Volatility hedging strategies for crypto miners
Protect yourself against price swings to ensure maximum profitability
Crypto mining can be an excellent side hustle and, if you’re willing to commit, even your primary source of income.
Nevertheless, that doesn’t mean it’s easy. Setting up your mining operation can be cumbersome. It requires a considerable initial investment and constant attention.
Most importantly, there are also several external factors that can impact your profitability and affect your earnings. Volatility is one of the most relevant among them.
That said, all miners should have an effective hedging strategy to prepare for any unpredictable price swings that may affect your mining operation and ensure its long-term sustainability.
To do that, it’s necessary to understand how volatility affects mining revenue and what are the different ways to protect yourself against it.
How can volatility affect your mining operation?
In crypto, we refer to volatility as the liability of a particular metric — often price — to change rapidly and unpredictably.
Of course, price is the first and perhaps most important factor in determining mining profitability. This applies to whichever coin you want to mine.
Miners earn their rewards in the currency they’re mining. If that currency is worth less, the value of their earnings — measured in fiat currency — will be lower and vice versa.
Naturally, volatility and price swings affect those with higher costs the most, as they’re more exposed to it. Miners with higher profit margins, on the other hand, can tolerate low prices for longer periods before they start losing money.
Should you be concerned about crypto volatility?
First of all, you need to determine your crypto mining plan and goals. Do you intend to hold your inventory (mined coins) or do you need your earnings to cover the costs?
If you’re a long-term holder, falling prices shouldn’t concern you. They may even be good for you, as reduced profitability discourages mining, thus lowering the network’s difficulty.
On the other hand, your mining operation may be self-sustained, meaning that you need to spend a part of your mining revenue to cover the costs of electricity and maintenance. In that case, there are many precautionary measures you can implement to protect yourself against price unpredictability.
Crypto volatility hedging strategies
Once you know what your situation, plan, and goals are, there are many hedging strategies you can adopt to protect yourself from volatility. Some of them are:
One option is futures contracts.
Futures contracts are agreements to sell or buy an asset at a predetermined price at a specified time in the future. As a crypto miner, you can lock up some of your inventory in a futures contract and sell that for more than its current market value.
By locking your cryptocurrencies in futures contracts, you are guaranteed to sell them at a fixed price on a specific date, regardless of price movements.
A similar financial instrument is option contracts.
Unlike futures contracts — in which parties take on the obligation to execute the contract — , crypto miners can sell a buyer the option, but not the obligation, to purchase their coins at a set price (called a strike price) and at an agreed-upon future time in exchange for a premium.
That way, you can lock up some of your inventory in an option contract and collect payment in advance. Once the contract expires, the buyer can decide if he executes the contract — buying your coins at the previously strike price — or not — letting you keep both the premium and your inventory. This will depend on the difference between the asset’s market price and the strike price.
Options contracts are a great instrument for miners to collect revenue in advance. Then, they can reinvest it to expand their operation.
Secondly, If you’re not comfortable with operating with crypto futures, you can also deposit your mined coins in interest-bearing accounts. Earning passive income from your inventory provides you with a steady revenue stream without having to sell your coins.
Finally, you could swap your crypto for other coins to diversify your inventory. Diversification is a common strategy among traders and reduces exposure to the price of one particular coin.
If you have a very low risk tolerance, you can always take profits periodically. Selling a part of your mined coins every month or two will protect the fiat value of your profits.
Volatility is an inherent aspect of cryptocurrency. Naturally, it also affects mining. However, it’s not an exclusively negative factor.
If you’re a long-term holder, short-term price swings don’t really matter.
On the contrary, if you rely on your mining earnings to cover the costs of your operation, you can explore the different hedging strategies listed above. Just remember to always keep your plan, goals, and risk tolerance in mind.
Finally, we are confident that the Lumerin Protocol will provide miners with additional hedging and increased profitability instruments.
We hope this article was helpful.
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