“The return comes from hash rate, not from pixie dust, Ponzi schemes, or rehypothecation,” a Luxor Technology executive stressed.
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.”
Luxor’s product works through investors receiving a cut of loan repayments by posting Bitcoin as collateral to Luxor, which will then loan it to other miners to fund their operations.
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%.
The process will be managed through Luxor’s upcoming hash rate marketplace.
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.
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.
“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 stressed that the hash rate-backed product isn’t available to everyone, only those who pass the firm’s due diligence checks.
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 may even mandate them to post insurance.
Luxor did not share when the product would be available.