What Type of Derivative Can Be Used to Hedge against the Operational Risk of Mining?
Miners face various operational risks, including price risk, electricity cost risk, and hash rate risk. To hedge these, they can use a combination of derivatives.
Futures or forward contracts can hedge price risk. Specialized hash rate futures can hedge against a drop in hash rate.
Swaps can be used to hedge the volatility of electricity costs, allowing the miner to lock in a fixed energy price.
Glossar
Hash Rate
Power ⎊ Hash rate quantifies the total computational power dedicated to solving the cryptographic puzzle in a Proof-of-Work network.
Operational Expenditure
Expenditure ⎊ Within cryptocurrency, options trading, and financial derivatives, operational expenditure (OpEx) represents the ongoing costs associated with maintaining and executing trading strategies and infrastructure.
Hash Rate Futures
Derivation ⎊ Hash Rate Futures represent a financial instrument predicated on the anticipated price of computational power dedicated to blockchain networks, specifically quantifying the expected cost of securing proof-of-work consensus mechanisms.
Operational Risk
Framework ⎊ Operational risk within cryptocurrency, options trading, and financial derivatives transcends traditional financial definitions, demanding a framework that explicitly incorporates technological, regulatory, and idiosyncratic elements.