Bitcoin Miners Turn to Derivatives to Increase their Profitability as Halving Looms & Fees Decline
Bitcoin miners are currently earning 12.5 BTC for each block they mine successfully. The third reward halving will cut down this reward to half to 6.25 BTC.
There are about 5 months left when this event will occur and put a dent in miners’ revenue. But before that could happen BTC miner fees are already down over 24% from the prior week.
The 7-day average for Bitcoin miner fees is down to $166,669, which is down 52% from last month but still up 188% in 2019.
But this needn’t be negative and can be a lagging effect of fewer transactions or better fee estimation by wallets or because of more effective transactions.
Actually, it was in March this year that Bitcoin mining started seeing an uptake after falling to its lowest in February 2019 since August 2017.
Bitcoin Mining Profitability on the Decline
Back in August, Coin Metrics reported that the all-time revenue for Bitcoin miner topped $14 billion. While it took eight years for miners’ total revenue to surpass the $5 billion, the next $5 billion were exceeded in just eight months.
This is because of the increase in Bitcoin prices. In 2019 YTD, Bitcoin is up about 90% after losing 84% of its value in 2018 from the all-time high of $20,000 in 2017.
Most importantly Bitcoin has been making a higher yearly low, from $0.01 in 2010, $4 in 2012, $185 in 2015 to $3,200 in 2018.
Bitcoin mining profitability that has been on an uptrend since December topped in June this year and has been on a decline ever since, as per Bitinfocharts. This is because while BTC price has taken a drop from 2019 high of $13,900 in June, the hash rate continues to climb.
Towards the end of October, Bitcoin hash rate hit an all-time high at 110 Th/s and though it has taken a fall since then it is staying around 90 Th/s.
As such, miners are now looking to hedge the hash rate and wild swings in electricity that can easily turn their profits to losses.
Attracting Traditional Investors
A spike in hash rate means a need for more electricity that drives up the cost and eats into their profits. But now come crypto miners have found the answer in derivatives that will allow them to hedge the hash rate.
These derivatives will allow the miners to price in risk and provide clearer projections of cash flow which is a prerequisite for investors. However, the market is at a very early stage.
“We’re building products around hashrate and difficulty,” Richard Rosenblum co-founder of crypto trader GSR told Reuters, but “It’s going to take more than a few months for there to be significant liquidity.”
In the current environment of ultra-low interest rates, traditional investors are looking for high-yield return options and crypto miners can offer them an attractive proposition.
But Marco Krohn, co-founder of Hong Kong-based Genesis Mining said “these people tend to ask questions” and being “risk-averse.”
And to attract such investors, mining firms are looking at controlling their risks in terms of price and hash rate through financial tools.
According to these firms, the adoption of derivatives in the mining communities has increased in recent months and the market for such products was growing more liquid. Also, more players are on the sidelines watching how these perform before they jump in themselves.