“Contagion” is the buzz word in crypto after the catastrophic events of the past year. And the dominoes continue to fall as investors feel connected to the entire cryptocurrency industry. Hundreds of billions of dollars were burned.
And bitcoin mining companies have not completely avoided this. In fact, a unique type of mining business failed miserably, which can provide valuable lessons for future entrepreneurs. The combination of crypto credit and crypto mining is exhibited in two famous companies: BlockFi and Celsius. Both of these companies are now bankrupt. What’s up?
This article explores the history, fall and lessons of both organizations.
Crypto Loan Business Mining Interest
Even the most casual crypto watcher will be familiar with two industry-leading crypto lending businesses going bankrupt in 2022. What may be less well known is that both companies also maintain significant bitcoin mining units. BlockFi and Celsius are not only names for centralized crypto lending, but also heavily invested in bitcoin mining. And when both companies collapsed, so did the mining team.
BlockFi announced a new mining operation in May 2021 in the form of a partnership with Blockstream and its long-standing mining unit. Exactly how many BlockFi hashrates are managed through Blockstream has not been disclosed, and the current status of BlockFi hashrates in the Blockstream facility is also unknown. But the lender says it sees mining as complementary to its financial services offering.
Celsius also invested heavily in bitcoin mining, with $500 million spent on mining efforts in November 2021. In an old interview, former Celsius CEO Alex Mashinsky said that the company operates 22,000 mining machines, most of which are the Antminer S19 model. Like BlockFi, Mashinsky describes the company’s mining venture as a strategic complement to its credit business.
Clearly, BlockFi and Celsius are not the only companies operating at the intersection of mining and lending. Mining companies that lend coins to other institutional market participants (for example, trading companies) are not common. And it is not unreasonable to assume that other smaller creditor companies also have influence in the mining industry. But BlockFi and Celsius are unmatched in the combined scale of credit and mining operations. Both companies also went bankrupt as a direct result of FTX’s spectacular fall.
Tale Of Two Bankrupts
Both companies – Celsius and BlockFi – have now filed for bankruptcy.
In June 2022, Celsius announced a pause in all withdrawals. The following month, the company filed for Chapter 11 bankruptcy. Machinsky abruptly resigned in the middle of bankruptcy proceedings but not before reportedly withdrawing $10 million.
Celsius Mining’s bankruptcy comes just months after announcing plans to go public. But the company plans to continue mining throughout the bankruptcy process, and has vigorously defended its plans. Celsius said mining operations are key to the company’s restructuring efforts. But mining is not cheap. In the first two weeks of mining through bankruptcy, Celsius Mining burned $40 million, according to a report by The Wall Street Journal. At the time, Celsius Mining told the court that its mining operations would be profitable by January 2023.
Shortly after Thanksgiving, BlockFi also filed for bankruptcy. Bitcoin mining operations do not play a significant role in processes like Celsius. No reports found for this article indicate that Blockstream’s agreement with BlockFi has been terminated or disrupted.
But the mining operation held by BlockFi is not only a matter of mining. In addition to hashing for itself, the company also makes loans to other mining entities. BlockFi company account addressed this matter on Twitter one month before filing for bankruptcy. Some reports indicate that BlockFi could suffer losses of up to $80 million from exposure to Core Scientific, for example.
Why Mine And Borrow?
Why would a lending company want to mine bitcoins is a question that needs to be answered. The exact answer to this varies, but here is a simple explanation of one potential motivation: By essentially acting as a “crypto savings bank” and lending bitcoins (and other cryptocurrencies) to various retail and institutional partners, institutions like BlockFi, for example, has a minimum. the best exposure to the parabolic rise of bitcoin. Borrowing clients, on the other hand, have full exposure to market volatility. In theory, spinning off mining operations can offer lenders more material risk with greater potential profits.
But the credit business – especially given how some of the crypto financial institutions manage their books – carries enough counterparty risk and operational complexity of its own, one would think. The mining business is notoriously ruthless and complex, leaving new entrants with huge losses even in the best market conditions. Managing a mining unit in addition to core lending services is not very difficult compared to just one or the other business, because the complexity of the business increases exponentially, not linearly. Although successfully running a credit/mining business together is not impossible, it is certainly not for inexperienced or risk-taking founders.
In short, after a decade of institutionalized mining growth, there is a good reason why most mining companies are just mining companies – not hybrid businesses with other core offerings outside of mining. Of course, some miners play the role of lenders in limited cases, as mentioned earlier. But its core business is mining. Doing anything else is often too much to manage.
Don’t Rinse And Repeat
2022 is a brutal year for all “crypto”, but especially for miners and lenders. Both high-end companies that merged the two businesses ended up bankrupt. Unfortunately, the “crypto” industry has a memory like a goldfish and is more likely to repeat than avoid these mistakes. However, hopefully, the future includes a severe adjustment in the practices accepted for lenders and also a strong recovery of well-managed mining companies, strong mining companies. Otherwise, the pain and suffering of the 2022 bear market will be for nothing.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.