I have been asked numerous times about leverage and whether trading with leverage is Halal or Haram. I have the stance that leverage most of the time is haram.
What is Leverage and Why I think it is Haram?
For those who are unfamiliar, the word leverage is used to refer to someone who is investing with borrowed money.
The reason why I think using it is haram, most of the time, is because typically the borrowed money comes from a party that has something to gain from the investor using the borrowed funds.
Either they’ll charge an outright interest rate, or they’ll benefit some other way.
For example, when you use the borrowed funds to purchase and make investments through the brokerage they’ll make money through something called Payment For Order Flow (PFOF). This means they get a cut of the difference between the bid and ask prices whenever you make a trade.
So there’s some benefit whether it’s explicit or implicit that the lender is getting from extending leverage to traders.
Loans in Islam can only be given as an act of charity. It should never become a business activity.
Therefore leverage is haram.
People who hear this answer are typically disappointed because they are looking to leverage their trades in hopes of higher returns. After all, this is the appeal of leverage. It offers the possibility of additional upside but also additional downside.
Many people find this trade-off attractive and it is one they are willing to make.
This is especially true of Bitcoin investors who typically have a higher risk appetite than the average investor.
Bitcoin Mining Stocks
Historically, there has been a way to amplify Bitcoin returns without the use of traditional leverage:
Bitcoin Mining Stocks.
If Bitcoin goes up, these stocks often go up by more. On the other hand, if Bitcoin’s price falls they often fall more than Bitcoin.
In March 2021, at the height of the bull market, Bitcoin mining stocks had outperformed Bitcoin by 455% over the past 12 months. While Bitcoin was up 900%, shares in the four largest publicly traded bitcoin mining firms were up 5,000% over the same period.
Where Leverage in Bitcoin Mining Stocks Comes From
For those unfamiliar with Bitcoin mining, it is the process of validating transactions on the Bitcoin Blockchain. The Bitcoin algorithm rewards miners with Bitcoin.
The miners then sell this Bitcoin to cover their expenses or hold on to it to benefit from its price appreciation.
This is one of the big reasons why there is “leverage” in Bitcoin Mining Stocks. You’re not only investing in the business of mining, but you’re also investing in the reserves of Bitcoin that these miners hold.
Another reason for amplified returns is that some people may not want to hold the bitcoin directly, or may not have access to hold bitcoin directly. So the way these people choose to gain exposure to the price of Bitcoin is through Bitcoin Mining Stocks.
This causes the price of Bitcoin Mining Stocks to appreciate or depreciate more than Bitcoin itself depending on the amount of greed or fear surrounding Bitcoin at that particular point in time.
Bitcoin Miner Considerations
For your convenience, I have narrowed down the list of Bitcoin Miners that I am considering buying into.
- CleanSpark, Inc. (CLSK)
- HIVE Blockchain Technologies Ltd. (HIVE)
- Riot Blockchain, Inc. (RIOT)
- Hut 8 Mining Corp. (HUT)
Considerations when investing in Bitcoin miners include:
1. Bitcoin Miners are constantly raising capital
- Bitcoin mining is a very capital-intensive business. The mining equipment requires large capital investments.
- Mining equipment can become obsolete very quickly when newer more powerful and more efficient mining equipment comes out.
Consequently, miners are constantly either raising money through debt or through issuing more shares which dilutes the shareholders.
That said, the companies that invest the most in their capacity during bear markets are the ones that stand to gain the most whenever the bull cycle comes around again.
2. Management Efficiency
Bitcoin mining is all about management efficiency.
This is a notoriously competitive business and costs need to be kept under very tight control. Therefore seek strong management.
3. The Upside is High and so is the Downside
If miners are not paranoid about managing their expenses they can quickly become insolvent. The margin for error is very small so it may be a better choice if you are bullish on Bitcoin to just invest in Bitcoin.
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