Bitcoin ‘hash rate’ futures to launch in 2020, is a mining boom coming?

Companies engaged in bitcoin mining could benefit from a growing market for bitcoin (BTC) derivatives, which can provide financing and support for miners’ energy-hungry operations. In 2019, mining activity remained near all-time highs despite price volatility.

Bitcoin mining becomes a massive business

Mining is becoming a massive business as large hashrate pools and ASIC miner manufacturers are back in the spotlight in 2019. Canaan, which makes Bitcoin mining machines, even went public on the Nasdaq, selling shares through a listed shell company.

But now, a special product may be created for miners to directly hedge against the volatility of Bitcoin's hash rate in the coming months, according to Reuters. Small mining pools are extremely vulnerable to hash rate fluctuations because large mining pools account for more than half of Bitcoin's block resources. Larger operators can also afford more powerful ASIC mining machines or run more machines using cheap hydroelectric power.

“The trend in hash rate is upwards. Unless miners increase their output, they will get fewer bitcoins for the same amount of power,” said Michelle Laws, author of a Cambridge University study on mining.

Hash rate derivatives can hedge risks

A high hash rate means more competition and a higher mining difficulty. The hash rate is not a constant, and the difficulty readjusts every 2016 blocks, changing the odds of getting a BTC reward.

The Bitcoin network’s hash rate has fluctuated wildly over the past few weeks, ranging between lows of 7.4 quintillion hashes per second and close to 10 quintillion hashes per second. During this time, mining difficulty has risen sharply once before falling slightly again.

DAG Global, a London-based crypto startup that offers derivatives based on bitcoin hash rate, calls itself a cryptocurrency merchant bank.

“You can go from profit to loss very quickly as the hash rate of the Bitcoin blockchain network changes,” said Robert Andersen, head of digital asset sales at DAG Global. “Hash rate derivative contracts provide you with insurance. It’s like buying insurance, and you pay a premium for it.”

The profitability of the mining industry is also highly dependent on the spot price of Bitcoin. Miners usually try to sell some of the Bitcoin they mine to finance their operations. The derivatives and futures markets provide a way to hedge Bitcoin price risk. Another company, GSR, is also preparing to build a product based on hash rate risk, but believes that the market is still in its nascent stage and may delay the launch by months.

Bitcoin mining farms with slightly higher electricity costs may need to pay attention to their break-even price. But for Bitcoin mining farms in China, hydroelectric power is very cheap and can break even even at lower BTC valuations. The annual consumption of the Bitcoin network exceeds 73.12 TWh of electricity, which is slightly higher than the national electricity consumption of Austria. Currently, about 50% of the energy goes to the four largest mining pools. (Toutiao)