Miners Run to Derivative Market?


Bloomberg has big news this week on strange things happening in the cryptocurrency environment – especially regarding Bitcoin mining.

With Bitcoin values moving steadily down from a high water mark of $20,000 over a year ago, miners are starting to get worried – actually, that’s an understatement. They’ve been worried for a long time.

But in reporting yesterday, Alastair Marsh cites a growing phenomenon that mirrors how hedge fund managers and other finance experts shore up their positions when a bear market strikes.

Marsh asserts that even miners are now turning to derivatives to try to hedge their positions.

“Desperate to survive the collapse of their market, cryptocurrency diehards are reaching into the financial tool kit to raise some old-fashioned cash,” March writes. “They’ve begun selling derivatives linked to digital tokens to squeeze something out of their depreciating assets. Their need is so acute that ventures run mainly by software developers and tech experts are negotiating the terms with financial pros who earned their chops on Wall Street.”

A method of choice, he writes, is the covered call option.

What does this mean? In a covered call option, the trader sells call options for an owned stock with a strike price at or lower than current stock value.

Buyers who want to maintain a short-term stock position but who also predict the market falling further can sell an ‘in the money’ (ITM) call option where the buyer pays a higher premium – the trick is that the stock must fall below the in the money option strike price during the option’s time frame.

Marsh notes that options trades are, in his words, “private bilateral contracts” and that means that the numbers are somewhat shielded, but citing hundreds of millions of dollars in sales volumes, he suggests that the covered call makes sense for miners under pressure in this down market.

“For long-term holders who are stuck after the cryptocurrency collapse, the trade is a no-brainer,” Marsh writes.

However, some critics point to the dangers of relatively inexperienced minors rubbing shoulders with savvy Wall Street “sharks.”

They worry that some of these relationships might not be in the miner’s favor.

There’s no doubt that recent times have shown a bear market for Bitcoin – but others are waiting for that to turn around.

Another big piece of news this week is remarks by Mike Novogratz of Goldman Sachs fame calling Bitcoin “digital gold” and saying that buyers of the future will pay a premium for the sovereignty that it provides.

This is a big idea among Bitcoin buy-and-holders – that eventually, the digital currency will be shown to be more value because it’s not tied to national fiat currency values or managed by a central bank – though some national banks have become to contemplate their own cryptocurrencies.

Keep an eye on the markets, and understand that when times get tough, miners are running for the derivatives market to try to protect their operations.