Some bitcoin miners have suffered amid the recent market turmoil, but here's why it may be a boon in the long-term

The recent crypto market sell-off has seriously impacted the mining industry, but the situation might not be entirely dire, some industry players told The Block. 

Miners – especially those that had been on a scaling spree and borrowing cash to support its operations before the bitcoin block reward is cut in half in May – are among the companies that took the hardest hit during the coronavirus-triggered global market turmoil, when bitcoin prices dropped by as much as 41% during the past two weeks. 

Around 90% of Chinese crypto lending desk Babel Finance's miner clients have been issued margin calls due to the recent price declines, while 35% of them had to be margin-closed out, according to Babel Finance CEO Flex Yang. 

"Now we are worried because we see miners shut down very quickly. The average computing power in the past three days has reached 80 TH/s, which has dropped by almost 40% over the past few days," said Yang.

Moreover, network difficulty, which is positively related to total computing power in the bitcoin network, is also projected to plummet by as much as 15% to 16% by midnight on Wednesday, reflecting how some miners have shut down their gear due to shrunken profit margins.

Even among those that have managed to keep their mines running, some moved to put up their hardware as collateral as they sought cash to fund their operations, according to several sources in the mining ecosystem.

According to Yang, Babel currently has two clients that use machines as collateral and top up their under-collateralized positions with the bitcoin they generate.

Matrixport, on the other hand, said it does not accept any machines as collateral, because it "won’t help when there is a big crash in market," the firm’s COO Daniel Yan told The Block.  

Signal of the future?

Still, some say that not all hope is lost with miners. 

"A lot of the miners are hurt, but not broke," noted Matrixport’s Daniel Yan, whose firm offers financial services to miners and inherited a large miner client base from mining machine maker Bitmain. 

As highly leveraged, high-risk miners exit the market and more players seek financial strategies to hedge their risks, the mining industry may be on its way to becoming healthier, according to The Block's conversations with several industry participants.

"The exit of highly leveraged miners and high-risk miners is relatively healthy for the market. After they get out, their machines will reach the hands of some prepared people… For them, the mining cost will decrease accordingly. In addition, computing power decreases so quickly that the difficulty is estimated to be adjusted once or twice by 10%. Then low-risk miners can still live really well," Yang said. 

Indeed, for larger mining farms such as Canada-based, publicly-listed Bitfarms, the shock of bitcoin price crash seemed temporary, especially given that the mining difficulty will fall.

"The sudden drop in Bitcoin price that occurred recently instantly reduced mining profitability, however, we have been encouraged to see that the implied network hash rate has also dropped, and the next network difficulty adjustment is now estimated to fall approximately 14%," Bitfarms interim CEO Emiliano Grodzki told The Block in an email. 

Perhaps more importantly, the price dip will also accelerate the financialization of the mining industry, a sign of market maturity that Iterative Capital partner Leo Zhang expected to fully emerge after the halving.

He explained that miners will be forced to seek out financial tools to fund their operations and hedge their risks as their revenues take hit. 

"In this [mining] ecosystem, the risk counter-party is not distributed widely. Before the emergence of lending desks, miners were basically streaking ... Although lending is a relatively vanilla structure ... it is better (than streaking) but the risk transfer is basically in the hands of the lenders,” said Zhang. 

As for financial services firms that are directly exposed to miners, some of them are taking steps to protect themselves in the current climate. Babel has halted lending to high-risk miners until the market becomes more stable, and Matrixport has adopted higher risk management standards across its product portfolio.

Update: The story has been updated to reflect that 35%, instead of 50%, of Babel Finance' miner clients were margin closed out.