Every person and every organization in the crypto industry is affected by the crypto winter. This is a particularly difficult time for crypto lenders. Miners are finding it hard to repay the millions of dollars that they borrowed and are now returning the mining equipment they secured.
Bloomberg reports during the crypto boom, when Bitcoin was at $69,000 and profit margins as high as 90% were possible, miners could raise as much as $4B from financing mining-equipment. Ethan Vera from Luxor Technologies, chief operations officer, noted that companies were offering huge loans to rigs and build mining farms. However, the financial institutions were able to move ahead with many of these deals because the machines were the collateral.
Things have been moving in a downward direction since then. Businesses are cutting back on staff following the collapse of TerraUSD, the implosionof FTX and Bitcoin’s current value of $16,800. The energy crisis, as well as Ethereum’s transition from proof-of work to proof-of stake, are also factors.
Many companies have defaulted on loans due to the market crash. Iris Energy Ltd. stated that it believes it will not be able to repay a $108million loan it owes to the New York Digital Investment Group. The majority of this loan is secured against mining equipment. BlockFi, which is already bankrupt, owes $54 million to the same lender, while Core Scientific Inc. owes it $39million. Core Scientific Inc. has also warned about possible bankruptcy.
Stronghold Digital Mining is one of the firms that has returned thousands of mining rigs in order to reduce its debt. Lenders have a problem because these machines’ value has dropped by as much as 15% since November last year.
This could just be the tip. Private companies account for 75% of the Bitcoin network’s computing power. They don’t have the obligation to reveal their rig-backed loans. More defaults can be expected.
Some companies have stopped paying their loans, even though they can still afford them. The collateral, i.e. the rigs, may be less valuable now than the remaining payments. Vera stated that it could be an economic decision not to continue financing the loans. Vera stated that miners are more focused on their survival for six months than whether they will need the lender for five years.
This week brought with it a warning from crypto firms that they weren’t seriously considering the possibility of Bitcoin dropping below $5,000 next year, which is a price it hasn’t seen since early 2020.