How to Finance a Bitcoin Mining Operation in 2022
Retail and institutional investors alike have multiple options to finance their bitcoin mining operations. Here are the most common.
Geopolitical, financial, and environmental use cases have brought Bitcoin mining to the forefront of retail and institutional investors alike, and interest in Bitcoin mining (particularly in North America) has never been higher.
So, you’re at the point where you’ve located the right ASIC from one of the many Bitcoin mining ASIC marketplaces available. But you might not have the dry powder available to buy, so you might need financing to purchase your Bitcoin miners, which range in price from $100 to $10k, depending on the model and market conditions.
Because every person and company’s situation is different, below are a variety of options bitcoin miners and investors can leverage to obtain capital.
Taking Out a Bitcoin-Collateralized Loan to Buy Bitcoin Miners
There are many services available for Bitcoiners to collateralize their BTC into fiat currency. The major perk? You don’t have to sell your BTC, nor are there credit checks or hard credit pulls required. Additionally, this loan will not be reflected on your credit score.
How does this process work? You receive dollars in accordance with an agreed upon interest rate, loan-to-value-ratio (LTV) (e.g., 25%, 33%, or 50% options), and contract duration. Upon the completion of paying back the loan’s principal and interest, the lender returns your bitcoin to your bitcoin wallet. Interest rates can range between 5-15% depending on duration and LTV.
The cons: Be cautious with this approach. Do NOT over-leverage or overextend yourself. Because if Bitcoin’s price drops, then the value of your collateral drops, and the lender will make a margin call which requires you to add bitcoin to your position. If you cannot add to your position, then the lender liquidates your bitcoin. For example, if you lock in 2 BTC to a loan when Bitcoin’s price is $50,000 (and the LTV ratio for the loan is 50%), then your lender loans you $50,000. If Bitcoin falls to $30,000 and the lender margin calls you, then you’d need to add 1.3 BTC to keep the loan-to-value ratio at 50%
If you take out a bitcoin collateralized loans: timing matters. It’s better to wait for a significant decline in price. (This is not financial advice).
This is also an option for Institutions. In December 2021, Bitcoin miner Bitfarms raised $100M from a BTC backed loan from Galaxy Digital at an interest rate of 10.75% over 6 months.
Business & Venture-Backed Loans to Finance Bitcoin Miners
For LLC corporations, small business loans are achievable. These loans typically entail lower interest rates and higher limits, as compared to personal loans. Traditional bank loans and lines of credit typically range between 2.5-7%. Small business loans are also an option.
Venture-backed Loans carry a higher risk/reward by alluding a traditional bank. Institutional investors can make use of services from Bitcoin-focused financiers like NYDIG, BlockFi, and Anchorage.
Buying Bitcoin Miners With Interest-free Credit Cards
This is a popular option for Plebs with steady cash flows. Miners who reject collateralizing their BTC or property can take advantage of 0% APR credit cards.
Meaning you can either 1) finance your miner with existing cash/credit cards and utilize the new card for living expenses, or 2) finance your miner over an 18 month period with no interest. This is a popular option among hobbyist and amateur Bitcoin miners.
0% interest rate credit cards can be detrimental to your credit score and financial well being, so please proceed with caution and consult a financial advisor before making any decisions.
Taking Out a Personal Loan to Buy Bitcoin Miners
Similar to a business loans, personal loans are available. These are typically advantageous to retail miners with good credit scores (FICO 700+). Interest rates are typically between 7.5% – 13% depending on your duration.
Financing Bitcoin Miners With 401k and Home Equity Loans
As of March 2022, most credit opportunities look more favorably at traditional collateral – not bitcoin-backed loans. Interest rates for these loans are significantly lower (2-4%). However, the downside of not repaying these loans can be substantially greater (you may lose your house, for instance). Proceed with caution.
This article is not financial and Luxor Technologies does not recommend any of the above options for financing bitcoin miners. You should consult a trusted financial advisor before taking out a loan or taking on debt to finance bitcoin mining operations.
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