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Luxor Looks to Help Bitcoin Miners Hedge Halving Risk With New Hashrate Futures
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Aoyon Ashraf
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The new derivatives product will settle on a CFTC-approved exchange, adding liquidity and transparency.
The financial product will help miners mitigate hashrate volatility risk, adding a treasury management tool ahead of halving.
The bitcoin (BTC) mining software and services company Luxor Technology partnered with crypto derivatives company Bitnomial to offer the U.S.’s first-ever exchange-traded hashrate futures to help miners hedge their revenue risk ahead of April’s halving event.
The product will be cash-settled, meaning the futures contracts won’t require physical delivery of the underlying assets, the firms said in a statement on Tuesday. The contracts will be based on hashprice, a term coined by Luxor that refers to the bitcoin mining revenue miners earn from a unit of hashrate over a specific period of time. The product will be unique as the contracts will be settled in an exchange instead of over-the-counter (OTC), providing more liquidity, transparency and less counterparty risks for the buyers and sellers.
Hashrate – a measure of computing power on the Bitcoin network – is one of the core aspects of a miner’s revenue generation ability. A higher hashrate means more competition for the miners to mine a block on the network, lowering the chance of potential reward and thus reducing revenue. With bitcoin halving approaching fast – an event that will cut rewards by half – miners are adding more mining computers, increasing the hashrate of the network, creating added uncertainty for miners’ revenue.
“Hashrate has one of the highest volatilities of major commodities, and the April 2024 bitcoin Halving will exacerbate this volatility,” said Luxor’s Head of Derivatives, Matt Williams, in the statement.
The contract size for Luxor’s new financial product will be one petahash (PH), will have monthly durations and will be benchmarked to Luxor’s Bitcoin Hashprice Index for settlement, according to the statement. It went on to add that the new financial product will be part of Luxor’s other hashrate-related products and will be a key addition to Bitnomial’s Bitcoin Product Complex.
Bitnomial received approval from the Commodity Futures Trading Commission (CFTC) last year to register as a derivatives clearing organization in the U.S., letting it settle margined futures and options contracts.
Unlike 2021’s bull run, where growth-at-any-cost led to many unsustainable means of operating mining businesses, a much more prudent strategies will be required by the miners. The recent crypto winter has seen many large bankruptcies and dried up capital markets for the miners. Moreover, investors are now shying away from mining stocks, even as bitcoin price soared to a new all-time high, heading into the halving, as spot traded bitcoin exchange-traded funds (ETFs) are deemed better investments versus miners.
If miners don’t use sound treasury management strategies, including hedging through derivatives products, investors are likely to continue to stay away from the industry, making it much harder for the miners to grow their operations and remain profitable.
“Bitcoin miners need additional methods to mitigate this price risk to ensure the longevity of their businesses,” Williams said. “Exchange-traded hashrate futures will allow them to quickly move in and out of hedging positions to de-risk their revenue streams, and the revenue certainty should improve their credit profile with lenders, which will lower their cost of securing capital,” he added.
