Two Ways to Hedge Bitcoin/Cryptocurrency Mining Profit Volatility
Crypto mining is an unstable business. Profits may vary significantly on a monthly and quarterly basis. If you immediately sell your tokens, as a miner you undoubtedly care about the value of your coins as they directly affect your mining income. However, the overall hash rate has as much influence as the value of coin toward affecting your mining income. We have found that on the Bitcoin network, a 10% hash rate increase can result in 9.09% revenue loss, assuming other factors stay static (Total Hash Rate: https://www.blockchain.com/charts/hash-rate). If the network hash rate is high, you are less likely to win the block reward on any given block, and so revenues fall.
Here are two ways to stabilize your mining income:
1. Manage the Price Volatility of Your Coins
There are products on the market that can help you hedge cryptocurrency price risk.
Bitmex (https://www.bitmex.com/):
BitMEX offers futures contracts that hedge against price risk. They also offer perpetual contracts for a similar purpose, though these require you to pay a funding rate. This works ok but there is a lot to manage.
Pros:
- Offers Futures and Derivatives
- A lot of features
- Also allows 100x Leverage
Cons:
- Deposits and withdrawals can be made only through Bitcoin
- Not suited for beginners
- Not available legally in many locations
Deribit (https://www.deribit.com/):
Deribit is the first platform in the world offering plain “vanilla” European BTC options as well as bitcoin futures with margin. It is a fast and technically advanced bitcoin exchange. The basic purpose of the exchange is to trade plain European style cash settled options on the Deribit BTC index, with margin and up to 10x leverage. Additionally Deribit offers futures that settle on the Deribit BTC index, with up to 100x leverage. These options and futures can hedge against BTC price falls.
Pros:
- Can trade in futures as well as options
- Hassle free account creation process
- Have fund insurance protection
- Reasonable fees
Cons:
- Does not support altcoins
- Not Beginner friendly
- Does not accept any payments other than BTC
- Does not have phone support
Kraken (https://www.kraken.com):
Kraken is one of the oldest exchanges serving US customers and worldwide users that also support margin trading with bitcoin and other cryptocurrencies. Being a veteran player on the market provides a great experience in terms of trading infrastructure and services as well as variety and fees. This makes Kraken one of the best options if you are looking to hedge your mining operation.
Pros:
- US Friendly
- Low fees
- Probably the most secure exchange
Cons:
- No credit card deposits
- Minimum deposits for some altcoins
- Verification can take some time
2. Manage the Volatility of the Network Hash Rate
Klade (https://klade.tech):
Klade will be soon releasing the first product that allows miners to properly hedge against hash rate volatility. These tokens have 3-month lifespan and a payout at the end. They payout more if the hash rate is high and less if the hash rate is low. These payouts are perfectly designed to hedge against your mining revenue losses due to hash rate increases.
Below is a picture to help explain the smart contract transaction between miner and investor. More details available here.
