Miners Could Face a $4B Debt Crunch if Downturn Continues
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Miners Could Face a $4B Debt Crunch if Downturn Continues

Bitcoin miners have racked up debts of around $4 billion during the recent bull cycle which is currently under distress.
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Several Bitcoin mining companies are reportedly facing margin calls as the value of their collateral, which is mainly BTC and mining rigs have dropped by more than 50% over the past several months following the general downturn in the cryptocurrency market.

If the condition doesn’t improve, a huge portion of miners might be forced to sell their Bitcoin reserves in order to pay their debts or top-up collateral, a scenario that would result in further bleeding for the leading cryptocurrency.

Bitcoin Miners Have Around $4B in Loans Backed by Rigs

The crypto mining industry was among the most profitable businesses during the recent bull run that saw the leading cryptocurrency hit an all-time high of around $70,000. To take advantage of this opportunity, some miners turned to loans to finance the construction of their mining operations

Loans for mining rigs via traditional finance were either very hard to come by or included high-interest rates given the market’s volatility. Therefore, in a bid to fill the gap, some prominent crypto lenders, including Galaxy Digital, NYDIG, BlockFi, and Celsius Network, started accepting mining machines as collateral. 

However, with the recent drop in prices of cryptocurrencies, the value of mining rigs has also been hit hard. This means that those lenders could be significantly undercollateralized, Ethan Vera, co-founder of Seattle-based mining company Luxor Technologies, told Bloomberg. “They are nervous about their loan books, especially those with high collateral ratios.”

Vera estimated that the value of all loans backed by mining rigs could reach up to $4 billion. While a limited number of miners have so far defaulted on their debts, a prolonged slump in Bitcoin prices could push more miners underwater. 

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Bitcoin Miners are “Feeling Pain”

So far, few miners have defaulted on the loans collateralized by mining rigs. However, recent sales suggest that more pain could be coming. Core Scientific, the world’s largest publicly traded bitcoin miner by hashrate, sold more than 2,000 Bitcoin in May to help cover operational costs, while another crypto miner Bitfarms unloaded nearly half of its mined tokens earlier this month to pay part of a $100 million loan. 

If the market doesn’t improve, experts believe the selling pressure by miners could further exacerbate the market crash. Luka Jankovic, head of lending at Galaxy Digital, said:

“Bitcoin miners, broadly speaking, are feeling pain. A lot of operations have become net IRR negative at these levels. Machine values have plummeted and are still in price discovery mode, which is compounded by volatile energy prices and limited supply for rack space.”

It is worth noting that many Bitcoin miners still enjoy decent profit margins. According to Jaran Mellerud, a mining analyst at Arcane Crypto, it currently costs a large mining company around $8,000 to mine a Bitcoin (worth over $19,000) given that they use fairly new mining machines. He added:

“But the reduced income still impacts their business as some of them have loans to repay and collateral to post for their machine purchases. These payments might be hard for them to make without selling a significant portion of their Bitcoin holdings.”

As reported, despite the selling pressure by miners, large and small Bitcoin investors are “aggressively” increasing their Bitcoin holdings. More specifically, Bitcoin whales (those who own more than 1,000 BTC) are currently purchasing 140,000 BTC per month while shrimps (those who own less than one BTC) are adding 36,750 BTC per month.

Nevertheless, at the time of writing, Bitcoin is trading around $19,700, up by more than 3% over the past 24 hours. The broader crypto market is also largely in the green over the past day.

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How would the selling pressure by miners affect Bitcoin? Let us know in the comments below.

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