Bitcoin miners are playing a high-stakes chicken game
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“It’s kind of a last man standing situation,” says Fred Thiel, CEO of US-based Marathon Digital Holdings. His crypto mining company, one of the largest in the world, is – like the rest of the industry – in the path of a perfect storm.
Over the past year, the sector has been hit by a plunge in bitcoin prices, coupled with a rise in energy costs and an increase in mining difficulties — a reflection of the amount of computing power directed at the bitcoin network determines the share of coins the miners can win.
At the height of the boom in 2021, profit margins in the mining business rose to up to 90 percent, says Thiel. But now they’re “totally broken down.” If bitcoin price doesn’t recover, he says, there will be “a lot more pain” and companies that are only marginally profitable today will be “very underwater.”
As they scramble to cut costs, miners are playing a high-stakes chicken game. In the spring of 2024, halving, a mechanism built into the Bitcoin system that regularly halves the number of coins awarded, will drastically reduce mining profits. The miners’ goal is to ensure they are financially strong enough to weather the decline in profits longer than anyone else; If the miners give in and exit the network, the percentage of coins that the rest win will increase.
“Miners who are struggling now will not be able to survive the halving,” says Jeff Burkey, VP of business development at Foundry, which operates its own mining facilities, a large mining pool, and a mining hardware marketplace. The momentum will spark a rush among miners to put their houses in order, he explains.
Miners will seek additional profit margins wherever they can, whether that be by employing superior hardware and cooling techniques, developing software to closely monitor how machines are performing, relocating to areas with cheaper energy, or renegotiating the terms of their loans .
Others, like Geosyn Mining, aim for vertical integration – right down to the power supply of the plants. The company, says CEO Caleb Ward, wants to build its own solar farm to power its machines, thereby eliminating major costs. “As an industry, we have to think better about how we protect ourselves against risks,” he says. “It’s not just about shooting for the moon.”
Meanwhile, miners, whose financial distress is preventing them from optimizing their operations, are playing a dangerous waiting game, betting on a Bitcoin price surge that may never materialize.
“The beauty of halving cycles is that the industry [is forced] to become more efficient – many weaker players need to go out of business,” says Jeff Lucas, CFO of mining company Bitfarms, which has been working to restructure its finances in the downturn. “The devil is in the details.”
Already on the backfoot, miners are starting to fold. Compute North, which owned several large mining assets, filed for bankruptcy in September, and Core Scientific, a publicly traded mining company, did the same in December. Others have to maneuver. Argo Blockchain, also a public company, has been forced to sell mining equipment and its state-of-the-art mining center while Stronghold Digital Mining has negotiated a debt payoff holiday. Neither company responded to interview requests.
