Crypto miners have been hit hard by the downturn in the digital asset industry

Crypto mining companies are coming under intense pressure from this year's downturn in digital assets, as high energy costs and plunging coin prices push more names to the financial cliff.

Nasdaq-listed Core Scientific warned last week that it could seek bankruptcy protection because it would run out of cash by the end of the year. On Monday, London-listed Argo Blockchain reiterated that bleak outlook, saying it could be forced to suspend operations after a key fundraising collapse.

The warnings came just weeks after US company Computer North, which ran data center services for miners, filed for bankruptcy, owing up to $500 million in debt and blaming difficult market conditions.

Their dire financial situation shows how crypto mining - the process by which coins are generated and transactions are verified - will be next to feel the impact of the crash in the price of popular cryptocurrencies such as Bitcoin over the past 12 months.

The downturn has already affected a number of once-prominent crypto firms such as lending platform Celsius Network and hedge fund Three Arrows Capital.

"The crypto winter is having a negative impact on the entire ecosystem, including miners. It's a chain reaction as this long cold crypto winter continues," said Dan Ives, managing director of Wedbush Securities.

Industry analysts and executives have questioned the sustainability of mining, especially after prices of the leading tokens have been range-bound since June. Bitcoin has rarely risen above $21,000 after reaching a high of nearly $70,000 late last year.

Miners play a crucial role in operating so-called “proof of work” tokens like Bitcoin. They verify new blocks on blockchains, effectively taking on the role of guarantor that trades are trustworthy in a system that bypasses third parties such as banks and exchanges. In return for mining, they are rewarded with new tokens. Ether, the world's second largest crypto token, recently moved away from the type of system that requires miners.

Many miners have been attracted by the ever-increasing prices of coins. As Bitcoin prices crashed in 2021, companies poured money into purchasing mining equipment, including fast computers that use large amounts of electricity. Hut 8, a mining company, added 9,592 machines for mining in the first quarter of 2022, increasing its capacity by almost a third.

The additional mining capacity has arrived on the market just as the price has fallen, meaning miners are fighting harder to win the token. Bitcoin's total hashrate, the computing power dedicated to mining, has risen 57 percent over the last year to a record 260 exahash - or quintillion - operations per second, according to the Hashrate Index.

The high energy costs have also affected many and dashed the ambitions of the miners. Miners compete against each other to solve complex mathematical puzzles and earn Bitcoin. They consume large amounts of energy whether they claim Bitcoin before their competitors or not. Argo admitted that energy costs for its Texas facility were nearly three times higher than the average price for August.

There is also the risk of power outages in the USA. In July, Argo, Core Scientific and Riot Blockchain scaled back their operations in Texas as demand for energy threatened to overwhelm the power grid.

"The bottom line is that even though electricity costs are high and the bitcoin price is fairly stable, competition has increased recently. . . I think they are still profitable, but profit margins are shrinking," said Chris Brendler, senior research analyst at DA Davidson, an investment bank. He remains positive on some miners, including Stronghold Digital Mining, which has lost more than 95 percent of its value in the past year.

Conditions may not improve in the short term. Since September's Ethereum "merge" effectively made Ethereum mining obsolete by switching to a different transaction verification system, companies like Hive and Hut 8 said they planned to fill their capacity with Bitcoin mining.

Additionally, rewards for mining Bitcoin are expected to halve in less than two years, in a quadrennial event preset in Bitcoin's code.

“The only way for miners to increase their Bitcoin production through the upcoming halving is to increase capacity much faster than their competitors,” said Jaran Mellerud, an independent crypto mining analyst.