A financial protection instrument is buzzing around the Bitcoin mining sphere – Financial Service firms are offering derivates based on Bitcoin’s total mining hash rates and difficulty.
Hedging one’s loss by buying mining derivatives would reduce the risk in the business as the industry looks for future growth. Hence, attracting more institutional players and investors to it.
Reportedly, seven large scale cryptocurrency miners have told the media that they are planning to or already engaging with hedge funds in trading these derivatives.
According to the report, a couple of crypto hedge funds are already offering or in the process of offering such derivatives; London-based DAG Global, BitOoda and crypto trader GSR to name a few.
Robert Andersen, who leads DAG’s digital asset sales told the media,
“As the hashrate changes, you can go from being profitable to losing money very quickly. The contract insures you against that. It’s like insurance, and for that you pay a premium.”
“We’re building products around hash rate and difficulty,” said co-founder GSR’s Richard Rosenblum.
The total hash rate and difficulty are metrics that evolve from the network strength and Bitcoin’s design. The protocol is designed in such a manner that as the hash rate increases/decreases, the network automatically resets its difficulty levels to slow/increase production.
The hash rate and difficulty have been on an upward trajectory this year with the increase in price, and the introduction of new-age miners. These miners are significantly cost-efficient and powerful compared to their successors.
Nevertheless, things can change post halving when the rewards for mining will be reduced by half. It is likely the difficulty rate might increase a lot making it difficult to make a profit. In such an environment, the derivatives will hedge against the loss of the decrease in production. The miners will accordingly buy/sell futures and options according to their capital project and budget.
Sam Doctor, the company’s chief strategist at BitOoda said,
“There are more players on the sidelines watching how these trades perform before they take the step of trading themselves.”
Do you think that these derivates would reduce or increase the risk for Bitcoin investors? Please share your views with us.
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Nivesh from Engineering Background is a full-time Crypto Analyst at Coingape. He is an atheist who believes in love and cultural diversity. He believes that Cryptocurrency is a necessity to deter corruption. He holds small amounts of cryptocurrencies. Faith and fear are two sides of the same coin. Follow him on Twitter at @nivishoes or mail him at nivesh(at)coingape.com