The financial side of Proof-of-Work mining is a quickly maturing and largely unexplored aspect of the cryptocurrency industry. In this livestream, Compass walks through financial products and services that miners use and talks with two leaders in the cryptocurrency and mining financial services sector.
This livestream is must-watch material for any miners that want to learn about the current state of leverage in the mining sector, what sorts of education and service opportunities exist for cryptocurrency miners, and what miner financial products could look like in the future.
Other ways to watch and read about this conversation:
Watch previous livestreams here.
Roshun Patel, VP at Genesis: He started exploring crypto in 2015, Nick Saban’s blog sparked his interest. After graduating college in 2017, he worked as an algo trader. He developed a serious interest in crypto and started cross arb trading with his own capital. He joined Genesis in 2018, with a focus on trading and financing.
Brian Wright, VP of Mining at Galaxy Digital: In 2017 worked at Fidelity in their internal consulting group. He later joined their crypto strategy team and worked on the early stages of Fidelity’s bitcoin products. He then moved to the fidelity mining team. He joined Galaxy in 2021 with a focus on proprietary mining.
What financial products do miners need and use the most? (timestamp)
- North American miners have access to cheap capital, they are raising money with debt and equity instruments.
- Miners are using their equipment and bitcoin as collateral.
- Although uncommon, miners can hedge with options and futures contracts.
- Depending on the network, the miner may need to borrow the underlying asset vs cash.
Is the amount of leverage concerning? (timestamp)
- Not very concerning, miners are very profitable; some are mining for less than 10k per coin.
- Lenders should be doing their due diligence and consider market volatility when making loans to miners.
- Miners are capturing spread between the price they are mining the coins vs the coin’s market price. These miners are not levered.
- Some miners do not want to sell any bitcoin, these miners will be more levered.
- Even if bitcoin crashes 20%, miners will still be able to make their margin calls.
Thoughts on crypto lending by miners? (timestamp)
- Mining is diversified in terms of where the risks lie.
- Miners sometimes lend out their coins to fund mining operations.
- Miners can handle excess collateral by withdrawing back to themselves and selling it or keeping it.
- If it’s overcollateralized, they can loan it out and earn interest paid in USD or interest compounded in kind and grow their crypto stack.
- Public miners are more likely to lend out bitcoin and generate yield to add shareholder value.
What financial advice are mining operations looking for? (timestamp)
- Miners believe they are insulated from the market because they are low on the cost curve (cheaper electrical and total fixed costs).
- If bitcoin’s price crashes, miners high on cost curve will be forced to shut down. Hash rate drops, leaving miners low on cost curve with higher bitcoin denominated revenues.
- These miners low on the cost curve do not typically ask for hedging products.
- Miner’s hedging is at an all-time low because profit margins are high.
Lots of mining companies are going public (timestamp)
- Miners can take advantage of robust capital markets by IPO-ing and raise cheap capital.
- Mining company stocks are popular investments because a lot of parties can’t access bitcoin direct investments.
- California and New Jersey have publicly admitted to buying mining stocks.
Will demand for mining company stocks decline as more bitcoin investment vehicles launch? (timestamp)
- Public structured products that offer exposure to the underlying proof of work coins exist.
- Mining is not a 1-to-1 beta with spot (not perfectly correlated with the underlying asset).
- Structured products and mining stocks are compliments not substitutes.
- With more bitcoin related products, investors will start scrutinizing the company or product’s business model vs just looking for bitcoin exposure.
Mining companies and other crypto firms leaving Asia (timestamp)
- FTX recently moved out of Hong Kong and into the Bahamas.
- Mining related businesses have incentives to leave China and Asian countries under their influence.
- United States’ regulatory environment is more stable than China, capital market rules are more straight forward.
Have non-US miners had difficulties with relocating? (timestamp)
- Some miners struggle with the transition
- Miners unfamiliar with US laws must rely on lawyers.
- Factors that make the transition difficult:
- Capex costs are higher in North America than China.
- North American miners have higher shipping costs.
Opinions on Ethereum's switch to Proof of Stake (timestamp)
- Ethereum miners should have a plan just in case the switch to PoS is successful.
- Roshun: The miners may be trying to earn as much as possible going into the merge to PoS. The switch may happen by Q2 2022.
- Brian: Galaxy might offer services to ETH miners. But they'll have to evaluate the payback period for each GPU and the probability of the Ethereum transition happening.
The status quo and future of mining derivatives (timestamp)
- There is a less of a need to hedge against upwards movement in hash rate due to the Chinese mining ban and an overall lower-than-expected current hash rate.
- Miners are naturally ‘short hash rate’ because when hash rate goes up, bitcoin denominated revenue goes down. The miner goes long hash rate to hedge.
- Miners who went ‘long hash rate’ through derivatives lost that trade.
- These miners have higher bitcoin denominated revenues due to a lower hash rate but are earning less because they must make up for the loss on the ‘long hash rate’ derivative contract.
- Being able to trade hash rate, as a commodity, would create the opportunity to build products on top of that market.