Bitcoin (BTC) and other cryptoasset miners have been forced to employ various strategies to hedge risks, said researchers at the Cambridge Centre for Alternative Finance, but most of these attempts are still “elementary.”
The study argued that, though mining pools are described as an aggregator of hashrate (the computational power of a cryptoasset network), they also purchase hashrate from hashers, thus contributing to its commoditization. And “as for any other commodity, the development of a spot market has led to the introduction of derivative contracts.” A few companies have started issuing a suite of financial products based on hashrate, said the researchers, while “[m]iners may see this development as an hedging opportunity to better manage their risks and improve their cashflow situation.”
According to this study: mining players have seen increased competition amongst themselves, as well as tighter profit margins, which led them to explore a number of different strategies to hedge risks and make additional cashflows. The study here highlighted the recent development of new financial instruments targeted specifically at miners, such as hashrate forwards and difficulty futures (futures contracts trading against Bitcoin’s future mining difficulty).
The study, however, described miners’ hedging strategies as “relatively elementary,” primarily consisting of holding cryptoassets (58%) or fiat reserves (41%).
The researchers concluded that,
“Only a handful of miners make use of sophisticated financial instruments, such as cryptoasset (12%) or hashrate (14%) derivatives, or choose to collateralize their coins (15%).”
Additionally, North American miners are twice as likely to use hashrate derivatives than Asia-Pacific (APAC) ones, and six times more likely than European miners, said the study. Furthermore, miners from APAC and North America are equally likely to enter cryptoasset derivative contracts. The regional discrepancies could be explained by certain factors, such as the availability of these financial products and regulatory clarity.
Here are some other key takeaways:
- Bitcoin is the most popular coin mined (89% of surveyed hashers), followed by Ethereum (ETH) (35%), and Bitcoin Cash (BCH) (30%).
Bitcoin mining is predominant across all regions, while other coins seem more popular in certain areas than others, e.g. Ethereum mining appears to be popular among Latin American hashers, whereas Bitcoin Cash is more popular in APAC and North America.
- China accounts for 52% of manufacturers’ total sales, dwarfing other regions, including the USA (12%) and Canada (9%).
- The share of labor and maintenance costs do not seem to differ significantly between China and the US.
- Vast majority of hashers no longer pay residential electricity prices, but gain industrial pricing via contractual agreements with power generators.
- Hashers’ operational costs may be reduced through government support, which may take the form of subsidies or tax exemptions, but only 23% of the surveyed hashers reported receiving support from governments. 38% of these operate in China, followed by Kazakh (19%) and Canadian (12%) hashers.
- 76% of hashers use renewable energies as part of their energy mix, but the share of renewables in hashers’ total energy consumption remains at 39%.
- For the majority of profit-driven miners, coin selection is generally guided by financial criteria, while hobbyist hashers, mostly located in Europe and North America, are often driven by subjective criteria, such as ideology and personal affection.
- Cost structure data from Chinese and American hashers seems to confirm that Chinese hashers have a competitive edge in the acquisition of mining machines, given the concentration of hardware manufacturers in China, and accompanying well-connected and shorter supply chains to Chinese hashers, simplified business conduct, and absence of overseas shipping fees.
- The seasonal advantage gained via electricity surplus in some APAC areas, such as the province of Sichuan in China, thought to give a competitive advantage in minimizing running costs, is offset by less affordable electricity prices throughout the rest of the year when hashers migrate back to their regions.
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