Bitcoin mining CEOs break contracts to offset rising costs.
As bitcoin miners continue to buy due to high costs and declining block rewards, Andy Fajar Handica, CEO and co-founder of Loka Mining – a decentralized mining pool operator – has found a way to sell hashrate futures to meet short-term needs and funding. development.
In an interview with Cointelegraph, Loka Mining's CEO introduced the idea of hashrate contracts — which allow miners to sell their future hashrate from lenders for fiat-denominated loans — that would help businesses raise capital.
He explained that these proposed hashrate forwarding contracts are used to finance the development of small mining operations and pay for work today with Bitcoin hashrate tomorrow.
Handika explained the benefits of these token contracts, which are now offered by Loka Mining in 3-month, 6-month and 1-year contracts:
“This means you can use your debt funds to buy more mining machines and hedge your risk of price volatility because the risk of Bitcoin's price in fiat is now transferred to the investors who buy the mining contracts.”
Handika also said that lenders would reap benefits from the proposed arrangement because the Hashreet Transfer Agreement could be used by lenders again as collateral for other loans – similar to asset refinancing.
The method provides an alternative to traditional ways of fundraising for large mining companies, such as using initial public offerings or corporate debt to grow their mining operations.
Small mining companies or individual miners do not have this luxury and can usually only finance their growth by selling their Bitcoin (BTC) holdings or using Bitcoin as collateral on decentralized finance (DeFi) protocols.
Related: Bitcoin Miner Rhodium Files for Bankruptcy in Texas Court
Handica said these Diffie strategies carry a significant amount of risk due to a sudden drop in Bitcoin's price, citing the “black swan” event that caused Bitcoin's price to fall from around $59,000 to $49,500 on August 5, 2024.
The Bitcoin mining industry is facing an economic crisis.
A recent report by cloud mining company BitFuFu revealed that mining costs have risen by 168% in the past 12 months. These increased costs, combined with the reduced block subsidy, have placed a significant economic burden on Bitcoin mining companies.
Debt-to-equity ratio of mining companies. Source: Minor Mag.
This new post-halo reality has pushed many mining companies to the brink, as Bitcoin miners turn their work to artificial intelligence and high-performance computing to offset profitability.
A recent JPMorgan report also shed light on the current state of the mining industry. The report notes that cash-strapped mining companies such as CleanSpark and Riot Platforms have found companies unable to compete as the industry continues to consolidate.
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