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It’s common knowledge that Bitcoin is one of the best-performing assets in human history. Most new crypto participants probably can’t spend too much time in the space without finding out that just a few dollars’ worth of Bitcoin purchased in 2009 would be worth millions of dollars today. It’s often said that hindsight is 20/20, but in this case it can seem almost painful to think about.
Bitcoin’s growth is certainly proof of one thing however: Bitcoin appreciates or, in other words, grows in value over time. This is and should be startling to you when considered in the context of modern money. After all, money isn’t supposed to increase in value. Governments don’t even want their money to maintain, let alone increase, its value. They are actively trying to debase the value of money, during the good times and the bad. But Bitcoin marches to the beat of a different drummer.
The price of Bitcoin is volatile without a doubt, and this isn’t meant to be an exposé on Bitcoin’s “number go up” behavior. However, Bitcoin’s price performance and fundamentals have led to interesting behavior on the part of many market participants: hodling, or the act of holding onto one’s Bitcoin for long periods, even years at a time.
Mine To Hodl, Hodl to Mine
We commonly think of hodlers as everyday users like you and me. But these days even countries and corporations are getting in on the action. It may not come as a surprise then to find out that Bitcoin mining companies are some of the biggest corporate hodlers of all. Makes sense, right? Companies don’t really get into Bitcoin mining if they don’t believe wholeheartedly in its future.
What may come as a surprise though is the recent news that some Bitcoin miners, like Marathon Digital and Hut 8 Mining, are hodling ALL of the Bitcoin they mine. In short, they’re not selling any Bitcoin at all.
It certainly is an interesting proposition. How does a mining company pay expenses and finance ongoing operations if it never sells what it mines? It can only sell equity for so long before there’s nothing left to sell.
Marathon Digital has seemingly found an answer, announcing last week that it had opened a $100 million revolving line of credit with Silvergate Bank that is largely secured (i.e., collateralized) by its Bitcoin holdings. Marathon gets to hold onto its Bitcoin and gets to use someone else’s money to mine more Bitcoin. If that’s not having your cake and eating it too, I don’t know what is.
How is this possible you ask? Simple: Bitcoin appreciates, fiat depreciates.
Flatlining in a World of Fiat
A dollar doesn’t go as far as it used to and that’s no joke. In just the past thirty years, the U.S. dollar has lost nearly 50% of its value (i.e., purchasing power). That’s not great for your grocery list, but it’s fantastic for any long-term loans, like a mortgage, that you might have.
Why, you ask? Well, in simple terms, your mortgage is a fixed amount, say $200,000. And that amount doesn’t ever get adjusted for inflation. In other words, the mortgage lender doesn’t come to you at the end of the year to tell you that you now owe them more money because inflation was five percent this year. That amount of inflation may not seem like a large amount when you look at a single year, but compound it over thirty years and, as we discussed above, you could be paying back the same mortgage with money that’s worth a lot less than when you started.
The same applies to Marathon’s line of credit with Silvergate, especially because the companies are able to renew it annually, perhaps forever (or at least as long as both companies remain in business). Marathon can borrow money to pay for its operating expenses (including interest on the loan, by the way) and eventually pay it back with devalued dollars when it’s ready.
Bitcoin Goes Up
As we’ve already discussed, Bitcoin is the opposite of fiat in many ways, and retaining value is certainly one of the biggest. Bitcoin had no value when its blockchain was first launched; it’s now worth over $50,000. If you’ve been holding onto your Bitcoin since day one like Satoshi Nakamoto has, then congratulations: you’ve experienced infinite returns.
In the context of Marathon’s fiat-based loan, Bitcoin’s tendency to appreciate over time is important because the loan is backed by a certain level of value rather than a specific number of Bitcoin. Let’s look at an example:
You want to take out a million-dollar loan. Your bank requires you to put up 2 million dollars’ worth of Bitcoin as collateral. At today’s prices near $50,000, that means you need to put up about forty Bitcoin as collateral.
Six months pass and the price of Bitcoin increases to $100,000 dollars each. You still need to post the same 2 million dollars of Bitcoin as collateral for your loan, but now it only takes twenty Bitcoin instead of the original forty. The other twenty Bitcoin are released as collateral and you’re now free to use them however you want.
Marathon has indicated that it intends to use the line of credit to pay operating expenses, the largest of which are paying for more Bitcoin miners and electricity to power them. It stands to reason then that Marathon will be successful in mining more Bitcoin to add to its holdings. Could it use those holdings to take out an ever-increasing amount of fiat-denominated loans? We’ll let the bank decide.
If what we’ve discussed above seems like a sure-fire plan to game the system, know that it’s not. In fact, it’s extremely risky. Why? Because Bitcoin is so volatile. Bitcoin’s value has increased a lot over the long-term, but its price action has been very choppy over short time frames. Just look at the last six months as an example: Bitcoin topped out at an all-time high of nearly $65,000 and then dropped to less than $30,000 a couple of months later. Marathon might have the stomach for that level of volatility since Bitcoin is its business. Do Silvergate and other banks? My guess is that they don’t, meaning they may pull the rug on Marathon if Bitcoin’s price dips too low for too long.
In other words, never risking more than you’re willing to lose is fantastic advice after all.
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