BTC miners take fresh look at hedging products, and more

09/06/2023 0 Comments

1. Bitcoin miners take fresh look at hedging products

Bitcoin may be volatile, but the returns for miners don’t have to be. That’s the message from GSR, a firm pitching hedging products that would make miners’ revenue more predictable.

Why it matters: The $500 billion Bitcoin network would be considerably more resilient if its largest operators weren’t in danger of going under every time there’s a massive drawdown.

Zoom out: GSR’s effort isn’t new, Brian Rudick, a senior strategist at the trading and market-making firm, tells Axios. He said they’ve been pitching miners on these instruments for years with very little uptake. In the boom, miners had zero interest. Many believed bitcoin price was going to go much, much higher than it did. GSR just put out a report on hedging. Looking at the financial reports of publicly traded miners, the only statements they found on hedges noted that companies weren’t buying them.

Today, its pitch is better timed. In the contraction, many miners had much larger problems of staying viable. Now they seem to be more interested, Rudick says.

How it works: GSR is pitching swap and options products that would allow bitcoin miners to lock in prices for future production. That would make their business considerably more predictable. With swaps, miners sell future production now at a set price. The advantage of swaps is that their counterparty is likely to agree to some kind of steadily increasing price. The risk of the swaps is that the price rises considerably faster and they miss out on gains.

Options, on the other hand, allow a miner to buy an option to sell bitcoin at a certain price. If the price is higher, they don’t have to exercise the option, but it also means they can still cover costs if price falls below the option. The price of options is they cost a fee. That’s a guaranteed new expense for miners, cutting into margins.

What others are saying: “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, tells Axios, via a spokesperson. Its main concern as it explores using these products, he said, is counterparty risk.

Zoom way out: GSR’s report contends that this model is well established in oil and gas exploration, and there’s no reason it shouldn’t be copied to bitcoin mining. “These miners have a really hard time knowing what they are going to make in six months,” Rudick tells Axios.

The impact: Rudick tells Axios that miners tend to get charged rates somewhere in the teens to finance expansion, because their business is so volatile. Rudick is trying to convince miners that hedging will help lending partners justify lower rates.

Of note: Bitcoin miners win fresh bitcoin proportional to their contribution to the network. If they don’t grow roughly as fast as the overall network, they start to fall behind. In other words, expansion is existential.

Be smart: Bitcoin miners often boast about all the bitcoin that they are not selling. Holding mined bitcoin rather than selling is a kind of hedge. It’s a bet that the price will be much higher later. One bitcoin is thought to generally cost about $15,000 to mine these days, Rudick said. At $25,000+ today, that means miners are putting a lot of guaranteed profit at risk.

Show me the money: Readers might be wondering how GSR makes running a business where they are basically offering to overpay miners at times.

Basically, GSR will try to find buyers on both sides of every bet, so that when it overpays on miner, it underpays another. It all washes out. Then it simply makes a profit on the fees for offering these instruments.

2. Bitcoin Mining and Electricity Bills in Different Countries

Data suggest an average bill for mining one BTC per household standard is around $46,291. BTC is trading at $25,778.33 at press time, falling 0.58% in 24 hours and 0.68% in the last seven days. There is a significant difference between the price of mining and the actual price of Bitcoin.

It should be noted that the average electricity cost could vary for different geographical locations. However, the average cost of mining is 35% more than the actual price of BTC. For instance, in Italy, a miner has to pay around $208K to mine one Bitcoin, an Austrian miner would pay $184.35K, in Belgium $172.38K, in Denmark $166.79K, while a German miner would pay $166.33K.

Continuing the similar scenario in countries believed to be most profitable for miners. Lebanese miners pay $266, Iranian miners pay $532, a Syrian miner will pay $1,330, a Sudanian miner will pay $2,128, while a BTC miner in Ethiopia will pay $1,596 to mine one Bitcoin. If watched closely, the difference between Italy and Lebanon is a striking 783 times.

How is Bitcoin Mining Cheaper than Drying Clothes?

The difference mentioned above is according to the electricity rate available in those locations. But the amount of electricity the machines use per hour remains more or less the same. They might consume more when the difficulty is high, and vice versa. Things become clear when these mining rigs are compared with everyday household items based on energy used.

Generally, every household in America has a few everyday items, like a washing machine, a dryer, etc. Studies suggest that electricity consumption for mining 1 BTC is more than that of a gaming PC, a leaf blower, an air conditioner, and similar items. However, drying clothes in a dryer consumes more power than mining BTC. Drying clothes consumes 5 kWh of electricity, while Bitcoin mining machines use 4.6 kWh.

An electric kettle uses 3.5 kWh, a leaf blower comes at 2.5 kWh, an air conditioner at home, a dishwasher, and an electric kettle consumes 1.5 kWh. A laptop and a 37-inch LED TV consume 0.12 kWh and 0.07 kWh, respectively. If the above data is accurate, Bitcoin mining at home is a viable option, but as it turns out, it is not.

If Bitcoin Mining Costs Less than Drying Clothes, Should One Start Mining at Home?

It seems profitable to start mining at home if it consumes less power than a tumble drying machine. But using a personal computer to mine BTC lost its relevance long ago. With the constant increase in mining difficulty lever, rendering becomes challenging for an individual compared to mining BTC and earning rewards.

Currently, the Bitcoin mining difficulty is around 55.62 Trillion, meaning that only 1 in 55.62 Trillion guesses will be correct. Also, if they wish to use dedicated ASICs to mine BTC, they might get higher speeds, but they might not be able to compete with substantial mining pools. Even if Bitcoin mining consumes less power than drying clothes, it is still challenging. Miners would continue to face these difficulties until the BTC price is significantly above $40,000.

3. Micro $3 Bitcoin miners won’t make bank, but that’s not the point: Inventors

While lacking in performance, micro Bitcoin mining devices should be seen as a stand against the Bitcoin ecosystem’s purportedly biggest flaw, its inventors argue.

Micro Bitcoin mining devices — often open-source and pocket-sized — have been serving a niche part of the market, offering buyers a fully assembled device or a do-it-yourself-kit to mine Bitcoin (BTC $25,698) solo.

Speaking to Cointelegraph, developers behind these kits admit that buyers won’t likely see much profit but argue that it’s important to fight the “secrecy and exclusivity” of the Bitcoin mining industry.

One company, BitMaker, recently claimed that one could be made for as little as $3, offering an output of 50 kilohashes per second.

A spokesperson from BitMaker — a company working on micro miners since as early as June 2022 — argued that all the well-known Bitcoin ASIC mining rigs are closed-source, very much unlike Bitcoin’s source code.

Data shows 35.4% of the Bitcoin hash rate comes from the United States, followed by Kazakhstan (18.1%), Russia (11.2%) and Canada (9.6%). U.S.-based Marathon Digital, Riot Blockchain and Singapore’s Bitdeer Technologies Group are among the largest mining firms in the world.

Skot, a builder of Bitaxe miners, shared a similar sentiment, explaining to Cointelegraph that open-sourcing the design enables much-needed transparency in the industry.

“The mining industry has traditionally been treated in secrecy and exclusivity. The advent of these open-source projects serves to shed light on this often opaque area, making it more transparent and accessible to the public,” Skot explained.

Skot, however, acknowledged that buyers shouldn’t expect to earn much Bitcoin right away. He said while Bitaxe engineers are working to make the miners more efficient, he also argued that the purpose of the portable miners isn’t about profit:

“It’s not necessarily about profit, it’s about learning, understanding and in some cases being part of a community.”

Skot also stressed that the portable miners weren’t built to compete with the commercialized players in the space but rather offer an opportunity for people to run a rig at home without needing to pay for a clunky, overheated and expensive mining rig.

Other small form-factor Bitcoin miners in the market include Bitmain AntRouter and Mars Lander. Meanwhile, innovators are also experimenting with how Bitcoin can be mined via mobile phones.