A real epidemic.

For the past few months, bitcoin miners have been experiencing difficulties in turn. At the end of December, it was one of the biggest players in the sector, the American Core Scientific, which filed for bankruptcy in the United States with the now famous "Chapter 11" ⚖️

A quick reminder: miners are those who secure the blockchain of a cryptocurrency with the computing power of their machines. Since Ethereum's switch to proof-of-stake in 2022, Bitcoin is the only "big" cryptocurrency on the market that operates with proof-of-work and therefore mining.

Chapter 11" does not mean that Core Scientific, whose machines account for about 5% of Bitcoin's hashrate (the computing power needed to secure the protocol), will file for bankruptcy, but that the company will restructure to regain its footing. The fact remains that the difficulties of one of the heavyweights of mining show how much the industry is under pressure. At least in part.

The reasons for these difficulties are well known: with the fall in prices and the rise in energy prices, many players are hanging on by a thread. Above all, and this is something new, some of them are also faced with... massive overindebtedness.

In the wake of the 2020 price hike and baited by soaring prices, many companies have taken on large debts to buy machines and thus mining capacity. Some borrowed at rates of up to 25% per year (because it is a risky business). "A pure madness", underlines a banker.

The phenomenon is most significant in the United States, by far.

In Europe, there are almost no miners because of regulation and high electricity prices, which is a problem in terms of sovereignty for our ecosystem.

According to trade firm Hashrate Index, U.S. miners have $4 billion in debt. Core Scientific alone accounts for more than 25% of that debt ($1.3 billion) 😬

"The new generation of American miners has made massive use of credit, whereas our sector historically did not have access to it," confirms Sébastien Gouspillou, founder of BigBlock Datacenter, a French miner with a particular presence in Africa.

"Those who abused it now find themselves caught in the crosshairs of the markets and have to answer to their creditors," he continues, adding, rather critically, "All the miners know very well that the markets don't just go up, it's cyclical, they should have anticipated it."

Investors were, in any case, not mistaken. In 2022, Core Scientific's stock collapsed by 98% with a capitalization that went from almost 500 million dollars to... 30 million dollars 😳. Complicated to manage with over $1 billion in debt!

Marathon is also in great difficulty, even if the company is not "game over". While its share price has been falling steadily (-90% in 2022), the group has managed to honor its debts by selling massively part of its bitcoins. It is not sure that this strategy will still work in 2023 if the largest crypto-currency remains permanently under 20,000 dollars.

Not all major U.S. players are involved, however. Riot Platforms has hardly borrowed any money, and as a result, it is floating in the ecosystem. "Riot has not resorted to debt, or only on the margin, which is what makes the difference today," emphasizes Sébastien Gouspillou.

👉 The big sell-off of mining machines

In the meantime, one man's misfortune is another man's happiness, and with the collapse of some miners, many machines are available on the market. Some machines (also known as "asics") are owned by groups that are downsizing and others are sold by companies that are disappearing.

But not everyone is happy about it. "The problem is that when machines had a face value of 100 just a few months ago, they are often worth much less, up to 10 times less, because of market conditions," explains Romain Nouzareth, founder of Sato, a mining company based in Quebec.

👉 Healthy miners ready to raid the pot... with Wall Street

Not everything is black and white for the miners either. If the situation is catastrophic for some, others see in the period a real opportunity and potential acquisitions "For us, it is very interesting, we look at all the files", assures Romain Nouzareth. "There are a lot of opportunities at the moment, the machines are very affordable and it's perfect to keep growing", he explains.

Several "bargains" like Celsius have the industry salivating. The crypto lending platform, which got caught up in the Terra-Luna collapse in the spring of 2022, will soon put 32,000 miners up for sale at a bargain price. An opportunity that interests not only miners. For a few months now, we have seen crypto investment companies close to Wall Street looking at these files.

Galaxy Digital is one of those players. The American group recently bought a Texas-based mining site from Argo Blockchain for $65 million.

Another American, NYDIG, which is one of the largest investors in bitcoin, is also shopping around. The group is currently in the process of buying the machines of Greenidge, a North American miner who is over-indebted. With this acquisition, NYDIG would recover about 1% of the Bitcoin hashrate for $74 million.

More interestingly, the biggest asset manager on the planet, BlackRock, is also in the starting blocks. The giant has positioned itself on Core Scientific 😏.

Larry Fink's group, which no longer hides its interest in cryptos, has just lent 17 million euros to the company under bankruptcy alongside other investors. If Core Scientific does not make it, BlackRock could recover some of the company's assets, including mining machines...

"For financiers, the mining sector represents a very good opportunity," explains Romain Nouzareth. "As it is a very risky business, they grant credits at very high rates and, in case of default, they can recover at low cost material that they can resell at a very high price when the prices go up again," he explains.

What you need to understand, however, is that mining is not going to stop despite the bankruptcies of many companies. The assets have just changed hands. The situation can be seen in hashrate, which is at historic highs despite the fall in prices.

The real risk," says Sébastien Gouspillou, "is that the sector will be concentrated in the hands of a small number of financially dominant players.

👉 What is the long-term future for miners?

So far, the strategy that has paid off is for companies that have done two things:

• Limit their debt ratio (what a surprise!), even though debt can also allow for investment and development.

• Prioritize access to cheap electricity over the long term.

"We are very well positioned for the future," explains Romain Nouzareth. "We are connected seamlessly to the Quebec power grid, our electricity rates are very affordable and fixed, which is not the case for many other miners," he continues.

In the United States, many miners have seen their bills explode with the rise in energy prices, which has contributed to the fragility of their model. This is the case of Argo Blockchain, whose price per kilowatt hour has risen from 2 to cents in 2022. This has increased the mining price for one bitcoin from $4,000 to $12,600 (not including its liabilities), according to analysts at Hashrate Index.

Sato's Quebec-based strategy is currently designed to break even with a bitcoin price between $9,000 and $12,000. "The only annoyance is that we are currently making less profit than a few months ago, but that's part of the cycle," Romain Nouzareth insists.

The company assures that it is strong enough to handle an even bigger market decline. "We are confident that bitcoin will continue to rise over the long term," he adds. For some, it would take more than that in the "short term."