Bitcoin Mining Risk

Bitcoin mining plays an important role in maintaining the Bitcoin network, as miners record and verify transactions that occur on the network and are rewarded with Bitcoin in return. This has made Bitcoin mining a lucrative business, particularly as the price of Bitcoin reached all-time highs in 2021, resulting in explosive growth in the industry.

However, the situation has changed drastically due to the Terrra/Luna incident and FTX bankruptcy, as well as a rise in energy prices due to the macroeconomic downturn. In particular, mining companies that expanded their operations using high leverage during the bull market have declared bankruptcy as the crypto market entered a bear market. What were the problems they faced?

(1) Debt

The first problem was debt. Among the mining companies listed on Nasdaq, Core Scientific had the highest debt ratio. As of the end of September 2022, Core Scientific's debt ratio was 18.23.
As the debt ratio was high, the company faced significant difficulties.
In December 2022, Core Scientific filed for bankruptcy. Bankruptcy (rehabilitation) is a process that seeks to efficiently rehabilitate a business by adjusting the legal relationships of creditors, shareholders, etc. in the event of financial crisis.

As of the end of September 2022, Marathon Digital Holdings' debt ratio was 1.36.
According to an analysis by the Korea Institute of Industrial Economics & Trade of the average debt ratios by industry in 2021, the average debt ratio for the semiconductor industry was 0.5354, making Marathon Digital Holdings' debt ratio relatively high.
As of the end of October 2022, Marathon Digital Holdings secured a loan of $100 million worth of Bitcoin as collateral. If the price of Bitcoin falls below a certain level, the collateralized Bitcoin may be liquidated.

Why are Bitcoin mining companies' debt ratios higher than those of semiconductor companies?
In 2021, the price of crypto assets soared, and many mining companies acquired mining equipment with debt to maximize profits.
During the bull market, it was profitable to acquire mining machines through loans and mine Bitcoin because the price of Bitcoin, which was received as a reward, was high enough to cover the interest costs.

(2) Capital increase (Issue of New Shares)

There are also mining companies that raised funds through a capital increase. A capital increase is when a company increases its capital, and usually new shares are issued. In the case of a capital increase, existing shareholders can purchase new shares in proportion to their existing ownership, or new shareholders can purchase shares.
Some mining companies raised funds through capital increases, but this may have diluted the value of existing shares and lowered investors' expectations for future profitability.

In summary, the high leverage used during the bull market to expand mining operations and acquire mining machines, as well as debt and capital increases, have led to the bankruptcy of some mining companies. The current situation in the crypto asset market, including the Terra/Luna incident and the FTX bankruptcy, as well as a rise in energy prices due to the macroeconomic downturn, has further worsened the situation for mining companies.

Source: Digital Asset