Argo uses derivatives to offset risk. How it can help other crypto miners.
A crash in crypto prices and rising energy costs are putting pressure on Bitcoin miners, and at least one miner wants to compensate for the risk by turning to the derivatives market.
Argo Blockchain
(ticker: ARB.UK) said in a statement last week that they have used derivatives to limit downside risk since the fourth quarter of 2021, and that they hired a full-time derivatives trader in June “to increase their internal risk and financial management capabilities. . ยป
Bitcoin miners draw huge amounts of energy to “extract” crypto – keep blockchain transactions secure and work smoothly. For their part, they are rewarded with tokens.
When prices are high, it can be a very lucrative business, but a recent decline in Bitcoin prices combined with sky-high energy costs has put business models under pressure.
This environment has also pressured miners to sell most or all of the Bitcoin they extract, instead of hoarding it, to cover operating costs – which puts sales pressure on a declining market.
Argo Blockchain
said the sold 637
Bitcoin
last month at an average price of $ 24,500.
“We believe the company is well positioned to navigate current market conditions and further increase our efficiency,” said Peter Wall, Argos’ CEO, in a statement.
Bitcoin has lost more than two-thirds of its value since reaching a record high near $ 69,000 in November 2021, trading around $ 20,500 on Monday and recently reaching its worst quarter since 2011 – a year in which it first took $ 1.
Much of the decline in digital asset prices is linked to a correlation with equities and widespread fear among investors about the risk of a recession.
Cracks in the crypto itself – including the meltdown of stablecoin Terra, breakdowns with lenders including Celsius and
Voyager Digital
,
and the bust of a large hedge fund that threatens wider infection – has not helped the case.
“Bitcoin miners may be next on the line,” wrote Marcus Sotiriou, an analyst at digital asset broker GlobalBlock, citing market turmoil and high energy costs. “Crypto-miners have been selling Bitcoin because their revenue is falling along with the bear market.”
Crypto derivatives can be a way for miners to protect themselves.
Trading in derivatives – such as futures or options – based on digital tokens represents the majority of all crypto trading by volume, with $ 3.2 trillion in derivatives traded on exchanges in May, according to computer firm CryptoCompare. It can be compared to $ 2 trillion in trading volume for tokens themselves, which
Ether,
Dogecoin,
or
Solana.
Futures allows traders to bet on the future price of Bitcoin – either on an ongoing basis through products called perpetual swaps or for a fixed period, such as six-month futures contracts. Options give traders the right to buy with a “call” option, or sell with a “put”, a digital asset at an agreed price.
As an asset class, derivatives – including some crypto derivatives such as
CME Group
-traded Bitcoin futures – are regulated by the Commodity Futures Trading Commission (CFTC), which suggests their fundamental role in commodity markets.
Ranchers, farmers and miners are looking for ways to secure their exposure to the prices of goods they sell with derivatives. Bitcoin miners can, in theory, secure their exposure to the token, but that’s not how it works in practice.
“The vast majority of these products are used for speculation,” according to Stephane Ouellette, CEO of the cryptocurrency derivatives broker.
FRNT Financial
.
And there have been few incentives, up to the recent market route, for Bitcoin miners to secure their exposure.
The price of the largest crypto had risen relentlessly higher since the last crash in late 2017, and miners earned billions in paper by keeping the token on balance. But risk management may be changing in the industry, which has undergone rapid change over the course of a few years.
“We would be stupid not to look at hedging and derivatives,” Wall said Barrons in an interview in April. “I think as this industry gets more and more mature, you’ll see more and more hedging.”
Wall said that Argo had at times used derivatives as put and call options in recent years, but that it was mostly “dabbling”. He added that the appointment of a top manager from the traditional financial world was a catalyst for doing more.
“That’s the way this industry has to go,” Wall said. “It’s going to be more and more financially sophisticated.”
Write to Jack Denton at [email protected]
