For most small and medium-sized miners, what should they do with the coins they mine? Besides holding promising coins for the long term and waiting for a bull market to sell, a common practice is to mine, withdraw, and sell to pay for electricity and maintain fiat-based profits.
First, let’s discuss the advantages of holding coins:
- Potential High Returns: Holding coins can lead to substantial gains if the market goes up.
- Low Transaction Costs: Less frequent transactions mean lower costs.
However, the disadvantages are also apparent:
- Risk Exposure: Holding coins exposes miners to the risk of price drops.
- Short-Term Liquidity Constraints: Held coins cannot be easily liquidated.
Now, let’s look at the “mine, withdraw, and sell” strategy:
- Stable Cash Flow: This ensures a steady income stream.
- Avoids Price Volatility: Immediate sales minimize the impact of price fluctuations.
The downsides include:
- Missed Potential Gains: Selling immediately means missing out on potential future price increases.
- High Transaction Costs: Frequent transactions can lead to high costs.
As a former finance professional, I pay special attention to investment risk, returns, and the liquidity of investment targets. Transitioning from traditional finance to mining machine trading, I have been considering how to leverage my previous knowledge and business experience to help miners increase their mining profits and reduce risks. Is there a strategy with a risk level between holding coins and “mine, withdraw, and sell”? Today, I want to introduce a risk control tool for mining—hedging.
1. Concept of Hedging
Hedging, also known as hedge trading, involves establishing a futures contract of equal value to the actual goods being traded. The primary purpose of hedging is to reduce risk and potential losses, which can be understood simply as buying insurance for physical prices. Essentially, it locks in buy or sell prices in advance to avoid the risk of future price fluctuations. Therefore, hedging is a business that locks in the risk of spot price fluctuations, without profit or loss, only the decision to hedge or not to hedge.
For crypto miners, the main hedging businesses are:
- Hedging Raw Materials: For example, using electricity futures contracts to hedge against rising future electricity costs.
- Hedging Output Products: For example, using BTC contracts to hedge against future price drops in the mined coins.
2. Long and Short Hedging
- Long Hedging: This involves buying futures contracts to lock in raw material costs. It is suitable for processors who want to fix their input costs. Example: Suppose there is a mining machine contract. If I plan to buy a batch of mining machines in six months but fear a price increase, I can buy a futures contract now for machines due in six months. Regardless of price changes, I will purchase the machines at the price agreed upon in the contract.
- Short Hedging: This involves selling futures contracts to lock in output prices. It is suitable for producers who want to fix their sale prices. Example: If your mining machines will produce 10 BTC over the next year, but the future price is uncertain, and you feel that selling at the current price of $70,000 is suitable, you can establish a short position of equal value. This way, whether the future price is above or below $70,000, the BTC produced will be sold at $70,000.
3. Settlement Methods
- Physical Delivery: At contract maturity, both parties settle the contract through the delivery of physical goods. This is commonly used by medium and large-scale production enterprises and actual manufacturing varieties, such as rebar or live pigs.
- Cash Settlement: Contracts can be closed at any time before maturity with real-time profit and loss settlement. Currently, perpetual/settlement contracts in the crypto world are mostly settled in cash, which is the method we miners will also use.
4. Key Operational Points
- Margin System: Contracts require a margin, significantly reducing capital occupancy. Contract Leverage: Domestic futures contracts typically offer 5-10x leverage, while crypto contracts can offer up to 100x leverage.
- Equal Value Principle: The contract value should equal the value of the actual goods being traded. Partial hedging can be done based on personal preference.
- Contract Delivery Months: When selecting delivery contracts, the delivery date should be later than the actual goods’ trading date to avoid the need to roll over contracts, which can cause slippage and basis risk. Perpetual Contracts: These don’t have rollover issues but have a funding rate charged every 8 hours, making holding costs higher.
5. Considerations
- Risk of Liquidation: Due to the margin system, adverse price movements may require additional margin to avoid liquidation.
- Overall Profit and Loss: Do not view contract profit and loss separately. Contract gains offset losses from future spot trading, and contract losses offset gains from future spot trading.
6. Personal Views and Hedging Tips
- In a bull market, hedge future production at high prices or hedge in batches based on different price levels.
- Avoid guessing tops and bottoms for hedging. Hedge based on your cost and payback period, as individual circumstances vary.
- Set a psychological price based on your cost. Above this price, selectively hedge; below it, fully hedge.
- Treat hedging as a business operation, not speculation. Hedging is a business; speculative operations are not hedging.
- Large mining companies should hedge electricity futures, especially for Bitcoin mining, where electricity costs are a significant portion of total costs.
For more information or the latest mining equipment, please contact the MinerSource sales team.
Disclaimer: This article is for knowledge sharing only and does not constitute any investment advice. Investments carry risks and should be approached with caution.
