LONDON: The old image of bitcoin miners is of young techies in their bedrooms, hunched over laptops that solve maths puzzles to earn new coins. Now they’re more likely to be savvy startups with ultra-high-speed chips and massive, power-guzzling machines.
And, in a new development, they’re beginning to look to financial derivatives to hedge against the wild swings in their electricity needs that can turn profits to dust.
The growth of a market for such tools could accelerate investment in cryptocurrency mining, originally the preserve of lone enthusiasts but now a capital-intensive industry that is expected to see growing demand for digital coins.
Crypto miners must draw on increasingly large amounts of computing power as they compete against others to solve the complex mathematical equations to build the blockchain and earn rewards in the form of new digital coins.
Startups have largely been defenceless against changes in so-called “hashrate” – in short, a fluctuating measure of the processing power of the entire bitcoin network that dictates how much power miners need to produce new coins.
A spike in hashrate means more electricity is required, ramping up production costs and eating into eventual profits of coins sold. This wildcard could become a major obstacle for startups to attract much-needed investment from institutions and markets.
The answer, seven cryptocurrency miners and industry players told Reuters, are derivatives that allow miners to hedge the hashrate. In theory, that would give clearer projections of cashflow – a prerequisite for would-be investors.
The miners and crypto traders, spread from the United States and Canada to Britain and Hong Kong, said a market for such products, though in a very early form, was emerging and would grow in importance.
“The trend in hashrate is upwards. Unless miners increase production, they will get fewer bitcoin with the same power,” said Michel Rauchs, author of a Cambridge university study on cryptocurrency miners.
“With hashrate derivatives, they can price in risk.”
London-based DAG Global, which pitches itself as a cryptocurrency merchant bank, said miners were showing strong interest in the firm’s products for hedging hashrates.
“As the hashrate changes, you can go from being profitable to losing money very quickly,” said Robert Andersen, who leads DAG’s digital asset sales. “The contract insures you against that. It’s like insurance, and for that you pay a premium.”
Another firm, crypto trader GSR, said it has been working on similar products but, given the early stage of the market, was not yet ready to offer them.
“We’re building products around hashrate and difficulty,” said co-founder Richard Rosenblum.
“It’s going to take more than a few months for there to be significant liquidity,” he said, cautioning that a market could take a few years to develop.
And for sure, the market is at a very early stage. Firm figures are hard to come by, but some crypto players say it likely totals around $50-$100 million dollars a year.
