According to Bloomberg News, miners of Bitcoin are deploying “yield-farming” of their version. Yield farming is often the strategy for making money in cryptocurrency. However, there is an old-school twist.
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HODL or “hold on for dear life” is the mantra held on to by most publicly traded miners, thereby hoarding their tokens. Hence, these tokens become appealing to investors that seek exposure to gains of the most prominent digital currency. However, these companies must incur significant expenses, and they must grind through cryptographic puzzles so they can spawn new coins, which take costly computer hardware and astronomical power bills.
Instead of selling the Bitcoin to raise money, companies like Marathon Digital Holdings Inc. are disposing of the Bitcoin call options to siphon out money off their holdings, seeking refuge in a profit-generating strategy widely used across the traditional financial setup.
Joshua Lim, the head of derivatives at Genesis Global Trading, a New York-based brokerage firm that offers options overwriting strategies in this industry, says that the Bitcoin miners are voraciously hungry for yields and make up the most yield seekers in the market currently.
These firms are tapping into the potential of an open secret in the options market, and that is frequently, contracts expire worthlessly. When this occurs, nothing comes into the hands of the contract’s owners, and the individual, the person who is a Bitcoin miner that had sold the coins to the owner, gets whatever the buyer pays to get the option.
Bitcoin is trading at around $39,000 currently. If a miner sells a call with an exercise price of $50,000 and Bitcoin fails to surge to that level by the time contract expires, the miner benefits and makes money. According to Lim, based on the trade, yields or annual returns can run well into two-digit percentages.
However, Bloomberg News states that the strategy is not devoid of risks. If the Bitcoin hits the exercise price, money starts getting lost by the miners. By trading multiple contracts at different prices, this risk can get mitigated, but it must be factored in the first place.
Public miners have been hunting for yield generating strategies for funding the rapid expansion without the need to issue new shares or debt. Other blockchains, most prominently, the second largest Ethereum, offer several ways to generate income. Many such options fall in yield farming, which is a popular but derided money-making strategy at times.
Although Bitcoin has half of its value approximately ever since it peaked in November, of late, the prices have been relatively stable. This can be helpful for option sellers since it minimizes the chances of the option strike being hit and the contract becoming profitable for buyers. However, miners could be subjected to loss if Bitcoin starts to rise once again.
