* Miners look to hedge swings in computer power
* Startups developing derivative products
* Market at early stage but expected to grow
* Could accelerate investment in crypto sector
* Graphic - Power hungry: Bitcoin mining gets harder https://tmsnrt.rs/37XZCKN
By Tom Wilson
LONDON, Dec 10 (Reuters) - The old image of bitcoin miners
is of young techies in their bedrooms, hunched over laptops that
solve maths puzzles to earn new coins. Now they're more likely
to be savvy startups with ultra-high-speed chips and massive,
power-guzzling machines.
And, in a new development, they're beginning to look to
financial derivatives to hedge against the wild swings in their
electricity needs that can turn profits to dust.
The growth of a market for such tools could accelerate
investment in cryptocurrency mining, originally the preserve of
lone enthusiasts but now a capital-intensive industry that is
expected to see growing demand for digital coins.
Crypto miners must draw on increasingly large amounts of
computing power as they compete against others to solve the
complex mathematical equations to build the blockchain and earn
rewards in the form of new digital coins.
Startups have largely been defenceless against changes in
so-called "hashrate" - in short, a fluctuating measure of the
processing power of the entire bitcoin network that dictates how
much power miners need to produce new coins.
A spike in hashrate means more electricity is required,
ramping up production costs and eating into eventual profits of
coins sold. This wildcard could become a major obstacle for
startups to attract much-needed investment from institutions and
markets.
The answer, seven cryptocurrency miners and industry players
told Reuters, are derivatives that allow miners to hedge the
hashrate. In theory, that would give clearer projections of
cashflow - a prerequisite for would-be investors.
The miners and crypto traders, spread from the United States
and Canada to Britain and Hong Kong, said a market for such
products, though in a very early form, was emerging and would
grow in importance.
"The trend in hashrate is upwards. Unless miners increase
production, they will get fewer bitcoin with the same power,"
said Michel Rauchs, author of a Cambridge university study on
cryptocurrency miners.
"With hashrate derivatives, they can price in risk."
London-based DAG Global, which pitches itself as a
cryptocurrency merchant bank, said miners were showing strong
interest in the firm's products for hedging hashrates.
"As the hashrate changes, you can go from being profitable
to losing money very quickly," said Robert Andersen, who leads
DAG's digital asset sales. "The contract insures you against
that. It's like insurance, and for that you pay a premium."
Another firm, crypto trader GSR, said it has been working on
similar products but, given the early stage of the market, was
not yet ready to offer them.
"We're building products around hashrate and difficulty,"
said co-founder Richard Rosenblum.
"It's going to take more than a few months for there to be
significant liquidity," he said, cautioning that a market could
take a few years to develop.
And for sure, the market is at a very early stage. Firm
figures are hard to come by, but some crypto players say it
likely totals around $50-$100 million dollars a year.
Click here https://tmsnrt.rs/2sBLQwV for an interactive
graphic.
WINNING OVER INVESTORS
For traditional investors, hunting high-yielding returns in
an era of ultra-low interest rates, crypto miners could offer a
tempting proposition.
With bitcoin trading at around $7,500, the 1,800
bitcoin that can be produced on any given day equates to an
annual market of around $5 billion a year.
And many investors want a slice.
In an major example of a crypto mining company going public,
last month Chinese giant Canaan launched a $90 million
initial public offering on the Nasdaq, valuing the firm at
around $2 billion.
While this is an indication of capital market appetite,
Canaan is one of only a handful of giant, global crypto miners.
Many others are smaller outfits that would likely have to work
harder to convince investors they can manage their risks.
Still, said Marco Krohn, co-founder of Hong Kong-based
Genesis Mining, which produces bitcoin from Iceland to
Kazakhstan, hundreds of millions of investment dollars could be
up for grabs.
"You need to leverage the traditional financial markets -
and these people ask questions. They tend to be risk averse."
To attract such investors, mining firms told Reuters they
are looking more closely at controlling their risks - both on
hashrates and prices - via financial tools.
"The adoption of derivatives in the mining community has
definitely increased in recent months," said Kevin Shao, a
manager at Canaan's blockchain unit, speaking through an
interpreter.
It may be early days for crypto mining hedging tools, but
changes are definitely afoot, said U.S. firm BitOoda, which has
since April brokered a product known as a "difficulty swap".
Sam Doctor, the company's chief strategist, said the market
for such products was growing more liquid, with the length of
contracts also on the rise.
"There are more players on the sidelines watching how these
trades perform before they take the step of trading themselves."
(Reporting by Tom Wilson; Editing by Pravin Char)