Today, cryptocurrency mining operators could benefit from taking out loans while using their mined coins as collateral to cover their expenses and persevere during the current bear market.
Miners Can’t Hodl…or Can They?
Large-scale miners have enormous fixed costs, which they must pay regardless of the price their mined coins are currently worth. Indeed, many mining farms operate on thin margins and a shoestring budget, where expenses like electricity, rent, and other overhead costs must be covered monthly or the operation goes under water.
Bitcoin and cryptocurrency mining, in general, is a cutthroat business where even the tiniest of advantages can give your competitors the advantage. Renewable energy sources, algorithm optimizations, superior cooling systems, and government subsidies are just some ways certain miners try to edge out the competition.
But regardless of whether you’re running AsicBoost or not, miners must still pay their monthly expenses to cover their operations. Unfortunately, this has been getting more difficult amid a prolonged bear market that has set in since the beginning of 2018.
So what could miners do if their mined or soon-to-be mined coins are dropping in value while they must also pay their bills?
How Crypto-Collateralized Loans Help
But this problem is nothing new. In fact, it’s an age-old issue farmers have faced for thousands of years as farm operating loans have always existed in one way or another where a farmer puts up his land as collateral.
The expectation is that the land will produce food. Therefore, he will take out a loan (with future earnings from the land) to buy seed, equipment etc. to cover expenses, which he will pay back once the harvest is collected and sold.
Today, cryptocurrency miners may choose to do something similar, particularly in a bear market.
“I remember when I started mining Bitcoin back in 2013, it was profitable all the time, selling or not selling was really a matter of higher potential gains in the future, but never about taking a loss,” explains Csaba Csabai, CEO of INLOCK, a crypto-backed lending platform. “When you ‘produce’ something the market isn’t willing to pay you enough to even cover your expenses, then you have a business that’s hardly sustainable.”
If a mining farm is “hardly sustainable” at least for the time being, the operator now has an option to use their mined cryptocurrencies (that would have likely been sold immediately anyway) as collateral to get cash and cover their outstanding expenses.
This offers three major benefits to the miner who:
- Avoids taking out a bank loan, which requires credit score checks and time;
- Avoids selling cryptocurrencies, a taxable event in many countries (unlike lending) with additional headaches like accounting and taxation issues;
- Gets his cryptocurrency back as soon as the loan is repaid. Furthermore, if the spot price goes up during this period then it’s a double-win.
However, if the market spot price is dropping — as it has been all year — an online lending platform such as Inlock could have been an invaluable tool for miners to lock in their profits.
At best, the miner covers their expenses and get back their cryptocurrency that has appreciated in value since the loan. At worst, the collateral is liquidated if the cryptocurrency spot price falls below the threshold agreed upon by the two parties in the smart contract.
Keep in mind, however, that the miner likely would have sold these coins anyway.
“INLOCK allows miners to essentially mine crypto at current difficulty while ‘selling it’ at future prices,” says INLOCK CSO Benedict Banathy.
When they lock it in as collateral for a fiat loan, they instantly gain access to the purchasing power of their crypto while keeping it for future profit. This is really the best option miners have in a bear market like the one we’re in now.
[Full disclosure: The author of this article is a supporter of the given project and is a holder of ILK tokens.]
Can mining operators benefit from a lending service like Inlock during a bear market? Share your thoughts below!
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