A compulsory course for professional miners: using financial tools to manage mining risks

With the development of blockchain technology and the popularization of digital currencies represented by Bitcoin, more and more users are participating in digital currency mining. After more than ten years of development and evolution, the mining industry has gradually become standardized and professional in all aspects, which is mainly reflected in two aspects: on the one hand, mining has gradually developed from decentralized and extensive to large-scale and refined ; on the other hand, financial instruments related to digital currencies have gradually become richer .

The abundance of financial instruments makes it easier for industry participants to avoid risks and lock in profits. Mining is different from cryptocurrency trading. Mining investment is fixed assets with poor liquidity such as mining machines and mining farms, and in the long run, it will continue to depreciate. The price of digital currency produced by mining fluctuates greatly, and miners need to bear greater risks than cryptocurrency trading. Therefore, using financial instruments to manage risks is a must for professional miners.

The essence of finance is to manage risks. Miners who cannot manage risks are not good miners! Today, we will talk about how miners can use financial tools to manage mining risks in conjunction with mining.

01 Earn interest on deposits

Depositing coins to earn interest, as the name suggests, means depositing coins in exchanges and other institutions to obtain stable returns. This business is easy to understand, similar to the commonly used Yu'e Bao. The essence of depositing coins to earn interest is that institutional investors borrow coins from users at a low cost, and use the borrowed coins to make venture investments. Users therefore obtain a certain annualized return, which is very low.

The product forms of deposit-based interest-earning products on the market are diversified, and the differences between platforms are quite obvious . There are fixed-term and current deposits, and the fixed-term periods are also different. The currencies are mainly stablecoins and mainstream currencies, and the corresponding annualized returns are also different. For miners, the basic currency used for deposit-based interest-earning is Bitcoin.

The main risk of earning interest on deposited coins comes from the platform , which has risks such as bankruptcy, running away, and failure to pay compensation. When choosing a platform, try to choose a platform with large scale, high popularity, and long operation time . The annualized interest rate of some platforms may be higher. At this time, miners should consider the risks and benefits comprehensively. It is best not to take the risk of depositing coins on some unknown small platforms because of the small difference in annualized income.

The people who are suitable for the long-term coin hoarding are those who deposit coins. Compared with putting coins in wallets, depositing coins on a reliable platform can not only gain the increase of coins, but also get interest income from coins. The risks are the collapse or running away of the platform, as well as network hacker attacks.

02Hedging

Market conditions are an important factor affecting miners’ earnings. If miners do not know how to use financial instruments, they can only passively “follow the market”. When the price of the currency rises, miners will earn more, and when the price of the currency falls, they can only passively suffer. If they know how to use hedging, the situation will be different.

If the coin price is judged to be artificially high, miners can sell the mining output for a period of time in the future and lock in profits in advance. Let's take an example:

In July 2019, the price of Bitcoin rose to nearly $14,000. If you judged that the price was too high at that time, and hedged the mining output for the next four months (assuming a total of 8 Bitcoins) at a high price (assuming $13,000), the specific operation is to find a reliable exchange to borrow 8 Bitcoins, and sell them at a price of $13,000, and then gradually return the daily mining output to the exchange. Later, the price of the currency really fell all the way, and the lowest fell to around $6,500. You locked in the profit in advance by hedging at a high price, and you had ample cash flow, so the payback period of mining was greatly shortened.

Of course, hedging is also risky. The risk is that if you make a wrong prediction and the price of the currency continues to rise in the future, you will miss out. In addition, due to the rise in the price of the currency, the computing power of the entire network will increase, the difficulty will increase, and the output per unit of computing power will decrease. Miners need longer output to fill the hedging coins. In general, the risk of hedging by miners is controllable. Miners have continuous mining output to hedge the risk of rising currency prices.

Hedging is more suitable for miners who use fiat currencies as the standard. Based on the judgment of the market, when the currency price is predicted to be at a stage high, the currency output for a period of time in the future is sold to lock in the fiat currency income, obtain cash flow, and the subsequent mining electricity costs are settled. If the judgment is right, the mining payback period can be greatly shortened, and the risk of hedging for miners is also controllable.

03 Pledge Loan

In some cases, miners are in an awkward situation. For example, the price of coins continues to be low, and cash flow becomes a problem. They are unwilling to sell coins at a low price, but they have no money to pay the electricity bill if they don’t sell coins. Pledge loans can effectively resolve this awkward situation.

Pledge loans mean that you pledge your bitcoins to the platform, and the platform will lend you money according to a certain pledge rate. You only need to pay a certain loan interest. In this way, miners do not have to sell their coins, but also have money to pay electricity bills. For example:

Miner Xiao Ming has not yet paid the 60,000 yuan electricity bill. Although he has some coins, he is reluctant to sell them at a low price due to the current low price. At this time, Xiao Ming found that he could borrow USDT by pledging Bitcoin on a certain platform. He could sell the borrowed USDT to pay the electricity bill. The initial pledge rate of the platform is 60%, and the price of Bitcoin is 50,000 yuan when pledging. When the pledge rate reaches 80%, the platform will force liquidation. So Xiao Ming pledged 2 Bitcoins to the platform and obtained a loan of 60,000 yuan. If the price of the currency rises in the future, Xiao Ming will hold the currency and take advantage of the increase in the price of the currency. He only needs to pay the platform's loan interest rate. This is a situation that Xiao Ming is looking forward to. If the price of the currency falls and falls to the liquidation price (the price of the currency is 40,000 yuan), liquidation will be triggered. The platform will force the sale of Xiao Ming's pledged currency to offset the loan. In order to prevent this from happening, before the forced liquidation is triggered, Xiao Ming can recharge Bitcoin to the platform to replenish the margin to prevent forced liquidation.

Pledge loans can also be used in other scenarios. For example, if you predict that the market opportunity has reached the bottom of the bear market, and there are a large number of cheap mining machines in the second-hand market, and you want to buy the mining machines at the bottom but have no money, and you don’t want to sell the coins in the bear market, you can also obtain cash flow through pledge loans, buy the mining machines at the bottom, and expand the production scale.

The risk of pledged loans is to predict the wrong direction. If the price of the currency continues to fall after the pledged loan, there is a risk of liquidation, which means that the currency is forced to be sold at a lower price. In the case of tight cash flow and a downward market, wrong judgments can be fatal, so when doing pledged loans, pay attention to the safety margin and reserve a large margin of error to avoid the tragedy of "dying before dawn".

04 Conclusion

As the mining industry develops and matures, more and more financial products related to digital currency and mining have emerged on the market to meet the needs of various users. The close integration of mining and finance is an inevitable trend in the development of the industry and is also a necessary skill for professional miners .

The essence of finance is to manage risks. The rational use of financial tools can better manage risks. Everything has two sides. If you do not understand financial tools well enough and use them incorrectly, it is likely to bring greater risks. A gun is a weapon and a safety guarantee in the hands of someone who knows how to use it, but it is a risk and a safety hazard in the hands of someone who does not know how to use it. The same is true for financial tools. Before using financial tools, you need to fully understand them. This is the premise for using financial tools to manage risks.

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