An upcoming Bitcoin (BTC) hash rate-backed product that could offer 10%–13% returns shouldn’t be compared to failed products by BlockFi or Celsius, as its returns come from proof-of-work, not “Ponzi schemes,” claims the product’s creator, Bitcoin mining firm Luxor Technology.
The legitimacy of Luxor’s hash rate-backed product was highlighted in an Oct. 17 episode of the What Bitcoin Did podcast. Host Peter McCormack expressed concern about Luxor’s upcoming offering and discussed what a worst-case scenario for Luxor’s product would look like.
Luxor head of derivatives Matt Williams told Cointelegraph that its hash rate-backed product isn’t a repeat of products from BlockFi or Celsius because it’s backed by economic production.
“There is actual proof-of-work and demonstrable economic activity happening [here],” Williams said. “The return comes from miners giving up some of the margin that they would produce from their mining business to an investor that is financing their operation.”
“The main takeaway: The return comes from hash rate, not from pixie dust, Ponzi schemes or rehypothecation.”
Investors make a return by paying Bitcoin to miners (not Luxor) and then receive that miner’s Bitcoin production.
The returns are created when hash rate is purchased from a Bitcoin miner at a discounted price and is then “locked in” when sold at a higher price. Bitcoin in the form of mining rewards comes from that hash rate. Luxor estimates investor returns will range from 10% to 13%. However, these returns will vary based on market conditions and are not guaranteed.
Luxor mandates miners to put up collateral to ensure they can still meet their obligations to the investor in the event of machine downtime, insolvency, or some other disruption to their operations.
Williams claimed the offering means miner’s are provided with “better” access to capital because they won’t have to sell their mined BTC to fund their operations.
“It can be a more economically viable option for miners because they can receive funding upfront while retaining ownership of their mined Bitcoin,” he added.
Luxor stressed that it isn’t using its own mining pool and is only acting as an intermediary between investors and mining firms. “We only custody Bitcoin for a very short period of time as we move funds from the buyer (investor) to the seller (mining firm),” Williams said.
Williams stressed that Luxor’s product isn’t tapping into its own mining pool reserves or client funds.
We understand your concern regarding rehypothecation, but to be clear again, there is NO rehypothecation with this product. The yield comes from mining rewards as stated in the podcast.
We’re happy to have a conversation on this topic to answer your questions and address your…
— Luxor Technology ⛏️ (@LuxorTechnology) October 27, 2023
But those interested in making a return on their Bitcoin should tread with caution, said Joe Kelly, CEO of Bitcoin lending firm Unchained.
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“Any investment or loan that requires a Bitcoin holder to part control with their Bitcoin should receive tremendous diligence and scrutiny,” he said.
“The Bitcoin lending and borrowing markets are very nascent, and we are likely to see repeats of the failures that happened with BlockFi and Celsius unless investors on the whole exercise extreme caution.”
Williams iterated that the hash rate-backed product isn’t available to retail customers and mining firms must pass the firm’s due diligence checks before being approved.
TLDR: @LuxorTechnology intends to take customer Bitcoin and loan it to well established mining companies looking for funding.
Luxor will do ‘due diligence’ on the recipient of the loan and the donor will immediately start receiving #Bitcoin at a pre determined rate (ie 10-13%)
— The ₿itcoin Therapist (@TheBTCTherapist) October 27, 2023
Williams acknowledged Luxor’s hash rate-backed product rightfully comes with “inherent trepidation” in light of the BlockFi and Celsius bankruptcies and noted that investors are taking on counterparty risk with Luxor.
To mitigate those risks, Luxor said it would only work with “reputable miners” and will mandate them to post collateral to use the product.
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Update (Nov. 6 at 9:02 UTC): This article has been updated to include corrections pertaining to how Luxor’s hashrate-based product operates and to clarify that 10-13% returns vary on market conditions and are not guaranteed.
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