Mining makes money, but first it needs money…
Bitcoin2022 hosted many amazing panel sessions to learn more about some of the best in the industry. There was a whole stage dedicated to panel discussions on mining. And that’s what we’ll be bringing to you all. We’ll be recapping some of the best mining panel sessions into an easy to read format so that you can all be caught up with some of the best insights and takeaways discussed at Bitcoin2022.
In this blog, we’ll recap the the panel session titled “Financialization of Mining” featuring:
Brian Wright, Galaxy Digital
Ethan Vera, Luxor
Zachary Cefaratti, Dalma Capital
Leo Zhang, Anicca Research
So what does this exactly mean? Well it refers to the financing and capital raising amongst miner companies. We all know mining can be very capital intensive. There needs to be enough money to purchase ASICs, a support and maintenance staff, land, buildings, and other engineering infrastructure to keep those ASICs churning. This all can total to a couple of million dollars real quick. Miners need to be able to raise capital in order to fund these operations. And lenders and other traditional capital financiers are attracted to the kind of returns they can expect from such a booming industry. This is where the two meet to agree on what type of capital financialization is need to start mining.
The panel session had a bunch of great topics which have been summarized and broken down below.
State of the Mining Capital Markets
The state of the capital markets for mining is undoubtedly the strongest it has ever been. And every year that maturing increases to the point of attracting more institutional investors in the space. Some may even say the maturity and efficiency of capital markets for mining may need to be even more efficient than the efficiency of miners themselves. Lenders need to be in the clear as to what they are investing in. With that, miners need to be transparent to lenders as to the type of returns they should expect. Despite bitcoin’s popularity rising over the past year, there still is a misconception of what mining is amongst traditional financiers. And this is where miners need to be able to close that gap through proper communication.
Back in 2018, many miners had a hard time raising money. It was hard just to get a loan for about $2 million dollars but now you’ll see many mining companies raise over $40 million dollars. Miner companies have been the only sector of the crypto space to see companies go public on the stock market as well.
Up until now, there has been more equity-based financing than debt-based financing. But debt-based financing is starting to see an uptick due to open lenders. And this spawns new financial innovations such as ASIC-backed loans. This new type of financing allows miners to put up their ASICs as collateral for funding. ASICs inherently have value and have become a secondary commodity behind bitcoin itself. And with ASICs also having a healthy market, lenders and financiers can feel more comfortable using it as a form of collateral for their money. Sometimes the mining company’s infrastructure and land are used as collateral, in a similar sense as other traditional industries.
NAV of Miners
The NAV of ASIC miners was also a strong talking point during the panel session. For those who do not know, NAV refers to the net asset value. Essentially it’s viewed as the current market price one could purchase an ASIC miner for on the open market. This metric is quite important if ASICs are going to be used as collateral for financing purposes. It’s the same way as to how a house is used for collateral on a mortgage. If the borrower, or miner, would default on the loan, the lender would come in and own all the ASICs.
It’s a challenging collateral to value so lenders and financiers rely on the NAV of an ASIC. And sometimes they are overvalued due to high optimism. For example, some miners are getting NAVs of $300 — $700 per TH despite being able to purchase ASICs for an average of $80 per TH on the open market. Their financiers and lenders need to be careful and look at certain factors. Financiers need to discount ASICs that haven’t been turned on yet or ASICs that haven’t even been delivered yet.
It’s also prudent for lenders and financiers to analyze the mining company’s team itself. What is the team background like? Do they have experience mining? How long have they been mining? These questions are just as important as the ASIC miners themselves. And sometimes it just comes down to how much risk tolerance these financiers can take. If their risk tolerance is large, they are willing to work with the mining company more.
Ethan Vera and Leo Zhang have always been a proponent of hashrate contracts. Although this hasn’t really been accepted by the market yet, Ethan made a verbal push that he thinks it will become more important in the next coming years. Eventually, it will become more prominent and investors will realize how useful it can be for miners themselves. Being able to hedge your hashrates and buy futures on it can definitely be a great method for miners to protect themselves during a bear market.
Also, investors need to realize that hashrates are attractive due to their increased physical ties as compared to bitcoin. It touches on renewable energy, Moore’s Law, chip production, and other physical real-world topics that can influence hashrates.
The future looks bright for miner financing. Lots of traditional and institutional players are coming in to provide funding and loans of all sorts. But it’s also good to know that miners need to realize there are a lot of other financing options that they can take advantage of. Bitcoin native DeFi is also going to play an integral role in future markets. Financing the old, traditional way will probably fade away in the next few decades.
It will also be interesting to see if there will be a trend in M&A (mergers and acquisitions) activity amongst miners. We could expect to see many miner companies struggle during a bear market, which at the same time presents great M&A activity. And the last thing the industry needs to focus on is providing miner financing globally. If a lot of the miner financing is just concentrated in North America, hashrates will just be centralized within this continent. Financing needs to stretch globally to ensure there is globalized decentralization.