After the catastrophic fallout of the last year, the most common word in crypto is “Contagion”. As investors realize how intertwined the entire crypto industry is, dominos continue to fall. This has led to the destruction of hundreds of billions of dollars. And bitcoin mining companies are not immune. A unique type of mining business went bust, which could be a valuable lesson for future entrepreneurs. Two prominent companies, BlockFi and Celsius, showcased the combination of crypto lending with crypto mining. Both of these companies are now bankrupt. What happened? This article explores the history, downfalls, and lessons of both companies. The Crypto Lending Businesses’ Mining InterestsEven the casual crypto observer would be familiar to the two industry-leading cryptocurrency lending businesses that went bankrupt in 2022. It may not be well known that both these companies also owned significant bitcoin mining units. BlockFi and Celsius were not just the best-known names for centralized crypto lending but also heavily invested in bitcoin mining. Both companies fell and their mining teams also suffered. BlockFi announced in May 2021 that it would be partnering with Blockstream and its long-standing mining operation. Blockstream is not yet clear on the exact amount of BlockFi’s hashrate and the current status BlockFi’s Blockstream facility hash rate. The lending company stated that it saw mining as an addition to its financial services offerings. Blockstream facilities do not have a current status of BlockFi’s hash rate. In fact, $500 million was spent on its mining efforts in November 2021. In an earlier interview, Alex Mashinsky, the former CEO of Celsius, stated that the company owned 22,000 mining machines, with most being Antminer S19 models. Mashinsky, like BlockFi, described his company’s mining activities as a strategic complement for its lending business. It is not unusual for mining companies to lend their coins to other institutional markets participants (e.g. trading firms). It’s reasonable to assume that other smaller lending companies had exposure to the mining sector. BlockFi and Celsius were unmatched in terms of the combined scale of their lending and mining operations. Both companies were bankrupted in the aftermath of the collapse of FTX. Tale of Two BankruptciesBoth Celsius and BlockFi filed for bankruptcy. Celsius announced that it would suspend all withdrawals in June 2022. The company filed for Chapter 11 bankruptcy the following month. Machinsky abruptly resigned during bankruptcy proceedings, but not before withdrawing $10 million. This was just months after Celsius Mining announced its plans for going public. The company had insisted that it would continue to mine throughout bankruptcy proceedings and vigorously defended its plans. Celsius claimed that the company’s mining operations were crucial to its restructuring efforts. Mining isn’t cheap. According to The Wall Street Journal, Celsius Mining lost $40 million in the first two weeks of its bankruptcy. Celsius Mining stated to the court that it expected the mining operations would become profitable by January 2023, according to The Wall Street Journal. BlockFi filed for bankruptcy shortly after Thanksgiving. Its bitcoin mining operations did not play as prominent a part in the proceedings as Celsius. There are no reports that Blockstream’s agreement has been terminated or suspended by BlockFi. The company originated loans to other mining companies in addition to hashing its own operations. This was the issue that BlockFi’s corporate account addressed on Twitter one month prior to filing for bankruptcy. According to some reports, BlockFi could have suffered losses of up to $80 millions from Core Scientific exposure. Why Mine and Lend? Although the exact reasons for this question vary, here is a simple explanation: BlockFi, for instance, acted as “cryptosaving banks” and loaned bitcoin (and other cryptocurrency) to various retail counterparties. This meant that they had very little exposure to bitcoin’s upside. The market’s volatility was exposed to its borrower clients. The idea of a mining operation giving lenders more risk could be attractive. However, the lending business, especially considering how some crypto financial institutions manage their books, carries enough counterparty risks and operational complexity. The mining industry is notoriously complex and ruthless, which puts new entrants at huge disadvantages in even the best market conditions. It is more difficult to manage a mining unit and a core lending service than it is to run one business. Business complexity increases exponentially, not linearly. Although it is possible to successfully run a joint lending/mining company, it is not easy for inexperienced founders. Business complexity scales exponentially, not linearly, so most mining companies are not hybrid businesses that offer other core offerings. As mentioned, there are some cases where miners can play the role as lenders. Their core business is mining. It is difficult to do anything else. Both of the high-profile companies that merged the two businesses went bankrupt. The “crypto” industry is plagued by a goldfish-like memory, and is more likely than not to repeat these mistakes. However, there are likely to be significant changes in the accepted practices for lenders. Also, expect strong recovery from bear-market-hardened, well-managed mining companies. Otherwise, the pain and suffering caused by the bear market of 2022 would have been insignificant. This guest post is by Zack Voell. These opinions are not necessarily those of Bitcoin Magazine or BTC Inc.