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How to Leverage the Hashrate Forward Curve

As adoption of the Luxor Hashprice non-deliverable forward contract grows, the forward curve becomes an increasingly valuable data point for ensuring the future viability of your mining fleet. In this edition of The Bitcoin Mining Block Post, we’ll explore what a forward curve is, how miners can leverage this data point to their advantage, and strategies for adjusting mining operations accordingly.

    • Forward Contracts

    • Forward Curve

    • Forward Curve as an Indicator

    • Benchmarking your Mining Fleet

    • How to Survive a Period of Thin Margins?

    • 3 Reasons Why the Market Might be Wrong

Forward Contracts

A forward contract is a tailor-made agreement between two parties to either purchase or sell an asset at an agreed-upon price on a predetermined future date. Forward contracts can serve purposes of hedging or speculation.

While forward contracts are very common in traditional commodity sectors, it is relatively new to the Bitcoin mining industry. In October 2022 Luxor Technologies launched the Luxor Hashprice NDF, an Over-the-Counter (OTC) non-deliverable forward contract (NDF) for Bitcoin mining hashprice.

Forward Curve

The forward curve, also known as the future curve, illustrates the relationship between the price of forward contracts and the time to maturity of those contracts. Below is the forward curve published by Luxor, which includes both hashprice ($/PH/Day) and hashvalue (BTC/PH/Day). The vertical axis represents the price change of a forward contract, while the horizontal axis measures the time to maturity. Luxor Technologies updates this chart on a weekly basis.

Source: Hashrate Index

Forward Curve as an Indicator

As adoption of the Luxor Hashprice NDF grows, the forward curve becomes an increasingly valuable data point for ensuring the future viability of your mining fleet.

As depicted in the forward curve above, the hashprice is projected to be $47.75 post-halving on the Luxor hashrate market. This indicates an anticipated decline of approximately 45% in hashprice following the halving.

At the time of writing this article, the hashprice stands at $83/PH/Day, with transaction fees comprising only 3% of the block reward. Given the current circumstances, the market’s expectations appear rational, as the majority of the hashprice is derived from the block subsidy, which will be halved.

Source: Lincoin Lens

Benchmarking your Mining Fleet

Now that we understand the market’s expectation of hashprice is ranging around $45 to $50 per PH/Day, let’s consider the profitability of popular Bitcoin ASIC miners with varying levels of efficiency. Below, you’ll find the daily profit projections for the Antminer S19J Pro, S19XP, and the latest S21.

If your mining fleet operates at an efficiency of 21.5 J/TH, you can expect to break even when operating at a cost of $0.09 to $0.10 per kWh. However, if your machines average 30.5 J/TH or higher and the hashprice drops to the levels anticipated by the market, your fleet will already be running at a loss when electricity costs are $0.07 per kWh.

How to Survive a Period of Thin Margins?

If market expectations materialize, miners can take several steps to prepare for the challenges ahead:

  1. Build up cash reserves or diversify revenue streams: Accumulating cash reserves or seeking alternative revenue sources can help miners weather the period of low margins or even mining at a loss. This strategy is particularly prudent if one anticipates that Bitcoin will appreciate post-halving, as it has historically.

  2. Improve efficiency through low-power mode: Miners can optimize efficiency by putting their machines into low-power mode. Underclocking machines in the appropriate settings reduces energy consumption per terahash produced, thereby enhancing profitability.

  3. Upgrade mining fleet: Investing in upgrading the mining fleet can enhance overall efficiency. Adding new machines or replacing older ones with newer generation hardware can significantly improve the average efficiency of the fleet, ultimately bolstering profitability.

  4. Temporarily suspend mining operations: In extreme cases, miners may consider temporarily shutting down mining rigs until market conditions improve. However, this approach carries the risk of potentially losing power purchase agreements that are in place, so careful consideration of the contractual obligations is essential before taking this step.

3 Reasons Why the Market Might be Wrong

There are several factors to consider that could influence the current market expectations. The hashprice might be higher due to various reasons, and here are three possibilities:

Drop in Hashrate Post-Halving

When the block subsidy is halved, it impacts the profitability of mining operations. Less efficient machines may become unprofitable, prompting miners to either switch them off or put them into low-power mode. This reduction in mining activity can cause a decrease in network hashrate. Consequently, the network difficulty may decrease, making mining more profitable and driving up the hashprice. Following the last halving, approximately 25% of the computing power went offline, and it took over a month to recover.”

Increased Demand from ETFs

The emergence of ETFs has significantly increased demand for Bitcoin. Over the past week, ETF net inflows have consistently surpassed +6K BTC per day. This surge in demand has been the primary driving force behind the recent uptick in Bitcoin prices. Following the halving, where the block subsidy will decrease from 900 BTC per day to 450 BTC, coupled with the heightened demand, this scenario could potentially accelerate price appreciation.

Potential Spikes in Transaction Fees

In 2023, transaction fees experienced intermittent spikes due to increased competition for block space. The uniqueness of the first blocks post-halving could similarly elevate transaction fees as users compete for block space.

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