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Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

Nathan Cox is the chief investment officer at Two Prime.

Consensus 2023 Logo
Join the most important conversation in crypto and Web3 taking place in Austin, Texas, April 26-28.

This past year has created an unprecedented risk event for the Bitcoin community. While we’ve seen this level of spot price volatility before, the leverage within the mining community has reached record levels. This has compounded the effects of debt exposure with falling spot prices, increasing energy price and diminishing collateral value. Bad treasury management ran rampant in 2022 and led to a problem that financial hedges can solve and/or prevent.

The strategy many miners have used to manage treasuries up until this point has been relatively simple: buy and hold bitcoin. In other words, hope and pray. With price models often assuming an average of ~2% spot growth per month, and a price floor near the current average production cost between $18,000 and $22,000. Clearly those assumptions have not held true.

Nathan Cox is the chief investment officer at Two Prime, which offers structured products and derivative strategies for digital assets and risk management.

Machine financing in 2021 was deployed at record prices, when large orders came with long delays and profit margins were wide. As those orders were filled, and hash power continues to grow, hashprice has tested new all-time lows in 2022 and has already begun to test the durability of this long-leverage strategy. A close look at public miners’ U.S. Securities and Exchange Commission filings shows that many companies are in dire straights.

Now miners have to face a difficult reality, can operational budgets survive a prolonged crypto winter?

The answer will not be the same across the board, and we have already seen several casualties of the new bear regime. Our concern is that bitcoin miners have over-exposed themselves, and now face potential liquidation if bitcoin prices remain depressed for an extended period of time.

So how do miners navigate this financial and operational minefield?

Miners must incorporate sophisticated financial strategies, in line with energy and commodity companies who have come before them. If bitcoin is indeed a commodity, then it's time industry leaders start treating it like one by managing financial exposure with financial strategies.

For years, the oil and gas industry has used sophisticated risk management strategies and gold miners have used target redemption forwards (TARF), a structured financial contract that allows for the hedging of risk.

Miners too should be looking to reduce downside risk, replace upside beta and generate yield on their digital assets. These strategies are time-tested in traditional commodity markets, and have allowed major energy companies to consistently expand their operations for decades. Miners are recognizing this need, though it may be too late for some.

With the current macroeconomic backdrop, rising interest rates, reduced liquidity and waning risk assets, it is time that the digital asset industry takes the necessary steps to weather this volatility and incorporate financial tools that will create sustainability and certainty. It is the appropriate behavior of any fiduciary running a bitcoin mining firm.

The digital asset industry has suffered major setbacks from leveraged borrowing without capital controls or risk management, and it is time we reconsider the long-term growth strategy for the industry. The solutions exist today to prevent further losses or liquidations, and it is our hope that miners have the constitution to evolve for a brighter future.


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Nathan Cox is the chief investment officer at Two Prime.