Bitcoin (BTC) miners are exploring hedging strategies to safeguard their earnings due to the unpredictable nature of the crypto market.
GSR, a top player in trading and market-making, is introducing hedging solutions that could grant miners a steadier income stream.
With these offerings, GSR intends to fortify the $500 billion Bitcoin infrastructure, ensuring that major operators remain stable even during market slumps, as mentioned in their latest report.
Brian Rudick, a chief strategist at GSR, told Axios in a discussion that the company has been advocating these hedging tools to miners for a while now.
During the height of the crypto surge, miners showed little interest as the threat of plummeting prices didn’t concern them.
Yet, as the market shrank, profitability became a challenge for miners, sparking a renewed attention towards hedging techniques.
GSR suggests employing swaps and options to allow miners to set future production prices.
Through swaps, miners have the chance to offload their future yields at an agreed-upon rate, ensuring some level of price security.
One benefit of swaps is that the opposing party is often inclined to settle for a consistent price increase. But this comes with the drawback of potentially missing out on bigger profits should the price see a substantial hike.
Conversely, options give miners the opportunity to purchase the right to offload Bitcoin at a set price.
If market prices surge beyond this, miners have the discretion to refrain from activating the option. But, should prices dip below the set rate, miners can still ensure they break even or remain profitable.
However, using options isn’t without cost. Fees associated with them can eat into miners’ profit margins, increasing operational costs.
Gary Vecchiarelli, CFO of Bitcoin mining firm CleanSpark, remarked, “We’re witnessing notable expansion and evolution in the hedging and derivatives sectors as more traditional finance tools make their way into our domain.”
Hedging Model Has Been Successful in Other Industries
The report from GSR draws parallels between the successful use of hedging in the oil and gas exploration sectors and its potential applicability in Bitcoin mining.
Rudick highlighted the unpredictability miners confront when trying to forecast their half-yearly earnings.
He stated, “For miners, gauging what their revenues will be in the next six months is incredibly challenging.”
Due to the crypto market’s inherent volatility, miners find it tough to devise concrete financial plans and make sound investments.
Rudick believes that the adoption of hedging techniques might ease this unpredictability, instilling greater confidence in lenders about the consistency of miners’ income streams.
It’s also noteworthy that miners often choose to retain the Bitcoin they extract instead of instantly cashing it in.
Holding onto mined Bitcoin is a miner’s inherent way of hedging, as they anticipate the price to rise in the future.
Yet, by retaining these Bitcoins, miners might be missing out on immediate revenue opportunities.
Rudick calculates that the cost to mine a single Bitcoin stands at about $15,000, whereas its current market value is above $25,000. This indicates that by not liquidating, miners might be bypassing considerable immediate gains.
GSR’s methodology seeks to pair buyers on either side of a hedging transaction, ensuring compensation is balanced to avoid excessive payouts or shortfalls.
The company profits from the fees they levy for these hedging services.
