TL: DR

• Compute North has declared Chapter 11 bankruptcy in the U.S. court in Houston, citing the collapse of crypto prices, rising electricity costs, and supply chain challenges.

• Compute North has over 200 creditors, assets reaching $500 million, and liabilities.

• Generate, a California-based financier Generate Capital subsidiary, loaned Compute North $300 million in February 2022 to fund upcoming projects in Texas and Nebraska. While it was able to repay some of the money, approximately one-third remains unpaid.

• By declaring Chapter 11 bankruptcy, Compute North joins a long list of crypto firms that have either been victims of or helped create crypto winter, including Voyager Digital and Three Arrows Capital.

Compute North

Compute North Holdings Inc., a data-center owner that houses bitcoin-mining rigs and blockchain companies, declared bankruptcy after succumbing to a liquidity crisis caused by the collapse of cryptocurrency prices, rising electricity costs, and supply-chain issues.

After borrowing up to $300 million in project financing earlier this year, the company, which manages data centers in Texas, South Dakota, and Nebraska, filed for chapter 11 in the United States Bankruptcy Court in Houston on Thursday.

Compute North blamed its troubles on this year's bear market, which has seen most miners' profits decline, the rising cost of electricity in the United States, and the time it takes between setting up a new data center and it becoming profitable.

The most significant blow, however, came from a loan from the data center company from Generate Lending LLC, a California-based financier Generate Capital subsidiary.

Background on Compute North

Compute North, a company based in Eden Prairie that creates scalable blockchain data centers, was founded in November 2017. It began by setting up mining operations, which validated industry demand for TIER 0™ data centers. It turned its focus from self-mining to providing colocation hosting services in June 2018 and became one of the biggest owners of data centers for BTC block reward miners. Last year, the Business Journal ranked Compute North number 1 among the 50 fastest-growing privately held companies in the Twin Cities by revenue growth from 2018 to 2020.

Compute North assists in facilitating and removing the complex barriers associated with cryptocurrency mining. The company works hard to provide miners with a best-in-class solution that supports the highest return on investment, going above and beyond to maximize hash rate and revenue. The team handles interested clients daily monitoring, troubleshooting, upgrades, firmware management, and other tasks. Some of the things that make Compute North stand out include:

1. Monitoring and Alerting of Hashrates: It automatically configured miners with MinerSentry, the company's proprietary tracking, and alerting system. When problems arise, such as devices going offline, low hash rate, or high temperature, the Compute North team will be notified.

2. Onsite support: When the company receives alerts from its miner monitoring system, it will monitor and automatically dispatch an onsite technician to investigate the signs.

3. Factory Firmware Updates: Compute North can install the most recent stock firmware release from the miner's manufacturer if desired by the client.

Compute North and Chapter 11 Bankruptcy

Generate, a California-based financier Generate Capital subsidiary, loaned Compute North $300 million in February 2022 to fund upcoming projects in Texas and Nebraska. While it was able to repay some of the money, approximately one-third remains unpaid.

In an attempt to recoup its investment, Generate took over some of Compute North's assets, including two of the sites built with its funds. They included one in Texas that would have run at 600MW and would have been the company's largest when completed.

Aside from taking over two sites, Generate stopped funding Compute North's other sites, hoping it would accumulate enough profits to repay the lender's loan.

Faced with this challenge, the company declared bankruptcy in a U.S. court on Thursday. According to the filing, the company has over 200 creditors, with assets reaching $500 million and liabilities in the same range.

This year, Compute North raised $385 million in debt and equity. About $300 million of that capital was in the form of debt, with the remainder coming from private equity investors familiar with independent and sustainable energy projects.

The filing stated that Compute North is faced with the threat of ongoing deterioration in its business value, including the potential termination of contracts that the company may be able to assign in a sale transaction.

A Chapter 11 bankruptcy filing shields a company from its creditors while allowing it to keep operating. This protection gives it enough time to determine how to repay its creditors without being auctioned off.

A Tough Time For Miners

The bankruptcy filing of Compute North is the latest example of how difficult recent times have been for block reward miners. Because of the bear market, these miners earn a fraction of what they did a year ago when every digital asset was 'mooning.' Rising electricity prices have exacerbated their problems, with hostile regulations and the failure of some of the industry's largest firms adding insult to injury.

Compass Mining, one of Compute North's partners, has been among those hardest hits. As a result of six-month late payments, the miner was forced to lay off 15% of its workforce and cut executive salaries in half in July. Soon after, its CEO resigned. Dave Perill, the Co-founder and CEO of Compute North, also resigned earlier this month, and chief operating officer Drake Harvey took over as CEO.

In a similar development, the old Ethereum Proof of Work miners was caught in an unfortunate situation. Those who don't want to dispose of their machines after the Merge shifted to other proof-of-work tokens like Ethereum Classic, and EthereumPoW, but none can match the massive profitability that the older PoW-based Ethereum had. The hash rate for Proof of Work altcoins like Ethereum Classic (ETC) was more than doubled in the hours after the Merge took place. However, a rising hash rate is an increasing difficulty, which means miners are less likely to be successful in mining a block and reap the block reward.

Did Ethereum Merge Contribute to Compute North Bankruptcy?

Even though Compute North's filing for chapter 11 bankruptcy came closely after the Ethereum Merge, it is not easy to categorically say that the end of mining on the Ethereum network contributed to it. First, Compute North broadly supports BTC mining. The hardware used on the old Ethereum PoW is not the same as that of BTC. Therefore, the outflow of miners from Ethereum following the Merge to other projects might not be one of the immediate causes of the insolvency. Nevertheless, the general bearish market, further exacerbated by the fear, speculations, and uncertainty surrounding the Merge, could be one of the drivers and triggers of the bankruptcy.

Specifically, bitcoin has fallen by about 60% in 2022, mirroring similar declines in other cryptocurrencies. Moreover, despite using renewable energy, rising energy prices have put a strain on Compute North.

Similarly, the 24 hours following the Ethereum Merge were bloody for the crypto markets. There was already a lot of uncertainty and doubt in the wake of the scalding hot consumer price index (CPI) numbers in the U.S. the week before, which sent the crypto markets and other asset classes spiraling down.

And then, just 24 hours after the Merge we saw a tragic loss in ETH price under $1500, ETH lost over 8% in market capitalization.

Conclusion

Compute North is a company that provides large-scale crypto mining hosting and facilities, hardware, and a BTC mining pool. It is one of the largest data center providers in the United States and has notable BTC mining partners such as Compass Mining and Marathon Digital. By declaring Chapter 11 bankruptcy, Compute North joins a long list of crypto firms that have either been victims of or part of the crypto winter, including Voyager Digital, Three Arrows Capital, Celsius Network, and BlockFi, to name a few.

Author: M. Olatunji, Gate.io Researcher

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