Bitcoin Miner Iris Energy To Default On $100 Million Loan
In today’s edition of YIYL, (You Invest, You Lose), we head back to the struggling bitcoin mining sector, where it seems like large players who were banking on bitcoin price runs did not prepare properly for the bear market, nor did they expect the price to be hovering around 20 000 for such a long time.
The longer the price sits at lower levels, the harder it is for large-scale miners to keep operations going and to service debts; they may have taken out thinking that bitcoin was going to the moon. When the price is running up, the profit motive is clear, and both individuals and companies might make poor calculations on timelines for future income and projections, and the volatility of bitcoin can come back to bite you in the bum.
I’ve already covered this in the story of Core scientific, who seem to be really struggling, and they are joined by Iris Energy, the Bitcoin mining firm out in Australia that are reported to be close to defaulting on loans.
Iris Energy running on a low battery
Iris Energy, an Australian “sustainable Bitcoin mining company”, with locations in Canada, run a mining operation and data centre in British Columbia using renewable energy. It all sounds fine and dandy, and even if you can get cheap electricity, it doesn’t mean you are going to win in the game of bitcoin mining.
The company has announced that they are close to defaulting on loans used to purchase $103 million of Bitcoin mining rigs. These machines depreciate in value quickly and are currently estimated by the company to be worth $65–$70 million. But your bet in this instance is that you’re going to continue to pump out bitcoin, which you can sell and service those debts over time, an assumption that hasn’t panned out.
At the moment, Iris energy produces $2 million in gross profit from mining Bitcoin, which is not sufficient for the company to meet the $7 million in loan payments each month.
Macroeconomic factors, such as rising inflation and a sharp hike in electricity prices, are severely impacting miners’ ability to turn a profit globally. Miners now find themselves in a very different market compared to a year ago, with prices for bitcoin continuing to trend down and with interest rates on debts continuing to rise.
All these factors eat into your runaway, and miners, like every other business, continue to feel the pinch.
Talk about the price
Iris Energy stock trades on the Nasdaq and fell 15% following the disclosure, now down more than 80% year to date. The stock trades at $2.79 right now, falling from around $4.44 a month ago and way down from its all-time high of $24.
So trying to raise funds through the equity market isn’t looking like it’s going to be an option, with higher interest rates pushing down the stock market.
If you can’t raise through the equity markets and you can’t do much about your income, its all about how you manage your exposure to the credit markets.
The company’s bad debt is structured within a number of special-purpose vehicles (SPVs), which Iris claims have been contained and should not affect operations. Iris Energy’s SPVs maintain a market value of approximately $65 million to $70 million, about 35% less than its principal loans outstanding as of September’s end.
Mining on leverage
While taking out debt is not a bad thing if you’re able to service it, it sure becomes a weight around your neck when you can’t and it shows how taking out leverage to mine bitcoin isn’t always a prudent choice.
Sometimes you have to live within your means, but since business is so used to pulling forward funding for future promises of wealth, we will continue to see companies apply this strategy.
Some might make it out alive, but most are likely not to survive, the Fed doesn’t look like it will be reducing interest rates anytime soon and if you’re going to rely on a pivot to keep your business alive, you’re living on a hope and a prayer at the moment.
If large miners do collapse in the coming months, we could see fire sales in the ASIC market and boy, am I ready for that, I’d love to pick up a miner or two on the cheap.