100K Bitcoin Is a Gift for Miners
Futures Markets Are Made for Hedgers, Not Speculators
The euphoria of Donald Trump's win has catalyzed Bitcoin speculators. Bitcoin Cronyism is rampant. One million dollars in bitcoin is spoken as if it is in the past tense.
Yet it is yet to be determined if we are making a major top like the magic 1,000 in the DJI a generation ago or if the Mother of All Gaps is the beginning of a new speculative Hyperwave.
For all Bitcoin speculators, I have important news. Futures markets are created to reduce risk, not increase risk. And you must understand this.
I have written about this over the years, but we are in a new era with a whole new crop of Bitcoiners, so this is an update explaining the scenario today.
In the fall of 2021, I was amazed to learn a major Bitcoin miner had never considered hedging his production. Bitcoin was trading at 60k at the time and he simply could not imagine a price break below 40k which would be required to threaten the profitability of his operation.
The miner did not learn the importance of hedging until Bitcoin dropped to under 20k nearly bankrupting his operation. He now has a full-time hedging operation to meet his unique needs.
Today when I suggested to our trading group that 100k Bitcoin was a gift to miners, one of my students observed, “Many mining operations require the price to rise to make a profit because they mine a breakeven or at a small loss. In that case, hedging would be locking in a loss.”, not realizing he made my point.
Contango is a hedger's paradise.
A miner who was marginal in September when BTC was 60k, can sell half of its production for the next 9 months at over a 10% premium or 15% annual yield paid in bitcoin. The hedge will lock in a profitable year for 2025 and be protected from a drop to 40k which would be devastating. Further, in such an event the market will likely go into backwardation again resulting in another windfall gain. No one thinks like this except for a few shrewd miners, and old-time traders.
Every mining operation is unique. Hedging must reflect this uniqueness. Mining is also extremely complicated and my purpose here is not to delve into its complexities.
A long-time miner in the group pointed out, “Mining is barely profitable if you are just mining BTC at the moment.” He also pointed out that 80% of his profit currently comes from a much smaller operation mining altcoins.
Because he is a long-time miner with much lower costs than those just starting, he has no interest in hedging and is quite bullish on Bitcoin and adding to his speculative HODL.
My point is, that miners who were barely profitable at 60k can now hedge half of their production for the next 9 months realizing a contango paid in Bitcoin and speculating with the remaining half of production.
Again, futures markets are not created to increase risk but to reduce risk. This risk is passed on to speculators.
Further, as your HODL grows it is vital to learn the hedging strategies I outlined over five years ago which are as relevant now as then.
Hope this helps.
UGLY OLD GOAT
