Crypto miners pose risk to lenders as ‘crypto winter’ continues to weigh on business

According to a Bloomberg report on Friday, $4 billion in loans, which are backed by crypto-mining equipment, are facing potential default risk.

The development comes on the back of a turbulent market that has wiped billions from the global crypto market cap over the past few weeks. And as a result, according to analysts cited by the report, some crypto miners may struggle to repay loans secured by their mining equipment or rigs, posing higher credit risk for lenders.

A prolonged winter led to under-secured loans

Bitcoin, which has slipped below crucial $20,000 levels more than once in the past week, has reportedly halved the value of loan collateral. Notably, over the past month, the king’s coin has plunged almost 30% according to data from CoinGecko.

Luka Jankovic, Head of Lending at Galaxy Digital, told Bloomberg, “Bitcoin miners, basically, are feeling pain.”

The report points out that few miners have ever defaulted on these loans, which weighs on others.

“A lot of trades have turned negative net IRR at these levels. Machine values ​​have fallen and are still in price discovery mode, which is compounded by the volatility in energy prices and the limited supply of rack space,” added Jankovic.

For example, Core Scientific Inc. reportedly liquidated its holdings of around 2,000 Bitcoin last month to cover operational costs. Additionally, Bitfarms Ltd. sold 3,000 BTC for $62 million to cover part of its $100 million loan with Galaxy Digital Holdings Ltd., the report said.

And with collateral margins falling in value, a prolonged crypto winter could likely create a default ripple effect.

At current levels, data from Luxor Technologies Corp. revealed that the value of Bitmain’s S19 mining rig lost 47% of its peak value of $10,000 in November 2021.

That said, with lenders significantly under-secured, Ethan Vera, co-founder of Luxor Technologies, told the outlet: “They [Lenders] are nervous about their loan portfolios, especially those with high collateral ratios. »

Market downturn led to reduced margins

Recent mining Data even confirmed that the market crash reduced the electricity consumption of cryptocurrency users by around 50%.

The Guardian cited a Digiconomist report which found that the Bitcoin network’s electricity consumption had been reduced by a third from its peak on June 11, dropping to 131 annualized terawatt-hours per year.

And as mining rewards dwindle with the fall in the price of Bitcoin, Alex de Vries of Digiconomist told the Guardian: “It literally puts them out of business, starting with those operating with sub-optimal equipment or under suboptimal circumstances. -optimal”.

“For bitcoin mining equipment, this is a big problem, because these machines cannot be reused to do other things. When they are not profitable, they are useless machines. You can keep them hoping that the price will recover or sell them for scrap,” he added.

That said, Jaran Mellerud, mining analyst at Arcane Crypto, echoed the same sentiments to Bloomberg, adding that reduced mining revenue is making loan repayments more difficult without liquidating digital assets.

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