Bitcoin Miners’ FTX Contagion Exposure May Amplify Industry Pain

Bitcoin miners, which already have up to $2.5 billion in loans outstanding, could find themselves in even hotter water as many have exposure to failed crypto exchange FTX and lenders such as BlockFi.

Miners’ balance sheets have been steadily deteriorating over the past few months as the price of bitcoin has slumped, killing their revenue. Meanwhile, energy prices have soared, increasing their costs. This has resulted in one of the biggest mining data center operators in the U.S., Compute North, to file for chapter 11 bankruptcy protection in September, while big players such as Core Scientific (CORZ), Argo Blockchain (ARBK) and Greenidge Generation (GREE) have said they are in a liquidity crunch. The stock prices of all three publicly traded miners have plunged more than 90% this year.

Now, some of the lenders working with these already struggling bitcoin miners are in deeper trouble after getting caught up in the FTX blowup – potentially causing another major hit for the mining industry.

“ASIC financiers going through distress and bankruptcy will contribute to the cost of capital rising significantly in the space, and access to capital drying up,” said mining service firm Luxor’s chief operating officer, Ethan Vera, who also estimated the total debt of up to $2.5 billion outstanding for the miners.

If lenders go bankrupt, creditors are likely to try to liquidate some of the equipment loans, he said. In some cases, “it might be too difficult for a bankrupt company to continue to operate a loan book, in which case liquidating these existing loans will result in a significant haircut,” according to Vera.

Not many miners have direct exposure to FTX’s assets. However, the crypto exchange contributed to a $431 million funding round for miner Genesis Digital Assets (GDA) in September of last year.

The company’s spokesperson didn’t comment on FTX’s investment but said GDA has no assets or accounts with FTX. Genesis Digital Assets is not related to CoinDesk’s sister company, Genesis Global.

Other key forms of exposures came from mining companies taking out large sums of loans from lenders such as BlockFi, Silvergate and Galaxy Digital, all of which have some exposure to Sam Bankman-Fried’s (SBF) exchange.

Still, considering that many miners are private and don’t share their debt obligations or exposure, the impact of the FTX implosion is uncertain. “We don’t know where all of the exposed counterparties are. And so for the industry, it’s really going to depend where new holes show up,” Jaime Leverton, CEO of Hut 8 (HUT), said during the firm’s third-quarter earnings call.

BlockFi became one of the many victims of FTX contagion and filed for bankruptcy protection in a federal court in New Jersey. The lender holds at least three mining machines-backed loans to publicly listed companies, crucially the $54 million that Core Scientific owes the lender. The miner, the U.S.’s biggest by computing power, is currently in talks to restructure its debt obligations that totaled about $244 million in loans and $597 in convertible and promissory notes at the end of the third quarter.

A Core Scientific spokesperson did not respond to CoinDesk’s request for comment on this story.

Canadian miner Bitfarms (BITF) also borrowed $32 million from BlockFi, but only about $22 million of that is outstanding as of the end of September. Meanwhile, peer Cipher Mining (CIFR) secured a $46.9 credit facility for a joint venture with energy firm WindHQ, of which it owns 49%.

A Bitfarms spokesperson declined to comment on the story. The miner has been actively trying to reduce its leverage and said it paid down $27 million of bitcoin- and equipment-backed debt on Nov. 14.

Cipher CEO Tyler Page said the company had drawn about $26 million of the BlockFi facility and “never anticipated any further draws” after a second one made in August, so it isn’t concerned about BlockFi’s issue. Less than $10 million of that is outstanding, and the joint venture “continues to service the debt as expected,” Page said.

BlockFi and other lenders also hold undisclosed debt to privately held miners, which is hard to estimate due to non-disclosure agreements. BlockFi spokespersons did not respond to requests for comment on this story.

Silvergate Capital, a digital assets bank and infrastructure provider, said that of its $11.9 billion in customer deposits, only 10% belongs to FTX and the bank has no outstanding loans related to FTX. The crypto bank also said that its BlockFi digital-asset deposit exposure totals less than $20 million.

One of the biggest publicly traded miners, Marathon Digital (MARA), has drawn $100 million in total, equally from two bitcoin-backed debt instruments that have a cap at $100 million each, said Marathon’s vice president of corporate communications, Charlie Schumacher. One is a term loan and the other is a revolving credit facility, both with Silvergate Capital.

As the news of FTX’s collapse started spreading and the price of bitcoin started to decline, Marathon had to post more collateral to back its dollar-denominated outstanding debt, Schumacher explained.

As of Nov. 9, only 1,950 BTC (about $30.6 million) of Marathon’s 11,440 BTC was unrestricted, meaning it can be used for business purposes, the firm said in its third-quarter earnings report. If bitcoin’s price declined further, Marathon would have to post more collateral, hence restricting more of its bitcoin holdings.

The mining firm has decided to reduce some of its obligations given the market uncertainty and volatility. “Given what’s going on in the broader markets, we want to make sure that we have even more breathing room,” Schumacher said.

Michael Novogratz’s Galaxy Digital (GLXY) has $76.8 million of cash and digital assets tied to the exchange, the firm said in its third-quarter earnings report. Galaxy has been reported to be looking to cut nearly 62% of its exposure to FTX. Galaxy has also been active in lending to miners.

Bitfarms is one of the miners that secured a $100 million bitcoin-backed credit facility from Galaxy. However, after paying down parts of the loan and amending some of the terms, the outstanding balance is $23 million, at the end of the third quarter.

Galaxy’s exposure to FTX hasn’t impacted its services and offerings for clients and the company continues to take a “a prudent, risk-managed approach toward financing arrangements in the mining space,” said the firm’s head of communications, Mike Wursthorn.

Galaxy is not in distress but other players that took significantly larger exposures will likely have issues, according to Wursthorn. “We are focused on secondary activity of ASICs, both from direct miners as well as lenders, and are in a good position to provide liquidity at good values for that equipment,” he noted.

During the third quarter, the Galaxy mining arm closed three existing machine leases totaling about $8 million “at expected terms without defaults, delinquencies, or losses,” Wursthorn added.

The shares of Galaxy fell about 81% on the Toronto exchange this year.

Crypto mining and staking firm, Foundry, has no direct exposure to FTX, but is indirectly tied to it through its sister company, Genesis Global, which is owned by CoinDesk’s parent company, Digital Currency Group. Genesis said its derivatives business unit has about $175 million of funds locked into its FTX account. DCG granted a $140 million equity infusion to the trading firm.

A Greenidge spokesperson said it has an outstanding loan to Foundry, which is a “fraction” of the original amount, but said that its “risk management strategy of liquidating” bitcoin mining revenue and “and removing all funds from exchanges daily was specifically designed to prevent” exposure to exchanges.

Bitfarms owes just above $1.5 million to Foundry, as of Sept. 30.

Foundry declined to comment on this story.

Canadian miner Hut 8 (HUT) said it paid off its debt to Foundry earlier this year and never drew from a $50 million credit facility from Galaxy, according to Erin Dermer, Hut 8’s senior vice president of communications and culture.

Meanwhile, another crypto lender, NYDIG, said it has consistently passed on opportunities to invest in the likes of FTX. Similarly, financial firm BlockFills said that it has zero exposure to Genesis Global, BlockFi, FTX or Alameda Research.