What Are Bitcoin Hash Rate Futures?
- Hash rate is a measurement of the computational power of a blockchain network.
- The hash rate is determined by the number of hashes (or guesses) per second.
- Bitcoin hash rate futures allows users to speculate on the changes in hash rate difficulty for the Bitcoin network.
- More often than not, the hash rate of Bitcoin follows its price.
What is the Bitcoin Hash Rate?
The proof of work consensus mechanism powers Bitcoin, and therefore its network relies on users to set up powerful computers or proprietary equipment to mine blocks continuously. A hash is a randomly produced alphanumeric code, and guessing it is known as hashing. The number of guesses made by computers on the network is counted, and the hash rate indicates how many guesses are made per second over the entire network. The Bitcoin network has an immense amount of computing power competing to mine blocks, and its hash rate is measured in trillions of hashes per second, known as terahashes.
Hash Rate’s Correlation to Price
In a nutshell, the hash rate of Bitcoin follows its price. The first people to receive new Bitcoins are Bitcoin miners, and it is thanks to their sales that the Bitcoin economy has been able to grow and spread to so many different types of investors. There will always be miners who will need to sell some of their assets in order to maintain their mining operations, which includes paying for costs associated with energy, internet, cooling, housing, equipment upkeep, and even the purchase of new, increasingly sophisticated ASIC miners. The operation of Bitcoin miners is highly dependent on the price of Bitcoin, and they must manage their risks accordingly in order to ensure their business is profitable.
A bear market makes it much more difficult for smaller miners with less efficient mining systems to continue their business, and this translates into bigger profits for larger mining operations. In contrast, a bull market makes it more attractive for smaller miners to enter the space since the small amounts of BTC that they acquire will be more valuable. It is for this reason that the hash rate seems to have a high correlation with the BTC price, as shown by this chart:
SynFutures’ Hash Rate Derivatives
Although SynFutures is well-known for its termed and perpetual futures contracts on a variety of different digital assets across a multitude of cryptocurrency networks, the platform also offers other derivative instruments that make it very unique. One of these is the Bitcoin Hash Rate futures, a financial instrument that is highly beneficial for Bitcoin miners to manage risks associated with their businesses.
The SynFutures Hash Rate Futures represents the total block mining reward in Bitcoin per PH hash rate, with the implied difficulty for 14 days after the expiry block (which is always a difficulty resetting block). With this design, the futures contract can be used to hedge the change in mining difficulty perfectly. More importantly, every future difficulty resetting block can have a futures contract expiring on that block for hedging needs. This makes these derivatives contracts highly versatile and suitable for any Bitcoin miner looking to hedge their business’s position to unanticipated changes. Please read this article for a more comprehensive introduction to SynFutures Bitcoin Hash rate futures.
Hedging with Hash Rate Futures
Hash rate futures is a revolutionary derivatives product that enables miners to hedge their risks associated with changing hash rate difficulty. Let’s take the case of a miner who recently acquired one petahash of mining power for a year and needs to ensure that he makes a profit. The miner must know exactly how much revenue his rig will produce despite changes in price and other variables. The miner must insure against all of the major variables influencing his return, specifically:
1. Mining difficulty
2. BTC/USD price
3. Electricity cost (a less significant factor given the high BTC price)
Luckily, the miner can utilize SynFutures’ derivative instrument to lock in the BTC/USD price and hedge against changes in the hash rate. Specifically, the miner can short the Hash Rate Futures to hedge against the risk of the increase in mining difficulty and lock in the number of new BTC mined. In addition, miners can long electricity futures so that their future power cost is determined. By utilizing hash rate futures, miners can account for a variable that was previously not controllable in their business and ensure the profitability of their business. This is revolutionary in the cryptocurrency space, as it will allow more people to enter the Bitcoin mining space and contribute to one of the greatest cryptocurrency networks in the world.
Explore open, trustless Bitcoin Hash Rate Oracles with SynFutures. Learn more.
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