Author | Blockworks, David Canellis & Michael Bodley
Compiled by | PANews
During bull markets, many Bitcoin miners rely on loans to purchase mining equipment or cover operational costs, preferring not to sell their appreciating BTC holdings.
However, the current crypto market downturn has exposed miners to severe financial strain. Beyond potential large-scale liquidations, highly leveraged miners risk triggering cascading failures among crypto lenders and hedge funds.
Key Profit Factors for Bitcoin Miners
- Bitcoin Price
- Electricity Costs
- High-Efficiency ASIC Miners
All three factors now work against miners:
- Price: BTC has dropped over 30% in a month, currently hovering around $19,000.
- Electricity: U.S. miners face doubled summer electricity rates in Northeastern states due to inflation.
- ASICs: With 40% of global mining in the U.S., lenders like BlockFi and NYDIG helped miners expand ASIC inventories—until leveraged positions became untenable amid market crashes (e.g., UST/LUNA collapse, Celsius crisis).
Todd Esse, co-founder of mining hedge fund HashWorks, notes: "Miners operate on razor-thin margins at these prices, while rising electricity costs squeeze profitability further."
The Leverage Trap
In bull markets, miners discovered a "financial hack": pay 30–50% deposits to equipment manufacturers, receive new ASICs, and repay loans with future mined BTC—profiting from price appreciation.
Some even used ASICs as collateral for cash loans, betting on continued BTC price rises. Lenders like Babel Finance underwrote such loans, but ASICs pose problems:
- Low liquidity
- Depreciating value during price crashes
- Operational losses when electricity costs exceed mining revenue
Alejandro De La Torre, a mining consultant, reveals "a flood of secondhand ASICs in the market" post-China’s 2021 mining ban, driving prices down. For example, Bitmain S19j Pros now sell at 65% below retail.
Crypto Lenders at Risk
Jurica Bulovic of Foundry Digital warns: "Miners with outstanding credit can’t generate enough income to service loans at current prices." Defaults could follow, pressuring lenders like Babel Finance (reportedly facing nine-figure losses).
While some miners seek alternative financing, prolonged market weakness may deplete cash reserves. Miners face a paradox:
- Bull markets: Hoard BTC to avoid "selling low."
- Bear markets: Hold BTC hoping for rebounds.
The desperate alternative? Defaulting on loans.
If lenders seize ASICs, they lack expertise to operate them profitably. Selling becomes difficult in illiquid markets, revealing collateral’s overstated value.
Key Takeaways
- Leverage magnifies risks: Miners juggle mining operations with debt repayments.
- ASIC liquidity is poor: Depreciating equipment complicates lender recoveries.
- Market cycles punish over-leveraging: Unhedged bets on BTC price rises prove catastrophic.
Todd Esse summarizes: "Miners should operate within cash flow limits—leveraged trading in volatile markets demands caution."
FAQ
Q: How does Bitcoin’s price drop affect miners?
A: Lower BTC prices reduce mining revenue while fixed costs (loans, electricity) remain, squeezing profitability.
Q: Why are ASICs bad collateral?
A: They’re illiquid, depreciate rapidly, and require expertise to operate profitably—unlike cash or stablecoins.
Q: What happens if miners default?
A: Lenders may seize ASICs but struggle to recover value via sales or mining, potentially leading to wider financial contagion.
👉 Discover how top miners hedge against volatility
Q: Can miners survive without leverage?
A: Yes, but growth slows. Leverage allows rapid scaling—until market downturns expose unsustainable debt.
👉 Explore sustainable mining strategies
Q: What’s the biggest lesson for miners?
A: "Price downturns turn leverage from a growth engine into an anchor." Always model worst-case scenarios.