Bitcoin Miners Will Use Derivatives Like Traditional Commodity Producers

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Bitcoin mining has become a multibillion-dollar industry.

Just like traditional commodity producers, Bitcoin miners will likely become large users of derivatives - whether it's with futures to lock in prices or options to hedge against losses.

At their core, the Bitcoin lending markets have been supported by the proliferation of crypto derivatives - through BTC/USD swaps and futures - that people are now able to trade with.

Derivative trading generates an implied interest rate on BTC, with which miners and other parties can use to borrow BTC against USD, or vice versa.

The current state of playThe trend of miners opting to borrow fiat to pay expenses without selling their coins has been growing.

"The explosion of derivative markets and basis trading has been a key part of the recent growth in Bitcoin lending. Miners and institutions make up a fair amount of the dollar-borrowing demand at our firm."

What miners think about the most is interest rates and collateral requirements.

Every party needs to protect themselves, and the best firms will try to ensure that miners are still alive when prices move lower.

The regulatory requirements and stringent collateral requirements for licensed financial services are a consequence of the fact that those firms deal with the capital of other parties when sending loans to miners and mining pools.

Its futures are priced by the average difficulty per quarter, meaning that as of May 2020, where the difficulty is roughly 16 trillion, the index is at 16.Hash rate futures should allow miners to hedge their exposure to difficulty adjustments, letting them reduce their risk while maintaining operations.