Funding for bitcoin miners is one of the silent casualties of the bear market, with billions in outstanding loans now shredded as a result of the downturn. As the bitcoin price continued to fall through 2022, many bitcoin miners who funded aggressive expansions in their operational capacity by borrowing against bitcoin on their balance sheets or other assets are facing acute stress. In the Q2-2022 report for the Hashrate Index, a data and research platform built by my employer Luxor Technologies, we estimate that there are currently $3-4 billion in outstanding loans.
As a result, several have been forced to liquidate assets to meet debt obligations or pay service contracts despite their pure mining operations remaining profitable on an EBITA basis.
This uncertainty creates opportunities for companies with better financial footing to expand by exploiting the misfortune of others, but it can also prove problematic for lenders with poor underwriting and risk management skills.
Broader context: 2021 was a year of overly aggressive mine expansion
2021’s bull market – and the migration of Bitcoin’s mining industry from east to west following China’s ban on Bitcoin mining – created a frenzy in the ASIC market, essentially the picks and shovels for bitcoin mining.
ASIC stands for Application Specific Integrated Circuit, a custom computer chip designed to perform a single function with high efficiency. Custom ASICs have been built to mine bitcoin, with hundreds of these chips grouped together in boxes that when stacked together resemble massive server farms.
These machines are very expensive and their prices rose exponentially last year before falling as the market turned. A top of the line miner like the Antminer S19 sold for about $4,800 at the start of the new year in 2021. At the peak of last year’s market frenzy, the same model could fetch $11,900 – an increase of 148%. Now the S19 is going for roughly $3,600 (a 70% drop from last year’s peak, which marked an all-time high for this model).
When the market went up, ASIC purchases at 100% premium over original price were reasonable based on financial projections made by many buyers. After China’s mining ban, there was a large reduction in network competition; couple this drop with Bitcoin’s booming price, and 2021 was an immensely profitable year for Bitcoin miners.
As a result, many of the machines bought locally last year were at top prices. They have lost 66% of their profitability in the current bear market. Last year, for example, the average revenue potential (hashprice) for a bitcoin miner was $0.30/terahash/day (so a 100 terahash machine like the S19 could reasonably fetch $30). Now the hash price is $0.10/TH/day, so the same machine only produces $10 per day). Of course, the specific profitability of a miner varies, depending on its specific setup, energy costs, and other forms of overhead.
Outlook and Implications: Reckless miners are at risk of being destroyed
The financial pain for miners doesn’t just end with reduced profitability. Companies that overstretched themselves by leveraging their balance sheets and bitcoin reserves to finance new miners through loans may come under even more acute pressure.
If we go further, some of the firms that issued these loans (many of which were granted by bitcoin miners who are suddenly much less valuable) were already heavily affected by the market crash. For bitcoin miners, there are four dominant players in the ASIC funding industry: NYDIG, Galaxy Digital, BlockFi and Foundry. BlockFi had to receive emergency funding from FTX in the form of a $400 million line of credit and agreed to a $240 million takeover proposal, while Galaxy Digital was hit hard when stablecoin UST and sister token LUNA collapsed in May. A handful of other lenders also exist.
It is difficult to identify specific breaking points, as many lenders and borrowers remain private and these agreements are confidential, and they can vary in size, length and interest rates. Additionally, they do not single out loans in SEC filings, nor do many publish press releases disclosing these loans, but there are a few examples. Hut 8 mining funded ASICs through Foundry, while also drawing from Galaxy Digital; Argo and Greenidge also took out loans from Galaxy Digital in 2021. As in Argo’s case, these loans are sometimes also used to finance infrastructure. BlockFi and Galaxy declined to comment when asked to provide context regarding loans to miners. Nevertheless, we have some great lines.
Typically, loans are made to miners who purchase equipment worth hundreds of thousands to millions of dollars. Crucially, the loans have short repayment periods (18-24 months), and the interest rates are usually in double figures (we estimate 15% as a rough average).
Loan-to-value ratios range from 65% on the conservative end to 80%+ on the liberal end. Needless to say, those lenders with over 80% LTV ratios who manage larger books are exposed to more risk than those offering lower LTVs. Given the risk, most lenders would only lend to experienced miners with proven operations. Usually these loans are secured either with BTC or bitcoin miners.
It’s worth noting that each lender is in their own unique position, with some lending riskier loans and others playing more conservatively.
Assess the health of a loan
Despite the fact that many of these loans remain in black boxes, it is useful to illustrate how miners can be affected by these loans given different purchase conditions. The following analysis, taken from Hashrate Index’s Q2-2022 report, provides a hypothetical example:
In the model below, Luxor analyzed hypothetical debt service coverage ratios (DSCR) for loans originated since the beginning of 2021. DSCR is a common metric used to assess a borrower’s ability to meet their debt obligations based on their cash flow.
A DSCR above 1.00x indicates that cash flow is sufficient to cover debt costs, while a ratio below 1.00x indicates that a borrower must use balance sheet funds (or raise additional capital) to pay for debt costs.
Monthly DSCRs were calculated using the formulas below:
DSCR=Miner Margin ÷ Debt Service
Miner Margin=$ Hash price × Machine TH/s-Machine kW*24 hours× Electricity price×30 days
Debt service= $ per TH machine price × loan to value%÷Tenor+interest÷12 ×loan balance
For mining margin, we used machine specifications of S19 Pro (100 TH, 3.25 kW) and an electricity price of $0.05 per kWh. Machine pricing from the Hashrate Indx ASIC Price Index and a 75% leverage value were used to calculate debt amounts. Debt due over 18 months with equal monthly amortization payments. Finally, the interest cost was calculated by applying an interest rate of 15% to the average loan balance between the beginning and the end of the month. The results using these assumptions are shown in the table below.
(1) Date refers to the month in which the loan was issued; (2) Indicates the average $/TH price of machines during the month of loan issuance
DSCRs remained healthy in all months of 2021. However, in early 2022, DSCRs for loans issued in months where machine prices were above $100/TH began to fall below 1.00x, indicating that miners were unable to service the larger loans they received to purchase machinery during high price periods. When hashish prices fell in May and June 2022, all loans fell below the 1.00x DSCR mark.
While it is difficult to determine the specific DSCR of a given miner in a given month, we have at least one compelling data point to underscore the financial stress that several (but certainly not all) miners are facing. According to data from Arcane research, public bitcoin miners sold a whopping 400% of the bitcoin mined that month. This obviously means that the companies had to dig into their coffers for additional inventory. This “capitulation” comes after the companies sold 100% of their created inventory in May. The only logical reason to take this step, as opposed to holding on to inventory in the hope of a market rebound, is liquidity crises and the need for cash to repay loans or cover operating expenses.
Decision points: Not all miners (or lenders) are in trouble
The analysis above lends color to headlines that bitcoin miners have liquidated coins to shore up the economy, cover costs and pay off debt.
Assuming the bear market continues to put pressure on these miners, we expect distressed asset sales of bitcoin miners to drive ASIC prices even lower. This will provide a golden opportunity for low-leverage, cash-strapped miners to buy new and near-new machines at bargain prices (ASICs in such sales typically sell for 10-25% less than market value, as the seller has to liquidate large volumes quickly) .
In addition to these sales, well-positioned miners also have the opportunity to finance deployments in 2022 with lower interest rates than last year. With machine prices also significantly down, they can secure more computing power per dollar spent.
This financing agreement from Bitfarms with NYDIG is a good example: Bitfarm’s interest rate is 12% (lower than the average of 15% used in the analysis above); the $37 million funding could buy 10,270 Antminer S19s at current prices, while the same sum last year would only provide 3,978 S19s given the average price in 2021 ($9,300).
On the other hand, investors looking to acquire discounted Bitcoin mining stocks would do well to evaluate the company’s balance sheet before buying. A couple of metrics we like to use to evaluate the financial health of public miners are the Enterprise Value / ASIC Value metric and the Enterprise Value + Hodl / ASIC Value Metric.
Investors can use approaches such as the Enterprise Value / ASIC Value Ratio, a new metric developed by Luxor’s Hashrate Index team. With this calculation, a company’s enterprise value (EV) combines the company’s equity value and debt. When we evaluate EV next to a miner’s active machine value, it shows us which mining stocks are trading at a higher value compared to its productive assets (the mining machines). This allows investors to gauge how much they are paying per share for both exposure to a Bitcoin miner’s productive assets (their machines) and obligations.
The Enterprise Value + Hodl / ASIC Value calculation is the same as above, but it also takes into account a miner’s bitcoin treasury. Bitcoin taxes have served the same role for miners as cash holdings have for a traditional company.
In both cases, it is better for a miner to have a lower value because it means it is less leveraged. The following chart shows both ratios for miners as of July 1, 2022. These ratios will change as new financial reporting emerges in the next week or two as miners report their July numbers.
For comparison and to show how values can shift month by month, the following chart shows the EV / ASIC value of public bitcoin miners as of June 1, 2022. The chart also shows the price / ASIC value ratio, a useful but less precise metric that compares a miner’s market value to its active machine portfolio.
It is worth noting that further selling or “capitulation” that develops in the bitcoin mining market is unlikely to send ripple effects into the broader Bitcoin mining or spot market. Poorly positioned miners may see their individual share prices fall if they cannot perform well in the coming year, but any distressed asset sales or BTC liquidations will not be significant enough to disrupt the broader market.