“Contagion” is the hottest word in crypto after the disastrous fallout last year. And the dominoes keep falling as investors painfully realize just how closely intertwined the entire cryptocurrency industry is. Hundreds of billions of dollars were cremated.
And bitcoin mining companies have not completely avoided this. In fact, a unique type of mining business has failed catastrophically, which could provide valuable lessons for future entrepreneurs. The combination of crypto-lending and crypto-mining was showcased at two high-profile companies: BlockFi and Celsius. Both companies are now bankrupt. What happened?
This article explores the stories, downfalls, and lessons of both organizations.
The mining interests of crypto lending companies
Even the most casual crypto observer would be familiar with the two industry-leading crypto lending companies that went bankrupt in 2022. What may be less well known is that both companies also maintained significant bitcoin mining units. BlockFi and Celsius were not only the go-to names for centralized crypto lending, but also heavily invested in bitcoin mining. And when both companies went under, so did their mining teams.
FiBlock Announced its new mining operations in May 2021 in the form of a partnership with Blockstream and its long-standing mining unit. Exactly how much hash rate BlockFi manages through Blockstream has not been disclosed, nor is the current status of BlockFi’s hash rate at Blockstream facilities fully known. But the loan company saying it viewed mining as a complement to its financial services offerings.
Celsius also invested heavily in bitcoin mining, with $500 million spent on their mining efforts as of November 2021. In a former interviewFormer Celsius CEO Alex Mashinsky said the company operated 22,000 mining machines, most of which were Antminer S19 models. Like BlockFi, Mashinsky described his company’s mining efforts as a strategic complement to his lending business.
To be clear, BlockFi and Celsius weren’t the only companies operating at the intersection of mining and lending. Mining companies lending their coins to other institutional market participants (for example, trading companies) are not uncommon. And it is not unreasonable to assume that other smaller lending firms also had exposure to the mining industry. But BlockFi and Celsius were unparalleled in the combined scale of their lending and mining operations. Both companies also went bankrupt as a direct result of the fallout from FTX’s shocking collapse.
A tale of two bankruptcies
Both companies, Celsius and BlockFi, have now filed for bankruptcy.
In June 2022, Celsius announced that it would pause all withdrawals. The following month, the company archived for Chapter 11 bankruptcy. Machinsky abruptly resign in the middle of bankruptcy proceedings, but not before reportedly withdrawal of $10 million.
The bankruptcy of Celsius Mining came a few months after it Announced his plans to go public. But the company planned to continue mining during its bankruptcy proceedings and vigorously defended these plans. Celsius saying its mining operations were key to the company’s restructuring efforts. But mining is not cheap. In the first two weeks of mining to bankruptcy, Celsius Mining burned through $40 million, according to to The Wall Street Journal report. At the time, Celsius Mining told the court that it expected mining operations to be profitable by January 2023.
Shortly after Thanksgiving, BlockFi also archived for bankruptcy. Its bitcoin mining operations have not played as prominent a role in the proceedings as Celsius has. No reports were found for this article that Blockstream’s agreement with BlockFi has been terminated or discontinued.
But BlockFi-hosted mining operations weren’t his only mining-related concerns. In addition to hashing for itself, the company has also originated loans to other mining entities. BlockFi Corporate Account managed this matter on Twitter a month before declaring bankruptcy. Some reports indicate that BlockFi could have suffered up to $80 million in losses from its exposure to Core Scientific, for example.
Why mine and lend?
Why a lending company wants to mine bitcoins is a question worth answering. Precise answers to this vary, but here’s a simple explanation of one possible motivation: By essentially acting as “crypto savings banks” and lending bitcoin (and other cryptocurrencies) to various retail and institutional counterparties — institutions like BlockFi, for example — they had minimal exposure at best to the bitcoin parabolic top. His borrowing clients, on the other hand, were fully exposed to market volatility. In theory, bringing a mining operation online could give lenders greater exposure to material risk with greater potential gains.
But one would think that the lending business, especially given the way some of the crypto financial institutions manage their books, carries enough counterparty risk and operational complexity. The mining business is notoriously cutthroat and complicated, putting new entrants at huge disadvantages even in the best market conditions. Running a mining unit in addition to a primary lending facility is more than twice as difficult compared to running just one business or the other, as the complexity of the business increases exponentially, not linearly. While it’s not impossible to successfully run a joint lending/mining business, it certainly isn’t for an inexperienced or risk-averse founder.
In short, after a decade of institutionalized mining growth, there are good reasons why most mining companies are just mining companies, not hybrid companies with other core offerings outside of mining. Sure, some miners play the role of lender in limited cases, as mentioned above. But its main activity is mining. Doing anything else is often too much to handle.
Do not rinse and repeat
2022 was a brutal year for all “cryptocurrencies”, but especially for miners and lenders. Both high-profile companies that combined the two businesses ended in bankruptcy. Unfortunately, the “crypto” industry has a memory similar to that of a goldfish and is more likely to repeat these mistakes rather than avoid them. But hopefully the future includes severe adjustments in accepted practices for lenders and also a strong recovery from well-run, bear-market-hardened mining companies. If not, the pain and suffering of the 2022 bear market was 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.
