Review of the Hash Rate Derivatives Market - Market Situation in August

Source: Hashrate Index

Today, Hashrate Index will launch a series of articles - "Hashrate Derivatives Market Review", which will bring you a monthly overview of the hashrate derivatives market and explore the deep-seated reasons behind market fluctuations. As the trading market matures, Luxor's goal is to enable every miner to have the knowledge to effectively manage hashrate investment and operations, so that everyone can have a deeper understanding of the dynamics of the trading market and participate in market development.

As the first article, this article will analyze the hashrate price trend, the trading activities of hashrate forward contracts, and the performance of hashrate forward contracts around the hashrate price in August 2024.

1. Hashrate Price Overview

The Bitcoin mining market is experiencing the lowest month of US dollar-based and coin-based hashrate prices in nearly 7 years, and has set a historical low for hashrate prices. On August 5, Bitcoin miners were hit by a global asset sell-off, causing spot Bitcoin prices to fall sharply. At the same time, network difficulty unexpectedly climbed sharply in the summer, and the transaction fee market was in a low-fee, low-volatility stagflation state. Eventually, the dollar-based hashrate price fell to $37.70/PH/s/day.

Dollar-based hashrate price (August 1, 2024 to September 1, 2024)

During August, the average monthly hashrate price in US dollars was $43.54/PH/s/day, starting at $45.47/PH/s/day and falling to $42.19/PH/s/day at the end of the month. The decline was mainly caused by the decline in spot Bitcoin prices, the record high network difficulty and the low transaction fee environment. The average monthly hashrate price in coin standard was 0.0007246 Bitcoin, which was 0.0007090 Bitcoin at the beginning of the month and rose slightly to 0.0007141 Bitcoin at the end of the month.

Coin standard hashrate price (August 1, 2024 to September 1, 2024)

2. Factors affecting hashrate price

Last month, the average monthly price of Bitcoin was $60,063, a month-on-month decrease of 4.15%. It fell sharply at the beginning of the month, from $66,100 to $50,725, a drop of 23.26%. The decline was caused by factors such as the deterioration of the US labor market, the unwinding of yen carry trades after the Bank of Japan's interest rate hike, and the intensification of geopolitical tensions. Given the continued existence of unfavorable factors, although the price of Bitcoin recovered to $59,087 at the end of the month, it was still 7.86% lower than the price of $64,125 at the beginning of the month.

Network difficulty rose sharply by 10.5% on July 31 to a record high of 90.67T. It fell briefly by 4.2% to 86.87T in mid-August. It then rose again by 3.0% to 89.47T on August 28. The surge in network difficulty at the beginning of the month was beyond market expectations, partly due to high electricity demand in Texas during the summer and the ERCOT 4CP project.

Bitcoin Price and Network Difficulty (July 30, 2024 - August 31, 2024)

Last month, average transaction fees were the lowest in nearly two years, with an average of 0.0797 bitcoins per block per day. However, during the launch of Babylon Protocol, transaction fees briefly soared, with block rewards as high as 15 bitcoins, and Bitcoin miners received an average of 0.15 bitcoins per block per day, a significant increase in transaction fees compared to before. At the same time, the price of computing power once soared to $49.25/PH/day, reaching a recent high. However, after the Babylon Protocol craze cooled down, miners received an average of 0.0506 bitcoins per block per day, a decrease of 66.60%. Although the explosive growth in transaction fees was short-lived, it did increase miners' weekly profitability. Transaction fees accounted for 2.43% of block rewards for the month. Without the boost to transaction fees from Babylon Protocol, the proportion would have been 1.86%.

Transaction fees as a percentage of block rewards (July 30, 2024 to September 1, 2024)

Also due to the Babylon Protocol craze, the volatility of hashrate prices has increased. So far, August's volatility is lower than that of January, April, May, and June, and is on par with that of February and March.

30-day average computing power price volatility

August mining market data

3. Computing power forward contract price

Next, we will use charts to show you the recent price changes of computing power forward contracts, including the computing power forward contract prices in specific trading months, and the computing power forward contract price curve they constitute.

The following figure shows the price changes in the Bitcoin hashrate forward contract market from March to August 2024. The rows represent monthly contracts and the columns represent trading months. The value in the first cell of each column represents the settlement price of the hashrate forward contract for that month, and the values ​​in the remaining cells represent the average mid-price of the hashrate forward contracts. The figure summarizes the trading history of the August hashrate forward contracts (green to red rows) and the hashrate forward contract price curve for August (red to orange columns). Based on these values, we can compare and analyze the price changes of a specific trading month with other trading months, and we can also complete a comparative analysis with the spot hashrate price based on a specific trading strategy (for example, comparing a 6-month rollover strategy with a 1-month rollover strategy). Finally, the settlement price of the hashrate forward contract for the current month shows the change in the specific trading month relative to the spot hashrate price (shown as spot premium in the figure).

Changes in the market price of computing power forward contractsPrice performance of computing power forward contracts in August 2024

4. Trading parties of computing power forward contracts

The trading parties of the August computing power forward contracts are composed of a variety of market participants. The main participants of the deliverable computing power forward contracts (DF) and non-deliverable computing power forward contracts (NDF) are miners, lenders and market makers. Miners sell NDF to hedge their risk exposure and sell DF to finance the upgrade of the new generation of mining machines.

On the other hand, lenders lock in the yield of holding DF long positions by selling NDF positions. We regard the discount of DF relative to NDF as the interest rate of the computing power base loan market. Buyers and sellers who prepay through DF can use NDF to lock in a fixed yield or funding cost. In August 2024, the annualized interest rate of this yield or funding cost is 10-13%.

DF and NDF transaction party composition

Unlike the market's previous expectations, the price of computing power reached a historical low in August. Based on this, we believe that miners who use computing power forward contracts to hedge risks will have significantly higher income than other miners. For example, miners who chose to sell their August hashrate in March this year (when hashrate forward contracts were first listed) received an average of $59.42/PH/s/day, which is much higher than the spot hashrate price. In other words, the earlier miners sold their August 2024 hashrate, the more Bitcoin they received.

In terms of revenue impact, the following chart shows the difference in revenue performance for miners with 1 EH hashrate selling August hashrate forward contracts versus selling hashrate spot in the same month.

Difference in revenue performance between August hashrate forward contracts and selling hashrate spot in the same month

We found that some listed mining companies did not sell their August hashrate forward contracts. Combined with the hashrate price trend we are experiencing, this is a decision that has an adverse impact on their own revenue. The following figure shows a hypothetical scenario, that is, the comparison of the Bitcoin production of listed mining companies with their actual production by August this year after hedging before the "halving" in March 2024.

The difference between the hypothetical situation and the actual situation

We need to remind you that this figure is only for demonstration purposes and is based on simplified assumptions: multiplying the actual Bitcoin production figures by the locked computing power price to obtain the difference with the spot computing power price, excluding all possible fees and bid-ask spreads.

In addition, hedging is usually included in the cost of business, and a predictable cash flow is obtained at a voluntary cost. This will help improve the company's own valuation, reduce the cost of capital, and enhance the ability to attract investment.

5. Price trend of hash rate forward contracts

In August this year, most trading parties were in a "wait-and-see" position. The sellers were mainly miners who wanted to lock in hash rate prices, either to ensure profit margins or to borrow money and temporarily expand hash rate. In addition to miners, buyers also included speculators who hoped to profit from the rebound in hash rate prices.

Composition of trading parties

The following figure summarizes the evolution of the hash rate forward contract market from September 2024 to January 2025 during August 2024. The rows represent specific monthly hash rate forward contracts and the columns represent specific trading weeks. The cell value represents the average mid-price of the weekly hash rate forward contracts.

Changes in the market price of hash rate forward contracts

By observing each column of values, we can see the hash rate forward contract price curve during August and the market's expectations for future prices. From the beginning to the middle of August, the market reacted to premium trading, but at the end of the month it turned to discount. The market believed that the surge in transaction fees caused by Babylon Protocol lacked staying power. In fact, the hash rate forward contract prices of different months bottomed out in early August and rebounded at the end of the month.

6. Summary

At this stage, the hash rate price continues to hover at a historical low. Based on this, miners may consider selling hash rate forward contracts if the following situations occur. First, the hash rate price drops further. For example, a sharp drop in Bitcoin prices pushed hashrate prices down to $20/PH/s/day, and executing a hedging strategy could have prevented a forced shutdown. Second, although the revenue per unit of hashrate is at a historical low, the revenue per unit of energy consumption (i.e., per kilowatt-hour) of new-generation mining machines is not at a historical low, and miners using new-generation mining machines still have sufficient profit margins.

We can look at hashrate prices from another perspective. Buy-side participants may find the current hashrate price environment an attractive entry point. Alternatively, miners whose hashrate costs are above the hashrate forward contract price curve (for example, using outdated mining machines or incurring higher electricity costs) can purchase hashrate forward contracts to reduce their cost of acquiring Bitcoin.

Finally, we reiterate that hedging is a risk management tool, and the results of locking in hashrate prices may change over time. As the industry continues to mature, miners who are open to financial derivatives may benefit from smoother cash flow, lower capital costs, and more confidence from investors.