The crypto winter is overshadowing spring. If crypto continues to falter in 2023, as it did in 2022, the ramifications will be felt in numerous adjacent industries—and bankruptcy filings will continue to rise.
Prominent bankruptcy filings of numerous crypto exchanges—FTX, Voyager Digital, BlockFi and Celsius Network—hedge funds with substantial crypto holdings—Three Arrows Capital—and crypto lenders—Silvergate Capital—signify this substantial shift in the market. Many restructuring professionals now believe this is just the tip of the iceberg. Factor in record inflation, increased cost of capital, supply chain challenges, and escalating energy costs, and cryptocurrency losses could be the nail in the coffin for many businesses on the cusp of insolvency.
Estimates are that 2022 brought just over $2 trillion in crypto losses, and the crypto marketplace has yet to feel the full effect. As more investors analyze losses, businesses will find it more challenging to borrow money and acquire the goods they need to deliver end products—and will likely turn to bankruptcy as the only option.
The crypto crash will almost certainly have a ripple effect on financially troubled businesses, even those not heavily invested in crypto assets, as crypto is a multi-trillion dollar industry in which too many people are entrenched to walk away without an epic and prolonged fight.
Even if it is, as some suggest, crypto’s death throes, it is reasonable to assume that this struggle will involve more frenzied mining for new and ‘untainted’ cryptocurrencies, creating tech supply chain constraints.
The pursuit of new and more advanced mining hardware is already straining semiconductor supply chains. For businesses reliant on the tech industry, including automotive, health care, aviation, and others, this disruption in the semiconductor supply chain further exacerbates an already difficult dynamic. The most recent sudden and spectacular collapse of US banks will further intensify the pressures on the suppliers of tech hardware needed to fill the market demand. Many in this industry will be, at a minimum, delayed in accessing their funds as the recent bank debacle goes through the recovery process via the Federal Deposit Insurance Corporation.
Mining cryptocurrency uses not only expensive hardware but also a lot of power. As the crypto industry struggles to maintain market relevance, the mining mechanism used to generate cryptocurrency wastes zillions of processor cycles in pointless brute-force computations that authenticate mere handfuls of transactions—not to mention the huge volume of carbon emissions it generates.
To add insult to injury, Bitcoin is just one of numerous cryptocurrencies continuously conducting these mining operations. The mining process consumes an astonishing amount of electricity, straining power grids to their limits in places ranging from Serbia to Kazakhstan—and, closer to home, Texas.
The economic fallout from the collapse of the strained power grid in Texas during the winter of 2021 sheds light on the challenges of power grid strain in the US. As crypto miners gobble up as much power as their vast arrays of mining hardware rigs need, the demand for power will increase.
Power producers will understandably raise rates as much as legally permissible under applicable law. That is, after all, the nature of a free-market economy, but rising energy costs will create yet more burdens for businesses already struggling to stay afloat. To come full circle, the increased power costs adversely affect the producers of semiconductors and microchips, who then pass those additional costs onto their end users, causing even more collateral damage.
To say there is volatility in this area is an understatement. It is imperative for businesses to keep a close eye on their assets, supply chains, and expenses to avoid falling victim to the failures of the cryptocurrency industry.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Thomas J. Salerno is a bankruptcy and creditors’ rights partner at Stinson.