Lets talk about debt. Debt can be a wonderful, beneficial tool to help your business grow. It can also be your worst nightmare if you miscalculate and take on too much. Almost every big Bitcoin mining company that has gone or is currently in the process of going bankrupt did so because they miscalculated and took on too much debt. Bitcoin mining is a high capital intensive business.
Even with ASICs costing record lows of around $2,000 per new S19, excluding the XPs, a 1 megawatt operation would cost north of $600,000 USD just for the ASICs alone. Add in the containers, transformers, any electrical upgrades to the existing infrastructure (which we had to do for our facility). And you are staring a dizzying $1,000,000+ start up cost right in the face.
Every new megawatt added has a lot of the same costs as well. Growth is expensive and there are two ways to finance the expensive growth. Either fund the growth from existing cash flows or raise debt with the promise to pay it back later.
The first option is safe but slow. The second option is much faster but also adds more risk. From what we have all seen most of the big players have opted for the second option and took out massive loans in order to buy tens of thousands of ASICs.
This, as it turns out, has been a massive mistake made by a lot of pubic miners who have been forced to file bankruptcy or default on their loans. In my opinion, debt is something that can and should be used in Bitcoin mining. The problem is that everyone used debt to purchase more ASICs. Why is this a problem?
The answer is because you are using debt with a fixed payback period to buy an asset that does not have anywhere close to stable income.
With the volatility of hashprice, which miners cannot control, it makes very little sense to take on huge amounts of debt to buy an asset that cannot lock in future revenues. This is the underlying problem with using debt grow a Bitcoin mining businesses.
I believe that debt can be used effectively to grow a Bitcoin mining business. Just not to buy ASICs. But it can be used to lock in energy prices.
Think about it. If no Bitcoin miner on earth can have any control over their revenue (hashprice) then the only thing we do have control over is our input costs i.e. energy. If you are going to use debt, using it to lower or lock in your energy prices is the best play.
Energy is one of the few things that Bitcoin miners can control. Whether that is PPAs (Power Purchase Agreements), ESAs (Electrical Service Agreements) or even building your own power generation via wind, solor, hydro, flared gas, etc. These are the types of debt that make the most sense for Bitcoin miners.
Think about it from a basic business perspective. We have no control over our revenue. If you are buying power without a PPA or ESA you have no control over your operating costs. And you add debt on top to grow a business with no control over revenue or input costs. This is a recipe for disaster as we have all seen time and time again.
Bitcoin mining is a commodity business. Fortunately the Wilson Mining brothers are 4th generation corn & soybean farmers so we understand VERY well how commodity businesses work. There are boom and bust cycles and those that overleveraged during the boom almost always go to zero when the bust cycle happens.
While Bitcoin is considered a tech style of investment and business, it does not function like a technology style of market where the name of the game is growth at all costs.
Do not forget this is a commodity market NOT a technology market. Survival at all costs is what is rewarded in commodity business. NOT growth at all costs.
Would love to hear what others think about this topic.