Today, Hashrate Index will launch a series of articles titled “Review of the Hashrate Derivatives Market,” which will provide an overview of the monthly hashrate derivatives market and explore the underlying reasons behind market fluctuations. As the trading market becomes increasingly mature, Luxor aims to empower every miner with the knowledge to effectively manage hashrate investments and operations, enabling a deeper understanding of the dynamics of the trading market and active participation in market development.
This inaugural article will focus on the hashrate prices in August 2024 and analyze the trends in hashrate prices, trading activity of hashrate futures contracts, and the performance of hashrate futures contract prices.
1. Overview of Hashrate Prices
The Bitcoin mining market is experiencing the lowest monthly prices for USD-based and coin-based hashrates in nearly seven years, setting a historical low for hashrate prices. On August 5th, Bitcoin miners suffered from a global asset sell-off, leading to a sharp decline in spot Bitcoin prices. At the same time, network difficulty unexpectedly climbed during the summer, and the transaction fee market was in a low-cost, low-volatility state of inflation. As a result, the USD-based hashrate price dropped to $37.70/PH/s/day.
USD-based hashrate price (August 1, 2024, to September 1, 2024)
During August, the average monthly USD-based hashrate price was $43.54/PH/s/day, starting the month at $45.47/PH/s/day and ending at $42.19/PH/s/day. This decline was primarily influenced by the drop in spot Bitcoin prices, the record high network difficulty, and the low transaction fee environment. The average monthly coin-based hashrate price was 0.0007246 Bitcoin, starting the month at 0.0007090 Bitcoin and ending slightly higher at 0.0007141 Bitcoin.
Coin-based hashrate price (August 1, 2024, to September 1, 2024)
2. Factors Influencing Hashrate Prices
Last month, the average Bitcoin price was $60,063, a decrease of 4.15% compared to the previous month. It experienced a rapid decline from $66,100 to $50,725 in the early month, with a significant drop of 23.26%. This decline was caused by a combination of deteriorating U.S. labor market conditions, unwinding of yen carry trades after the Bank of Japan’s interest rate hike, and escalating geopolitical tensions. Despite recovering to $59,087 by the end of the month, the price still had a 7.86% decrease compared to the beginning of the month.
Network difficulty sharply increased by 10.5% on July 31st, reaching a record high of 90.67T. It briefly declined by 4.2% to 86.87T in mid-August, followed by another increase of 3.0% to 89.47T on August 28th. The unexpected surge in network difficulty at the beginning of the month was partially due to high electricity demand in Texas during the summer and the ERCOT 4CP program.
Bitcoin price and network difficulty (July 30, 2024, to August 31, 2024)
The average transaction fee reached its lowest level in nearly two years, with an average of 0.0797 Bitcoin per block per day. However, during the Babylon Protocol launch, transaction fees briefly surged, with block rewards reaching as high as 15 Bitcoin, significantly increasing the average daily block rewards for Bitcoin miners to 0.15 Bitcoin. As a result, the hashrate price briefly spiked to $49.25 USD/PH/s/day, reaching a recent high. However, after the cooling down of the Babylon Protocol frenzy, miners were receiving an average of 0.0506 Bitcoin per block per day, a decrease of 66.60%. Although the explosive growth in transaction fees was short-lived, it did increase miners’ weekly profitability. Transaction fees accounted for 2.43% of the block rewards for the month. Without the boost from the Babylon Protocol on transaction fees, this ratio would have been 1.86%.
Transaction fee as a percentage of block rewards (July 30, 2024, to September 1, 2024)
Due to the Babylon Protocol frenzy, the volatility of hashrate prices increased. As of now, the volatility in August is lower than in January, April, May, and June, and on par with February and March.
30-day average hashrate price volatility
August mining market data overview
3. Hashrate Futures Contract Prices
Next, we will use charts to show the recent price changes of hashrate futures contracts, including the prices of specific trading months and the resulting hashrate futures contract price curves.
The following chart shows the price changes in the Bitcoin hashrate futures contract market from March to August 2024. Rows represent monthly contracts, and columns represent trading months. The first cell in each column represents the settlement price of the monthly hashrate futures contract, while the remaining cells represent the average mid-price of the hashrate futures contracts. This chart summarizes the trading history of August hashrate futures contracts (green to red rows) and the price curve of August hashrate futures contracts (red to orange columns). Based on these values, we can compare the price changes of specific trading months with other trading months and perform a comparative analysis of specific trading strategies (e.g., comparing a 6-month maturity strategy with a 1-month maturity strategy) against the spot hashrate price. Finally, the settlement price of the monthly hashrate futures contracts shows the change in specific trading months relative to the spot hashrate price (represented by a spot premium in the chart).
Hashrate futures contract market price changes
Performance of August 2024 hashrate futures contract prices
4. Participants in Hashrate Futures Contract Trading
The participants in August hashrate futures contract trading consist of a diverse range of market participants. The main participants in deliverable futures contracts (DF) and non-deliverable futures contracts (NDF) are miners, lending institutions, and market makers. Miners sell NDF contracts to hedge risk exposure and sell DF contracts for financing the upgrade of next-generation mining machines.
On the other hand, lending institutions lock in the yield of holding long positions in DF contracts by selling NDF positions. The discount of DF to NDF is considered the interest rate of the hashrate basic lending market. Buyers and sellers of DF contracts with upfront payments can use NDF contracts to lock in fixed yield or funding costs. In August 2024, the annualized interest rate for this yield or funding cost was 10-13%.
Participants in DF and NDF trading
Contrary to market expectations, hashrate prices reached a historical low in August. Based on this, miners who hedge risks using hashrate futures contracts may have significantly higher income compared to other miners. For example, miners who sold August hashrate in March this year (when hashrate futures contracts were first listed) averaged a revenue of $59.42/PH/s/day, much higher than the spot hashrate price. In other words, the earlier miners sold August 2024 hashrate, the more Bitcoin they received.
In terms of income impact, the following chart shows the performance difference between miners who sold August hashrate futures contracts and miners who sold spot hashrate in the same month, assuming they own 1 EH of hashrate.
Performance difference between August 2024 hashrate futures contracts and spot hashrate sold in the same month
We found that some publicly listed mining companies did not sell hashrate futures contracts for August. Considering the hashrate price trend they are experiencing, this decision has a negative impact on their own income. The chart below shows a hypothetical scenario comparing the Bitcoin production of publicly listed mining companies hedging in March before the “halving” to their actual production in August.
Difference between hypothetical scenario and reality
We would like to emphasize that this chart is for illustrative purposes only and is based on simplified assumptions: multiplying the actual Bitcoin production figure by the locked-in hashrate price to derive the difference from the spot hashrate price, excluding all possible costs and bid-ask spreads.
In addition, hedging activities are usually considered a business cost to obtain predictable cash flow at a voluntary cost. This would be beneficial in improving the company’s valuation, reducing the cost of capital, and increasing the ability to attract investment.
5. Trends in Hashrate Futures Contract Prices
In August this year, most market participants adopted a “wait-and-see” approach. Sellers were primarily miners looking to lock in hashrate prices or to ensure profit margins or financing for temporary hashrate expansion. Buyers included not only miners but also speculators hoping to profit from a rebound in hashrate prices.
Participants in hashrate futures contract trading
The following chart summarizes the evolution of the hashrate futures contract market from September 2024 to January 2025 during August 2024. Rows represent specific monthly hashrate futures contracts, and columns represent specific trading weeks. The cell values represent the average mid-price of the hashrate futures contracts for the week.
Hashrate futures contract market price changes
By observing the values in each column, we can see the price curve of hashrate futures contracts during August and the market’s expectations for future prices. From the beginning to the middle of August, the market reacted with contango trading, but it turned into backwardation by the end of the month, indicating that the market believed the surge in transaction fees caused by the Babylon Protocol was not sustainable. In fact, the prices of hashrate futures contracts for different months all hit bottom at the beginning of August and experienced some recovery by the end of the month.
6. Conclusion
Currently, hashrate prices are lingering at historical lows. Based on this, miners may consider selling hashrate futures contracts if the following scenarios occur. First, if hashrate prices further decline, such as a significant drop in Bitcoin prices pushing hashrate prices down to $20/PH/s/day, executing a hedging strategy may prevent forced shutdowns. Second, although the income of a unit of hashrate is at a historical low, the income of a unit of energy consumption (i.e., per kilowatt-hour) for next-generation mining machines is not at its lowest. Miners using next-generation mining machines still have sufficient profit margins.
We can also look at hashrate prices from another perspective. Buyer participants may find the current hashrate price environment an attractive entry point for long positions. Alternatively, miners with hashrate costs higher than the hashrate futures contract price curve (e.g., using outdated mining machines or bearing higher electricity costs) can purchase hashrate futures contracts to lower their Bitcoin acquisition costs.
Finally, we reiterate that hedging is a risk management tool, and the outcome of locking in hashrate prices may change over time. As the industry continues to mature, miners who are open to financial derivatives may benefit from more stable cash flows, lower funding costs, and increased investor confidence.
