How Bitcoin Miners Hedge: Bitfarms, Compass and TWOPRIME

A Bitcoin miner earns coins every day and pays its bills in dollars. At Mining Disrupt Miami 2024, held June 24 to 26, 2024, four companies explained how they manage that gap. Jeff Lucas, CFO of Bitfarms, said the company uses hedging for two things. In his words: "One, how can we use hedging efficiently to reduce our cost of capital?" The second is to keep the upside in the Bitcoin it mines.

Raising money in the market, he said, can cost a miner 25 or 30 percent. Bitfarms' answer is what Lucas called a synthetic HODL. The company sells the Bitcoin from its excess operating cash flow, puts 85 or 90 percent of the proceeds into growing the business, and uses the other 10 or 15 percent to buy call options. That keeps exposure to the price while funding growth from its cheapest capital.

As he put it: "So you can have your cake and eat it too." Adam Richard of TWOPRIME, an SEC registered investment advisor, said every trade should start with defined risk, so the possible loss is known to the penny. He added that a regulated firm also has to vet the exchanges, counterparties and custodians it faces. CJ Burnett of Compass Mining said each miner first has to decide what it wants. Some customers want levered long exposure to Bitcoin; others want a cash flow business.

He warned against copying another company's strategy because it looks good to investors, and told small miners to think counter-cyclically: buy machines when hashprice is low and sell when everyone is excited about mining again. Mitchell Askew, head analyst at Blockware, said a miner is exposed to Bitcoin through its treasury, its machines and its revenue, and argued for more than one income line, such as hosting, demand response or ASIC resale. Burnett added a warning for anyone who uses a host: check its track record, its reputation and its financial stability, because a host that manages its own treasury badly can pass that risk on to its customers. The panel was moderated by Daniel Goodman of Core Scientific, who pointed to transaction fees as one of the bigger sources of variance after the halving and summed up the risk of a bad forecast: a miner can end up net short a very convex asset.

Bitcoin was $61,272 when the event opened. Today it is $79,770. The full story is on Mining Disrupt at miningdisrupt dot com, and many more like it play around the clock on Bitcoin Radio.