Bitcoin miners play a high-stakes game of chicken
“It’s like that a systems man situation, says Fred Thiel, CEO of US-based Marathon Digital Holdings. His crypto mining company, among the largest in the world, has found itself – like the rest of the industry – in the path of a perfect storm.
Over the past year, the sector has been hit by a fall in the price of bitcoin, combined with a rise in energy costs and an increase in mining difficulty – a reflection of the amount of computing power directed at the bitcoin network, which dictates the proportion of coins miners are in able to win.
At the height of the 2021 boom, profit margins in the mining business rose as high as 90 percent, says Thiel. But now they have “completely collapsed”. If the price of bitcoin doesn’t rise, he says, there will be “a lot more pain,” and firms that are only marginally profitable today will find themselves “very underwater.”
As they scramble to cut costs, miners are playing a high-stakes game of chicken. In the spring of 2024, the halving, a mechanism baked into the bitcoin system that periodically halves the number of coins allocated, will reduce mining profits. The goal for miners is to ensure that they are in a strong enough financial position to survive the drop in profits longer than anyone else; as miners give in and drop from the network, the proportion of coins won by the rest will increase.
“Any miner struggling now will not be able to survive the halving,” says Jeff Burkey, VP of business development at Foundry, which operates its own mining facilities, a large-scale mining pool and a mining hardware marketplace. The dynamic will create a rush among miners to get their houses in order, he explains.
Miners will look to gain additional profit margins where they can, either by implementing superior hardware and cooling techniques, developing software to closely monitor the performance of machines, moving to territories with cheaper power, or renegotiating the terms of their loans.
Others, such as Geosyn Mining, aim for vertical integration – right down to the energy that powers the facilities. The company, says CEO Caleb Ward, wants to build its own solar farm to power its machines, eliminating a major cost. “We need to be more thoughtful as an industry about how we protect against risk,” he says. “It’s not just about shooting for the moon.”
Meanwhile, the miners whose financial difficulties prevent them from fine-tuning their operations are playing a dangerous waiting game, gambling on a rise in the price of bitcoin that may never come.
“The beauty of halving cycles is that the industry [is forced] to become more efficient – many weaker players will have to leave the business, says Jeff Lucas, CFO of mining company Bitfarms, which has been working to restructure its finances during the downturn. “The devil is in the details.”
Already on the back foot, the mining companies are starting to pounce. Compute North, which owned several major mining facilities, filed for bankruptcy in September, and Core Scientific, a publicly traded miner, did the same in December. Others have to maneuver. Argo Blockchain, also a public company, was forced to sell mining equipment and its state-of-the-art mining center, while Stronghold Digital Mining has negotiated a debt repayment holiday. None of the companies responded to interview requests.
