Valuation, Risk and Hedging of Bitcoin Mining Operations

The recent volatility in crypto-currency prices caught many Bitcoin miners, lenders, and financial institutions off guard, highlighting their lack of risk management practices for financing Bitcoin Mining ASICs.The lack of understanding of the sensitivity of ASIC machine pricing to BTC prices, coupled with the absence of practical tools for managing that price exposure, has contributed to borrower defaults borne by miners and in some cases the lenders in the space.While over-the-counter (OTC) derivatives and hash rate contracts \cite{Bitooda2020}, \cite{Luxor2022} have emerged as hedging tools for miners, they are still not widely used due to their illiquidity, high costs, and associated counterparty risks.This study aims to provide practical tools for pricing and hedging BTC mining operations by the following contributions.(1) We introduce the option bundle methodology in \cite{Yaish2020}, \cite{Hashimoto2019}, and show how it can be used to practically price BTC mining ASIC machines.(2) We conduct an empirical analysis using historical OTC machine price data spanning three years and propose the effective value and the implied payback time as a key variables in analysing machine price economics.(3) Using these tools, we demonstrate the outsized riskiness of unhedged financing arrangements then, miners are fundamentally levering long call option positions.(4) Finally we propose a \textit{Machine Replication} methodology for hedging ASIC machine sensitivity to BTC price risk without using or incurring the high costs of OTC derivative contracts.All code for this work can be found in \cite{Serenity2023}