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TBW #41: The secret of Web3? Innovation!

TBW #41: The secret of Web3? Innovation!

Read all about The Big Whale's 41st Premium newsletter.

Hello Whales and happy new year! 🍾

Welcome to the little newcomers who have just joined us in the Premium edition. There are already over 1,500 of you reading us every week! Thank you so much 😍

To devour this week

🖊️ Editorial

🔥 Our exclusive news

⚡ ️ The challenges facing miners

⛏ Mining: at what cost?

THE BIG SPLASH

Innovating and innovating again 💡

10 days. It only took 10 days in 2023 for an industry giant to announce yet another redundancy plan. This time, it was Coinbase 🇺🇸 , the exchange platform, which is to shed 950 employees, i.e. 20% of its workforce, but it could very well have been another player.

Because Coinbase will obviously not be the only one experiencing difficulties. The arrival of the new year has done nothing to dispel the clouds hanging over the sector: markets are down, investment is down... In Web3, as elsewhere, there is no magic slate (unfortunately)!

Is this a problem? Not necessarily. While growth is obviously easier when money is flowing like it has been since 2020, it can also be a form of poisoned gift with the risk of spreading ourselves too thin and resting on our laurels.

In an which we published last week, the CEO of crypto-asset manager CoinShares, Jean-Marie Mognetti, explained that 2023 will be a pivotal year for the sector and that the premium will be on companies that manage to innovate the most while spending the least. We couldn't have said it better ourselves! 👌

THE BIG NEWS

Our EXCLUSIVE NEWS 🔥

👉 CryptoSimple raises €1 million

While market sentiment isn't great, some companies like CryptoSimple are still managing to convince investors 🤑. According to our information, the Marseille-based start-up has completed an initial Seed round of €1 million with three investment funds. One of these funds is the American SIG. There are no European funds in the deal.

CryptoSimple is a crypto investment platform (with guided management) launching in 2022 with two types of product. The first is aimed at retail investors - the company claims more than 1,000 customers - and the other at professionals, particularly wealth managers.

With this injection of fresh money, the company wants to develop its two products and also position itself internationally. According to our information, it is targeting the UK, where the government wants to turn London into a crypto-hub, as its first destination!

THE BIG STORY

Inquiry: the challenges facing miners

Shrinking prices, rising energy costs, and now over-indebtedness... The bitcoin mining industry has probably never been under so much pressure.

A veritable epidemic.

For the past few months, bitcoin miners have been experiencing difficulties one after the other. At the end of December, one of the biggest players in the sector, the American Core Scientific, filed for bankruptcy in the United States under the now infamous "Chapter 11" regime ⚖️

Brief reminder: miners are those who secure a cryptocurrency's blockchain with the computing power of their machines. Since Ethereum's move to proof-of-stake in 2022, Bitcoin has been the only "big" cryptocurrency on the market to operate with proof-of-work and therefore mining.

Chapter 11 does not mean that Core Scientific, whose machines account for around 5% of Bitcoin's hashrate (the computing power needed to secure the protocol), will file for bankruptcy, but that the company will restructure to get back on its feet. The fact remains that the difficulties of one of the heavyweights in mining show just how much pressure the industry is under. At least in part.

The reasons for these difficulties are well known: with falling prices and rising energy costs, many players are hanging on by their fingernails. Above all, and this is something new, some of them are also faced with... massive over-indebtedness.

In the wake of the rise in prices in 2020 and lured by soaring prices, many companies have taken on huge debts to buy machines and therefore mining capacity. Some borrowed at rates of up to 25% a year (because mining is a risky business). "Pure madness", stresses one banker.

The phenomenon is biggest in the United States, by far.

In Europe, there are virtually no miners because of regulations and electricity prices that are too high, which is a problem in terms of sovereignty for our ecosystem.

According to specialist firm Hashrate Index, US miners are in debt to the tune of $4 billion. Core Scientific alone accounts for more than 25% of this debt ($1.3 billion) 😬

"The new generation of American miners has made massive use of credit, whereas our sector historically had no access to it," confirms Sébastien Gouspillou, founder of BigBlock Datacenter, a French miner with a particularly strong presence in Africa.

"Those who abused it now find themselves caught out by the markets and have to answer to their creditors", he continues, adding, rather critically: "All miners know very well that the markets don't just go up, it's cyclical, they should have anticipated it."

Investors have, in any case, not been mistaken. In 2022, Core Scientific's share price collapsed by 98% with a capitalisation that fell from almost $500 million to... $30 million 😳. Complicated to manage with a debt of over a billion dollars!

Marathon is also in deep trouble, even if the company is not "game over". While its share price has been falling steadily (-90% in 2022), the group has managed to honour its debts by massively selling off some of its bitcoins. It's not certain that this strategy will still work in 2023 if the largest cryptocurrency remains permanently below $20,000.

Not all the major US players are affected, however. Riot Platforms has hardly borrowed any money, as a result, it is floating in the ecosystem. "Riot has not resorted to debt, or else only on the margins, and that's what makes the difference today," stresses Sébastien Gouspillou.

👉 The big sell-off in mining machines

Meanwhile, one man's misfortune makes another man's happiness, and with the collapse of some miners, many machines are finding themselves available on the market. Some machines (also known as 'asics') are owned by groups that are downsizing, and others are being sold by companies that are disappearing.

But not everyone is happy about it. "The problem is that when machines had a face value of 100 just a few months ago, they are often worth much less, up to 10 times less, because of market conditions," explains Romain Nouzareth, founder of Sato, a mining company based in Quebec.

👉 Healthy miners ready to rake in the cash... with Wall Street

It's not all doom and gloom for miners either. While the situation is catastrophic for some, others see the period as a real opportunity and potential acquisitions "For us, it's very interesting, we're looking at all the deals," says Romain Nouzareth. "There are a huge number of opportunities at the moment, the machines are very affordable and it's perfect for continuing to grow", he explains.

Several "bargains" such as Celsius are making the sector salivate. The crypto lending platform, which got caught up in the Terra-Luna collapse in the spring of 2022, will soon be putting 32,000 miners up for sale at a bargain price. And it's not just miners who are interested in this opportunity. For some months now, crypto investment companies close to Wall Street have been looking at these deals.

Galaxy Digital is one of these players. The American group recently bought a Texas mining site from Argo Blockchain for $65 million.

Another American, NYDIG, which is one of the biggest investors in bitcoin, is also shopping around. The group is currently completing the purchase of the machines of Greenidge, an over-indebted North American miner. With this acquisition, NYDIG would recover around 1% of the Bitcoin hashrate for $74 million.

More interestingly, the world's largest asset manager, BlackRock, is also in the starting blocks. The giant has positioned itself on Core Scientific 😏.

Larry Fink's group, which no longer hides its interest in cryptos, has just lent €17 million to the company under bankruptcy alongside other investors. If Core Scientific does not pull through, BlackRock could recover some of the company's assets, in particular its mining machines...

"For financiers, the mining sector represents a very good opportunity," explains Romain Nouzareth. "As it's a very risky business, they grant credit at very high rates and, in the event of default, they can recover equipment at little cost that they can resell at a very high price when prices recover," he explains.

What you need to understand, however, is that mining is not going to stop despite the bankruptcies of many companies. The assets have just changed hands. The situation can also be seen in the hashrate: it is peaking at historic levels despite the fall in prices.

"The real risk," breathes Sébastien Gouspillou, "is that we are seeing a concentration of the sector in the hands of a small number of financially dominant players.

👉 What is the long-term future for miners?

So far, the strategy that has paid off has been for companies to do two things:

  • Limit their debt levels (what a surprise!), even though debt can also be used to invest and grow.
  • Prioritise access to cheap electricity over the long term.

"We are very well placed for the future," explains Romain Nouzareth. "We are connected without intermediaries to the Quebec power grid, and our electricity rates are very affordable and fixed, which is not the case for many other miners," he continues.

In the United States, many miners have in fact seen their bills explode with the rise in energy prices, which has helped to weaken their model. This is the case for Argo Blockchain, whose price per kilowatt-hour has risen from 2 to 1 US cents over the course of 2022. This has increased the mining price for one bitcoin from $4,000 to $12,600 (not including its debts), according to analysts at Hashrate Index.

Quebec-based Sato's strategy is currently designed to break even with a bitcoin price of between $9,000 and $12,000. "The only annoyance is that we are currently making less profit than a few months ago, but that's part of the cycle," insists Romain Nouzareth.

The company assures that it is robust enough to handle an even sharper market downturn. "We are confident that bitcoin will continue to rise over the long term," he adds. For some, it would take more than that in the "short term".

THE BIG FOCUS

Sébastien Gouspillou: "We can more than hold our own with bitcoin at $6,000 or $7,000"

The French boss of BigBlock Datacenter, which has a strong presence in Africa, has been working with renewable energy for years. It's a gamble that's paying off at a time when other players are in serious difficulty.

The Big Whale: How do you explain the fact that companies as big as Core Scientific are on the brink of bankruptcy?

Sébastien Gouspillou: There are essentially two reasons for this. The first is that they took on too much debt when the markets were rising. The second is that they obviously didn't anticipate such an increase in energy prices ⚡ ️

One of my customers, who has part of his business in the United States, recently explained to me that his rates had more than doubled in one year (from 3.5 to 7.8 centimes per kilowatt-hour). For him, it's no longer worthwhile mining. Then you have to look at it state by state. The country is huge and several states mine under different conditions.

Is US mining doomed in the medium term?

Not necessarily. There are still power stations, especially gas-fired, that are far from full capacity and there is also a lot of gas available, particularly in Canada. Given the price of gas, mining using this - carbon-based - energy is not going to disappear there any time soon.

Could Bitcoin's hashrate, which measures the computing power that protects the network, fall?

On paper yes, of course, but at the same time, it's interesting to note that it's still not falling while the price of bitcoin has fallen sharply.

This situation shows that miners are hanging on despite the particularly complicated market conditions. It's all to do with the price of electricity: as long as you can pay your bill, there's no point in stopping mining. For those who were already there a few years ago, the market looks a bit like the one we observed in 2018.

The miners who are doing best are those who have negotiated a fixed electricity tariff. Is this the key?

These contracts are signed over several years, at least three to five years. This is clearly the best strategy because simply plugging into the grid exposes you to price volatility.

Recently, however, we've seen that fixed prices can change if demand for local electricity soars. In such cases, prices that are supposed to be "fixed" can move upwards, which will upset your business and force you to go mining elsewhere. And believe me, you don't want to. It's a hell of a logistical process to move machines!

What's your view on the evolution of energy prices? Miners are perhaps the best experts on this subject...

I think prices will continue to rise, or at least remain at current levels. Everything is increasing: demand for energy, energy companies' revenues, etc. Structurally, I don't see how prices can continue to rise. Structurally, I don't see how things could develop any other way. That's why our strategy for the last three years has been to go and find 'lost electricity', where there is no competition to consume it.

There are surpluses everywhere, we just have to go and find them. Eventually, I think there will be a lot of competition between bitcoin miners around renewable energy sources.

To what extent might rising energy prices favour miners who use renewable energy?

We mainly work with hydroelectric and geothermal-based energy. Our biggest installation is in the Virunga National Park in the Congo.

There, local demand does not absorb all the production and we use the surplus to mine. There's room for improvement. With this energy, we can more than hold our own with a bitcoin at $6,000 or $7,000.

This edition was prepared with ❤️ by Raphaël Bloch and Grégory Raymond. The Big Whale is a free and independent media. By supporting us, you are contributing to its development.
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