Bitcoin mining gear maker Canaan has tied up with cryptocurrency market maker GSR to offer its clients risk management products to protect themselves against volatility in bitcoin prices.
Hong Kong-based GSR will offer through Hangzhou-based Canaan’s strategic partner Interhash, customised financial instruments such as swaps and collars, which could help them to avoid losses or boost their returns on inventory. Swap is a derivative instrument traded between two parties based on a specified notional amount that can be used for both hedging and speculating, while collar is an options strategy used by traders to protect against downside risks.
Some US$3 billion of bitcoin is expected to be mined globally next year at current prices, according to GSR. The liquidity provider expects Canaan’s clients, who will account for US$256 million worth of that bitcoin inventory by the end of next year, to seek its risk management solutions.
While cryptocurrency exchanges in Hong Kong and the US, such as the CME, already offer bitcoin futures and options, Kevin Shao, general manager of Canaan’s blockchain division, said that the market still lacks hedging instruments that match a miner’s production costs and production cycle.
“There is also a direct relationship on how derivatives can help maximise bitcoin rewards that a miner can get. For example, given the current low price level of bitcoin, we have seen some active miners who want to lever up their investment in mining gear for a higher future return,” said Shao.
Since a miner’s return hinges on the prevailing market price of bitcoin, so does Canaan’s fortunes. Last year many miners were forced to unplug their machines after bitcoin prices fell 80 per cent from its all-time high of more than US$19,000 in December 2017. The world’s oldest cryptocurrency has lost almost 50 per cent from its peak this year to its current price level of US$7,155.
China comes down hard on cryptocurrencies as it seeks to rein in market prone to excesses
The bitcoin blockchain is designed to produce only 1,800 coins a day, with China accounting for 70 per cent of the supplies.
Nasdaq-listed Canaan, which reported a net loss of 330.9 million yuan (US$48.2 million) for the first half of 2019, could see the value of its mining machine inventory depreciate further and its machine prices fall if bitcoin prices trend lower.
Xin Song, business development adviser for Asia at GSR, said the mining industry is maturing, as it has shifted from individual miners to professional managers managing mining funds. These managers were also seeking financial risk management products to stabilise their returns.
“These institutional investors would be keen to hedge bitcoin returns as part of their fiduciary duties to their clients,” said Song.
In China, cryptocurrency mining has the support of government officials, particularly in provinces such as Sichuan, Xinjiang and Inner Mongolia where electricity costs are cheap and abundant, but the trading of digital currency still faces regulatory scrutiny.
In November, the People’s Bank of China warned against the trading of digital currencies, targeting particularly those involved in illegal fundraising. Officials at the bank’s Shanghai branch reportedly raided offices of cryptocurrency exchanges.
Song said GSR, which does not have an office in China, will service Canaan’s clients from jurisdictions outside the mainland. The company has offices in Chicago, London and Zug in Switzerland.
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