Bitcoin Miners Will Use Derivatives Like Traditional Commodity Producers

Sunday 7 May 2020, 7:30 AM AEST - 1 week ago

Bitcoin (BTC) mining has become a multibillion-dollar industry. Pools, manufacturers and farms contribute to the growth and professionalization of the space. Financial service companies bring institutional-grade products and capital that increases liquidity for the biggest operators.

Theres a fundamental shortage of United States dollars available relative to the overall demand when the sector encounters certain market conditions. The dollar shortage is one of the contributing factors to volatility in the markets.

Just like traditional commodity producers, Bitcoin miners will likely become large users of derivatives — whether its with futures to lock in prices or options to hedge against losses. Everybody with a business that has relatively predictable cash flow is going to have an appetite for access to debt in order to reduce the capital requirements necessary to fund their growth.

For Bitcoin miners, its no different.

At their core, the Bitcoin lending markets have been supported by the proliferation of crypto derivatives — through BTC/USD swaps and futures — that people are now able to trade with. Derivative trading generates an implied interest rate on BTC, with which miners and other parties can use to borrow BTC against USD, or vice versa.

Finding scalable sources of low-cost capital and educating more institutional players about mining will lead to increased funding opportunities. Expanding access to capital is going to play a role in securing the Bitcoin network. Everything is becoming more sophisticated, and you dont have to look far to find analogies for what we can expect will happen to this space over time.

The current state of play

The trend of miners opting to borrow fiat to pay expenses without selling their coins has been growing.

Financiers from Genesis Trading and Three Arrows Capital suggested that terms are getting tighter, but demand is increasing.

Su Zhu, the CEO of Three Arrows Capital, said:

If firms can get a better understanding of where their yields come from, who and why is borrowing, and how people will pay for it, that will be a good step forward for this industry.

For firms doing the arbitrage trade, we n ...

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