Financial trouble for bitcoin miners: A look back, and ahead as the halving looms

As the Bitcoin halving nears, miners express ongoing concerns about the potential need to shut down less efficient mining rigs due to reduced block rewards.

When the halving happens less than a week from now, the Bitcoin network’s per-block mining rewards will halve from 6.25 BTC to 3.125 BTC.

This impending reduction has led to worries about increased cost inefficiencies that may render smaller contributors unprofitable. These apprehensions are not new, having surfaced prior to past halving events as well.

In anticipation, a number of mining companies have sought to strengthen their balance sheets, deploy more efficient machines, and diversify their revenue streams to better withstand the upcoming changes.

However, some observers believe these fears are generally overblown. They point out that larger mining outfits have historically managed to adapt and thrive amidst the cyclical market fluctuations typically associated with block halvings.

They predict a similar outcome for the upcoming cycle, where initial disruptions may give way to a phase of price discovery, driven by the increased scarcity of Bitcoin.

This could potentially lead to higher Bitcoin prices, which would help to offset the reduced block rewards. That in turn may alleviate some of the financial pressures on miners and possibly restore profitability to their operations.

Industry giants like Marathon Digital and Riot Platforms seem to have a clear edge over most of their peers in at least one category; their balance sheets consist of more than $1 billion each in combined cash and BTC.

Chase White, a senior analyst at Compass Point Research & Trading, previously said private miners without easy access to public markets capital are more likely to have to shut down operations in the aftermath of the per-block mining rewards cut.

Despite expecting “pain for everyone,” White added that miners carrying low or no debt, who pay the lowest amounts in terms of energy costs, and who are equipped with the most efficient mining fleets are likely to be fine.

Not all mining companies fit these criteria.

And so, the question remains: Which firms will come out on the other side of the halving intact, and stronger?

Past financial troubles for miners

Several sources had trouble coming up with any major miners hurt badly by the last halving event four years ago.

According to Kayla Joyce, an associate at the law firm Holland & Knight, the 2024 halving event differs from its predecessors in 2016 and 2020. She predicts it may lead to a wave of consolidation and defaults across the now matured space.

She did not disclose which firms she believes are most at risk, however.

“The 2020 halving seemed to have less of an impact because the bitcoin mining industry was a smaller space prior to the 2021 crypto bull market,” Joyce told Blockworks. “Investors only started pouring money into the industry in 2021.”

Hardship across the mining sector was not primarily due to the 2020 halving, but rather resulted from the 2022 crypto winter. This downturn followed a period where mining firms accumulated substantial debt to fund aggressive growth initiatives.

Crypto mining data center operator Compute North filed for bankruptcy in September 2022 after raising $385 million in debt financing that February. The company said in bankruptcy filings at the time that it owed as much as $500 million to at least 200 creditors.

Core Scientific then filed for bankruptcy in December 2022. It noted at the time that while its cash flow was positive, it was insufficient to repay an equipment financing loan.

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 to equity.

Core Scientific CEO told Blockworks last month that going forward, the company intends to be more “pragmatic” on its infrastructure growth strategy and more “opportunistic” on the machine purchase side.

Though Argo Blockchain did not go bankrupt amid the 2022 bear market, the London-based firm said late that year it was looking to avoid such a fate despite holding “insufficient cash” to sustain operations for much longer.

Argo mined 103 bitcoin last month and held digital assets worth the equivalent of 26 BTC ($1.82 million), as of March 31. Last month, the company also closed on the sale of its facility in Mirabel, Quebec for $6.1 million

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

Overall, the company reduced its debt by $12.4 million during the first quarter, Argo Blockchain CEO Thomas Chippas said in a statement.

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

A look at hash cost, miners’ fate this time around

Looking at the hash price and hash cost of public mining companies, it is clear that some are better positioned than others as they head into the halving.

Hash price takes bitcoin price, network difficulty, block subsidy and transaction fees into account. It measures the potential earnings a miner can expect from a specific quantity of hash rate. This is positively correlated with changes in BTC price and negatively associated with shifts in bitcoin mining difficulty.

Hash cost, though similar to hash price, offers a different perspective by measuring the cost to the miner.

Reducing hash cost — via improving efficiency by deploying newer machines or securing lower energy rates — has been a key focus for the segment’s firms as the halving looms.

The hash price for bitcoin stood at roughly $106 per petahash per second (PH/s) on Monday, according to Hashrate Index data. This figure takes into account intraday variations in price and transaction fees.

Wolfie Zhao, head of research at TheMinerMag, notes that the hash price will be cut in half after the halving, resulting in earnings of just over $50 per petahash per second (PH/s).

“In that scenario, most of the mining companies would still be mining with a gross profit, albeit much less than before,” he told Blockworks.

Some of the publicly traded miners with a higher hash cost don’t have much debt on their balance sheet, Zhao noted. Companies with elevated debt-to-equity ratios — like Greenidge, Terawulf and Stronghold Digital — are on the lower end of the all-in hash cost scale, he added.

“So it looks like most of the public miners will survive the halving after having survived the highly levered bear market of 2022,” Zhao said.

Companies remain confident despite challenges

Bit Digital and Bitfarms had higher total hash costs than competitors during the fourth quarter, according to TheMinerMag data — amounting to about 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 fleet by the end of the year with more efficient miners.

The company may consider acquiring some of its hosting infrastructure to lower production costs. That decision “depends on the opportunity set and corresponding returns profile,” he added.

Beyond that, the company launched a business line in October that is focused on supporting AI workstreams.

“The margins are substantially better than our mining margins, and helps absorb all of our fixed overhead costs, making us more resilient to hash price volatility,” Tabar said.

Ben Gagnon, chief mining officer at Bitfarms, said that the company’s low-cost power contracts and energy efficiency strategies will ensure profitability even after the halving.

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

“With this plan we are strongly positioned to thrive and take advantage of what we believe will be the most bullish post-halving market the industry has ever seen,” Gagnon told Blockworks.

Joe Flynn, an analyst at Compass Point Research and Trading, wrote in an April 9 research note that Stronghold Digital Mining goes into the Bitcoin halving “in a more difficult position relative to other miners.” This is due in part to its debt and limited access to capital markets.

Stronghold’s infrastructure and access to power is valuable, however, Flynn noted, as companies will need such resources to plug in the hoards of mining machines they have already ordered. He added that selling some of that infrastructure could boost Stronghold’s stock, which was down about 48% year to date, as of Friday morning.

“We ultimately think there’s value in its assets that could be taken out through [mergers and acquisitions], as there is ability to take out [general and administrative expense] and lower Stronghold’s high overhead as a current small public company,” Flynn wrote.

Stronghold CEO Greg Beard told Blockworks that if Stronghold is deemed an attractive M&A target by an industry peer, such a deal would be “something to consider.”

“Generally speaking, companies that are misunderstood by the public market that have actual attributes and value that can be valued by other public companies…tend to be realized in that way.”

Despite its debt, Stronghold’s vertically integrated structure gives it levers to pull around the halving, Beard said.

For example, last month the company shut down operations at one of its Pennsylvania plants to take advantage of lower electricity prices by importing power instead. It intends to keep that in effect “until it becomes economically compelling to run it relative to purchasing electricity,” the company said in a news release.

“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. “We don’t have that issue.”

While Stronghold is a potential target to be acquired post-halving, Applied Digital has already been on the sell-side of pre-halving deals — agreeing to sell its facility in Garden City Texas last month to Marathon for $97.3 million.

Applied Digital CEO Wes Cummins said in a statement that the company will focus on building out its HPC data centers.

“This strategic transaction represents a purposeful pivot, equipping the company to allocate financial and operational resources toward strategic sites in North Dakota, as well as bolstering our balance sheet strength,” Cummins said.

The company declined to comment further about its post-halving strategy.

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