In the bear market, some crypto miners may turn to mergers and acquisitions to stay active

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In the bear market, some crypto miners may turn to mergers and acquisitions to stay active

“I think in the next six months or so we’ll probably see some M&A activity happen,” said Amanda Fabiano, head of mining at Galaxy Digital, “because some miners who got in the sector during the peak are just not going to be able to meet their requirements.”

Fast forward to 2022, bitcoin prices have tumbled and margins have shrunk. Bitcoin network’s hashrate is hovering around all-time highs and operating costs are higher due to rise in energy prices – leaving miners in a very tight spot. “A falling bitcoin price means miner margins are compressing,” said Mason Jappa, co-founder and CEO of blockchain infrastructure and cryptocurrency mining company Blockware Solutions. “On top of that, margins have also been declining because Bitcoin’s network mining difficulty is increasing” as more miners are joining the network, he added.

“These companies have found themselves in a position where they made plans and commitments that assumed external capital, whether from public or private markets, would always be readily available,” he said. “Now, the cost of capital, if available, just got more expensive, and some of these miners do not have sufficient capital to finish what they have started.”

A less profitable environment for bitcoin mining
Many of these companies that came into the mining sector in the last 12-18 months lacked a “sound balance sheet,” Mike Levitt, CEO of Core Scientific (CORZ), the largest publicly traded miner in terms of hashrate, told CoinDesk.

Story Highlights

  • Competition in digital asset mining, particularly for bitcoin, has risen dramatically in recent years, with several new entrants joining the business at its height in 2021. According to industry participants, the survival of many new miners may hinge on their ability to sell themselves or combine with another peer in the event of a price drop.

  • During the 2021 bull run of the crypto market, margins of some bitcoin miners had been as high as 90%, which led to many new entrants and miners looking to grow at hyper speed. To do so, companies ordered mining rigs at high prices and deposited money upfront for their orders.

Moreover, supply-chain issues and lack of access to capital are making matters worse for many miners. “The ability to secure large pre-orders of ASIC miners is no longer the major bottleneck to growth,” said Wall Street bank Jefferies analyst Jonathan Petersen in a recent research note. “Construction delays, caused by difficulties securing building materials and finalizing power purchase agreements, are a larger impediment to deploying new fleets.”

This perspective was echoed by crypto miner Hive Blockchain. “The crypto mining industry in general appears to find itself at a crossroads with a supply of very expensive ASIC chips and few places to plug them in,” according to a statement from the miner. “In our market intelligence, the company has noticed significant supply disruptions for electrical equipment needed to make data centers, such as transformers and switch gear.”

All these factors combined, and some of the newer and less capitalized miners are now in a limbo, as they are finding it hard to pay for their operations under the terms set out during the bull run. “I think we’re going to see miners get humbled this year, in contrast to last year, when we saw the rise of public miners,” Fabiano said. Some of the miners who have signed some longer-term contracts will have to put up a lot of money in order to satisfy those obligations, she added.

On top of that, the ASIC markets are shifting downward, which means that miners are not going to be able to make the profit that they could have on the secondary market by just selling their machines if their operations aren’t up and running, according to Fabiano. In fact, with the slide in bitcoin prices, some of the older mining rigs, such as Bitmain’s Antminer S9s, are becoming less profitable, leading to miners shutting them down to avoid shouldering the costs. This is likely to drive several miners to look for an exit strategy by selling their business or merging with other companies. “I think the ones [miners] that have no operational experience, no background in bitcoin mining, are probably the ones that will look for M&A, or they’ll have a distressed debt situation where they’re taking on [expensive] debt,” she said.