In the Bitcoin community, there has been an unprecedented and dangerous accident in the last year. Similar levels of spot price volatility have previously been observed, but the mining community’s leverage has reached new highs. This, along with falling spot prices, rising energy prices, and falling collateral value, has resulted in the worst-case scenario. In other words, the chronic bad practise of financial management has resulted in the issue of financial risk hedging.
Most miners’ financial management strategy has been quite simple up until now. It was simply purchasing and storing bitcoin. The ‘hope and pray’ period had come to an end. We implicitly set a price floor between $18,000 and $22,000, similar to the current average cost of production, assuming spot prices climb by 2% each month on average. Of course, this is an assumption that is not true.
Miner financing was at an all-time high in 2021. Large orders were delayed for an extended period of time at the time, and profits were much lower than planned. As these orders were fulfilled and hash power grew, the hash price reached an all-time low in 2022. Meanwhile, the long-term viability of leveraged methods is being evaluated. A review of public mining pools’ filings with the US Securities and Exchange Commission (SEC) reveals that many are in grave financial problems.
Miners are now confronted with a harsh reality. Can they withstand a protracted crypto winter on their existing operational budget?
It would be difficult to provide a consistent response. This is due to the fact that each organisation is unique. However, several stragglers have emerged since the start of the crypto winter. When Bitcoin miners are too leveraged, they risk being liquidated if the price of Bitcoin falls for an extended period of time.
So, how can miners get out of their current financial and operational bind?
Miners, like energy and commodity firms on similar courses, must adopt sophisticated financial strategies. If Bitcoin is actually a commodity, industry leaders must now appropriately construct their financial plans by treating Bitcoin as a commodity.
For years, the oil and petrol sector has used sophisticated risk management tactics, and gold miners have used structured financial contracts called target redemption forwards (TARFs) to hedge risk.
Miners must also create returns on digital assets while limiting the danger of decreasing prices and replacing the so-called ‘upward beta’. This method has long been tested in traditional financial markets, and big energy players have been able to grow their operations continuously over the last several decades. Miners are aware of the need for this as well, although it may be too late for some.
The digital asset business must establish financial instruments to overcome diverse volatility and generate sustainability and certainty in the face of unfavorable macroeconomic situations such as rising interest rates, less liquidity, and lower-risk assets. Active measures are required to do this. This is especially true if you are a trustee in charge of a Bitcoin mining operation.
Leveraged borrowing without capital controls or risk management has harmed the digital asset business tremendously. The moment has come to reconsider the industry’s long-term growth strategy. It is critical to be equipped with the constitution to progress into a brighter future in order to avoid further loss or liquidation.