ASIC-backed loans worth $4 billion at risk as prices fall

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Loans taken out by crypto mining companies against mining ASICs are under pressure as the value of ASICs declines, making loans difficult to repay and posing significant risks for lenders.

Although no ASIC-based borrower has defaulted on their loans yet, worrying signs for crypto lenders have emerged over the past few weeks. Texas-based Core Scientific sold 2,598 bitcoins, while Canadian-based Bitfarms unloaded 3,000 coins to “improve liquidity”, “deleverage” and “strengthen” its balance sheet. After that, Bitfarms borrowed more money from New York Digital Investment Group LLC (NYDIG), using mining ASICs as collateral.

Prices for ASICs, specially designed computers that attempt to correctly guess the “hash”, a 256-bit combination of numbers and letters, of a crypto transaction, have halved with the recent drop in bitcoin’s price. If more mining companies continue to sell their bitcoin holdings en masse, lenders could start liquidating ASICs to recoup the losses, driving their prices down further. The cost of ASIC S19 from Chinese manufacturer Bitmain fell 47% from $10,000 in November. According to data collected by ASIC Miner Value, the profits of the Bitmain S19 Pro fell from $15.11 per day in March this year to $0.71 at press time.

Over $4 billion amassed in loans from crypto-native lenders

The reluctance of traditional financial institutions to lend money to crypto mining companies has spawned a small battalion of digital native lenders such as BlockFi, NYDIG, Celsius Network and Galaxy Digital Holdings accepting mining ASICs as collateral. As a result, Ethan Vera of Luxor Technologies estimates that there are nearly $4 billion in ASIC-backed loans today.

The health of lending companies was in the spotlight recently, as crypto broker Voyager Digital recently reported that hedge fund Three Arrows Capital failed to repay a $650 million loan, causing the stock price to plummet. of its stock as investors lost confidence. Loan company BlockFi, after taking collateral from Three Arrows as part of a preemptive measure to liquidate the company’s loan, told Bloomberg that loans to mining companies follow the same risk assessments and underwriting policies as all borrowers.

Understand the risks of using ASICs as collateral

Companies that lend against ASICs need to have a thorough understanding of the risks involved, which stem from previous bear markets, Cassie Clifton of Galaxy Digital Holdings said in a recent interview with Compass Mining, a bitcoin mining market. Clifton says loans must be structured with the “correct covenants” to make sense. His colleague Craig Birchall believes that a crucial part of risk management is having mining specialists within the lending company assess the possibility and feasibility of liquidating ASICs. Otherwise, the ASICs have no collateral value.

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