(Bloomberg) -- Bitcoin mining companies are increasingly opting to sell equity, resorting to one of their least attractive options to raise money as profits dry up and higher interest rates makes borrowing more expensive.

Core Scientific Inc., one of the largest US publicly traded Bitcoin miners, entered into a $100 million common stock purchase agreement with B. Riley Principal Capital II in July. Australian miner Iris Energy Ltd. said in September that it agreed to sell up to $100 million in equity to the same investment bank. London-based Argo Blockchain PLC, earlier this month, decided to issue stock at a discount to an unnamed investor for $27 million. 

Bitcoin miners have been pummeled by low Bitcoin prices, soaring energy costs and steep competition in the industry. These firms had rushed to the equity market to raise money during crypto’s bull run, when investors expected Bitcoin prices to surge and publicly traded miners were seen as an efficient way to invest in the sector. 

Now, mining companies that are attempting to issue new shares to weather the ongoing digital-asset slump risk upsetting their shareholders, whose stakes end up diluted. Several large miners have already seen their stock prices decline this year, with Core Scientific, and the US-traded shares of Iris Energy and Argo Blockchain plunging by at least 78% year-to-date. The $2.35 million Valkyrie Bitcoin Miners ETF (ticker WGMI), which tracks several major public miners, is down 73% since its inception in February. 

“While painful for investors through additional dilution, raising equity capital is one of the only ways to shore up a miner’s balance sheet to meet their financial obligations,” said Ethan Vera, chief operations officer at crypto-mining services firm Luxor Technologies. “The other option is to fire sale assets, which can be equally or more detrimental to shareholders.”

Other less favorable alternatives to raising equity include selling Bitcoin at lower prices or facing bankruptcy, says Daniel Frumkin, head of research and content at crypto-mining services firm Braiins. Core Scientific, for example, sold about 85% of its Bitcoin reserves since the end of March, its September update indicates. The firm had $29.5 million in cash at the end of September, down 77% from $128.5 million at the end of the second quarter. The second-quarter figure does not include $11.9 million in restricted cash.

A recent surge in mining difficulty, a measure of Bitcoin miners’ computing power, delivers another blow to companies looking to ride out the current slump. A higher level of computing power will lead to lower mining revenue for already-bruised Bitcoin miners. And the more mining power there is, the less each Bitcoin miner receives.

Lender Stress

A handful of Bitcoin miners have been ramping up sales of their rigs to help them ride out the storm or at least trim their debt. But firms that took massive loans backed by the value of their mining machines are feeling the squeeze as prices of some of these popular rigs have plunged more than 80% since last November, when Bitcoin hit a record high of $69,000, Luxor’s Vera said. 

This also poses a major risk to their financiers, who are already under pressure with Bitcoin lingering around $20,000 since June. Lenders, including Celsius Network Ltd. and Asia-based Babel Finance, are grappling with liquidity issues exacerbated by the crypto-market crash earlier this year. Another major crypto lender Genesis, who also lends money to Bitcoin miners, has said it’s eliminating 20% of its 260-person workforce, and its parent company had filed a $1.2 billion claim against bankrupt crypto hedge fund Three Arrows Capital.

“I don’t see lenders scaling back completely, but there is a definite focus of many lenders on ‘distressed’ miners that may be willing to accept unfavorable terms in order to avoid bankruptcy,” Frumkin said. 

Several miners are still turning to equity financing because some lenders have raised interest rates, said Matthew Kimmell, digital-asset analyst at crypto-research firm CoinShares.

To be sure, not all miners raising money from the equity market are flailing. Riot Blockchain Inc., which is another large US publicly traded Bitcoin miner, is attempting to get approval from its shareholders to issue new shares, in part to scale up operations. It withdrew a similar appeal this summer. The firm gained more than 700 coins between March and September, and it had $270.5 million in cash on hand by the end of the second quarter. Still, its shares are down nearly 74% year-to-date. 

“To expand during the bear market, Bitcoin miners must raise capital,” Jaran Mellerud, crypto-mining analyst at Hashrate Index, said. “Without raising equity now, these companies will be unable to fulfill their expansion plans, and some of the most indebted ones might even go bankrupt.”

©2022 Bloomberg L.P.