Highly-leveraged Bitcoin Miners Go Bust
A recurring theme in every bear market is that so-called zombie companies are in the first wave of companies to go bust. These companies typically have a lot of debt and are not making much or any money. They have survived in a bull market on their story and naïve new investors who have been led to believe that stocks always go up. (Remember the pizza review guy?) Bitcoin mining can be quite profitable but the process uses a lot of electricity. So long as Bitcoin was flying high many mining companies were making money. Now there is a perfect storm of high electricity prices and low Bitcoin prices making the business unprofitable with those running older equipment.
Bitcoin Mining As a Margin Business
The spectacular rise in value of Bitcoin and other cryptocurrencies attracted speculators and it attracted miners. Speculators could get really rich or lose everything. For those with the wherewithal Bitcoin mining has been a secure business that was protected from wide price fluctuations. The business of mining Bitcoin has at times seen 80% to 90% profits. Because profits seemed so reliable the best approach was to borrow the money to set up the computers and run them and count the profits as Bitcoins were mined. However, Bitcoin miners have fallen prey to the same hype as speculators. Expecting Bitcoin to keep going up miners could only profit by borrowing more and adding more capacity. Then Bitcoin lost more than two-thirds of its value from the end of 2021 to mid-2022. The margin in this business shrunk and, in the case of folks using older equipment, the margin went negative.
Cost Vs Profit In Bitcoin Mining
A conservative estimate is that the Bitcoin mining business has about $4 billion in debt. Many miners kept accumulating Bitcoin instead of selling all of their production. This was because they believed that the cryptocurrency would hit another high. Like the housing crisis that fueled the Great Recession this belief led to mounting debt because the miner had more and more “equity” in their business. Like with the housing crisis, a fall in value of Bitcoin (versus a home) has the capacity to put a company “upside down” on their debt. In many cases the issue is not the profitability of mining Bitcoin but the belief that by hoarding their production a Bitcoin miner would get richer and richer over time.
Mining Operations That Have Not Started Production
Some of the worst case scenarios are Bitcoin miners who were just setting up shop or building new capacity and had not brought any online. Examples of publicly trading companies in this sort of pickle are Stronghold which has a debt to equity ratio of 4.7 to 1 and Core Scientific with a ratio of 2 to 1. Mine now and pay later schemes came along that encouraged the excesses that today threaten so many mining operations.
Putin’s Invasion of Ukraine Did Not Help Bitcoin Miners
According to The Guardian electric rates will go up by at least 50% before Putin’s war in Ukraine is over. Higher rates will especially be an issue in Europe and with miners using older computers that are less energy efficient. The longer the war lasts the farther up electric prices will driven. And if worse comes to worse in Europe Putin will cut off oil and natural gas supplies totally. Worse than paying too much to mine Bitcoin, not being able to mine at all and still having to pay interest on debts will be worse.
On one hand this is a lesson in doing business on margin and on the other it is a caution for believing all of the hype about Bitcoin going ever and ever higher like stocks that never go down when, in fact, they typically do. Now is not the time to be trading any of these stocks solo. Sign up with one of the squadrons at Top Gun Options where we potentially print money no matter which way the market is headed.