Happy Friday. As you know, BitOoda strives to educate and add value through our expertise and experience in Capital Markets. Many of our clients are miners, who have asked us to not only manage price risk of their inventories and future rewards, but also figure out a way to hedge their difficulty curve risk. A few weeks ago, we completed our first Hash-Power Weekly Extendable Contract which would be considered a PHYSICAL contract. The seller of the hash-power contract, to hedge against the difficulty curve, sold/loaned their compute power to lock in a profit. Below is a chart of BTC Difficulty vs. BTC Price, courtesy of BitInfoCharts (https://bitinfocharts.com/comparison/difficulty-price-btc.html#1y).
Today we are exploring the potential of creating a FINANCIALLY settled product to hedge a miner’s difficulty curve risk. We will start with BTC at first, calling this product the “Bitcoin Difficulty Swap”. The idea behind this contract is that your PNL would be reflected by transfer of FIAT, and not by renting/loaning any physical compute power.
The chart above from BitcoinWisdom (https://bitcoinwisdom.com/bitcoin/difficulty) shows the Current Difficulty as well as the Hash-Rate for BTC.
Basically, the value of the BDS (“Bitcoin Difficulty Swap”) will be the current difficulty of ~6,061,518,831,027. What we need to work on is the contract specs:
- Will these contracts have an expiration or do they trade perpetually?
- What should be the minimum price fluctuation (tic size) and price of that tic?
- What will be the minimum “block size” or notional value to trade this product?
- We imagine these will initially be bilateral deals. At some point, can we get this listed electronically, on exchange as a listed product, to eliminate counterparty risk?
We would really love to hear your input on this concept. Any comments or constructive feedback would be instrumental into kicking off this product.
Enjoy your Presidents Day weekend and we look forward to revisiting this topic next week.