Small mining companies help themselves: use financial derivatives to hedge hash rate fluctuations

Source: Reuters , original author: Tom Wilson

Source: Odaily Planet Daily Translator: Nian Yin Si Tang

The old image of Bitcoin miners was that young technicians were standing in their bedrooms and using laptops to solve math problems to earn Bitcoin. Today's Bitcoin miners are transformed and become savvy startups with ultra-high-speed chips and large professional mining machines.

Now these miners have a new idea-they are starting to look for financial derivatives to hedge against sharp fluctuations in electricity demand. The reason for this is obvious, because such fluctuations may make miners lose their money.

The growth of such a tool market may accelerate investment in cryptocurrency mining. Speaking of mining, this was originally an area that only a small number of people are keen on, but it has now developed into a capital-intensive industry, and the demand for digital currencies is expected to grow.

Crypto miners must use more and more computing power when competing with others to solve complex mathematical equations to build a blockchain, and to obtain new digital currencies as rewards.

Startups have little defense against so-called "hash rate" changes. Hash rate refers to the volatility index that measures the processing capacity of the entire Bitcoin network, and it determines the power required by miners to produce new Bitcoins.

The surge in hashrate means more power is needed, which will undoubtedly increase production costs and erode the ultimate profit made when cryptocurrencies are sold. This unknown situation may become a major obstacle for startups to attract imminent investment from institutions and markets.

To cope with this dilemma, miners also have their own solutions. Seven cryptocurrency miners and industry sources told Reuters that derivatives that allow miners to hedge their computing power can help solve the problem. In theory, this will provide a clearer forecast of cash flow-a prerequisite for potential investors.

Miners and crypto traders who responded to this response came from all over the world, including the United States, Canada, the United Kingdom, and Hong Kong. They all said that although the market for such products is in a very early form, it has gradually risen and will become more and more important.

"The hash rate trend is upward. Unless miners increase their production, they will receive less bitcoin at the same power," explains Michel Rauchs, author of the cryptocurrency miner research report at the University of Cambridge.

"Using hash rate derivatives, they can price at risk."

London-based DAG Global, which claims to be a cryptocurrency commercial bank, said miners have shown strong interest in the company's products used to hedge the hash rate.

"As the hash rate changes, you may soon change from profit to loss," said Robert Andersen, head of digital asset sales at DAG. "Contracts (that we provide) can defend against this risk, which is similar to a kind of Insurance, for which you pay premiums. "

Another crypto dealer, GSR, said they have been developing similar products, but because the market is in its infancy, they are not ready to offer them.

"We are building products around hash rate and mining difficulty," said GSR co-founder Richard Rosenblum. "It will take more than a few months to have a lot of liquidity." He is also cautious about this, saying It may take several years for the market to take shape.

Obviously, this market is still very early. Although exact numbers are difficult to obtain, some people in the crypto field predict that the market value in one year may be about 50 million to 100 million US dollars.

To win investors

For traditional investors looking for high-yield returns in the era of ultra-low interest rates, the claims made by cryptocurrency miners are not enticing.

Bitcoin's current transaction price is about $ 7,500, and 1,800 bitcoins can be mined every day. Based on this calculation, the annual market value of bitcoin is about $ 5 billion.

It's no wonder that many investors want to share a piece of cake.

As an important example of the listing of crypto mining companies, Chinese mining giant Jia Nan Yunzhi went public on NASDAQ last month, raised $ 90 million in an initial public offering, and has a company valuation of about $ 2 billion.

Although this shows the appetite of the capital market, Canaan is one of the few large mining companies in the world. Many are smaller companies that may have to do their best to convince investors that they can manage risk.

Marco Krohn, co-founder of Genesis Mining, based in Hong Kong, China, said the mining market is still competing for hundreds of millions of dollars in investment. It is understood that the company is mining Bitcoin from Iceland to Kazakhstan.

"You need to take advantage of traditional financial markets-these people have a lot of problems and they tend to avoid risk," Krohn said.

To attract such investors, mining companies have told Reuters they are paying closer attention to controlling hash rates and price risks through financial instruments.

The adoption of derivatives in the mining sector has definitely increased in recent months. "Kevin Blockchain Division Manager Kevin Shao said.

US company BitOoda said that crypto mining hedging tools may be in its infancy, but it is beyond doubt that the changes have arrived. The company has been promoting a product called "difficulty swap" since April.

The company's chief strategist, Sam Doctor, said that the market for such products is becoming more liquid and contract terms are increasing.

"Before taking trading steps, more participants are watching the performance of these transactions," Doctor added.