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Cryptocurrency lenders become miners

Due to the large number of Bitcoin mining machines that cryptocurrency lenders have seized, they are now forced to plug them in and take the tokens themselves.

In order to deal with the mining equipment they took as collateral for the $4 billion in rig-backed loans they underwrote when the Bitcoin price surge seemed inevitable, lenders are getting inventive. According to statistics from Luxor Technologies, the value of new generation machines has decreased by 85% as a result of the recent rise in loan defaults and decline in cryptocurrency prices.

Lenders like New York Digital Investment Group (NYDIG) are using debt talks to find different solutions while some equipment are just waiting in warehouses for prices to rise again. In exchange for a reduction in debt, NYDIG agreed in December to pay Greenidge Generator Holdings for both the mining rigs' ownership and operation. The agreement basically turned Greenidge, formerly among the biggest Bitcoin miners, into a hosting company and NYDIG into the miner.

According to Wolfie Zhao, head of research at TheMinerMag, a research division of mining consulting firm BlocksBridge, "lenders are saturated with mining equipment." Maintaining the collateralized machines and generating some revenue is one strategy for the lenders to stop further losses from the defaulted loans.

In particular, lenders like Galaxy Digital LP and Digital Currency Group's Foundry, which already have mining capabilities to build on, are considering this option more seriously.

One of the most lucrative industries in cryptocurrency was bitcoin mining, which involves using specialised computers known as "rigs" to validate transactions on the blockchain in exchange for rewards in the token. In the period leading up to Bitcoin's spectacular rally, miners tried to take advantage of that value. However, a lot of loans are now underwater due to an increase in energy prices and a 58% year-over-year decline in the value of Bitcoin. Even with this week's 30% increase on hope for a US economic rebound, the Valkyrie index of Bitcoin miners is down 75% from a year ago.

According to information gathered by TheMinerMag, between October 2020 and May 2022, NYDIG originated around $378m in rig-backed loans to miners. In order to pay off the miner's $67 million debt, it has already acquired roughly 26,200 machines from Stronghold Digital Mining. In the future, it's also likely to acquire more machines from Iris Energy, which defaulted on $103 million in machine-backed loans.

Lenders have started taking more rigs out of storage, according to Mason Jappa, CEO of Blockware Solutions, a provider of crypto mining services. Several lenders are already searching for top-notch hosting sites, he added. If they can locate trustworthy Bitcoin mining operations with affordable electricity, which is difficult to do, lenders may be able to recoup some of their losses.

Naturally, lenders could still decide to sell some of the equipment, "even at a steep discount," according to Jappa. Nonetheless, they might not be interested in selling much. Even more equipment is anticipated to enter the market when more miners, like Core Scientific, fail. Lenders would suffer even bigger losses if this led to more price declines.

February 2023, CryptoniteUae