Bitcoin miners took on billions in debt to ‘pump their stock’—leading to a crypto catastrophe10 Dec 2022 16:47
The phone just won’t stop ringing, beams Zach Bradford, the CEO of Bitcoin mining company CleanSpark. The calls are from other mining bosses—and they’re panicking. After Bitcoin crashed and energy costs spiraled over the summer, mining firms that took out expensive short-term loans to buy hardware during the bull run now teeter on bankruptcy. Lenders are breathing down their necks, and the miners need quick cash. But only a handful of companies are buying mining rigs these days—and Bradford’s CleanSpark, which only took on a small amount of debt during the bull run, is one of them.
Having always sold 70% of the Bitcoin it mined using mostly cheap nuclear energy, CleanSpark is in the enviable position of being rich enough to swoop in to buy box-fresh, top-of-the-line machines from near-bankrupt miners at sensible prices. At the start of the month, CleanSpark spent $5.9 million on 3,843 miners that Bradford says cost about $1,500 each—down from $13,000 last November during peak Bitcoin mania. Crypto finance giant Grayscale also had hopes of buying miners on the cheap but then pulled back amid economic troubles at its parent company, while Bitdeer set up a $250 million fund to exploit the crisis.
Meanwhile, the pressure has only continued to build at companies that bungled the Bitcoin crash. Core Scientific, America’s largest Bitcoin miner, took on a debt-to-equity ratio almost 12 times greater than CleanSpark during the bull run and now risks bankruptcy if it doesn’t raise money by the end of the year, having lost $1.7 billion in 2022 alone. Another miner, Argo, told investors it’ll shut down if it can’t sell miners it hasn’t even taken out of the box. Another, Iris, defaulted on a $108 million loan.
And there is the state of Texas, whose bold experiment to welcome Bitcoin miners to help balance the power grid risks turned into a Lone Star State-sized disaster. In the wake of rising energy prices and debt burdens among miners, one state executive bemoaned a situation where “transformers, switch gears, and mobile data centers and containers for mining…are just sitting there.”
So how exactly did this mess develop? One would expect that miners, who had to wait months for out-of-stock rigs to arrive, would have played it safe in a market known for volatility. But Guzman Pintos, the cofounder of mining company Luxor, says that these mining companies were incentivized to load up with debt to “pump their stock.” The premise is simple enough: The more mining rigs a company operates, the more Bitcoin they can produce, the greater its revenue, the higher its stock’s value—so long as Bitcoin’s price continues to fly.
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