ASIC-Backed Loans Worth $4B in Jeopardy as Prices Tank

Loans taken out by crypto mining companies against mining ASICs are under pressure as ASICs drop in value, making the loans challenging to repay and posing significant risks to lenders.

While no ASIC-based borrowers have yet defaulted on their loans, worrying signs for crypto lenders have emerged in the last few weeks. Texas-based Core Scientific sold 2,598 bitcoin, while Canadian-based Bitfarms offloaded 3,000 coins to “enhance liquidity,” “de-leverage,” and “strengthen” its balance sheet. After that, Bitfarms borrowed more cash from New York Digital Investment Group LLC(NYDIG), using mining ASICs as collateral.

Prices of ASICs, purpose-built computers that try to correctly guess the “hash,” a 256-bit combination of numbers and letters, of a crypto transaction, have halved along with the recent decline in bitcoin price. If more mining companies continue to sell their bitcoin holdings en masse, lenders could start liquidating ASICs to recoup losses, driving their prices down even further. The cost of the S19 ASIC from Chinese manufacturer Bitmain has dropped 47% from $10K in November. According to data collected by ASIC Miner Value, profit from the Bitmain S19 Pro dropped from $15.11 per day in March this year to $0.71 at press time.

More than $4B racked up in loans from crypto-native lenders

The reticence of traditional financial institutions to lend money to crypto mining companies spawned a small battalion of digital-native lenders such as BlockFi, NYDIG, Celsius Network, and Galaxy Digital Holdings, accepting mining ASICs as collateral. Consequently, Ethan Vera of Luxor Technologies believes that almost $4 billion in ASIC-backed loans exist today.

The health of lending companies has been in the spotlight recently, as crypto broker Voyager Digital recently announced that hedge fund Three Arrows Capital failed to repay a $650 million loan, causing its share price to tank as investors lost confidence. Lending company BlockFi, after taking collateral from Three Arrows in a pre-emptive move to liquidate the company’s loan, told Bloomberg that loans to mining companies follow the same risk assessments and underwriting policies that all borrowers do.

Understanding risks with using ASICs as collateral

Companies issuing loans against ASICs must have a thorough understanding of the risks involved, which come from going through previous bear markets, said Cassie Clifton of Galaxy Digital Holdings in a recent interview with Compass Mining, a bitcoin mining marketplace. Clifton states that loans must be structured with the “correct covenants” to make sense. Colleague Craig Birchall believes that a crucial part of managing the risk comes from asking mining specialists within the lending company to evaluate the possibility and feasibility of liquidating ASICs. Otherwise, ASICs have no collateral value.

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