7 months ago

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SHOW NOTES:
https://www.whatbitcoindid.com/podcast/bitcoin-mining-adapt-or-die

Today we have two representatives of the Bitcoin mining firm Luxor Technologies: Nick Hansen, CEO, and Matthew Williams, Head of Derivatives. In this interview, we discuss derivative trading, the potential impact of the BlackRock ETF on the market, the challenges Bitcoin miners face, the political and economic situation in Argentina, and the importance of hedging in business operations.

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TIMESTAMPS:
00:00:00 Introduction
00:06:30 Mining: adapt or die
00:22:58 New miner hedging tools
00:39:20 Where’s hash headed?
00:59:52 Hash-derivative yield
01:15:27 Risk & maturing markets

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****

“The reason this is actually different is because there is actual proof-of-work, there is demonstrable economic activity happening…you’re just giving up some of the yield, or some of the margin that you would produce from that mining yield to somebody that financed your operation.”
— Nick Hansen

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Bitcoin’s price has been relatively stable for well over a year. Whilst prices have recovered from the cycle lows seen in November 2022, the rapid price swings, which have been a feature of the market since its launch, have subsided. Nevertheless, a series of events are aligning that raise the prospect of a renewed period of volatility in the near future: the approval of a spot ETF, the Bitcoin halving, and further macro shocks.

The issue for capital investment in the Bitcoin mining space is that such volatility distorts and stresses normal business management practices. There have been numerous mining companies that have suffered existential crises because they have over-extended at the wrong time, or, they have had ineffective hedging strategies. Luxor aims to help improve the cost of capital for Bitcoin miners through the introduction of new derivative products.

Luxor’s strategy is predicated on hashrate being treated as an asset class; miners are able to sell their hashrate forward, guaranteeing a return. The contracts are determined by an agreed hashprice, which is a function of various variables: the block subsidy, transaction fees, network difficulty, and bitcoin price. These contracts are then tradable as derivatives, which enables investors to gain exposure to Bitcoin mining without needing to be physically involved.

Luxor is also working on additional financial products, including what will be a controversial yield instrument. There is still significant hesitancy in the community around such markets, and it will take time to build liquidity. Perhaps a new approach can renew demand for lending. And, if anyone can pull this off, who better than a diversified company that weathered a brutal bear market that aggressively showed who was naked when the tide went out?

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