A miner is paid in Bitcoin every day, pays its power bills in dollars, and has to decide what to do with the gap. That was the subject of a hedging and treasury panel at Mining Disrupt Miami 2024, held June 24–26, 2024. On stage were Jeff Lucas, CFO of Bitfarms; CJ Burnett of Compass Mining; Adam Richard of TWOPRIME, an SEC registered investment advisor; and Mitchell Askew, head analyst at Blockware. Daniel Goodman of Core Scientific moderated.
The moderator set the terms early: there is no one size fits all answer, and each strategy depends on the miner's own goals. The panel kept to that line for the rest of the half hour.
Start with the goal
Lucas said Bitfarms thinks of hedging less as building its balance sheet and more as reinforcing it. Mining is capital-intensive, and raising money in the market can cost a miner 25 or 30 percent. He gave Bitfarms' two aims.
One, how can we use hedging efficiently to reduce our cost of capital?
Jeff Lucas · 2:33
The second aim, he said, is to keep the upside in the Bitcoin the company mines. At the time Bitfarms ran about 12 data centers, with two more in development, across Canada, the US, Argentina and Paraguay, and was on track for 21 exahash that year and 35 exahash or more the next.
Burnett said Compass sees a wide spread of goals among its retail and light institutional customers.
Some people have a really long thesis. They just want to accumulate more Bitcoin, levered long exposure to Bitcoin
CJ Burnett · 3:17
Others, he said, want a cash flow business. His advice was to decide which one you are early, and not to copy another company's strategy because it looks good to investors. Askew put himself in the first camp: as a miner, his goal is to grow his balance sheet in Bitcoin terms, not fiat terms.
Know the loss before the trade
Asked which metrics matter, Lucas described a banking measure Bitfarms applies to every project, from options to new builds: risk-adjusted return on capital. The company works out the potential return, the downside and how much loss it can afford.
the bigger challenge is not knowing which option or future to buy. It's actually knowing when to liquidate and when to sell.
Jeff Lucas · 5:47
Richard said every strategy his firm runs starts with defined risk.
putting defined risk trades on so that we know what the potential loss is down to the penny is extremely important.
Adam Richard · 6:11
As a regulated US firm, he added, TWOPRIME also has to vet the exchanges, counterparties and custodians it faces. Goodman added the view from Core Scientific: transaction fees have become one of the bigger sources of variance after the halving, so a miner has to know how much Bitcoin a hedge on three months of forward production actually covers.
Operational risk is part of the hedge
Askew pointed out that a miner is exposed to Bitcoin three ways: the coins in its treasury, the ASICs whose value moves with the price, and the revenue itself. His answer was more than one income line, such as hosting, demand response or ASIC resale alongside self-mining.
So really diversifying your revenue streams, I think, is one of the best ways to protect yourself
Mitchell Askew · 9:24
Burnett turned to counterparty risk for miners who use a host. He said Compass had learned that lesson in spades over the last several years.
But one of the things that you have to do when you evaluate your host counterparty is, you know, track record, reputability, financial stability, right?
CJ Burnett · 9:57
Richard raised staffing. Bitcoin trades 24-7, so a miner running a hedging or yield strategy needs a team or system that watches it around the clock. TWOPRIME built a 100% proprietary platform for that; a miner without one has to build it or vet an outside manager.
On what can go wrong, Lucas said the first step is to understand cash flows and how much they vary. Bitfarms' power is 77% hydro renewable energy at relatively fixed rates, which makes outgoing cash easier to forecast; the price of Bitcoin and hashprice are the harder part. Goodman summed up the risk of a forecast miss: a miner can end up net short a very convex asset.
Bitfarms' synthetic HODL
On the return side, the case for staying net long at all times was put plainly from the panel: much of Bitcoin's gain comes on a few days a year, and a miner does not want to be short on one of them. Lucas said Bitfarms still struggles with stepping in and out of the market and relies on a risk committee that takes part in every derivative decision.
Richard described the tools: structured products, long and short volatility strategies, covered calls, and borrowing against mined Bitcoin to put the dollars into a yield strategy. Another panelist cited MicroStrategy's approach of accumulating Bitcoin and staying solvent. Lucas then laid out the Bitfarms version, which he called a synthetic [HODL]. The company sells the Bitcoin it produces from excess operating cash flow.
We use 85% or 90% of the funds from that sale to fund the growth of the business.
Jeff Lucas · 19:50
The other 10 or 15 percent goes into call options, so the company funds growth from operations, its cheapest capital, and keeps exposure to the upside. A panelist called it one of his favorite strategies and noted that miners are never forced buyers: new Bitcoin arrives every day.
Burnett offered the contrarian view. Public markets reward self-miners with large holdings, he said, but a mining business should not depend on the Bitcoin price to be profitable.
But when you're building a mining business, I think it's more important to view it as a cash flow vehicle, right?
CJ Burnett · 21:16
What a small miner can do
From the audience, someone asked what a small miner can do. Burnett said cash flows from mining are concentrated in certain parts of the market cycle, so a small miner should buy machines when hashprice is low and sell when everyone is excited about mining again.
taking a really dynamic approach on that front and thinking counter cyclically as opposed to, you know, pro cyclically
CJ Burnett · 23:33
Another panelist agreed, recalling that S19s sold for over $10,000 in late 2021 and that, just after the halving, hashprice was pushing towards all-time lows. One panelist noted that CME contracts carry a one Bitcoin minimum, which puts exchange hedging out of reach for many individuals. Burnett's last word was to study what both large and small miners do rather than outsource a strategy to the largest players.
A final question asked whether any miners mine altcoins and sell them for Bitcoin. The moderator said it was more common a few years ago and less so among public miners, who weigh the optics of being a pure play. A panelist added that public miners stay away from other coins because the line between commodities and securities is not as clear.
Bitcoin traded at $61,272 on June 24, 2024, the day the event opened. It is $79,770 today.