Bitcoin Miners’ Financial Woes: A Review and Future as Halving Approaches

As the Bitcoin halving approaches, miners have expressed concerns about the potential need to shut down inefficient mining equipment due to the reduction in block rewards.

In less than a week, the Bitcoin network’s block reward will be halved, from 6.25 BTC per block to 3.125 BTC. This expected reduction has raised concerns about increased cost efficiencies that could make small mining operations unprofitable. These concerns are not new, having arisen before past halving events. In response to these changes, some mining companies have taken steps to strengthen their financial position, deploy more efficient equipment, and diversify their revenue streams to better weather the coming changes.

However, some observers believe that these concerns are generally overblown. Large mining companies have historically proven that they can adjust and thrive during the periodic market fluctuations typically associated with block halvings.

They predict a similar outcome for the upcoming cycle, with initial disruption likely to give way to a price discovery phase driven by Bitcoin’s increasing scarcity. This could lead to a rise in Bitcoin prices, which would help offset the impact of the reduction in block rewards. This, in turn, could ease some of the financial pressure on miners and potentially restore profitability to their operations.

Industry giants like Marathon Digital and Riot Platforms appear to have a clear advantage in at least one category: their balance sheets hold more than $1 billion in cash and bitcoin, respectively.

Chase White, senior analyst at Compass Point Research & Trading, previously said that private miners that lack easy access to public market capital are more likely to be forced to cease operations after the reduction in mining rewards per block.

While predicting that “everyone is going to have a hard time,” White added that miners with little or no debt, the lowest energy costs and the most efficient mining equipment will likely be fine. Not all mining companies meet those criteria.

So, the question remains: which companies will be able to survive the halving cycle intact or even stronger?

Miners’ past financial woes

According to multiple sources, it’s hard to find a major miner that was badly hurt by the last halving four years ago. Kayla Joyce, an associate attorney at law firm Holland & Knight, said the 2024 halving will be different from the 2016 and 2020 halvings. She predicted it could lead to a wave of consolidation and defaults in the now mature industry.

However, she did not reveal which companies she considered most at risk.

“The 2020 halving event appears to have less of an impact because the Bitcoin mining industry was smaller before the 2021 crypto bull run,” Joyce told Blockworks. “Investors only started pouring money into the industry in 2021.”

The woes of the entire mining sector were not primarily caused by the 2020 halving event, but rather by the crypto winter of 2022. This decline came after mining companies accumulated huge debts for aggressive growth plans.

Compute North, a cryptocurrency mining data center operator, filed for bankruptcy in September 2022 after raising $385 million in debt financing in February of the same year. The company stated in its bankruptcy filing at the time that it owed up to $500 million to at least 200 creditors.

Core Scientific subsequently filed for bankruptcy in December 2022. At the time, the company said that although it had positive cash flow, it was not enough to repay equipment financing loans.

The Texas-based company emerged from bankruptcy in January - reducing its net debt to $571 million by converting equipment lender and convertible note holder debt into equity.

Core Scientific’s CEO told Blockworks last month that the company would be more “pragmatic” in its infrastructure growth strategy going forward and more “opportunistic” in its machine purchases.

While Argo Blockchain did not go bankrupt during the 2022 bear market, the London-based company said late last year that it was working to avoid that fate despite holding “insufficient cash” to sustain operations longer.

As of March 31, Argo mined 103 bitcoins last month and holds the digital asset equivalent to 26 bitcoins ($1.82 million). Last month, the company also completed the sale of its Mirabel, Quebec, facility for $6.1 million.

It used the proceeds from the sale to pay off the remaining $1.4 million mortgage on the Mirabel facility and to repay a portion of its outstanding debt to Galaxy Digital. Argo still owes Galaxy Digital $12.8 million, down from its original $35 million debt balance to the company.

Argo Blockchain CEO Thomas Chippas said in a statement that the company reduced its debt by a total of $12.4 million in the first quarter.

He added: “As we approach the halving, we will continue to focus on streamlining operations and running them as efficiently as possible.”

A look at the hash cost and the fate of miners this time

Looking at the hash price and hash cost of publicly traded mining companies, it is clear that some are better positioned than others going into the halving.

Hash price takes into account Bitcoin price, network difficulty, block subsidy, and transaction fees. It measures the potential revenue a miner can earn from a specific amount of hash rate. It is positively correlated with changes in Bitcoin price and negatively correlated with changes in Bitcoin mining difficulty.

Hash cost, while similar to hash price, provides a different perspective by measuring the cost to miners.

With the halving approaching, reducing hashing costs (either by deploying newer machines to improve efficiency or ensuring lower energy prices) has been a key focus for companies in the space.

Bitcoin’s hash rate was about $106 per petahash per second (PH/s) on Monday, according to Hash Rate Index data. The figure takes into account intraday changes in price and transaction fees.

Wolfie Zhu, head of research at TheMinerMag, noted that after the halving, the price of hashrate will be halved, bringing a return of a little over $50 per petahash per second (PH/s). In this case, most mining companies will still mine at a gross profit, albeit much less than before.

Some of the publicly traded miners with higher hash costs do not have much debt on their balance sheets. Companies with higher debt-to-equity ratios such as Greenwich, Terawulf, and Stronghold Digital are at the lower end of the overall hash cost scale. As a result, it looks like most public miners will survive the halving after a highly leveraged bear market in 2022.

Despite challenges, businesses remain confident

According to data from TheMinerMag, Bit Digital and Bitfarms’ total hashing costs were higher than their competitors in the fourth quarter, at approximately 74.2 PH/s and 70.3 PH/s, respectively.

Bit Digital CEO Sam Tabar told Blockworks in an email that the company plans to double the size of its mining machines by the end of this year with more efficient mining machines. It may consider acquiring some hosting infrastructure to reduce production costs. In addition, the company launched a business line focused on supporting artificial intelligence workflows in October.

The Canadian miner agreed in November to buy nearly 36,000 Bitmain machines as part of what it called a “transformative fleet upgrade.” The process will help the company more than triple its computing power and improve energy efficiency by about 40%.

Stronghold Digital Mining is “in a more difficult position relative to other miners” heading into the bitcoin halving, Compass Point Research and Trading analyst Joe Flynn wrote in an April 9 research note. This is in part due to its debt and limited access to capital markets. Stronghold’s infrastructure and power supply are valuable because companies will need those resources to plug in the mining machines they have already ordered. He added that selling some of the infrastructure could boost Stronghold’s stock price, which is down about 48% year to date as of Friday morning. We ultimately believe its assets have value that could be acquired through [mergers and acquisitions] given the ability to deduct [general and administrative expenses] and reduce Stronghold’s high overhead as a currently small public company.”

Stronghold CEO Greg Beard told Blockworks that if industry peers viewed Stronghold as an attractive M&A target, then such a deal would be “something worth considering. Generally speaking, companies that are misunderstood by the public markets, that have real attributes and value that other public companies can value… tend to materialize in this way.”

“I think the challenge for a lot of miners is that if their power contracts are structured in a difficult way, they’re forced to buy power at a negative margin,” Beard said.

While Stronghold is a potential target for a post-halving acquisition, Applied Digital has already been a seller in a pre-halving deal — agreeing last month to sell its Garden City, Texas, facility to Marathon for $97.3 million.