Hedge mining revenue?

[gnar1ta$]

What is the correct way to protect mining revenue from another price decrease using Bitcoinica?  I'm somewhat familiar with trading but could use some help. If I'm concerned about a $1 decrease do I sell a trailing stop for the amount of BTC I'm holding $1 below market price?  Or do I buy a long position and hedge it separately with another?

[teek]

What is the correct way to protect mining revenue from another price decrease using Bitcoinica?  I'm somewhat familiar with trading but could use some help. If I'm concerned about a $1 decrease do I sell a trailing stop for the amount of BTC I'm holding $1 below market price?  Or do I buy a long position and hedge it separately with another?

You open a short position equal to the total amount you wish to hedge.  The idea is you need to have a no net position if you want to not be affected by the market swings, so if for example you are trying to protect 100 btc savings against fluctuation (thus long 100 btc) you need to short sell 100 btc, cancelling out your position..  It can be a little more tricky than that, but that's the basic idea.

[gnar1ta$]

How do I actually short sell the 100 though?

EDIT: I see, just put a sell order up.

[kjj]

If there was a right way to do it, everyone would do it, and then it wouldn't work.

Trailing stops are uncertain.  None of the exchanges that I'm aware of can actually do them.  You can do it yourself with a bot, or with a meta-exchange, but you risk a fast move blowing past your price, and latency says that you can't remove that risk.  I think Bitcoinica does trailing stops, but they are the counterparty, so they have to charge you extra for their latency risk.  But, they may be your best bet, for now, because...

You can't really hedge properly, because we don't have an actual future or forward market.  And at this point, I don't think that anyone in the world even remembers how either of those used to work before leverage.  I've done a lot of work on futures before, and it isn't trivial to do it right, and it gets worse when you need to minimize trust.

[Andrew Vorobyov]

You go to bitcoinica.com

Deposit some cash and do short sell

Don't overleverage yourself.

[Mushoz]

Why pay the spreads? If you want a short position to cancel out your entire mining revenue you might just as well sell your mined coins...

[gnar1ta$]

Why pay the spreads? If you want a short position to cancel out your entire mining revenue you might just as well sell your mined coins...

Why limit profits? I'd rather pay the spread than have some bonehead sell x hundred thousand BTC while I'm sleeping/working/vacationing and drive the price into the ground.  You only pay the spread if the order is executed right?

[omri]

Why pay the spreads? If you want a short position to cancel out your entire mining revenue you might just as well sell your mined coins...

I think you are missing the point here.
 The idea is to hedge expected FUTURE mining revenue. Thus eliminating market risk from the mining operation income. It still leaves the risk of difficulty rise.
 One may sell short his expected mining revenue, and later deposit the mined coins to close out the position.

[eldentyrell]

If there was a right way to do it, everyone would do it, and then it wouldn't work.

Actually there is a right way, it's called "futures", and all the commodities producers (farmers, metals miners, etc) do do it.  They sacrifice a small amount of expected return in exchange for a large decrease in variance.

Unfortunately we don't have futures yet in the bitcoin world.

Also keep in mind that -- unlike real-world commodities producers -- you don't know your "cost of production" beyond the end of the current difficulty window.  So you're already somewhat hedged: if the price plummets, the difficulty "ought to" drop, giving you more coins from the same equipment.  Of course it doesn't always work this way...

[eldentyrell]

One may sell short his expected mining revenue, and later deposit the mined coins to close out the position.

... except that bitcoinica does not let you close out positions by depositing coins.  Like a casino, you have to buy the chips from the dealer...