Guaranteed income for crypto miners
Cryptocurrency miners can use blockchain-based forward contracts to convert their highly variable profit and loss profile into a fixed income stream with assured rentability of their mining assets.
Miners purchase or rent hardware mining units against payment of fiat currency. This upfront investment will only be recovered if the mining output generated by the assets is sufficiently high. While the mined quantity of crypto network tokens can be predicted based on hashpower and difficulty level, the fiat price of those tokens is uncertain and very volatile.
Let's assume a miner pays a cloud mining provider $1,100 per month for a certain amount of hashpower that is expected to yield 5 ETH until the end of the current month. The return of this investment will be determined by the ETH market price at the end of the month when the mining output is sold. For example, over a price range from $200 to $300 per ether, the rentability varies from -9 % to 36 % but the ETH price could go much lower or higher.
| ETH Price | Revenue | Return |
|---|---|---|
| $ 200 | $ 1,000 | -9% |
| $ 210 | $ 1,050 | -5% |
| $ 220 | $ 1,100 | 0% |
| $ 230 | $ 1,150 | 5% |
| $ 240 | $ 1,200 | 9% |
| $ 250 | $ 1,250 | 14% |
| $ 260 | $ 1,300 | 18% |
| $ 270 | $ 1,350 | 23% |
| $ 280 | $ 1,400 | 27% |
| $ 290 | $ 1,450 | 32% |
| $ 300 | $ 1,500 | 36% |
If the miner is unwilling to take the risk of making low or negative returns, they could enter into a forward contract at the same time the mining hardware is rented to lock in a rate of return that will not be affected by adverse price movements over the mining period.
For example, if the forward price locks in a price of $260 per ether then the miner will earn a return of 18 % irrespective of the final price of ether.
| ETH Price | Revenue | Forward Payoff | Return |
|---|---|---|---|
| $ 200 | $ 1,000 | $ 300 | 18% |
| $ 210 | $ 1,050 | $ 250 | 18% |
| $ 220 | $ 1,100 | $ 200 | 18% |
| $ 230 | $ 1,150 | $ 150 | 18% |
| $ 240 | $ 1,200 | $ 100 | 18% |
| $ 250 | $ 1,250 | $ 50 | 18% |
| $ 260 | $ 1,300 | $ - | 18% |
| $ 270 | $ 1,350 | $ (50) | 18% |
| $ 280 | $ 1,400 | $ (100) | 18% |
| $ 290 | $ 1,450 | $ (150) | 18% |
| $ 300 | $ 1,500 | $ (200) | 18% |
Moreover, if the rate of return provided by the forward contract is insufficient then the miner has the option to forego the investment or choose a different asset to mine.
How to use ProDerivatives contracts to lock in a rate of return
For the scenario described above, the miner would choose the USD:ETH contract that expires at the end of the mining period. The contract is priced in ETH/USD and so the inverse is the ETH price in dollars that can be locked in, e.g. 0.004 ETH/USD -> 1/0.004 -> 250 USD/ETH which would guarantee a return of 14 % . If the return is acceptable then the miner only needs to decide the amount to cover in the trade. This "notional" amount is simply the amount of ether expected to by mined divided by the forward price, i.e. 5 ETH / 0.004 ETH/USD = $1,250. Therefore, the miner submits a Buy (Long) order for USD 1,250 at 0.004 ETH/USD.
At expiration, the forward contract settlement in ether will make up the difference so that the resulting balance of mining output +/- forward payoff equals $1,250 when sold at the final ETH price.