Lets start with the good news. Joanna Ossinger reports that JPMorgan Says Bitcoin Cost of Production May Be Down to $13,000
Bitcoin’s cost of production has dropped from about $24,000 at the start of June to around $13,000 now, which may be seen as a negative for pricing, according to JPMorgan Chase & Co.
The drop in the production cost estimate is almost entirely due to a decline in electricity use as proxied by the Cambridge Bitcoin Electricity Consumption Index, strategists led by Nikolaos Panigirtzoglou wrote in a note Wednesday. They posit that the change is consistent with efforts by miners to protect profitability by deploying more efficient mining rigs, as opposed to a mass exodus by less efficient miners. They also say it could be seen as an obstacle to price gains.
Publicly traded miners have struggled along with digital assets themselves. Marathon Digital Holdings Inc. is down 76% year-to-date, Riot Blockchain Inc. has dropped 78% and Core Scientific has tumbled 86%.
The miners' valuations were based on the stratospheric margins they enjoyed as the progress of BTC "to the moon" starting in the fall of 2020 greatly outpaced the supply of new mining hardware, then fell as China cracked down
in mid 2021, then recovered to peak on 7th
November. The graph shows the rapid decline in miners' margins since then, culminating with the Terra/Luna collapse when mining briefly became unprofitable. The collapse of miners' valuations was clearly justified.
Miners need BTC to keep heading up. Note the period on the graph before it headed moon-wards when mining was barely profitable.The slight recovery in miners' margins may not last
“While clearly helping miners’ profitability and potentially reducing pressures on miners to sell Bitcoin holdings to raise liquidity or for deleveraging, the decline in the production cost might be perceived as negative for the Bitcoin price outlook going forward,” the strategists wrote. “The production cost is perceived by some market participants as the lower bound of the Bitcoin’s price range in a bear market.”
On May 5th
the Bitcoin hash rate was around 228M TH/s, and with the Terra/Luna collapse it has stopped its strong upward trend. It is now around 192M. If JP Morgan is correct that miners are "deploying more efficient mining rigs" then they can't be correct that an "exodus by less efficient miners" isn't happening. If more efficient mining rigs are flowing in to the market, then older less efficient rigs must be flowing out.
This is certainly what the team behind the Cambridge Bitcoin Energy Consumption Index believe. Their estimate of the total power usage of the Bitcoin blockchain has dropped 41% from 15.3GW before the Terra/Luna collapse to 9.1GW now, while the hash rate has dropped only 16%. So the average efficiency of the miners must have increased, which means that less efficient rigs have been turned off.
David Pan's Bitcoin Miner Woes Risk Getting Worse After Celsius Collapse
confirms that this is what is happening:
The troubled crypto lender’s mining subsidiary also filed for protection from creditors late Wednesday. Celsius Mining said in the filing that it owns 80,850 rigs -- with 43,632 in operation -- and expects to run about 120,000 rigs and generate more than 10,000 coins by the end of this year.
It is likely that the 37,218 rigs Celsius has sitting idle are the older, less efficient and thus less profitable ones. I would expect that, in bankruptcy, Celsius will struggle to keep mining, let alone ramp up to 120K rigs. instead they will need to sell rigs to raise cash. But Pan reports
The bankruptcy comes as the value of mining rigs plunges with Bitcoin prices in sharp decline. Some of the most popular machine models have fallen as much as 50% since the last bull run and miners are struggling to complete purchase orders they made several months ago.
What these reports don't mention is that flooding the market with older, less efficient rigs and thereby dropping their residual value means that they are depreciating even faster than the estimates from before the Terra/Luna crash, meaning that the problem Paul Butler identified in miners' financials is even worse than his description. He concluded
Investors have been happy to provide capital to these companies, looking for anything in the public markets that provides some exposure to bitcoin, without paying much attention to what the companies are doing.
I don’t think it ends well.
So far, he is a prophet. These companies, which were essentially a bet that BTC would proceed "to the moon", were struggling to do anything but lavishly reward their executives
when BTC was around $30K, but it is now around $20K. Not to mention that most of the rigs are in Texas and, as David Pan reports
Nearly all industrial scale Bitcoin miners in Texas have shut off their machines as the companies brace for a heat wave that is expected to push the state’s power grid near its breaking point.
Not merely are their rigs depreciating far faster than before, but they aren't generating any income either. It may be summer, but regulatory winter is coming.
Dani Anguiano reports in Energy use from US cryptomining firms is contributing to rising utility bills
The largest US cryptomining companies have the capacity to use as much electricity as nearly every home in Houston, Texas; energy use that is contributing to rising utility bills, according to an investigation by Democratic lawmakers.
The lawmakers solicited information from seven of the largest US cryptomining companies, including Stronghold, Greenidge, Bit Digital, Bitfury, Riot, BitDeer and Marathon, about their energy sources and consumption and the climate impacts of their operations. The data revealed that the industry is using a substantial amount of electricity, ramping up production and creating significant carbon emissions at a time when the US needs to drastically reduce emissions to combat the climate crisis.
Amy Castor and David Gerard's Bitcoin mining in the crypto crash — the mining companies’ creative accounting is a comprehensive overview of the economics of mining in the "crypto winter":
"Bitcoin mining is a highly lucrative business as long as the price of bitcoin keeps going up — and as long as investors believe it will keep going up.
When the price crashes — and the price of bitcoin has halved since the start of the year — crypto miners face margin calls, they have to dump their bitcoins, and reality comes knocking."
Bitcoin Miner Made Millions in Credits by Shutting Rigs During Texas Heat by David Pan shows how public-spirited the Bitcoin miners of Texas are:
"Riot Blockchain Inc. earned about $9.5 million in credits last month from shutting down its Bitcoin mining rigs at a Texas facility while the region weathered a historic heat wave.
The amount will be credited against the company’s power usage. The value of the credit is equal to around 439 Bitcoin. Riot also mined 318 coins during the month, according to the company’s monthly production and operations update.
While the power crunch sent electricity prices soaring and made Bitcoin mining operations unprofitable, some large-scale miners such as Riot were able to sell electricity purchased earlier at a lower price back to the grid with a premium."
Not merely were Texas consumers' "electricity prices soaring" they were also having to pay Bitcoin miners to not mine Bitcoin - a win-win situation!
But wait, there's more. The next day, David Pan reported that Bitcoin Gains Spur Miners to Turn On Rigs in Midst of Heat Wave:
"A rise in the price of Bitcoin has prompted some miners of the cryptocurrency to switch on more rigs over the last two weeks even with much of the US still caught in a heat wave that boosted demand for electricity.
While many Bitcoin miners shuttered operations as electricity prices soared amid the heat wave, the rebound in Bitcoin prices over the period boosted mining revenue and prompted more miners to turn back on their machines."
Evidence of the depth of miner's financial problems comes from David Pan in Crypto Lender Tied to Chinese Rig Giant Throws Miners a Lifeline:
"Chinese Bitcoin mining rig giant Bitmain Technologies Ltd. has been selling machines to miners for about nine years. Now it’s helping to keep them afloat during the cryptocurrency market downturn through its ties with industry financier Antalpha.
Bitmain and its Antpool mining spinoff are working with Singapore-based Antalpha to offer low-interest loans to miners to help them reduce borrowing costs and repay nearly $4 billion in loans backed by equipment which have fallen in value along with the price of Bitcoin since it peaked in November.
To alleviate some of the pressure, Antalpha said some of its loans would not require margin calls and it would let miners delay payments to Bitmain for mining machines by allowing miners to use purchased rigs as collateral."
US miner Marathon Digital Assets published their 10-Q for the 3 and 6 months to June 30, and it is dire. In the last quarter their revenues were $24.9M. Their cost to generate these revenues was $16.7M plus $24.7M in depreciation and amortization, for a total of $41.4M. So just on raw cost they lost $16.5M. Then they had to pay "general and administrative" expenses of $12.6M, and tax of $9.9M making the loss on running a continuing business $39M.
But there's more. Their losses on HODL-ing cryptocurrency totaled $207.3M, partially offset by selling $58.2M-worth of mining rigs. The bottom line is that they lost $191.6M in the quarter.
Results like these from miners, and the fact that the hash rate has recently a significant drop, explains why this paragraph from David Pan's article is important:
"To alleviate some of the pressure, Antalpha said some of its loans would not require margin calls and it would let miners delay payments to Bitmain for mining machines by allowing miners to use purchased rigs as collateral."
Bitmain is making loans that can't be margin-called and are secured against collateral that depreciates to zero over about 15 months! Bitmain is clearly scared; these loans will default unless Bitcoin heads moon-wards in a big way so miners start making money again.
D. Andrew Owens testified to the Arkansas Public Service Commission and highlighted not just the environmental problems of Proof-of-Work mining, but also the credit risk they pose to the utilities that supply them with power:
"First, unlike data centers, which similarly involve significant electrical load, Crypto miners do not have to invest significant capital in state-of-the-art facilities because they are able to place their equipment in shipping container “pods”, which allow them to locate almost anywhere, typically close to an electric utility’s substation. These portable pods allow Crypto miners to relocate easily and quickly if economic conditions change, and as described below they do so frequently and without notice. As an emerging industry, Crypto miners often do not have credit history that demonstrates their financial viability for the types of significant infrastructure investments necessary to serve them."
David Pan reports that Largest Bitcoin Miners Lost Over $1 Billion During Crypto Crash:
"Core Scientific Inc., Marathon Digital Holdings Inc. and Riot Blockchain Inc. posted net losses of $862 million, $192 million and $366 million, respectively, in the three months ended June 30, recent quarterly earnings reports show. Other significant miners such as Bitfarms Ltd. and Greenidge Generation Holdings Inc., which reported results Monday, were also forced to write down the value of their holdings in the wake of the almost 60% drop in the price of Bitcoin during the quarter."
"Top public miners sold 14,600 coins in June whereas they produced 3,900, Mellerud said. Core Scientific sold nearly 80% of its coins to cover operational costs and fund expansion in June. Bitfarms sold nearly half of its holdings to pay down a $100 million loan in the same month."
The balance sheet issues Paul Butler described are catching up with the miners. Molly White reports that Compute North, one of the largest crypto mining datacenters, files for bankruptcy:
"Compute North has filed for Chapter 11 bankruptcy, in what may be a blow to the crypto mining industry. Compute North is a major datacenter provider, and have deals with crypto mining companies including Marathon Digital, Compass Mining, and others. Compute North had just raised $385 million in February through a Series C equity round and debt financing."
Nicholas Weaver demolishes Celcius' laughable plan to mine its way out of bankruptcy in an amicus letter to the court:
"Cryptocurrency mining overall is a marginal business and Celsius has already shown they are not (and probably can not be) a viable participant in that space. Every day Celsius is allowed to pretend that their mining business is viable is another day of destroyed creditor value."
Naureen Malik reports that Texas Crypto Boom Slows as ‘Double Compression’ Hinders Miners:
"The growth in Texas crypto-mining capacity will be stunted as Russia’s war on Ukraine drives up global energy prices and Bitcoin prices languish, according to an industry group.
Mining capacity in the Lone Star State will increase by 2 gigawatts to 3.5 GW by the first quarter of 2024, rather than the former forecast of up to 5 GW, said Lee Bratcher, president of the Texas Blockchain Council.
The “double compression effect” of higher electricity prices and declining cryptocurrency values means it’ll take longer to bring online the huge queue of mining projects set to connect to the state grid, Bratcher said at a conference on Monday."
"In recent months, power demand soared to all-time highs almost a dozen times, prompting the Electric Reliability Council of Texas to urge businesses and households to curtail usage to avoid shortages. Miners have argued that they are super sensitive to power costs and voluntarily curtail operations to aid the state’s grid."
Bitcoin Miners Pan for Cash as Profits Dry Up and Crypto Markets Slump by David Pan documents miners' struggles to stay afloat:
"Bitcoin mining companies are increasingly opting to sell equity, resorting to one of their least attractive options to raise money as profits dry up and higher interest rates makes borrowing more expensive.
Core Scientific Inc., one of the largest US publicly traded Bitcoin miners, entered into a $100 million common stock purchase agreement with B. Riley Principal Capital II in July. Australian miner Iris Energy Ltd. said in September that it agreed to sell up to $100 million in equity to the same investment bank. London-based Argo Blockchain PLC, earlier this month, decided to issue stock at a discount to an unnamed investor for $27 million.
Bitcoin miners have been pummeled by low Bitcoin prices, soaring energy costs and steep competition in the industry."
Lin Cheng and Carly Wanna report that Bitcoin Miner Core Scientific Says It May Seek Bankruptcy:
"Core Scientific Inc., one of the world’s largest miners of Bitcoin, warned that it may run out of cash by the end of the year and could seek relief through bankruptcy protection.
Core Scientific held 24 Bitcoins and approximately $26.6 million in cash as of Thursday. That’s compared with 1,051 Bitcoins and about $29.5 million in cash as of September, the company said in the filing.
The shares, which traded as much as $14.32 late last year, closed at 22 cents. they’ve tumbled 98% since the start of the year.
Riot Blockchain Inc. fell 3% to $6.84, while Marathon Digital Holdings Inc. dropped 1% to $13.65. The companies are down about 69% and 58% this year, respectively."
Molly White reports on another miner's troubles i n Iris Energy Bitcoin mining firm close to defaulting on loans of $103 million:
"Iris Energy, an Australian "sustainable Bitcoin mining company", has announced that they are close to defaulting on loans used to purchase $103 million of Bitcoin mining rigs. These machines depreciate in value quickly, and are currently estimated by the company to be worth $65–$70 million. At the moment, they produce $2 million in gross profit from mining Bitcoin, which is not sufficient for the company to meet the $7 million of loan payments each month."
Iris Energy's warning was prophetic, as Molly White reports in Iris Energy defaults on $100 million+ loan, unplugs miners:
"Iris Energy has defaulted. Unable to pay the $7 million/month in debt obligations with their $2 million/month gross profit, Iris Energy has powered off 3.6 EH/s worth of mining capacity.
Iris Energy's stock has plummeted to $1.66, down 93% from its $24.80 peak when the stock first began trading a year ago."
It isn't just exchanges that are in trouble. As we've been saying, investing in expensive to buy, expensive to run, rapidly depreciating mining rigs works great when BTC is heading moon-wards. Otherwise, not so much.
Luis Ferré-Sadurní and Grace Ashford report that New York Enacts 2-Year Ban on Some Crypto-Mining Operations:
"New York became the first state to enact a temporary ban on new cryptocurrency mining permits at fossil fuel plants, a move aimed at addressing the environmental concerns over the energy-intensive activity.
The legislation signed by Gov. Kathy Hochul on Tuesday was the latest setback in a bruising month for the cryptocurrency industry, which had lobbied fiercely against the bill but was unable to overcome a successful push by a coalition of left-leaning lawmakers and environmental activists."
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