/Crypto miners fight for survival as market turmoil continues

Crypto miners fight for survival as market turmoil continues

Ambitious plans for Britain’s biggest bitcoin mine have come to an abrupt halt.

Bladetech, a team of entrepreneurs who have worked on specialist IT projects for the likes of Nato and BAE Systems, announced in March that they were building an industrial facility for the creation of the then-pricey digital currency. 

But the start-up now says their proposals have now been put “on hold” due to “turmoil in crypto markets”.

They are not alone. Numerous commercial bitcoin mining outfits, as well as thousands of individual “hobby” miners, have opted to shut up shop as falling cryptocurrency prices have left them nursing losses. 

Some experts estimate the average cost of mining one bitcoin — the “break even point” — at around $5,000, including overheads and depreciation costs. But the digital currency is currently trading at around $3,200, more than 80 per cent lower than this time last year, with predictions that its slide will only continue

“At the moment we’re seeing a shake-out,” said Aron van Ammers, chief technical officer and founding partner of Outlier Ventures, a crypto-focused venture capital fund. “For many miners, the current bitcoin price is below cost.”

Ben Sebley, head of brokerage at NKB Group, a UK investment bank focused on cryptocurrencies, said: “[Miners] are struggling so bad. They are hating life.”

Bear market takes its toll

Miners use computing power to approve transactions in a particular cryptocurrency and add them to a blockchain, or digital ledger of activity. The computer systems compete to solve complex mathematical problems, testing equations as part of authenticating the newest data in the network. Whoever cracks the code authorises the transaction — and obtains some newly minted cryptocurrency as a reward. 

Running these systems requires specialised hardware and huge amounts of electricity, much like a data centre. To date, many commercial crypto mining operations have been set up in countries such as China, Iceland, Russia and Kazakhstan, where energy is cheap and low temperatures act as a natural cooling system for rows of whirring equipment. 

Once thought to be the domain of fringe start-ups or tech geeks in their bedrooms, the bitcoin mining market exploded late last year as the price of cryptocurrency skyrocketed, and entrepreneurs sought out juicy profit margins. 

The wider infrastructure that supports miners also expanded rapidly. By the middle of this year, three manufacturers of mining hardware based in China — Ebang, Canaan and Bitmain — announced plans to list in Hong Kong, the latter with a multibillion-dollar valuation. Meanwhile, incumbent chipmakers such as Nvidia Corp and Advanced Micro Devices in the US made initial forays into the sector. 

“The profitability was incredible,” said Patrick Brogan, a Texas-based crypto enthusiast who spent more than $40,000 on equipment late last year to set up his own home mining system. 

But the bear market is now taking a toll. 

The bitcoin hash rate — a measure of how much power miners are using — has dropped more than 40 per cent since its peak in August. This suggests that about 1.5m bitcoin mining rigs have been switched off since September, according to Fundstrat, the market research boutique.

Slowdown hits miners of all sizes

Mr Brogan is among those who closed down within months of getting started. The entire exercise — which involved rewiring his garage with copper, and run-ins with the police who were suspicious about the loud noise and the sudden spike in electricity coming from his DIY facility — was lossmaking, he said.

“But I learnt a lot,” he added. 

It is not just the smallest players who are hurting. US mining company Gigawatt filed for bankruptcy in November. Ebang, Canaan and Bitmain have all postponed their initial public offerings. Nvidia has shut its crypto equipment arm

“The miners who started early enough that they are well capitalised are [OK],” said Alex Kern, a research analyst at Fundstrat. “[But those] who started mining more recently might not have the rainy day fund to weather the depression that we have now.”

Industry watchers say crypto miners’ future survival depends partly on their ability to negotiate favourable electricity deals and acquire the most efficient equipment — though Mr van Ammers warned an advantage in hardware is “always shortlived because of the rapid development”.

“You need local connections and political connections to give you security,” said Joseph Chin, chief executive officer of CoinGeek Mining and Hardware, a mini equipment seller that also runs a “mining pool” collective that shares processing power over a network and then splits any profits. 

The regulatory risks are significant: the Chinese government cracked down on mining earlier this year following concerns of excessive electricity consumption and financial risk.

Riding out tough times

Some bigger players are diversifying in search of fresh sources of revenue. Bitfury, which manufactures mining equipment and software, raised $80m last month in a bid to expand its “existing areas of focus” into technologies such as artificial intelligence. The chief executive of Bitmain, Jihan Wu, has also outlined plans to look at AI. 

Some observers nevertheless argue there are reasons to be hopeful. Miners not only drive the creation of bitcoin, but they are also among the biggest bitcoin sellers. According to Mr Kern at Fundstrat, this means that if they stop selling when prices fall, the price could be cushioned — suggesting there is a natural price floor.

The mining process also has an inbuilt mechanism which means that as competition grows, it becomes more difficult to mine bitcoin. The inverse is also true, meaning that those who ride out tough times can then potentially enjoy more profitable periods again. 

“With price declines, the lowest cost producers can maintain [business] due to the difficulty adjustment mechanism,” said a spokesperson for BitMex, a crypto trading platform and researcher. 

“Whether that plays out as designed or not is difficult to say but it has seemed to work during previous price declines,” the spokesperson said. 

The market is also maturing. Above all, developers are exploring new ways to mine cryptocurrencies that are more cost efficient and require less energy, as concerns grow over the environmental impact of the current process. 

“A lot of implementations of these ideas to date have been flawed, often deeply,” said Preston Byrne, a partner at Byrne & Storm. “But I expect someone is going to crack the nut of an effective replacement for [the current process] in due course.”

Crypto mining manufacturers shelve IPO plans

Three crypto mining manufacturers — Canaan, Ebang and Bitmain — have pushed back plans to list on the public markets, as the price of bitcoin plummets and trade tariffs increase the cost of equipment.

Under Hong Kong listing rules, IPO filings lapse six months after applications are filed. Canaan’s application lapsed last month, while Ebang, which filed on June 21, is due to see its application expire next week.

Meanwhile, Bitmain, which filed its initial public offering prospectus in late September, spooked investors with its significant cryptocurrency exposure and apparent discrepancies in published profit numbers. The profits numbers shared with private investors were far bigger than those that appeared in the public IPO filings, and critics raised questions about the $18bn valuation targeted in pre-listing investor documents.

Bitmain is now due to reveal its third-quarter earnings, which analysts expect to bear all the scars of falling bitcoin prices and rising equipment costs.

Louise Lucas in Beijing