Gu Yanxi: Bitcoin miners need to consider how to use options

As Bitcoin has developed to this day, its operating model is becoming more and more like commodities such as oil and soybeans. On the one hand, it has an actual production process, and miners use their own equipment to produce Bitcoins through mining. On the other hand, in the trading market, there are a large number of Bitcoin spot and derivative transactions in the market. Since these trading methods are more convenient than mainstream commodity transactions, the corresponding trading volume is also very large. Unlike mainstream commodity transactions, Bitcoin spot and derivative transactions are basically carried out 7*24 non-stop. In addition, due to the characteristics of Bitcoin itself, the price of Bitcoin changes greatly. For miners, it is very important to guard against market risks and avoid losses. In this regard, Bitcoin miners have the same concerns as producers of commodities such as soybeans and oil.

In terms of dealing with the market risks of Bitcoin, the most commonly used financial instrument is futures. Miners can use futures to ensure that they can sell the Bitcoin they can produce at a suitable price. As a hedging tool, futures have their advantages. These advantages include the characteristics of leverage, continuous changes in the underlying price, and the huge number of transactions that can be supported. However, futures also have their limitations, including relatively simple functions and very large unilateral risks. Futures collect margin in both directions. That is, for both bullish and bearish parties, if the market trend is opposite to the direction of the trader's position, then he will have to increase the margin. During periods of significant market turbulence, there is even a risk of liquidation.

Compared with futures, options are more suitable for individual Bitcoin miners to use as a trading tool to hedge market risks and obtain stable returns. Options include call options and put options. The lower limit risk of the trading party using options to go long is only the premium paid for it. Only the party who goes short has huge risks. In addition, various trading strategies can be formulated using options to achieve arbitrage or hedging purposes. For Bitcoin miners, understanding the characteristics of Bitcoin options provided by the market may help them find a more suitable trading tool for themselves. They can use their Bitcoin to earn stable returns or guard against downside risks.

For example, miners can use the Covered Call strategy of options to obtain stable returns. Figure 2 lists the Bitcoin option trading quotes on a derivatives exchange in the United States. We can see that the option market quote for the March 2021 strike price of $50,000 is $210. If a miner holds one Bitcoin, he can sell this call option at this strike price. He can therefore receive a premium of $210. If the Bitcoin spot price does not reach $50,000 before March 26, 2021, the miner can keep the $210 premium. If the Bitcoin spot price exceeds $50,000 at that time, and the trader who purchased this option chooses to execute it, the Bitcoin miner can also sell his Bitcoin at $50,000. This can also achieve very good profits. If the miner does not use options as a trading tool, but operates directly in the spot trading market, then he can only obtain the profits of spot trading and lose the opportunity to earn option premiums.

Figure 1. Covered Call Trading Strategy

Figure 2. Quotes for call options on the options exchange

For Bitcoin miners, another important role of options is to prevent the downside risk of the market. For this purpose, the Protective Put trading strategy can be adopted. Miners buy put options at a low price in a market. If the market spot price falls to this price, then the miner can at least sell the Bitcoin he holds at this price to avoid greater losses. If the price of Bitcoin goes up, then the Bitcoin he holds will increase in value. The overall Bitcoin spot and put options he holds can still achieve very good returns. For example, as shown in Figure 4, on March 26, 2021, the price of a put option with an exercise price of $15,000 was $1,399. In order to ensure that the Bitcoin he holds can be sold at this price, the miner can pay $1,399 to purchase this right. In case the market price of Bitcoin falls below $15,000, he can sell his Bitcoin at this price.

Figure 3. Protective Put Trading Strategy

Figure 4. Quotes for put options in option trading

Options are very suitable for trading products with a small total volume that retail users can participate in. Therefore, the trading volume of stock options is very active. In addition, due to its flexibility and the ability to configure a variety of trading strategies, it is also very popular among traders who are good at quantitative trading. But for ordinary miners, understanding the basic properties of options and using the correct trading strategy can use it to achieve their own goals.