Bitcoin (BTC) miners are considering hedging options to protect their revenue stability amidst the volatility of the cryptocurrency market.
GSR, a leading firm in the trading and market-making space, is pitching hedging products that would provide miners with a more predictable income.
By offering these tools, GSR aims to make the $500 billion Bitcoin network more resilient, ensuring that large operators are not at risk of going under during market downturns, the company said in a recent report.
Brian Rudick, a senior strategist at GSR, said in an interview with Axios that the firm has been promoting these hedging instruments to miners for several years.
However, there was not much interest during the crypto boom as miners were not concerned about potential price declines.
But as the market contracted, miners faced significant challenges in staying profitable, leading to a newfound interest in hedging strategies.
GSR proposes the use of swap and options products to help miners lock in prices for future production.
With swaps, miners can sell their future production at a predetermined price, providing a certain level of price protection.
The advantage of swaps is that the counterparty is likely to agree to a steady increase in the price. However, the risk lies in missing out on potential gains if the price rises significantly.
Options, on the other hand, allow miners to buy the right to sell Bitcoin at a predetermined price.
If the actual price exceeds this level, miners can choose not to exercise the option. However, if the price falls below the option price, miners can still cover their costs.
The use of options incurs a fee, which cuts into miners' margins and adds to their expenses.
"We are seeing substantial growth and maturity in the hedging and derivatives markets as more products from traditional finance crossover into our industry," Gary Vecchiarelli, the chief financial officer of Bitcoin mining company CleanSpark, said.
Hedging Model Has Been Successful in Other Industries
GSR's report argues that the hedging model has been successfully applied in the oil and gas exploration industry, making a case for its adoption in Bitcoin mining.
Rudick emphasized the challenges miners face in predicting their earnings over a six-month period.
"These miners have a really hard time knowing what they are going to make in six months," he said.
The volatile nature of the cryptocurrency market makes it difficult for miners to plan their budgets and investments effectively.
Rudick claimed that implementing hedging strategies could potentially lower these rates by providing lending partners with more confidence and stability in miners' revenue.
It is worth noting that miners often hold onto the Bitcoin they mine rather than selling it immediately.
This acts as a form of natural hedge, as miners bet on the price increasing over time.
However, by not selling their mined Bitcoins, miners risk forgoing immediate profits.
Rudick estimated that it costs around $15,000 to mine one Bitcoin, while the current price is over $25,000, suggesting that miners are potentially sacrificing significant profits by holding onto their coins.
GSR's approach involves finding buyers on both sides of each hedging bet to balance out potential overpayments or underpayments.
The firm generates revenue through fees charged for offering these hedging instruments.