The aftermath pt.1
Friday December 2, 2022 - Issue # 31
Are you feelin’ the Christmas spirit yet? Good riddance November — for the industry it was, as SBF pointed out during a live interview at the New York Times DealBook Summit “a bad month” indeed.
However, and pardon me if I’m coming off as boastful, but I do think it’s important to note — it was a very strong month for Satstreet trade volume. We processed close to $80M in transactions — one of our largest months this year. Most of the volume being on the sell side, primarily stablecoins to fiat, in a flight to safety, with a healthy mix of opportunistic buys.
I’d like to think of December as a new month, a fresh start, a clean slate for the crypto industry to find its legs and march toward a recovery. I’m just not so sure that is the case. I think it’s pretty likely that we haven’t seen all the knock-on effects from the FTX/Alameda collapse. Sure, we’ve heard from BlockFi (bankrupt), Genesis (seeking emergency financing), and Gemini Earn (customer accounts frozen - Genesis lending partner), but these are just the household names. There are likely other lenders that are currently trying to work themselves out of a tough spot — case in point — Bitcoin mining financiers.
It has been an extremely tough year for miners, to say the least. In 2020 and 2021, capital came relatively easy and cheap to the bitcoin mining industry. Miners were viewed in the public markets as a more digestible proxy for bitcoin exposure and they were rewarded for their efforts to build the largest BTC treasury possible. Not only did miners refrain from selling their mined BTC (it wasn’t in their interests and frankly, they didn’t need to as they were able to raise cash easily), but some of the largest miners were net buyers of BTC as they competed to grow the largest treasury. It was a growth at all costs environment. At the same time, there were not enough ASICs (computer chips used to mine BTC) to go around (problem exacerbated by supply-side constraints stemming from Covid — these chips are manufactured in Asia) which created a huge bidding environment for future orders, further driving up the prices.
The above picture is of a popular model of miner (commonly referred to as a rig) which enclosed sits the chip. These machines are ~30 lbs and miners were ordering thousands or tens of thousands at a time. Here’s an example of what they look like racked up in a facility:
As the price of bitcoin increased, so did these machines. Lenders like NYDIG, Foundry, BlockFi, and Galaxy (to name a few), started to view these machines as qualified collateral and lent out as much as $4bn from mining-equipment financing. This is all just another example of exuberance fuelled by loose monetary policy and frankly, subpar risk management practices. Money was flying last year.
Like everything else, this all came to a head when the Fed did a 180 this year and tightened up, fast. As the price of Bitcoin fell, publicly traded miners started to fall out of favour and it became increasingly harder and more expensive to raise cash. If that wasn’t enough, energy prices skyrocketed and slammed the profit margins for most miners. All the while, miners had their nose to the grindstone working to carry out their grand expansion plans — a potential critical distraction for some.
The cycle continued to spiral as bitcoin, and subsequently, mining equipment continued to fall in price. The once valuable machines are now off ~85% and miners are starting to default on their loans and are sending hundreds of thousands of these machines back to lenders who, in the most part, did these deals where only the machines were collateral. There are likely to be many more defaults by private miners which make up the majority of market share and whose financial positions aren’t clear. The market is now grossly saturated with equipment and lenders are in a very tough position where they have to evaluate selling these machines at a steep discount, or find locations to mine BTC themselves.
What does this mean for the price of Bitcoin? Well, miners have had their fingers on the sell button since the beginning of the year. It is likely that miners have sold off the brunt of their treasury and are continuing to sell their mined coins on a regular basis, so I’m personally not too concerned about further capitulations stemming from miner sell pressure.
For the miners out there that are able to survive this harsh environment, there should be great opportunities to increase revenues from falling hash rate and to pick up equipment at heavily discounted prices. To those that have access to cheap power and have been waiting to enter into the mining space, you couldn’t ask for a better opportunity.
On a separate note, Fed Chair Powell spoke Wednesday. It was essentially a Xerox of his previous speeches, however, the markets seemingly only heard this line: "The time for moderating the pace of rate increases may come as soon as the December meeting” — which sent markets flying and the dollar down.
This piece is already too long so I’ll just give some quick thoughts. The market is very wound up and will grasp onto anything that sounds more like a dove than a hawk which in turn will be good for risk assets in the short term. The Fed is committed to bringing inflation down to their 2% target at all costs meaning, if they’re true to their word, although the hikes might be smaller in size, they’re not stopping until the job is done. Cracks are starting to show, we’re seeing mass layoffs, especially in tech, and it’s finally showing up in the jobs reports which should put more downward pressure on inflation. I think it will be interesting to see what happens when we get down to the 3-4% range…what would we have given up (in terms of the economy) to get there? Will it be worth more pain to shave off another 100-200 basis points? Or, will the Fed change its inflation target and pivot from there? Time will tell.