How Miners Can Hedge Their Inventory to Increase Return on Investment

To a newcomer, crypto mining may sound deceptively easy — essentially, a way to switch on a machine, walk away and watch the lucrative crypto rewards roll in. But the reality is a little more complicated.

The oldest and most powerful crypto out there, Bitcoin (BTC), uses a proof-of-work algorithm to ensure it’s blockchain’s security, and plenty of other influential cryptos have followed suit. Miners in PoW protocols receive a crypto reward whenever they’re the first to submit a correct answer to the cryptographic math problem that seals each new block of data on the blockchain. The more miners there are operating on one blockchain network, the stiffer the competition becomes to solve this problem and win a crypto reward.

To improve their chances, miners generally use hardware rigs that demand more and more hardware components and electricity to become more powerful. Crypto miners need to make significant rig investments and pay high monthly electricity bills if they want any chance of earning a mining reward more than once or twice in a blue moon.

Regions with cheaper electricity tend to attract more miners, but even among these operations, profit margins tend to be tight. As a result, miners generally sell off their mined crypto as soon as they can. Selling their earnings for fiat not only helps them keep their rigs turned on but also lowers the risk of wiping out their profits or even having their capital sunk into mining equipment if market prices drop. That cautious business model also makes it harder for miners to earn a high return on investment, which is enjoyed by more institutional crypto traders — especially when they have access to sophisticated strategies borrowed from the world of derivatives and traditional finance.

But as crypto markets continue to mature, more and more asset classes become available to miners and can help them earn a higher ROI on their mining investment — without risking huge losses in a volatile crypto market.

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