Hut 8 Mining (HUT.T) went into damage control over the weekend following Bitcoin’s precipitous 46% crash in the wake of the coronavirus, optimizing their mining operations by running its equipment in the most cost-efficient modes possible.
Normally a period of decline is expected due to the natural volatility of the coin, but a decline like the cryptocurrency experienced over the weekend is anything but the standard volatility. It would seem that the panic that led to aisles of empty racks where toilet paper and other staples has also led to a liquidation of digital assets.
It’s safe to say we can put the idea of Bitcoin as a safe-haven currency to rest.
The company is slashing their energy consumption and costs in half while reducing the hashrate output by approximately 35%. This optimization will reduce total output, but the total margin is maximized and costs are reduced. This is being performed in real time on a 24 hours a day, seven days a week basis. Management is going to keep an eye on future price fluctuations and make future decisions based on how it performs.
The coronavirus pandemic has negatively impacted most asset and commodity values around the world, including Bitcoin. Now the company is going to have to sell bitcoin at lower prices to cover continuing fiat-currency-based costs.
There’s also a question as to whether or not the company is going to be able to meet their obligations with the TSX after the crash, as they’re only in their probational ‘sandbox.’
Still, the company reports that their relationship with their lender Genesis Global Capital remains positive, but they’re worried that the increased volatility in the Bitcoin’s price may have an adverse effect on the value of the bitcoin collateral held with Genesis that may mean a margin call they can’t cover. Talk about mixed news.
The negative consequences could be exacerbated by the halving, expected mid-May, when the compensation paid to miners is cut in half. If impact could be decidedly negative for Bitcoin miners if there isn’t a corresponding increase in the price of bitcoin, or a decrease in the network hashrate. This could make Hut 8’s operations uneconomical as the price of bitcoin would not be enough to cover, and exceed, the price of mining.
If there’s any upside to all this, it’s that during the crypto crash, nearly 40 types of mining rigs, including the Antminer S9, which is responsible for 40% of BTC’s hashrate, were also taken offline, because the slash in price made them unprofitable. Over time, that will reduce the hash-rate, which will give new companies options to enter and the price will rebound. Whether or not companies like Hut 8 survive that long is anyone’s guess.
Why did BTC crash?
The majority of Bitcoin mining in China is an overleveraged mess. That’s why.
Independent miners and small mining farms have only recently begun to use novel financial services.
Third-party brokerages made their appearance in late 2019 offering to help miners leverage their profits while mitigating their risks by lending them money to buy mining equipment. But because of quarantines, companies like Bitmain and Shenzhen-based MicroBT couldn’t get the equipment to the farms, which are mostly in the northwest of the country where hydroelectricity can be utilized.
When Bitcoin’s price was low, miners could lend their coins to brokers, over-the-counter cryptotrading desks and VIP customer services from top exchanges. The miners could pawn their coins for cash now, wait for the price to climb as the halving approached, and then pay the loans back. Meanwhile, the miners would get operating cash in fiat, which they could use to pay for operating expenses, electricity and upgrades to their mining rigs.
The problem is crashed so hard panic set in and many miners reached a liquidation point. Their brokers sold the collateral to prevent further bleeding, driving the price down even more. Next, miners closed up shop because they couldn’t afford to operate their businesses anymore. If they can’t mine bitcoin because they don’t have any equipment, then when their debts come due they won’t be able to pay them.
It highlights one of the principle problems of a global decentralized currency, which can honestly be said for most of globalization—what happens overseas has global consequences. We’re all in this together for better or for worse.
—Joseph Morton