Bitcoin mining companies are increasingly choosing to sell equity, resorting to one of their least attractive options to raise funds as profits dry up and higher interest rates make borrowing more expensive.
Core Scientific, one of the largest publicly traded bitcoin miners in the U.S., in July entered into a $100 million common stock purchase agreement with B. Riley Principal Capital II.
Australian miner Iris Energy said in September it had agreed to sell up to $100 million in equity to the same investment bank.
London-based Argo Blockchain earlier this month decided to issue shares at a discount for $27 million to an unnamed investor.
Bitcoin miners have been plagued by low bitcoin prices, rising energy costs, and fierce competition in the industry.
These firms had rushed to the stock market to raise money during crypto’s bull run, when investors expected Bitcoin prices to surge and publicly traded miners were viewed as an efficient way to invest in the sector.
Now, miners trying to issue new shares to weather the ongoing slump in digital assets risk upsetting their shareholders, whose shares end up being diluted.
Several large miners have already seen their share prices fall this year, including Core Scientific and U.S.-traded shares of Iris Energy and Argo Blockchain, which are down at least 78 percent year-to-date.
The $2.35 million Valkyrie Bitcoin Miners ETF (ticker WGMI), which tracks several large public miners, is down 73% since its inception in February.
“While it’s painful for investors from additional dilution, raising equity is one of the only ways to shore up a miner’s balance sheet to meet their financial obligations,” said Ethan Vera, chief operations officer of crypto mining services company Luxor Technologies .
“The other option is to release assets from the sale, which may be equally or more detrimental to shareholders.”
Other less cheap alternatives to raising equity include selling bitcoin at lower prices or filing for bankruptcy, says Daniel Frumkin, head of research and content at crypto mining services firm Braiins.
Core Scientific, for example, has sold about 85% of its bitcoin reserves since late March, according to its September update.
The company had $29.5 million in cash at the end of September, down 77% from $128.5 million at the end of the second quarter.
The second quarter figure does not include $11.9 million in restricted cash.
A recent spike in mining difficulty, a measure of bitcoin miners’ processing power, has dealt another blow to companies looking to weather the current slump.
Higher processing power will lead to lower mining revenues for already ailing bitcoin miners.
And the more mining power there is, the less each bitcoin miner gets.
A handful of bitcoin miners have upped sales of their assets to help them weather the storm, or at least pare down their debt.
But companies that have borrowed massively backed by the value of their mining equipment are feeling the pressure, as the prices of some of these popular rigs have fallen more than 80% since last November, when Bitcoin hit a record high of $69,000. said Vera of Luxor.
This also poses a major risk for their financiers, who are already under pressure as Bitcoin has lingered around $20,000 since June.
Lenders, including Asia-based Celsius Network and Babel Finance, are grappling with liquidity problems that were exacerbated by the crypto market crash earlier this year.
Another major crypto lender, Genesis, which also lends money to bitcoin miners, said it will cut 20% of its 260 employees, and its parent company has filed a $1.2 billion lawsuit against the bankrupt cryptocurrency Hedge fund Three Arrows Capital filed.
“I don’t see lenders fully scaling back, but many lenders are clearly focused on ‘distressed’ miners who may be willing to accept unfavorable terms to avoid bankruptcy,” Frumkin said.
Several miners are still turning to equity financing because some lenders have hiked interest rates, said Matthew Kimmell, a digital assets analyst at crypto research firm CoinShares.
Sure, not all miners raising money from the stock market are fidgeting.
Riot Blockchain Inc., another major publicly traded bitcoin miner in the US, is trying to get its shareholders’ approval to issue new shares, in part to expand operations.
She withdrew a similar appeal this summer. The company gained more than 700 coins between March and September and had $270.5 million in cash at the end of the second quarter.
Still, shares are down nearly 74% year-to-date.
“To expand during the bear market, bitcoin miners need to raise capital,” said Jaran Mellerud, crypto mining analyst at Hashrate Index.
“Without raising equity now, these companies will not be able to fulfill their expansion plans, and some of the most heavily indebted could even go bankrupt.”