Bitcoin miners are using an old-school investment method to create their own version of “yield farming”.
Bitcoin miners embrace what is currently known as HODLing, which simply means “hold on for dear life”. They try not to sell their cryptocurrency in order to gain exposure on the potential upside. However, these firms face major expenses in their operations. The mining process requires significant investment in computer hardware and giant electricity bills.
Instead of selling Bitcoin to raise money, the miners are turning to the options markets. They are selling Bitcoin call options in order to extract money of out of their holdings.
“Bitcoin miners are some of the most voracious yield seekers in the market today,” said Joshua Lim, head of derivatives at New York-based brokerage Genesis Global Trading, which offers options overwriting strategies to the industry.
Why are Bitcoin miners using options?
It is an open secret in the options market that out-of-the-money option contracts frequently expire worthless. When that happens, the owner of the option contract gets nothing, and the party that sold the contract – in this case, the Bitcoin miner – keeps the premium that the buyer paid to purchase the option.
The current price of Bitcoin is around $39,000. If a Bitcoin miner sells a call with a $50,000 exercise price and Bitcoin fails to rise to that level by the time the contract expires, the miner makes money. According to industry specialists, depending on the trade, the annual returns or yields can get well into double-digit percentages.
However, this strategy is not risk-free. If Bitcoin reaches the exercise price, then Bitcoin miners start losing money. That risk can be somewhat mitigated by trading multiple contracts with different strike prices.
“We use call option straddles, where essentially you sell a call option and then buy one at a higher price so that you don’t miss out on the upside,” said Fred Thiel, chief executive officer of Las Vegas, Nevada-based Marathon. “Historically, it has generated more than 10% annually.” Thiel targets generating yield — using other techniques, too, including lending out Bitcoin — from 25% of the company’s holdings.
Although Bitcoin has lost almost half its value since peaking in November, prices have been relatively stable lately, at around $39,000. This lower volatility can be helpful to options sellers because it reduces the chance that the option strike price will be hit and the contract becomes profitable for the buyer. But miners could face losses if Bitcoin starts soaring again.
“When Bitcoin is in a range-bound market, this type of yield-generating strategy will outperform a mine-and-hold or mine-and-liquidate strategy,” Lim said. “However, in an upward trending market, miners will give up any upside performance beyond the strike of the calls they are selling.”