Under the market volatility, how can crypto miners obtain stable income
2020 is a year full of changes. The extreme price of 312 led to a contract burst of nearly 3.5 billion US dollars, a large number of loans were forced to be liquidated, and many mainstream mining machines reached the shutdown currency price. Once low-cost power resources were the core consideration in mining, but as Bitcoin became more and more market-oriented, miners needed mature financial services to improve the liquidity of assets and hedge risks.
Electricity costs, network-wide computing power, mining machine costs, and currency prices are four key factors in the mining field. The cost of the mining machine and the electricity fee are relatively fixed. At present, financial products in the market are mainly designed for currency price fluctuations to reduce risks and increase revenue.
Crypto miners: high yield or high stability
Before choosing a financial product, it is necessary to confirm what the crypto miners need for the nature of the financial product. Larry, industry research director of Amber Group, told Cointelegraph in Chinese:
“Mining has become a mature commercialization behavior. As a commercialization behavior, the pursuit of high stability is not about gaining high profits.”
Mining is an asset-heavy activity. Miners need to invest a lot of fiat currency costs to continue to purchase mining machines and pay for electricity. The original purpose of miners’ use of financial products is to hedge the risk of currency price fluctuations, so they are more inclined to choose stable profits and cash flow to pay for mining power and costs.
Selection of miner’s financial products
At present, the most common products on the market are mainly carried out through positive and negative leverage. If the current currency price is low and the future is bullish, then miners are more inclined to hold the currency. However, miners and electricity fees need to be paid in fiat currency, and at this time, loans will generally be pledged by digital currency, which is a positive leverage. The other is the reverse hedging leverage. If the current currency price reaches a high level, miners will bear the currency price in the future and can sell the bitcoin that has not yet been produced in the future at the current higher price. Miners need to combine their own liquidity and anti-risk ability to choose the appropriate direction of leverage.
1. Pledged loans
Miners purchase mining machines and pay electricity fees generally through fiat currency, but the mining behavior produces digital currency. In the bear market, fiat currencies are still needed to pay for electricity. At this time, miners will look at the cryptocurrency market for a long time in the future, and selling digital currency directly is not the most cost-effective way. Miners are more willing to pledge loans of digital currency in their hands than sell them.
Pledged loans can also help miners expand their production scale during the bear market. For example, after the bear market stage or the market plummeted, there are a large number of cheap second-hand mining machines on the market. If the miners are optimistic about the market outlook, but there is no cash flow in their hands, they do not want to sell the digital currency in the bear market. At this time, a large number of second-hand mining machines can be purchased through mortgage lending to expand production scale.
Wang Li, co-founder of PayPal Finance, told Cointelegraph Chinese that in addition to pledged loans, PayPal also provides some more flexible customized loan services.
“PayPal also provides a flexible service of currency-based deposit + loan integration. After depositing digital currency, in addition to the currency-based income, you can also get the USDT standard loan amount. If you need to borrow, you can lend at any time ; When there is no loan, you will get interest income in the currency standard.”
Mortgage lending provides convenience for miners to replace machines, cash flow management of electricity bills, and allocation of trading coins. But there are also risks. If the currency price continues to fall after pledged loans, there will be a risk of liquidation.
Hedging refers to buying (or selling) futures contracts of the same kind of goods in the opposite direction of the spot market on the futures market, and trading in opposite directions in the two markets, while losing money in one market, Another market is profitable. And the amount of loss is roughly equal to the amount of profit, so as to achieve the purpose of risk avoidance.
For miners, the purpose of hedging is not to make a profit, but mainly to eliminate or hedge risks. If the miners believe that the current currency price has reached a high level, the market begins to have a large number of bubbles, then he can choose the way of hedging to lock in the proceeds in advance.
Larry told Cointelegraph in Chinese that if the currency price rises now, you can dig out the abundant season by way of instalment hedging and first lock in the current income. For example, you can hedge the production for two months first, and then use options or futures to realize income based on market changes. It is equivalent to maximizing the return on the premise of a stable guarantee. “
The method of hedging is not without risks. If the judgment on the direction of the future market is wrong and the currency price continues to rise in the future, the gains brought by the currency price increase will be lost. However, for miners, the pursuit of high-risk returns is not the main purpose. Locking returns in advance to ensure that you can survive the risks is the key.
Miners use financial products in order to hedge risks, but human nature is greedy. “The design of hedging is actually more anti-human, and it needs to choose between future high returns and current stability. But it is precisely the need to do these anti-human things in order to live longer.” Wang Li to Cointelegraph Chinese Speaking.
In 2020, the market will fluctuate violently and the mining competition will be fierce. The combination of financial services and mining is an inevitable trend in the development of mining, but financial services are also an extremely sharp double-edged sword. Miners need to improve their self-awareness, develop financial management and control capabilities, and avoid the original risks brought by asset-heavy business practices. When choosing a financial product, one cannot blindly pursue high returns. It is necessary to combine its own liquidity and anti-risk ability and choose the appropriate direction of leverage.