Bitcoin Mining's first major bankruptcy creates uncertainty for major partners, and opportunity for others

Bitcoin Mining’s first major bankruptcy creates uncertainty for major partners, and opportunity for others

what happened

Compute North, the second largest bitcoin mining hosting provider in the United States, has applied for Chapter 11 Bankruptcy last week. The company quickly followed this filing with another court order requesting a 363 sell bankruptcy To liquidate assets to cover nearly $140 million in accumulated debt.

Bankruptcy is perhaps the biggest bitcoin mining news to emerge in the 2022 bear market. Compute North provides hosting services of $700 million worth of equipment to about 84 mining entities, including publicly traded companies such as Marathon Digital Holdings. Now, with the hosting provider looking to auction off its assets, these customers could face a situation where their service agreements are being rewritten under new management. Some miners may be forced out of their host sites, while others may risk default if their prices rise.

Wider context: brutal economy crushing the north’s margins account

Mining Bitcoin on a large scale is expensive. By now, most people know that it requires a lot of power and expensive machinery, but miners also need expensive electrical equipment (transformers, panels, power lines, things like that) to match the size of their fleet, and they also need containers or Storage space to store it.

Given the scale and cost, miners often rely on hosting providers like Compute North to eliminate the cost and effort of building a Bitcoin mining farm themselves. The miners power the machines, and the host supplies them with power. Under these agreements, both parties sign a contract that maintains a hosting rate for a specified period of time. These contracts can vary, but usually include a set price for power, which may include a profit or revenue sharing agreement.

As the chart above shows, Compute North has more than 20 subsidiaries engaged in various aspects of this business. Most of these (the companies under the “operating corporate silo”) are wholly owned by Compute North, while others are joint ventures with NextEra Energy and Marathon Digital Holdings. In addition, CN Borrower LLC is now owned by Compute North’s principal lender, Generate Capital (more on this later).

North account contracts typically last 3 to 5 years and maintain a constant power rate for miners. The problem is that Compute North has not locked down its power rate with power providers through a long-term power purchase agreement (PPA). Meanwhile, in Texas, a state that hosts a significant portion of Compute North customers and where Compute North is aggressively expanding, average industrial power rates rose 64% from July 2021 to July 2022, from $5.20/kWh. to 8.21 US dollars / kWh.

According to a Chapter 11 filing, Compute North said it’s “typical [hosting service agreement] Don’t explicitly allow it to pass on increased energy costs to customers”, so the host company has to eat the increased energy rates without offsetting costs from customers.

Compute North’s revenue was being eroded by the Bitcoin bear market. Bitcoin retail price – A measure of how much revenue miners can earn in a working day – down 68% year-to-date.

So when Compute North’s initial operating cost (energy) rose, its margins, already shrinking due to market conditions, were effectively crushed.

Trouble sensing, calculate the technical default of the main lender in the north

While Compute North doesn’t mention this in its filing, it’s possible that the company’s precarious revenue situation has pushed its primary lender, Generate Capital, into a technical default.

Generate Capital opened a $300 million line of credit to Compute North in February, of which Compute North received $101 million. In Per Compute North’s bankruptcy filing, Generate Capital confirmed that Compute North was technically in default, shutting out Compute North’s access to credit and giving Generate Capital the right to control two Compute North facilities (one in Kearney, Nebraska and the other in Granbury, Texas, plus a $23.6 million bank account.

Prospects and implications: Nordic facilities account is in operation at the moment, but will be sold soon

With its primary line of credit closed and its margins evaporating, Compute North has filed for Chapter 11 bankruptcy. Commonly referred to as reorganization bankruptcy, Chapter 11 allows the company to continue operations while it develops a plan to satisfy creditors.

In terms of creditors, Compute North owes $99,809,696 to NextEra Energy, an energy company with which Compute North has entered into a joint venture for one of its Texas facilities; $21,013,027 for Marathon Digital Holdings from Bitcoin Public Mining; $7,466,005 Foundry, a subsidiary of Digital Currency Group; and $1,8374,138 for about 30 other entities.

To pay off this debt, Compute North filed with the US Bankruptcy Court in the Southern District of Texas to publicly auction its assets in a 363 bankruptcy sale. If the sale is approved, Compute North can sell up to $1,000,000 in assets out of auction in a minimum sale.

However, the lion’s share of the sale will occur in an auction that will begin on November 1, 2022. This auction will include anything and everything that Compute North controls, including bitcoin mining containers, bitcoin mining machines, and their data centers, the last of which will be the coveted asset.

Decision Points: What happens to customers if Compute North’s business is split?

The asset auction is sure to attract bidders from every corner of the bitcoin mining industry, including financial institutions and energy companies active in the sector. These representatives will now have the opportunity to grab assets for pennies on the dollar.

No one is now guessing where the chips are in terms of buying, but depending on who you end up with which data center, it could mean a headache or hell for customers working on those sites. Given the fact that the existing hosting service agreements are not profitable, the new management will undoubtedly want to rewrite these agreements. Some miners may be excluded from their agreements, while others may choose to leave.

Digital Marathon, for example, already has got a deal With Compute North the competition applied to Blockchain for another energy and warehouse space to house the current and future mining machine fleet of the public miner. In terms of bankruptcy, Marathon Digital stock was down 10% on the day the news broke, but the stock price has rebounded significantly from this past week. It’s also worth noting that Marathon’s computing power, through its own Marapool mining pool, did not decrease Last month under bankruptcy.

In addition to implementing Blockchain, bitcoin miners who could be quarantined through restructuring may look to Core Scientific, the largest bitcoin mining host in the United States, for a new home. Although Core Scientific lost $4.7 million from hosting services in the second quarter of 2022, According to his 10-Q filing.

Without an inside look at Core Scientific’s operations, it’s impossible to determine whether this loss was due to high power rates and a lack of PPAs or whether it was caused by data center downtime during summer heat waves (Core Scientific has significant operations in Texas). However, industry sources say Core Scientific has the ability to pass on increased energy costs to its customers in the event of higher energy prices.

This situation is a prominent reminder that public and private miners who own their own data centers and powerhouses, while expensive, have one less thing to worry about in times of market uncertainty. Riot, Argo, Hut 8, Bitfarms, and Cleanspark, among others, don’t have to worry about counterparty risks to hosting providers.

For those using hosting providers, with lower mining margins and higher energy costs, uncertainty looms regarding hosting alternatives. It hasn’t been uncommon for Bitcoin miners over the past few years to abandon long-term PPAs because energy costs have been trending downward, and hosting rates have been rising on average for the industry.

As such, Compute North customers may be stuck between choosing the best of two bad positions either by holding on to uncertainty in the midst of a Compute North restructuring or seeking new uncertainty with another hosting provider.

It’s too early to tell if the situation will develop into a credit contagion, but the impact of the bankruptcy on other miners will become more pronounced with the sale of Compute North data centers to the new management.

Investors in these companies would be well suited to understand the strength of portfolio companies to determine if reallocation or additional diversification is necessary.

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