Partnered With:

NewBloc Investment Research: Discuss the option strategy combination of Bitcoin miners

Read this article in 9 Minutes

Miners need to use financial derivatives to hedge and transfer risks.

Original title: "Newbloc Investment Research: Discussion on Bitcoin Miners' Option Strategy Combination"
Original source: New Bloc Strategy Analyst Barry

As Bitcoin attracts more and more attention from global investors, the most upstream organization mining industry in this field is also favored by institutions. We know that The cost of mining includes the price and wear and tear of the mining machine. As the electricity cost of the mining machine and the computing power of the entire Bitcoin network continue to increase, the difficulty of mining will become more and more difficult, and the payback period will also become longer .

For Bitcoin miners, the longer the mining payback time, the more risk they need to bear the price fluctuation will be bigger. Therefore, miners need to use financial derivatives to hedge and transfer risks.

An option is an option that can be given to the holder to buy or sell at a fixed price within a certain period of time in the future An asset rights contract. In essence, an option is a contract between the buyer and the seller. Due to the difference in each investor's risk assessment and risk preference for the market, the time and price of people's intention to bet will also be different, and there will be different exercise prices in various cycles. buyers and sellers.

The recent surge in Bitcoin seems to have brought excess income to the mining industry, but mining requires The fixed cost of mining machines, the investment in electricity costs, and the increased difficulty of mining due to the sharp increase in the computing power of the entire network, so these risks must be considered comprehensively.

If the price of Bitcoin falls, the return cycle of miners will be longer, or the trend of Bitcoin will reverse The market has entered a down cycle, and miners will face the risk of losing money. Therefore, we can use options to lock in risks and maximize returns within controllable risks.

Option Value

Options The value comes from two aspects, namely intrinsic value and time value:

1. Intrinsic value

It refers to the part of the value between the strike price and the futures price. For example, in a call option, the part where the strike price is lower than the futures price is the internal price. If the price is higher than the futures price, its intrinsic value is zero. Similarly, the intrinsic value of the put option is the value when the strike price is higher than the futures price. If the strike price is lower than the futures price, its intrinsic value is zero.

2. Time value

Refers to the remaining value of the option price after subtracting its intrinsic value. The time value reflects the time risk within the option trading period. When the market fluctuates more violently, its time value will be more expensive, that is, when the volatility rises, the corresponding The option price is more expensive, and the corresponding price of the option will be cheaper when the volatility falls.

Selected option strategy

1. Bull market: The price of Bitcoin is much higher than the shutdown price (aggressive, risk-free plus leverage)

When miners buy mining machines and When we started mining, we obtained bitcoins through the lower-cost primary market. At this time, we are mining with an uncertain payback cycle, and we can lock in part of the profits by selling call options in the options market.

Due to the large fluctuations in the bull market, the price of options is more expensive, which is more beneficial for us to sell options. During the Bitcoin bull market, the computing power of the entire network is usually high, and the payback period caused by the increase in mining difficulty will also be longer. If you only sell forward options, then the income may be relatively stable, but the disadvantage is that if there are more If there is a big upward market, Bitcoin will miss the opportunity to make huge profits.

Therefore, in order to keep profits while obtaining the possibility of higher returns, we can choose to sell 7-day call Out-of-the-money options, and buy a small amount of flat call options at the same time (making the profit of the out-of-the-money call option equal to the cost of the at-value call option). After seven days of delivery, miners can continue to sell for seven days At the same time, buy a small amount of at-the-money call options, and so on until the price of Bitcoin begins to plummet and is less than 20% from the stop price, then you can sell at-the-money call options and buy a large number of at-the-money call options at the same time. Out-of-the-money puts (so that the gain from selling an at-the-money call equals the cost of buying an out-of-the-money put).

2. Shock: The price of Bitcoin is much higher than the shutdown price (stable type, subsidizing risk through time value)

Under the continuous volatility of Bitcoin, miners can sell 7-day expired call out-of-the-money options equal to the output of their own mining machines, Subsidize income through time value (that is, bear the risk of fluctuations), and enjoy the benefits brought about by the price increase of Bitcoin. Similarly, until the price of Bitcoin begins to plummet and is less than 20% from the stop price, sell at-the-money call options at the same time Buying a large number of out-of-the-money put options (which can make the income of selling at-the-money call options equal to the cost of buying out-of-the-money put options)

3. Downside: Bitcoin price is higher than stop price (conservative, lock in profit)

When Bitcoin is in decline Under cyclical market conditions, miners can sell 7-day at-the-money call options and buy 7-day in-the-money put options at the same time (the profit from selling at-the-money call options can be equal to the cost of buying out-of-the-money put options) , until the bitcoin price is lower than the shutdown price, sell a large number of 7-day call options (used to subsidize electricity bills).