The latest episode of the Hashr8 Podcast features three guests very well known in the community — Matt D’Souza, CEO of Blockware Solutions, Christopher Bendiksen, Head of Research of CoinShares and Wolfie Zhao, Asia Editor at CoinDesk.
This is a wide ranging discussion on the state of Bitcoin mining both now and what’s to come in the next 6–12 months.
The content is rather dense with valuable information, and as such it doesn’t lend itself well to brief excerpts. However here are a few of highly-informative moments from the episode:
“Christopher Bendiksen: [18:17]: I also think Matt touches on a really important point here when he says that the supply doesn’t hit the market evenly, and that is exactly what we saw on March 12th when every single Bitcoin-collateralized loan got blown up at the same time and all of a sudden all that supply which has kind of been pent up. So for audiences who may not know how this works: so if you’re a miner, say that you post 100 Bitcoin as collateral at $10,000, that works out to be a million dollars, so if you post a 100 Bitcoin worth a million dollars to these lenders you can borrow, call it, $6 million in cash or stablecoin, immediately, and so long as the value of that collateral doesn’t fall below 100%, ever, you don’t get liquidated and you pay back your cash later or you let the loan roll over.
But essentially what this does is that it creates all of this essentially pent-up sales pressure that doesn’t get triggered unless the Bitcoin price falls below certain critical levels, but when it does it all gets flooded into the market at the same time and it’s very often the very worst possible time which is the time when all the leverage traders are getting liquidated on the derivatives exchanges.
Matthew D’Souza [19:31]: Chris brings up an excellent point I wanna just throw a little detail on that. What he is talking about, the price starts selling off and all the bids get removed, no one’s gonna go in and buy and when they get margin-called it’s not some limit order, some smooth sell, it’s a market order so all the buy orders are gone, and you get margin-called and it gets turned into a market order so they just sell. They just sell, whatever the price is, so if there’s no buyers and Bitcoin’s at $4,500, and the next buyer up is at $4,200, that order gets filled and that’s how you get these whips. Sorry, Chris, go ahead, I apologize.
Christopher Bendiksen: [20:02]: No, no, that’s perfectly fine. It just adds color to the picture which is important if you wanna understand how these things work. And what we saw on March 12th was a double-whammy of these two things happening at the same time. You first have a derivatives liquidation cascade, which then triggers all of these collateralized Bitcoin loans to auto-deleverage into the market, let’s just say, and then we get these extreme volatility events. I mean it’s great if you have low bids, so congratulations to everyone who picked up cheap coin, but it doesn’t help us on the front of institutional sales, to pick one, because these people don’t love volatility to that extent, even when it is coupled with great risk-adjusted returns, so we probably should do something about that. And I do think that will be done. You know, the lenders don’t like this, the miners don’t like this either. The only one who liked what happened where the traders who got coins at like $3,500. Good for them.”
Matthew D’Souza [34:08]: I don’t do this lending on decentralized exchanges it’s a very non-zero chance that I lose my principal, so I don’t participate in that. And I don’t think 6% or 7% is worth taking on that risk. I think it’s insane, actually. But once that matures and gets better and is stress-tested it’s gonna be a great opportunity and that’s just the nature of being in its infancy. But I think we’re moving towards that, and we’re gonna start getting great products with this hedging of difficulty and acquiring just hash and it’ll be comparable to bonds basically.
Christopher Bendiksen [34:37]: Yeah, I can’t wait until US capital markets start bringing their monumental force into this space and start re-packaging this into products that legacy finance people know how to analyze and read, and get a good grip on. And I think at that point, you’ll see a completely revolutionized flow of capital into this space. But it’s also dependent on like, every day that Bitcoin ticks on, exists and lives, people get more and more comfortable that this is something that’s gonna continue to exist in five years or however many years the duration of these financial products would be. And when this happens, it’s gonna change everything. It’s gonna be awesome.
Wolfie Zhao [35:19]: That reminds me of a model that a mining farm once told me. They were trying out how to attract more institutions in China, so they are talking about traditional companies that can get involved in mining. The thing is they cannot just buy the machines and mine Bitcoin, because they have problems liquidating them into fiat and how to do the accounting for that. So, the thing they mentioned is they were talking to some institutions, the companies, that they will buy the machines, and they rent to the mining farms, and they just set it up and they just receive a fixed income every month so the mining farm will take the risk of the volatility so the institutions will own the assets, they will let you borrow it and then you give them very fixed income every month for, say, several years, and that’s the way they can make sure that their accounting is clean. Don’t have Bitcoin bought, because of the unregulated environment, which is something interesting.
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