Help me hedge difficulty

[optimator]

I can't figure out how to hedge difficulty increases. Maybe I'm doing it wrong.

Here's what I have:

1. August 6 - Difficulty  37,392,766
2. I have purchased miners for 0.14 per Gh/s
3. The table below represents the net income (mined btc - miner cost ) for 6 months of mining, per Gh/s, based on three separate delivery dates for miners (October, November, December) at 5 different possible difficulty increase levels.

BTC Profit per Gh/s at various delivery dates and difficulty increase levels

Difficulty Increase	Oct 1	Nov 1	Dec 1
15%	0.49	0.26	0.13
20%	0.20	0.10	(0.00)
25%	0.09	(0.02)	(0.08)
30%	0.01	(0.09)	(0.12)
35%	(0.06)	(0.11)	(0.13)

Assume, I believe I'll have miners in hand on October 1 and difficulty will increase linearly at 25%.
 
What difficulty futures should I purchase to maximize the mining income? Specifically, at what strike price, and what  quantity.

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[koin]

What difficulty futures should I purchase to maximize the mining income?

where are these offered?

[drawingthesun]

What difficulty futures should I purchase to maximize the mining income? Specifically, at what strike price, and what  quantity.

Maximize with chance of loss or maximize risk free? If you are not willing to take risk and want maximum income, then simply mine away and take no futures whatsoever.

[optimator]

What difficulty futures should I purchase to maximize the mining income?

where are these offered?

You can find one here - https://btct.co/security/CB.IDIFF-O

This is a difficulty future for an even month (the -O) expiring on the third wednesday in the month.

[optimator]

What difficulty futures should I purchase to maximize the mining income? Specifically, at what strike price, and what  quantity.

Maximize with chance of loss or maximize risk free? If you are not willing to take risk and want maximum income, then simply mine away and take no futures whatsoever.

I think I follow...

But I believe the statement:

Assume, I believe I'll have miners in hand on October 1 and difficulty will increase linearly at 25%.

specifies my parameters. Thus, I wish to protect myself against either a) difficulty increasing because I haven't received the miners before October 1; or b) the difficulty increases beyond 25%.

[Ytterbium]

Difficulty futures? What?

Are you also going to buy credit default swaps to cover in case these diff futures don't actually pay out?

If you want to hedge against difficulty, sell your mining stocks.

[davos]

What difficulty futures should I purchase to maximize the mining income?

where are these offered?

You can find one here - https://btct.co/security/CB.IDIFF-O

This is a difficulty future for an even month (the -O) expiring on the third wednesday in the month.

The "O" futures are for Odd months, not even ones.

If you own mining units / orders for mining units / shares in mining bonds / shares in mining farms then the higher the future difficulty, the less you will earn from your units/shares/bonds/etc - so you hedge this investment by purchasing mining futures - this will only protect you, however, if the difficulty rises higher than the price you paid for the futures contract. You can also purchase a futures contract simply as a speculator - if you feel the difficulty reflected in the price of the contract is lower than what will be reached by the settlement date.

You sell a futures contract when you believe that mining difficulty will not rise above the current price of the futures contract, or above the price you can get for a futures contract.


Take the September contract (the current -O issue).

If you believe that

Assume, I believe I'll have miners in hand on October 1 and difficulty will increase linearly at 25%.

specifies my parameters. Thus, I wish to protect myself against either a) difficulty increasing because I haven't received the miners before October 1; or b) the difficulty increases beyond 25%.

Then this is akin to saying that there will be approximately 5.47 difficulty adjustments between now and 18 September 2013 (25% growth per period = 7.5 days per period = 41 days (til 9/18) / 7.5days and that difficulty on 9/18/2013 will be approximately 114,113,665 as of the fifth of those adjustments (do I have you right? difficulty will increase by 25% each cycle?).

Based on this model, you should definitely buy the futures contracts at any price up to BTC0.01, as they will automatically settle at BTC0.01 per contract early (on or around 14 September 2013) - if I have your model correct - both to hedge your mining investment and also because your model says there's a solid 10-20% ROI available on the market price of these futures (currently in the 0.008 - 0.009 range)

[rini17]

Difficulty futures? What?

Are you also going to buy credit default swaps to cover in case these diff futures don't actually pay out?

If you want to hedge against difficulty, sell your mining stocks.

We offer the same futures on Bitfunder since February and they were always paid out on time (regardless if at loss - already happened), as well as customers of CoinBr.com MPEx brokerage got all their withdrawals. CoinBr users were also among first ones when SatoshiDICE paid out, mind you that such an unexpected big event would cause any naked scam to fold.

And thanks davos for the explanation, you are correct.

[optimator]

The "O" futures are for Odd months, not even ones.

Thanks for fixing that for me   

Then this is akin to saying that there will be approximately 5.47 difficulty adjustments between now and 18 September 2013 (25% growth per period = 7.5 days per period = 41 days (til 9/18) / 7.5days and that difficulty on 9/18/2013 will be approximately 114,113,665 as of the fifth of those adjustments (do I have you right? difficulty will increase by 25% each cycle?).

Based on this model, you should definitely buy the futures contracts at any price up to BTC0.01, as they will automatically settle at BTC0.01 per contract early (on or around 14 September 2013) - if I have your model correct - both to hedge your mining investment and also because your model says there's a solid 10-20% ROI available on the market price of these futures (currently in the 0.008 - 0.009 range)

However, the last difficulty change was on August 3 making the 7.5 day, 25% increase cycle finish on September 17, at a difficulty of  142,642,083. But, I think I understand....

If I purchase the future at .009 and it settles at .008 - the .001 represents the COST to me to protect my investment, right?

If I purchase the future at .009 and it settles at .01 - the .001 represents protection benefit of the hedge, do I have that correct?

If so, then assume I've purchase 500 Gh/s of mining equipment I wish to hedge. How many futures should I purchase?

EDIT:

I think to answer to above question I need to determine what I think the maximum increase in difficulty is I'm hedging against. So, let's say it's 30%.

Therefore, network hash rate (Gh/s) at 25% = 1021072;
network hash rate at 30% = 1291982;
Expected per day btc mining revenue at 25% = 1.762853158 (500/1021072*144*25)
Expected per day btc mining revenue at 30% = 1.393208265 (500/1291982*144*25)

Expected loss per day = 0.369644894, or for 30 days = ~11.08 btc.

So, I need to hedge a position that will result in 11.08 btc, if difficulty is above  142,642,083

[optimator]

We offer the same futures on Bitfunder since February and they were always paid out on time (regardless if at loss - already happened), as well as customers of CoinBr.com MPEx brokerage got all their withdrawals. CoinBr users were also among first ones when SatoshiDICE paid out, mind you that such an unexpected big event would cause any naked scam to fold.

And thanks davos for the explanation, you are correct.

Is there a cap on the difficulty increase for the payout?

[rini17]

Is there a cap on the difficulty increase for the payout?

Yes, any difficulty increase above 100 million will pay maximum 0.01 BTC/share and no more.

If I purchase the future at .009 and it settles at .008 - the .001 represents the COST to me to protect my investment, right?

If I purchase the future at .009 and it settles at .01 - the .001 represents protection benefit of the hedge, do I have that correct?

If so, then assume I've purchase 500 Gh/s of mining equipment I wish to hedge. How many futures should I purchase?

First two questions - yes, correct.

The last question cannot be answered without more precise formulation what is exactly your goal. If your goal is to keep the profit fully at 0.20 BTC per GH/s in next 6 months even if difficulty increases by 30% every time or more (as per your table), you need the future to earn you 0.2 * 500 = 100 BTC. You can earn this from the difference between current sell price ~ 0.008 and maximum 0.01 per share  = 0.002 . This means you need  100/0.002 = 50000 shares of CB.IDIFF-O... but sadly, there isn't such a depth. Maybe in future when it will get established and backed by bigger investor than us.

Also, you can wait for introduction of CB.IDIFF-E October in ~ 2 weeks, which might better suit you time-wise.

[maqifrnswa]

Another futures difficulty market:
https://icbit.se/WebTrade/Account/Futures.aspx

very low OI though, contract through september

[optimator]

First, I really appreciate the time everyone has taken to help me understand this. THANK YOU.

The last question cannot be answered without more precise formulation what is exactly your goal. If your goal is to keep the profit fully at 0.20 BTC per GH/s in next 6 months even if difficulty increases by 30% every time or more (as per your table), you need the future to earn you 0.2 * 500 = 100 BTC. You can earn this from the difference between current sell price ~ 0.008 and maximum 0.01 per share  = 0.002 . This means you need  100/0.002 = 50000 shares of CB.IDIFF-O... but sadly, there isn't such a depth. Maybe in future when it will get established and backed by bigger investor than us.

I think I finally get it. Using my OP table....

Assume I believe I will receive the units on October 1 & the difficulty will increase 25%.

Then, if I wish to hedge against an increase to 30% (reducing profit by .08 / Gh)....

I need to purchase .08 / .002 = 40 future contracts per Gh /s of purchased mining equipment.

Hedging against a future delivery date (say November 1 rather than October 1) I need to purchase (.11 / .002) = 55 future contracts per Gh/s of purchased mining equipment.

I suppose the final point is the cost of those contracts.... represented in either a) growth below 25%; or b) arrival of equipment before October 1. Therefore, I just need to compare the cost of the hedge to determine how to proceed.