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God fish 🐟

Mining is a zero-sum game, and the excess income is obtained when other miners fail.

Hedging is a tool to resist violent market fluctuations and black swans. When the 312 plummeted, the number of mine shutdowns was even more than the halving. Every miner should think about their risk exposure and not ignore it just because it is complicated or not intuitively acceptable. Hedging can save lives in extreme cases, and it is a key means to determine whether miners can obtain excess returns in investment, or whether they can recover their capital.

Selling a part at the right price may be a risk-avoiding strategy generally adopted by miners, but you may not be lucky enough to seize the opportunity, so our strategy is to consider reducing risk exposure before making a decision, at least part of the Set out the electricity bill.

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Xu Zhe

The miners must first ensure that they can survive and not be out, otherwise, the revolution of the blockchain has nothing to do with you.

There is no need to think about whether the black swan will come, the black swan will definitely come, no matter when and to what extent, this must be guarded against, no matter whether the investment cost is high or low, you should have this kind of thinking. It does not mean that hedging should only be considered when investing a large amount of funds. This has nothing to do with how much money you have. You must have a risk control mindset to survive.

To do hedging, you must choose a time when mining is profitable, and first use futures or options to lock the selling price of the currency.

I bought a batch of mining machines myself, and then shorted the futures, combined with some option combinations, to form a relatively stable asset value that can continue to generate cash flow.

Most miners have faith in Bitcoin, and they will not short all their output, as long as they short the electricity bill. Then use futures to short 60% of the bitcoins produced by the mining machine in the future. In this way, when the electricity bill is paid every month, your electricity bill payment must be guaranteed, and then you can continue to mine.

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Shang Silin (host): The topic we share today is to unravel the mystery of hedging. Today's miners have more choices than in the early years, but what I have seen so far is whether it is depositing coins to earn interest, mortgage lending (mortgaging BTC to obtain USDT), whether it is paying electricity bills, or in the secondary market Operations, these are to help everyone retain Bitcoin and keep their positions. In my personal understanding, hedging is not the same as the above two, and it is not entirely a currency standard. Because Bitcoin is highly volatile, it is also important whether the currency in your hand can be anchored to the value of legal currency. However, after experiencing 312 and the recent fluctuations in the market, miners have to face the reduction of halving income and the increase of uncertainty, as well as greater volatility. It is estimated that many people have learned the lesson of blood and tears, so now we are discussing hedging This topic is timely.

Let me briefly introduce today's two guests. Shenyu is a big miner who has experienced several halvings. He is also the co-founder of Cobo and the co-founder of F2Pool, the world's largest bitcoin mining pool.

Xu Zhe is a well-known financial big V on Zhihu, the author of "There Will Be No Pies in the Sky", and has written many articles about Bitcoin. It is estimated that many people outside the circle understand Bitcoin through Xu Da's articles. He is also a first-line hedger Fund's chief strategist.

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Shenyu 🐟: At the beginning, I didn’t have this awareness. After stepping on the pit, I realized that I need to use this method to hedge risks. In 2013, we made silverfish mining machines. At that time, our strategy of making mining machines was different from that of current mining machine manufacturers. After finishing the chips, we mainly focused on mining by ourselves.

At that time, the break-even point for mining Litecoin was about 30 yuan. Friends who already had traditional finance around us suggested that we do hedging. But firstly, because the price of Litecoin was still relatively high at that time, more than 100 yuan, with two or three times the net profit, everyone thought it was OK; secondly, the lack of professional financial knowledge, so there was no hedging.

With the gradual mass production of the machines, the currency price has been falling all the way since 380, and fell to a minimum of 5 yuan in 2015. The cover cannot afford the cost of electricity, and it is impossible to continue mining. We choose to turn off the power during the day, because the electricity bill is very expensive in the industrial park during the day, and it is the valley at night, so we use the electricity at night. Later, it was found that the electricity at night could not support it, so I had to turn it off. Later, when resuming the market, let’s recall that if we set up a part of the position at the right position of the currency price, for example, if we set out the electricity bill for a period of time, we would not be able to shut down later; in addition, compared to other mining machines, we It can be mined longer, so from the perspective of currency standard and legal currency standard, you can get more benefits.

This incident touched us a lot. Since then, when making investment decisions in the mining industry, we will first determine that we need to reserve a period of electricity bills and reserve a certain amount of cash. At that time, derivatives were not so developed, and we sold the spot directly. For example, suppose we bought 1,000 mining machines and could dig out 1,000 bitcoins in two years, and the electricity cost accounted for 30~40%. The price is to sell 400 bitcoins first, and keep the electricity bill first.

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Image source: Weibo @神鱼BTCer

Shang Silin: Selling a part at an appropriate price may be a risk-avoiding strategy generally adopted by miners.

Shenyu 🐟: Yes, but you may not be lucky enough to seize the opportunity, so our strategy is to consider reducing risk exposure before making a decision, and at least cover part of the electricity bill.

Shang Silin: Just now a friend said that hedging is now a tool commonly used by miners, is that true? I don't think so.

Therefore, when doing hedging, you must choose a time point when mining is profitable, and first use futures or options to lock the selling price of the currency.

For example, the electricity bill of the mining machine now accounts for about 60%, that is to say, if you can mine one bitcoin a month and use 0.6 bitcoin to pay the electricity bill, there are two options now:

One is to short all the electricity bills for the next 12 months, 12×0.6=7.2, first short 7.2 bitcoins; dig 12 coins a year, and take out 7.2 to pay electricity bills, so that even if bitcoins fall to 3,000, you can It won't hurt you, it just keeps on around 3,000 and you don't have to turn it off, but others have to. If other people shut down, the computing power difficulty will be adjusted, and you will be able to get more bitcoins.

In addition, after settling 60% of the electricity bill, the rest can have cash flow back, and keep some liquid assets for yourself. If the currency price does not rise, the difficulty of computing power will increase, and the output of each currency will decrease again. Under such circumstances, leaving a part of the liquidity can save lives.

In addition to shorting electricity charges, there is another option to short all output, which is viewed as a pure asset. Still assuming that one bitcoin is produced every month, first short the output (12 bitcoins) in the next 12 months, then what you get is the future determined dollar cash flow, and then use this future determined dollar cash flow as cash flow The discount algorithm has been counted up to now, compare it with the price of the mining machine to see if it is a good investment, if it is, then you can do it like this.

However, most miners have faith in Bitcoin and will not short all their output, as long as they short the electricity bill. Then use futures to short 60% of the bitcoins produced by the mining machine in the future. In this way, when the electricity bill is paid every month, your electricity bill payment must be guaranteed, and then you can continue to mine.

You must first ensure that you can survive and not be out, otherwise, the blockchain revolution will have nothing to do with you.

Sometimes mining will encounter some unexpected situations. Shenyu must have encountered more than I have encountered, such as sudden network fluctuations or hardware failures. It was originally promised to mine one bitcoin a month, but in the end it was only 0.95 1, 0.94, it is very possible. What if you shorted one bitcoin on the futures first and found out 0.94? If the currency price is still rising now, then the futures are empty, isn't it a white loss? So you have to keep some remaining cash flow to protect yourself.

I have already practiced the above strategies, and I dare not talk about them empty-handed if I have not practiced them. I bought a batch of mining machines myself, and then shorted the futures, combined with some option combinations, to form a relatively stable asset value that can continue to generate cash flow.

Shang Silin: Will the ratio of hedging be adjusted according to the proportion of electricity bills? For example, the current proportion of electricity bills is high, indicating that the currency price is relatively low; What about adjusting the ratio of hedging?

Xu Zhe: No, the proportion of electricity bills has nothing to do with whether the currency price is overestimated or not. When the proportion of electricity costs is low, the currency price can also rise, and when the proportion of electricity costs is high, the currency price can also fall, which is different from the idea of ​​traditional spot commodities.

In the traditional bulk commodity market, for example, oil has fallen below the cost of mining oil fields, and copper and iron have fallen below the cost of mining mines, so prices cannot go down. Because in the case of limited stocks of traders who produce spot goods, if mining loses money, the supply will also decrease. For example, when crude oil fell to more than ten dollars a while ago, many oil fields stopped opening; before iron ore plummeted, mines stopped mining. When the supply of goods in the world decreases, the price will rise, so the price will not be lower than the production cost of mining for a long time, but Bitcoin is different.

No matter how profitable or losing money Bitcoin mining is, it will increase 50 bitcoins, 25 bitcoins, 12.5 bitcoins, and 6.25 bitcoins every 10 minutes. Regardless of the sale of scrap iron, it still supplies 6.25 bitcoins every 10 minutes. The supply speed is very certain and will not change because of whether the miners are losing money. Therefore, if the proportion of Bitcoin mining electricity costs is particularly high, it will not affect the supply, and will not change at all, only the mining difficulty will be changed. So you can't say that the proportion of electricity bills is high now, and Bitcoin has the potential to rise in the future. Can I hedge less? Can't. It is unscientific to use the proportion of electricity bills as a reference indicator for the future of currency prices.

Shang Silin: I would like to ask Shenyu, how do you determine the timing and ratio when you are doing hedging strategies?

Shenyu 🐟: There are several time nodes in the mining process.

The first time node is to decide whether to purchase mining machines. At this time, we will build a model, calculate the payback cycle, how long it will take to pay back under the current computing power, electricity bills, etc., and then according to the difficulty of the market and the predictable difficulty Period, roughly estimate the payback period and profit rate, after all, this is not a small investment.

Before placing an order for the mining machine manufacturer, I already have a rough psychological expectation. Knowing whether the batch of mining machines will pay back the cost in 120 days or 200 days, then I can basically calculate the composition of the electricity bill - before paying back the cost or How much electricity cash flow needs to be prepared when net profit is obtained.

Usually when you make up your mind to buy a mining machine, the price of the mining machine and the currency price are still relatively good; or the currency price is very poor and the mining machine is seriously undervalued, such as after a sharp drop. So at this time, we choose to hedge a part of the currency according to the currency price. For example, if the currency price is high now, we may cover the electricity bill for the entire life cycle; if the currency price is low, at least 30 days to a quarter of electricity bills. This will ensure that even if the market drops sharply in the future, these mining machines can still be turned on.

Xu Da also mentioned just now that the mining market is different from the traditional oil mining market. Mining is a stock game market. When the currency price is lower, a single mining machine can dig more bitcoins, so Many friends who have not done hedging may find that the marginal cost and marginal revenue are inconsistent, and the electricity bill is lost when the machine is turned on, so it is turned off.

Therefore, through hedging to protect the electricity bill, the mining machine can still be active in the market when the currency price is low, and can dig more bitcoins. At the same time, because we are a currency-based investment, or we want to obtain more bitcoins, there is still a part of the net profit of the mining machine that is stored in the form of coins. If there is a large-scale rise in the currency price, such as Like the market in 2017, there will be two parts of income:

Part of it is the coins mined after the electricity fee is removed, and the remaining coins can also increase in value.

In addition, the mining machine is a kind of hardware resource. In the process of rapid price rise, the price of the mining machine will also react violently. Because hardware manufacturing is cyclical, and price increases occur rapidly, the difference between these two parts is already very considerable for miners.

So we only need to do hedging to ensure that the machine is still on in the worst situation, and we can dig more bitcoins than competitors in the market, and we will win.

Xu Zhe: Yes, I agree. Live, live until the day you have the chance.

There is an old saying in the industry - loss is determined by oneself, and wealth is determined by the market. I don't know whether Bitcoin will rise to 14,000 or 18,000. How much it rises and how much money you make is determined by the market.

But you can decide how much you hedge, whether you want to cover half or all, or only 1/10, you can decide whether you can survive, and then the market decides how much you can make a fortune, what we can do Just make sure you can survive. As long as you live long enough and don't choose the wrong market, you will definitely be able to make a profit. If you can't survive, no matter how good the market is, you can only snap off your thighs.

So my suggestion to everyone is: whether you are doing contract trading or mining, everyone must have a bottom line, which is to ensure that you can survive. There is no higher principle than this.

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What role can hedging play?

Shang Silin: The two of you can talk about the specific role of hedging in the extreme market of 312 and when dealing with the halving.

Shenyu 🐟: In the days when the 3.12 plunge, the currency price fluctuated between three and four thousand, and the S9s that were on in the market were all shut down, which was more than the number of shutdowns after the halving.

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Image source: Weibo @神鱼BTCer

The other is halving, which will bring about a significant reduction in the income of miners. Many miners shut down in the early morning of the halving day, because the electricity bills at that time (especially in the dry season) could not cover the output at that time. If you do hedging at the right time, even if the electricity cost is relatively high, you can still continue mining. At least you must use the same mining machine. If you drive it for a longer period of time than other miners, your profit margin will be generated. , the payback cycle is shortened.

There is no need to think about whether the black swan will come. The black swan will definitely come. It is nothing more than when and to what extent. It does not mean that hedging should only be considered when investing a large amount of funds. This has nothing to do with how much money you have. You must have a risk control mindset to survive.

And living this thing will actually bring you benefits. To put it cruelly, you have extra income, which is achieved by the exit of those who do not control the risk. This market is very cruel, and the objective law of the market is like this.