“Many miners are relying on the bitcoin price to increase post-halving in order to stay operationally profitable, and that’s not an ideal situation for any business to operate in,” said F2Pool business director Thomas Heller, leading one of Asia’s largest bitcoin mining operations. “In early March, a number of miners had their bitcoin-backed loans liquidated, and other operators had to turn off their machines.”
It’s hard to say which miners now face crippling debts because few privately owned mining operations court publicity. Among those with public records, the Canadian startup Hut 8 owes roughly $14 million to Genesis Global Capital, an affiliate of the American crypto giant Genesis Trading (which is owned by CoinDesk’s parent company, Digital Currency Group).
Hut 8 CFO Jimmy Vaiopoulos said he is “comfortable with the debt level,” adding the repayment deadline is in 2021 and he expects the bitcoin price to increase long before that. The loan has an annual interest rate of 9.85 percent.
Read more: Bitcoin Halving, Explained
Canadian mining operations such as Hut 8 have an advantage over some competitors abroad: They are deemed “essential services” under the federal government’s COVID-19 strategy, according to Bitfarms co-founder Emiliano Grodzki.
“This is the reason we can continue working,” Grodzki said of his Canadian company, unlike mining farms in his homeland, Argentina, where miners aren’t permitted to continue as usual.
Plus, with regards to profitability, Vaiopoulos said Hut 8 aims to have updated equipment from Chinese hardware suppliers, which is more efficient than current models.
“There were some delays in terms of equipment,” Vaiopoulos said. “But we’re kind of past that hump.”
However, over the past two months Hut 8 CEO Andrew Kiguel and board member Gerri Sinclair both resigned. During a public earnings call the first week of April, Kiguel said equipment timelines are still unclear, due to the ongoing pandemic.
“The world is grappling right now with different supply chain issues like getting ventilators and masks around the world as opposed to bitcoin mining machines,” Kiguel said during the call.
As such, many mining operations around the world are facing this same struggle. BitPatagonia co-founder Walter Salama in Argentina, whose mining farm is temporarily closed by the coronavirus lockdown, said the cost of new machines is his most pressing concern.
“Today the problem continues to be the high cost of machines that do not allow long-term planning,” Salama said. “Moving operations is very expensive. Each country should have the privilege of having mining companies and contribute to the blockchain.”
He predicted “medium and small miners” could disappear as those who provide funds and hardware “concentrate on the larger ones” while “praying to Bitcoin” for a bull market. If this happens, Salma added, it would undercut “the fantasy of decentralization.”
This is why Vaiopoulos said Hut 8 applied for an Emergency Wage Subsidy from the Canadian government, an ongoing program to help companies that have lost more than 30 percent of their revenue since 2019 continue to pay salaries.
It’s clear governments have a significant impact on whether bitcoin mining can remain profitable in their respective jurisdictions.
Generally speaking, mining operations require both cheap electricity and government leeway to stay competitive throughout volatile cycles. A longer political chilling effect took place in Iran from 2018 to the present. Iran was once home to a thriving bitcoin mining industry due, in part, to subsidized electricity. Then stricter government enforcement damped the domestic mining sector and made businesses even more vulnerable to supply chain disruptions.
If Salama manages to get and operate new hardware in Argentina before the halving in May, which will reduce miners’ rewards by 50 percent, local operating costs will still impact his profitability. For example, Chinese miners are expected to get lots of cheap energy during the annual “wet season,” July through September, thanks to national hydropower projects.
The strength of local currencies is yet another important factor. Due to the volatile fiat exchange rate, subject to both the Great Lockdown and national policies, Grodzki said Bitfarms’ operational expenses are now basically 10 percent cheaper.
“Our revenue is in bitcoin, which [buyers] value in U.S. dollars. But our operational expenditures are in Canadian dollars,” Grodzki said.
Russia’s mining industry witnessed a similar impact, where a decline in local currency value offset bitcoin’s own volatility. Even if the price of bitcoin goes down in dollars, it may be up in rubles.
Beyond Hut 8, volatility in both crypto and traditional currency markets may affect even more loans in the months to come. Bitfarms owes roughly $20 million to the New York-based Dominion Capital LLC.
“We will study opportunities for low-cost electricity in other parts of the world, like Latin America,” Grodzki said. “Miners in other parts of the world with [cheaper] electricity can sell their capacity. … We also expect to find another source of electricity cheaper than Canada.”
David Pan contributed reporting.