Cut Through the Black Box: investing in the Crypto Mining Biz
The crypto space has moved into a new era since last October. US-China trade declined. The institutional money in both the U.S. and China compete to look for new investment opportunities. Some of the hot money went into the crypto ecosystem.
Since this May, the U.S. woke up to the economic shock by scooping up large amounts of Bitcoin. China allocates tens of billions of RMB into blockchain infrastructure projects.
Mainly affected by the unsettling macro-economy, bitcoin mining enters an era of institutionalization, where both the large hedge funds and the retail investors find that they are in an uncharted area. The industry continues consolidating, where the barriers to entry are higher than ever.
Against this backdrop, Kenny Ge, the founder of Xuanji Technology, co-founded the decentralized investment platform Dd.finance with Khalid Mazouz.
Dd.finance is a co-governed platform offering access to investment vehicles built as DAO and specialized in the mining sector. Each investment vehicle will provide full on-chain reporting to its investors.
Through Dd.finance, retail and institutional investors can now enter the highly lucrative mining industry safely.
Institutional Funds Turns to Bitcoin for a Higher Gain
According to Coindesk, JPMorgan reported on Nov. 6th, the Grayscale Bitcoin Trust is outperforming gold exchange-traded funds (ETFs). Since last month, Grayscale has been buying Bitcoin consecutively for 16 working days, for an accumulation of 40,000 Bitcoin.
Under this narrative that the world economy hits a recession and central banks printing money massively (till October, Fed has injected 9 trillion), Bitcoin has been siphoning wealth from the institutional funds and family offices who favor its liquidity more than gold.
One of Wall Street’s most renowned hedge fund managers, Paul Tudor Jones, reportedly holds in one of his funds a low single-digit percentage in futures on Bitcoin, according to Bloomberg News. Jones considers it as an inflationary hedge.
From August to September, Nasdaq-listed MicroStrategy raised Bitcoin holdings to $425 million after the second purchase. During Q2 of 2020, Cash App, developed by Square, generated $875 million of bitcoin revenue, up 600% and 711% year over year respectively.
To catch up with Square, Paypal announced on Nov. 12th to launch its cryptocurrency buying, holding, and selling service. This opens the gate for 289 million of its users in the U.S. to crypto assets.
“At dd.finance, we notice a sudden growth of overseas demands from Q2 2020,” Kenny Ge says in an interview: “A bulk order would reach at least 10k units of Whatsminer M30 and Antminer S19 (an estimated $21 million). There are many of those orders placed. This new demand is absorbing a big chunk of the factories’ production capacity.”
Solo miners have vanished from the industry for ages, for reasons like this: Bulk preorders for the latest bitcoin ASIC miners are sold out until next spring
In this article by Wolfie Zhao, the mining expert at The Block, Kenny Ge elaborated on the machine supply shortage.
This had made it hard for retail investors to enter, but it also signifies undoubtedly a good time to enter.
Survive the Crypto Mining biz with DAO, the Ultimate Hedge
The hedge fund management is structured to operate like a black box. It allows the managers the flexibility and freedom to generate high returns, but the obscurity also gives leeway to scandals like Amaranth, and financial Armageddons like the 2000s dot-com bubble, 2008 financial crisis.
Fund managers’ flexibility to perform in a black box is no light matter. Their favor in the high-yield junk bonds tends to tank the financial market at economic downturns.
Wall Street has proved itself to be the outlaw. Hoping the fund managers to fully disclose their activities is like expecting banks to adopt real blockchain and head towards decentralization. Whilst in the crypto mining space, regardless of anyone’s will, minting digital currencies in a public visible accounting book actually makes the IoT part technically feasible.
The crypto mining space is also a wild game. Here are some of the decisive factors for cost control: the pricing power on electricity bills, machine inventory (pick the right type from the right provider), operation, the timing to enter, the ability to sell the machine, hedging. Even the institutional funds that had the caliber for strong due diligence paid the price.
Investing in the mining spaces is a tantalizing yet palpitating game. This is a multi-billion dollar industry. The highly lucrative information is kept in insiders’ circles amongst about 300 people in China, where 65.08 percent of the world’s hash rate is.
They are the survivors under the jungle rule, and under the high profit, they continue to play the jungle rule amongst each other — when co-investing into a factory, there are plenty of rooms to maneuver an accounting book. And there is the information asymmetry from cross-border investment.
The jungle rules of the enclosed mining circle set a high risk for the hedge funds; the retail investors can’t afford to lose more than once in this business that requires large payment up front and basically adjusting the money supply by eliminating non-competitive operators every year.
Especially this year, after halving, some miners could no longer hold onto the S9. The machines were then bought by mining factory runners who have access to cheaper electricity.
On the regulation side, later half of 2019, several cities in Sichuan opened sites offering power usage specialized for mining. Regulation changes like this stabilized the electricity cost. The market is pushing out small players and consolidating its resources.
Is Bitcoin Mining Profitable?
Absolutely yes, if you play it right. At the current price, $17874.50 at the time of publication, with the hash power at 92 TH/S, minus all the costs, the daily return rate is at 0.61%.
The institutions have been building up the momentum since May. When Bitcoin is in a bull rally, now is the right time to invest in mining funds instead of participating in a Bitcoin periodic fixed investment.
And as the industry is financialized, half of the mining is about managing the assets you mined.
Kenny Ge says, “Playing the mining game offers more leverage than buying Bitcoin. Mining Bitcoin with your own machines is like applying a 2X leverage. On the other hand, hedging with derivatives lowers the risk. This makes it an investment that pays back in the mid to long term. Besides, the machine’s value increases when Bitcoin goes up.”
Automation for a Fair Game
A Chance to Enter
It is not enough to find a good partner. As it is technically feasible, we strive at eliminating human error, the dependence on trust, and facilitate a Decentralized Autonomous Organization built on smart contracts and IoT, a real fair game.
In contrast to traditional fund management where it all relies on the managers who do not systematically disclose every investment in the portfolio, DAO makes the flow of the funds visible and the investment decision crowdsourced and balanced.
- Stories have shown each year the rainy and dry seasons in China cause miners to invest and sell machines: the mining business cycle is short and dynamic, at the same time, it requires a large sum of money upfront. It’s not a business that tolerates mistakes.
- After all, we are monitoring data centers that are open for us. The data for IoT is already there. The live status of the mining machine, CCTV of the mining operation, the number of cryptos mined in real-time, are all ready for use, which makes the IoT part much more feasible than a healthcare or insurance smart contract application.
This new investment vehicle is structured for co-governance and transparent management. It sets a safe environment for capital inflow. A safeguarded mining investment mechanism is going to yield high returns compared to a traditional hedge fund.
Top 5 traditional hedge funds in comprehensive have a net gain between 31.9% to 58.5% from the start. Bridgewater, the winner, was founded in 1975. In 2019, the top 5 hedge funds with the best annual performance, have their annual rate of return range between 4.9% to 8.4%. That is a conservative gain compared to mining fund investment.
As the anticipated ongoing bull run attracts interests from retail and institutional investors, the large sum of capital and its high liquidity is going to keep all boats afloat for the promising blockchain projects in the DADA community.
How Does The DADA Mining Fund Aggregator Work?
DADA Mining Fund Aggregator is an investment platform for crypto investors offering access to a catalog of selected DAO.
Investors can now :
- Access promising mining projects selected by the platform and its community
- Manage funds via an automated portfolio selection
- Invest in safe investment vehicles to pool funds for projects that require a large sum of payment upfront (the DAO’s)
- Benefit from transparent financial reporting, accessible on-chain
- Manage and trace their investment in real-time without the need for a third party
- Co-govern by voting on project selections and project fundamental decision throughout the project
- Receive their ROI in priority, before the DAO managers
- Smart contract risk control over the entire course
Miners can now attract new injection of capital
- From institutional investors who can now access fully transparent mining investment opportunities
- From individual investors who can now overcome the financial barrier to entry
This is how the capital flows: the fund releases by ratio to the user’s liking. A portion of the funds would be sent to the mining machine dealers; the dealers then deliver the machines to the previously chosen mining sites. The operator turns the machines on and uploads the monitor’s address onto the blockchain. Meanwhile, the fund manager sends the principal and profits into the smart contract wallet. Investors can trigger the wallet with their tokens and obtain their principle and profits when redemption opens. The process is transparent and open to the community. Projects are fully reporting all their data on-chain. Fund managers’ past performance and credentials are recorded on-chain, and traceable via their DID’s, for credit risk assessment.
DAO as a Socio-economic Experiment
The fabric of our traditional societies supports a pyramid structure of wealth trickling down. As a counter strike, we need to implement DAO to start clean (start on a clean slate).
Among the programmers who believe in decentralizing the data ownership, money-minting, and the economy built online and offline, “code is the law” is a shared mantra. The Decentralized Autonomous Organization (DAO) is a great experiment where all these endeavors congregate — programmed smart contracts replace the corporate organization, serving as the governing rule; every node on the network can see the transactions; your token is your pass. There is no central bank nor central server in this formula.
Mining remains to dictate a significant portion of token ownership, and hence, a crucial experimental field for innovative governing methods.
DAO is essentially a transparent, co-governing hedge fund management model: the funds were raised in Ethereum and locked in the smart contract; in return, the investors receive an equivalent amount of DAO tokens to weigh in the votes, co-deciding the fund allocation.
These features above make transparency an even more urgent need for the crypto mining funds. You want to vote for and see where your money is going, and you don’t want data tampering to occur.
The Crypto Mining Aggregator serves as a bridge for traditional funds, retail investors to enter with low risk, and like DAO envisioned, ingesting the capital to grow the crypto space. ingesting the capital into the crypto space and empowering everyone in it including the miners.
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