As the crypto bankruptcies continue, crypto miners are straining the power grids

by Arthur · March 28, 2023

The crypto winter overshadows the spring. If crypto continues to falter in 2023, as it did in 2022, the consequences will be felt in a number of adjacent industries – and bankruptcy filings will continue to increase.

Prominent bankruptcy filings by a number of crypto exchanges – FTX, Voyager Digital, BlockFi and Celsius Network – hedge funds with significant crypto holdings – Three Arrows Capital – and crypto lenders – Silvergate Capital – indicate this significant shift in the market. Many restructuring professionals now believe that this is only the tip of the iceberg. Factor in record inflation, rising capital costs, supply chain challenges and escalating energy costs and cryptocurrency losses could be the nail in the coffin for many businesses on the brink of insolvency.

Estimates are that 2022 brought just over $2 trillion in crypto losses, and the crypto market has yet to feel the full impact. As more investors analyze losses, companies will find it more challenging to borrow money and obtain the goods they need to deliver final products—and will likely turn to bankruptcy as the only option.

Cryptocrash will almost certainly have a ripple effect on financially troubled businesses, even those not heavily invested in cryptoassets, as crypto is a multi-trillion dollar industry in which too many people are entrenched to walk away without an epic and protracted fight.

Requirements for mining

Although, as some suggest, it is the death knell of crypto, it is reasonable to assume that this battle will involve more frenetic mining for new and “untainted” cryptocurrencies, creating constraints in the technology’s supply chain.

The hunt for new and more advanced mining hardware is already straining semiconductor supply chains. For businesses that depend on the technology industry, including automotive, healthcare, aerospace and others, this disruption to the semiconductor supply chain further exacerbates an already difficult dynamic. The latest sudden and spectacular collapse of US banks will further intensify the pressure on the suppliers of technical hardware needed to meet market demand. At the very least, many in this industry will be delayed in accessing their money as the recent banking debacle works its way through the recovery process via the Federal Deposit Insurance Corporation.

Cryptocurrency mining uses not only expensive hardware, but also a lot of electricity. As the crypto industry struggles to maintain market relevance, the mining mechanism used to generate cryptocurrency wastes millions of processor cycles in meaningless brute-force calculations that authenticate only a handful of transactions—not to mention the enormous volume of carbon emissions it generates.

To add insult to injury, Bitcoin is just one of many cryptocurrencies that continuously perform these mining operations. The mining process consumes an astonishing amount of electricity, straining the power grid to its limits in places ranging from Serbia to Kazakhstan—and closer to home, Texas.

The economic fallout from the collapse of the strained power grid in Texas in the winter of 2021 sheds light on the challenges of the load on the power grid in the United States. As crypto miners gobble up as much power as their vast array of mining hardware rigs need, the demand for power will increase.

Power producers will understandably want to increase prices as much as is legally allowed under current law. It is, after all, the nature of a free market economy, but rising energy costs will create even more burdens for businesses that are already struggling to stay afloat. To come full circle, the increased electricity costs will negatively impact semiconductor and microchip manufacturers, who will then pass these additional costs on to end users, causing even more collateral damage.

To say there is volatility in this area is an understatement. It is important for businesses to keep an eye on their assets, supply chains and expenses to avoid falling victim to the failures of the cryptocurrency industry.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.