Quick Take

There is a growing trend that highlights the growing significance of Bitcoin in bankruptcy and financial restructuring within the digital assets sector.

Rhodium Encore LLC, a bankrupt Bitcoin mining company, recently disclosed significant financial challenges, revealing debts between $50 million and $100 million while holding assets valued between $100 million and $500 million, according to The Street.

According to Bloomberg, shareholders’ efforts to restructure the business were unsuccessful, leading to the decision to file for Chapter 11 bankruptcy.

In a bid to stabilize its operations during the bankruptcy process, Rhodium received a lifeline from Galaxy Digital, which offered a $30 million loan or an alternative loan of 500 BTC. The dollar loan carries an annual interest rate of 14.5%, while the Bitcoin loan bears a 9.5% interest rate. Notably, the lenders have the discretion to repay the Bitcoin loan in dollars at an exchange rate determined by “reasonable published market spot prices” at the time of repayment, adding flexibility to the repayment terms, according to Bloomberg.

This move reflects a growing trend in the digital assets sector, where Bitcoin loans are increasingly being used in Chapter 11 bankruptcy proceedings. A notable example is Bittrex, the crypto exchange that filed for bankruptcy in May 2023, securing court approval for a debtor-in-possession (DIP) loan facility of up to 700 BTC.

Similarly, Core Scientific, the Bitcoin miner that filed for Chapter 11 in December 2022, has heavily involved Bitcoin in its restructuring efforts, even though its initial DIP financing was in traditional currency.

With Bitcoin’s price depressed below $60,000 and mining costs increasing due to the halving, the mining sector will continue to face pressure. This environment could lead to weaker miners facing bankruptcy, while larger players may step in to acquire them, further consolidating the market.

The Valkyrie Bitcoin Mining ETF (WGMI) has seen an increase of just 1.54% in 2024, compared to spot Bitcoin, which is up over 30%.