Cryptocurrency winter continues as Bitcoin miners try to deleverage to avoid liquidity crunch

Cash-strapped bitcoin miners are reducing loan amounts and scaling back operations as the cryptocurrency industry is expected to continue to weather a slump in digital asset prices in 2023. During the historic bull run in late 2021, bitcoin miners raised billions of dollars in debt financing to fund their expanding operations. But since the crypto market crashed early last year, bitcoin miners are repaying loans and covering operating costs by refinancing and selling token reserves and equity.

“Miners are trying to deleverage to avoid margin calls or an imminent liquidity crunch, preparing for Bitcoin to fall below a certain price point,” said Wolfie Zhao, an analyst at cryptocurrency consultancy Blocks Bridge.

Marathon Digital (MARA.US) has raised hundreds of millions of dollars in loans from crypto-friendly banks such as Silvergate Capital (SI.US), which have been affected by the collapse of the cryptocurrency industry. Last month, Marathon Digital repaid its $30 million revolving debt, increasing its unrestricted cash flow to more than $100 million.

Core Scientific (CORZ.US) became the industry's first major mining company to declare bankruptcy in December last year due to cash flow problems caused by falling bitcoin prices and soaring energy costs. The Austin, Texas-based company is working to develop a plan to repay creditors.

According to Blocks Bridge data, the scale of funds raised by 15 major mining companies in the market through debt financing has been shrinking since the first quarter of 2022, with a reduction of US$112.6 million for the first time in the third quarter, and net expenditures of mining companies in the third quarter fell 77% year-on-year to US$180 million. The total industry funds in the first and second quarters were US$348 million and US$188 million, respectively.

A sudden drop in the price of Bitcoin at any time could lead to a severe liquidity crunch. Bitcoin had previously risen to more than $45,000 in March 2022, but fell to $29,000 a month later due to the collapse of the cryptocurrency stablecoin Terra Luna, evaporating about $40 billion from the cryptocurrency market. Coupled with the Federal Reserve's tightening monetary policy and the impact of the bankruptcy of large digital asset companies such as hedge funds and cryptocurrency exchange FTX, the price trend of cryptocurrencies was suppressed throughout last year. Bitcoin fell by about 65% year-on-year in 2022.

Some miners, such as Riot Platforms (ROIT.US) and Bitfarms (BITF.US), began selling their cryptocurrency reserves last year to increase liquidity. Marathon Digital prefers to keep about 12,200 bitcoins on its existing balance sheet. As of December 31, about 36% of the company's reserves were restricted and will be pledged as collateral for its remaining loans.

In addition, Argo Blockchain (ARBK.US), Core Scientific (CORZ.US) and Riot Platforms (RIOT.US) have also recently had to turn to selling equity to raise funds to maintain cash flow amid the economic downturn.