Case Study: Smoothing volatility of miners’ future rewards with BTC put options
17 NOV 2023 | VIEWS | 3 MIN READ
Mining companies, driven by the recent cryptocurrency rally and ahead of Bitcoin’s upcoming halving in April 2024, are moving quickly to secure profits. The pressing concern for many miners is to safeguard holdings from potential price drops in a market that’s prone to fluctuations and uncertain cash flows. With future rewards at stake, it becomes vital to employ strategies to ensure profitability and meet financial commitments.
In this case study, we’ll explore how Wintermute Asia assisted a Bitcoin miner in protecting his significant BTC holdings against the potential risk of market downturns.
The challenge of securing mining profitability in a volatile market environment
A Bitcoin miner faced the challenge of managing the uncertainty surrounding their future mining rewards. By early June 2022, the price of BTC was hovering around $29,000, and the miner was concerned about potential price drops that could impact the value of his BTC holdings and future mining rewards, which were expected to reach a total of $2.9 million worth of BTC. For example, a price decrease from $29,000 to $19,000, would imply a loss of $1 million (-34% of the initial value), risking the profitability of his mining activity.
How buying put options can hedge BTC value
To mitigate this risk, the miner decided to protect his BTC holdings using put options at $26,000 for a premium cost of $120,000, equivalent to 4% of the current value of the original notional. These put options provide a form of insurance for his BTC holdings, enabling him to sell Bitcoin at a predetermined price if the market experiences a significant downturn.
Wintermute Asia’s no fees & direct access to major Options liquidity sources and efficient capital management framework played a vital role in crafting a customized and cost-effective solution to protect the miner’s assets during market volatility.
Results: The miner’s holdings stayed safe regardless of market swings
Scenario 1: Price declined and miner was protected
By July 2022, the price of Bitcoin had fallen from the initial price of $29,000 to $19,000, more than 30% decline. However, the miner exercised the BTC put options at a strike price of $26,000, mitigating potential losses to a maximum of -14.5% under the initial value of his BTC.
Scenario 2: If prices had increased, miner would have retained upside potential
In the hypothetical case that the price of Bitcoin would have increased, for example, soaring from an initial $29,000 to $39,000, the BTC miner would have made the decision not to exercise his put options, choosing instead to hold onto his Bitcoin holdings. By doing so, he would have capitalized on the substantial increase in value, achieving a 30% profit on his initial investment as the Bitcoin price reached new heights.
Key Takeaways
This case study emphasizes the significance of employing risk management and financial tools in the Bitcoin mining industry. Using derivative products, like BTC put options, is valuable for addressing challenges related to price fluctuations and uncertain cash flow.
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