Bitcoin miners have borrowed a total of nearly $4 billion using mining rigs as collateral. The plummeting crypto market makes this debt a hanging bomb on the heads of miners and crypto lenders.
According to analysts, an increasing number of loans are losing money as the collateral to invest in Bitcoin mining rigs has dropped by a quarter in value, the same price of the largest cryptocurrency in the market.
Although very few miners have announced defaults so far, their sales have become increasingly difficult. Core Scientific Inc had to sell over 2,000 Bitcoins last month to cover operating costs. Meanwhile, Bitfarms Ltd also had to sell off nearly half of the tokens it mined in early June to pay off part of the $100 million loan.
Experts said that in case the market does not improve, a bad scenario is likely to happen. The sale of the Bitcoins in the vault adds downward pressure and the price of equipment could fall even further as miners are forced to liquidate their mining rigs if they default.
According to data from mining firm Luxor Technologies, Bitmain’s popular S19 mining rig has dropped about 47% in value from its high of $10,000 last November.
Not only the “debtor” is worried, the lender also has a headache
Bitcoin mining was one of the most lucrative businesses during the cryptocurrency’s historic bull run. Margin rate can be up to 90%, but loans to upgrade miners using traditional finance are difficult to get approved, or have to carry high interest rates due to market volatility.
As a result, several crypto lenders such as Galaxy Digital, NYDIG, BlockFi, Celsius, Foundry or Babel Finance have approved rigs as collateral in addition to cash payments. According to Luxor Technologies, lenders are currently “sitting on fire”, especially for loans with a high ratio of collateral.
Ethan Vera, co-founder of Luxor, estimates that there are up to $4 billion in rig-collateralized loans.
Even so, many Bitcoin miners are still enjoying good profit margins. According to Jaran Mellerud, an analyst at Arcane Crypto, the production cost at a major mining company is $8,000 per token, based on average electricity prices and relatively new mining rigs.
“However, the drop in earnings is still impacting the business as some companies have to meet debt and collateral obligations when investing in initial equipment. It will be difficult for them to meet payments without selling off a significant portion of their Bitcoin holdings,” Melleurud explained.
Not only that, a few months ago miners rushed to buy equipment rigs thinking that the market would recover and machines would increase in price. “They bought tens of thousands of rigs, signed up for storage, put up a deposit, and maybe now they won’t be able to fulfill their contractual financial obligations.”
Wilfred Daye, CEO of Securifying Capital, said that if you factor in the overall cost of infrastructure and interest, the total cost for some miners has exceeded $20,000, equivalent to the current price of Bitcoin.