Texas’ crypto boom is starting to look more like a bust

(Bloomberg) — The digital gold rush in Texas is losing its luster as bitcoin miners grapple with financial woes, leaving behind some fears as a wasteland of abandoned fields and abandoned equipment.

As a haven for cryptocurrency mining, Texas has aggressively lured miners to cheap power and favorable regulations, prompting many to take out billions in loans to buy expensive machinery and build infrastructure.

However, rising energy costs, a sharp drop in Bitcoin prices and more competition have squeezed profit margins and made it harder for miners to pay off debt. Some are on the verge of bankruptcy.

“There’s just tons of assets everywhere, it’s like a mess.” said Mason Jappa, Austin-based CEO of Blockware Solutions, a Texas-based crypto-mining service company. “I’ve had messages about transformers, switches, mobile data centers and containers for mining, they’re just sitting there.”

There are a lot of losers if the Bitcoin mining industry goes bust. First, local governments have offered incentives such as tax breaks amounting to tens of millions of dollars. Planned energy production, which the region desperately needs to avoid another energy crisis, may not materialize. Some developers have made huge investments to build Bitcoin mining enterprises. According to Jappa, the average cost to own one megawatt of mining infrastructure is currently about $300,000 in the state, which is at the high end of the range.

Iris Energy said it will evaluate how much and when to build beyond the initial 20 megawatts at the Childress site after closing two facilities and defaulting on $108 million in loan debt. The company planned to have 600 megawatts of power in this area. Compute North, which owns another 600-megawatt site under construction in Hood County, filed for bankruptcy in September.

Argo Blockchain originally planned to complete an 800-megawatt mining farm in Dickens County earlier this year, but the miner experienced a liquidity crisis. It warned in October that it would “restrict or suspend operations” if new funding is not secured. Core Scientific has warned of potential bankruptcy after announcing plans to build 200 megawatts of facilities near Dallas.

The companies represent the largest players in Texas’ crypto-mining industry, among dozens of crypto-mining companies planning to build facilities. They are projected to generate 7 gigawatts of demand from the Texas grid, with 3 gigawatts coming in 2023, according to announcements and filings with the US Securities and Exchange Commission.

Lancium, which has two sites in Taylor and Pecos counties with more than 1 gigawatt of capacity, will take several years to fill the facilities, a spokeswoman said. In addition to miners, the firm expects to host a variety of applications such as high-performance computing.

Riot Blockchain, Argo, Compute North and Core Scientific, Genesis Digital Assets and Bitdeer did not respond to requests for comment.

“Many of the supply chain issues that have been strong in the Covid era are no longer necessarily a bottleneck factor.” said Matthew Kimmell, digital asset analyst at CoinShares. “The only limitation is the cash they have on hand.”

Energy costs for miners have been high throughout the year due to Russia’s invasion of Ukraine and heat waves in Texas during the summer. The tightening of monetary policy by the Federal Reserve and the collapse of major crypto firms have sent Bitcoin prices down more than 60% this year.

After China banned cryptocurrency miners last year, Texas tried to fill the gap to add fuel to the state’s booming economy. But because mining depends on energy consumption, the new wave of demand threatens to stress the grid, which is struggling to recover from failures during an extreme winter storm in February 2021 that left millions in the dark for days and killed more than 200 people.

Gov. Greg Abbott has touted mining as a way to help the grid because the machines can be brought down quickly in times of stress and sped up to absorb excess wind and solar energy that would otherwise be wasted. The ability to reliably shift output from such huge demand would be a boon, but regulations requiring miners to act in certain ways in certain market conditions are still being debated. Critics worry that current practices will allow cryptocurrency miners to avoid the costs of upgrading the network to meet all their consumer demands.

Abbott’s office did not respond to requests for comment.

As of Oct. 20, Texas has about 1.5 gigawatts of cryptocurrency mining capacity, mostly Bitcoin, with about 37 gigawatts competing to connect to the state grid, according to the latest data from the Texas Electric Reliability Board. This queue has more than doubled in six months.

While the turnout earlier this year showed rising energy demand from miners, the amount may be overstated. Power brokers and mining companies could submit multiple applications for the same mining site because these applications do not require a deposit.

Ethan Vera, chief operating officer of crypto-mining services firm Luxor Technologies, said some applications may not even be available due to the possibility of those with little experience in Bitcoin mining abandoning their plans.

©2022 Bloomberg LP

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