BHEX Bitcoin Options – the Better Hedging Tools for Crypto Miners
Currently, the rising costs of mining, combined with Hashrate competition, fluctuations in the cryptocurrency price, and various other reasons, have resulted in increased instability in total mining profits. Additionally, once the value of any cryptocurrency falls below the mining cost, the high electricity bill and low output will simply cause miners to choose to turn off their mining machines – resulting in a loss of investment.
Although many mines have opened mining models with pre-paid income, if the market fluctuates drastically and does not transfer assets in time, once the price of the cryptocurrency falls, the income will still be affected.
Therefore, choosing financial derivatives as a tool to hedge the risks brought by price fluctuations is a relatively "smart" approach for the majority of miners.
Hedging, in simple terms, is to use the same pattern of price movements in the spot market and the derivatives market, and to operate in the spot market and the derivatives market with the same cryptocurrency, equal quantity, and opposite direction. In the end, no matter how the price fluctuates in cryptocurrency, the profit and loss of the two-side operate at the same level to achieve the purpose of asset preservation.
For example, if a miner is expected to dig a certain amount of bitcoin at some time in the future, he is worried that the price of the cryptocurrency will fall at that time, he can make use of the short mechanism of financial derivatives to short the expected returns, and the early gains can be locked in. .
If the price of the cryptocurrency falls, the profit after the position of the derivatives market is offset by the loss after the spot market sells; if the price of the cryptocurrency rises, the loss after the position of the derivatives market is offset from the profit after the sale of the spot market, and eventually Can achieve balance between profit and loss.
At present, futures and options are the two mainstream financial derivatives in the market. Which ones are more suitable as hedging tools for miners? Let us look at an example:
Assuming that the spot price of 1BTC on 15 April 2019 is 5000USDT, miner Bob expects to dig 10 BTC in a week. However, he fears that the cryptocurrency will fall at that time, and also, he hopes to secure gains of each BTC at the unit price of 5000USDT in advance. Bob therefore has two options:
1. Choose a platform futures contract for hedging
Take a platform week contract as an example. Suppose the current contract price is 5000 USDT (assuming the contract price and the spot price are the same), use a BTC margin of 10 times leverage 1 BTC is used as 10 BTC). ) Open a short contract.
If the price of BTC drops to 4,500 USDT each after 1 week, sells the BTC in the spot market, the expected return is reduced by 500 USDT each. In the futures market, Bob has obtained 10 times of leverage and gained 10 times of return due to the price decline. The total gains were 1.11 BTCs at the time of settlement, and the spot price lost a total of 5000 USDT. In this way, Bob succeeded in achieving hedging.
However, if within this week, the BTC price will rise first and then fall, from 5000USDT to 5500USDT and then fall to 4500USDT. When the BTC price rises, it needs to increase the margin and increase the investment of funds. If the margin is not increased in time, Bob will be liquidated. Not only will he not have a successful hedging, but he will also lose all the principal, and will enlarge the loss.
Method: Open a weekly futures contract with 10 times leverage
Cost: 1 BTC, high capital occupancy rate
Result: There is a risk of forced liquidation under the fluctuation of the market, which is easy to enlarge the loss.
2. Choose BHEX Bitcoin option hedging
Bob bought 10 put spreads at BHEX, and he will pay 1400 USDT as premium.
If the price of BTC fell to 4500USDT a week later, Bob sold the BTC as the spot market and would have lost 500USDT per BTC; yet, he could gain 5000USDT on BHEX options, reducing the loss.
If the BTC prices fluctuate heavily within a week, with the same up- and downtrends as before from 5000USDT to 5500USDT to 4500USDT, Bob’s position will not be affected, and he would still receive 5000USDT in earnings when the option expires.
Method:: Buy BHEX put option
Cost: approximately 1400 USDT with low capital occupancy
Results: it can either be successfully hedged, or reduced the losses.
Futures Contract VS BHEX Bitcoin Option
BHEX Bitcoin Option
Capital occupancy rate
Establishing a futures position requires a mortgage of sufficient margin
A small amount of premium is needed, which can be seen as sunk cost
It is possible to increase investment/forced liquidation and enlarge losses
Successful hedging or reducing losses
By comparison, we can see that both futures and options products can meet the needs of miners' hedging. If the price of the cryptocurrency falls, you can hedge the risk and realize the purpose of asset preservation or loss reduction by opening the futures contract or buying the put option.
However, the capital utilization rate of futures products is very high. Once the market fluctuates drastically, there will be a risk of forced liquidation, which may further increase the cost of hedging, which is not cost-effective for miners.
In contrast, BHEX's bitcoin options are clearly a better choice. After the miner buys the put option, once the price of the cryptocurrency falls, the gain from the payment of the option settlement or the increase in the price of the option can make up for the loss in the spot market. Even if the price of the cryptocurrency rises, only a small portion of the premium for the purchase of the option will be lost, the input cost will be smaller, and the capital occupancy rate will be greatly reduced.
The same hedging operation, the choice of tools is critical. Compared with futures contracts, BHEX Bitcoin options products adopt a spread option strategy, which is cheaper to issue and has no risk of forced liquidation. It is a cost-effective and safer hedging tool for miners.
Executive editor： 李萍萍