Thread by @Leorzhang

Excited to share Part I. of "The Alchemy of Hashpower"

Information in the mining industry is opaque and highly fragmented. Despite its massive growth, investors still find entry into the space challenging.

aniccaresearch.tech/blog/the-alche…

We define all assets that produce hashpower in exchange for coins, and synthetic contracts that mimic mining returns as the hashpower asset class. The hashpower assets have distinct risk & return profile, but there is no proper theory for understanding it as a collection.

In this essay, we attempt to establish a framework for various forms of hashpower assets, their key characteristics, and how their value responds to the changes of the underlying variables.

As a start, we explore the basic questions about the economic value of hashpower. Hashpower secures the Bitcoin network, provides strong settlement assurance for it to be a global settement system; and in turn, the economic value of hashpower is driven by the value on the network

We describe the different types of hashpower assets, their nature as financial instruments, as well as the challenges each market vector is facing today.

The value of hashpower fluctuates when Bitcoin price, network hashpower, and transaction fees change.

Using the historical rig data collected by @hashrateindex, we discovered that prices of the machines follow Aggregate Mining Revenue / Terahash per second the closest.

Next, we construct a simple proxy model for the valuation of hashpower using days-to-breakeven. Similar to how “implied volatility” is the proxy for options valuation, days-to-breakeven has become a popular proxy for machines valuation.

While days-to-breakeven is a simple and intuitive static measure of mining performance, it eliminates the inherent options value of the machines, and thus the metric itself is highly volatile.

Taking the partial derivative of days-to-breakeven w.r.t. price / global hashrate / fees, we can calculate its sensitivity to changes. This is analogous to options delta, which measures how much the value of the option changes when the underlying asset’s price changes.

In addition to the complexity in financial valuation, purchasing and running mining machines come with many operational challenges. As the hashpower capital markets develop, more financial instruments and synthetic contracts start to emerge.

Sophisticated traders can structure synthetic hashpower portfolios. There are multiple creative ways to structure mining portfolios with financial instruments. For funds and trading firms who don’t want to own and operate hardwares, this is a cleaner way to gain mining exposure.

Miners are also starting to use complex instruments to protect their downside, such as the hashpower forwards popularized by @BitOoda_Crypto.

These deals will happen more frequently as more exchanges / financial services vertically integrate with mining pools.

Investing in mining is a full-time job. Most investors and venture capitals don’t have the bandwidth or the expertise to run machines or structure complex synthetic hashpower portfolios. It’s more common for them to get exposure to mining through mining SPV or mining companies.

How the operators manage cash flow is imperative. Developing a reasonable selling strategy to counter changes in market conditions is critical to the fund / company’s financial success. In the article we illustrate the back-testing outcomes of four common strategies.

Lastly, we draw a summary of the hashpower asset class today:

Shoutout to @thinktankkv for the hours of data work and charting.

Special thanks to @derek_hsue @nic__carter @tarunchitra @tpacchia @fishkiller @Weinaynay @QWQiao @tzhen for edits and feedback, and especially @hasufl for taking time during vacation to read this (twice!) ♥️

In Part II, we describe the internal logics of the variables that drive the trends in mining, and present how reflexivity plays out in the hashpower market. We will break down the cyclic patterns that emerge from these intricate interactions, and illustrate w real market examples