Survival of the fittest – the old adage is playing out for crypto miners this year as a sell-off in the broader market is squeezing out some companies in the overcrowded industry.
In digital asset mining, particularly for bitcoin, competition has increased greatly in recent years as several new entrants joined the industry during the peak of 2021. However, with a price decline, survival of many new miners might be hanging on these companies being able to sell themselves or merge with another peer, according to industry participants.
“I think in the next six months or so we’ll probably see some M&A activity happen,” said Amanda Fabiano, head of mining at Galaxy Digital, “because some miners who got in the sector during the peak are just not going to be able to meet their requirements.”
During the 2021 bull run of the crypto market, margins of some bitcoin miners had been as high as 90%, which led to many new entrants and miners looking to grow at hyper speed. To do so, companies ordered mining rigs at high prices and deposited money upfront for their orders.
Fast forward to 2022, bitcoin prices have tumbled and margins have shrunk. Bitcoin network’s hashrate is hovering around all-time highs and operating costs are higher due to rise in energy prices – leaving miners in a very tight spot. “A falling bitcoin price means miner margins are compressing,” said Mason Jappa, co-founder and CEO of blockchain infrastructure and cryptocurrency mining company Blockware Solutions. “On top of that, margins have also been declining because Bitcoin’s network mining difficulty is increasing” as more miners are joining the network, he added.
A less profitable environment for bitcoin mining
Many of these companies that came into the mining sector in the last 12-18 months lacked a “sound balance sheet,” Mike Levitt, CEO of Core Scientific (CORZ), the largest publicly traded miner in terms of hashrate, told CoinDesk.
“These companies have found themselves in a position where they made plans and commitments that assumed external capital, whether from public or private markets, would always be readily available,” he said. “Now, the cost of capital, if available, just got more expensive, and some of these miners do not have sufficient capital to finish what they have started.”
Moreover, supply-chain issues and lack of access to capital are making matters worse for many miners. “The ability to secure large pre-orders of ASIC miners is no longer the major bottleneck to growth,” said Wall Street bank Jefferies analyst Jonathan Petersen in a recent research note. “Construction delays, caused by difficulties securing building materials and finalizing power purchase agreements, are a larger impediment to deploying new fleets.”
This perspective was echoed by crypto miner Hive Blockchain. “The crypto mining industry in general appears to find itself at a crossroads with a supply of very expensive ASIC chips and few places to plug them in,” according to a statement from the miner. “In our market intelligence, the company has noticed significant supply disruptions for electrical equipment needed to make data centers, such as transformers and switch gear.”
All these factors combined, and some of the newer and less capitalized miners are now in a limbo, as they are finding it hard to pay for their operations under the terms set out during the bull run.