It takes money to make money – or in this case even just to hedge.
Different exchanges have different methods of calculating margins/posting/collateral.
ERCOT-N 100MW Cal 24 will likely require around $2-$3 million for 100 MW on-peak.
We have talked about power hedging in a number of our previous reports, noting that a certain scale is needed to make hedging worthwhile. This creates a competitive advantage for miners that do reach that scale. The cost to hedge/trade power is not trivial – hedging 100 MW on-peak for a whole calendar cycle will likely require a posting/margin requirement of $2-3 million. However, there are strategies to minimize that posting by strategically hedging in certain months. If you play the cards right, you can actually start booking some of the trades to pay for most of the collateral requirements.
Exchanges are applying historical risk factors to these contracts, which get computed to produce the margin requirement. Commodity trading, unlike equity trading, is focused on the delta to the contract. As a financial instrument, if you buy at $90/MWh and it stays at $90, then there really is no transaction conducted between the parties. It is the delta that causes money to flow from buyer to seller and vice versa. The risk models in theory should capture the extreme cases to manage your trading volatility.
Different exchanges manage different risk strategies. One significant difference can be seen in ERCOT. ICE does not show a difference in long or short positions, which is detrimental to a miner looking to hedge via BUY power – long position. If you are long power, the risk is if power falls; however, the odds of a summer month contract going to zero even for a day is very small. However, due to the recent ERCOT issues, we can see that going to the max ($5000/MWh) has become more probable than usual. With ICE not differentiating between long and short, this will put a strain on miners to hedge as the premium/collateral to hold a long position soars along with the short holders, given the potential to hit $5000/MWh. Nodal Exchange, on the other hand, does differentiate between long and short positions, so in theory a long position holder should see a lower premium / collateral requirement compared to a seller of power.
At BitOoda, we work with all exchanges and therefore can work with you to develop strategies to meet your needs.
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We have talked about power hedging in a number of our previous reports, noting that a certain scale is needed to make hedging worthwhile. This creates a competitive advantage for miners that do reach that scale. The cost to hedge/trade power is not trivial – hedging 100 MW on-peak for a whole calendar cycle will likely require a posting/margin requirement of $2-3 million. However, there are strategies to minimize that posting by strategically hedging in certain months. If you play the cards right, you can actually start booking some of the trades to pay for most of the collateral requirements.
Exchanges are applying historical risk factors to these contracts, which get computed to produce the margin requirement. Commodity trading, unlike equity trading, is focused on the delta to the contract. As a financial instrument, if you buy at $90/MWh and it stays at $90, then there really is no transaction conducted between the parties. It is the delta that causes money to flow from buyer to seller and vice versa. The risk models in theory should capture the extreme cases to manage your trading volatility.
Different exchanges manage different risk strategies. One significant difference can be seen in ERCOT. ICE does not show a difference in long or short positions, which is detrimental to a miner looking to hedge via BUY power – long position. If you are long power, the risk is if power falls; however, the odds of a summer month contract going to zero even for a day is very small. However, due to the recent ERCOT issues, we can see that going to the max ($5000/MWh) has become more probable than usual. With ICE not differentiating between long and short, this will put a strain on miners to hedge as the premium/collateral to hold a long position soars along with the short holders, given the potential to hit $5000/MWh. Nodal Exchange, on the other hand, does differentiate between long and short positions, so in theory a long position holder should see a lower premium / collateral requirement compared to a seller of power.
At BitOoda, we work with all exchanges and therefore can work with you to develop strategies to meet your needs.
Purpose
This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.
Analyst Certification
David Bellman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.
Conflicts of Interest
This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.
General Disclosures
Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.
All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
BitOoda Technologies, LLC is a member of FINRA.
“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.
Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.
We have talked about power hedging in a number of our previous reports, noting that a certain scale is needed to make hedging worthwhile. This creates a competitive advantage for miners that do reach that scale. The cost to hedge/trade power is not trivial – hedging 100 MW on-peak for a whole calendar cycle will likely require a posting/margin requirement of $2-3 million. However, there are strategies to minimize that posting by strategically hedging in certain months. If you play the cards right, you can actually start booking some of the trades to pay for most of the collateral requirements.
Exchanges are applying historical risk factors to these contracts, which get computed to produce the margin requirement. Commodity trading, unlike equity trading, is focused on the delta to the contract. As a financial instrument, if you buy at $90/MWh and it stays at $90, then there really is no transaction conducted between the parties. It is the delta that causes money to flow from buyer to seller and vice versa. The risk models in theory should capture the extreme cases to manage your trading volatility.
Different exchanges manage different risk strategies. One significant difference can be seen in ERCOT. ICE does not show a difference in long or short positions, which is detrimental to a miner looking to hedge via BUY power – long position. If you are long power, the risk is if power falls; however, the odds of a summer month contract going to zero even for a day is very small. However, due to the recent ERCOT issues, we can see that going to the max ($5000/MWh) has become more probable than usual. With ICE not differentiating between long and short, this will put a strain on miners to hedge as the premium/collateral to hold a long position soars along with the short holders, given the potential to hit $5000/MWh. Nodal Exchange, on the other hand, does differentiate between long and short positions, so in theory a long position holder should see a lower premium / collateral requirement compared to a seller of power.
At BitOoda, we work with all exchanges and therefore can work with you to develop strategies to meet your needs.
Purpose
This research is only for the clients of BitOoda. This research is not intended to constitute an offer, solicitation, or invitation for any securities and may not be distributed into jurisdictions where it is unlawful to do so. For additional disclosures and information, please contact a BitOoda representative at info@bitooda.io.
Analyst Certification
David Bellman, the research analyst denoted by an “AC” on the cover of this report, hereby certifies that all of the views expressed in this report accurately reflect his personal views, which have not been influenced by considerations of the firm’s business or client relationships.
Conflicts of Interest
This research contains the views, opinions, and recommendations of BitOoda. This report is intended for research and educational purposes only. We are not compensated in any way based upon any specific view or recommendation.
General Disclosures
Any information (“Information”) provided by BitOoda Holdings, Inc., BitOoda Digital, LLC, BitOoda Technologies, LLC or Ooda Commodities, LLC and its affiliated or related companies (collectively, “BitOoda”), either in this publication or document, in any other communication, or on or through http://www.bitooda.io/, including any information regarding proposed transactions or trading strategies, is for informational purposes only and is provided without charge. BitOoda is not and does not act as a fiduciary or adviser, or in any similar capacity, in providing the Information, and the Information may not be relied upon as investment, financial, legal, tax, regulatory, or any other type of advice. The Information is being distributed as part of BitOoda’s sales and marketing efforts as an introducing broker and is incidental to its business as such. BitOoda seeks to earn execution fees when its clients execute transactions using its brokerage services. BitOoda makes no representations or warranties (express or implied) regarding, nor shall it have any responsibility or liability for the accuracy, adequacy, timeliness or completeness of, the Information, and no representation is made or is to be implied that the Information will remain unchanged. BitOoda undertakes no duty to amend, correct, update, or otherwise supplement the Information.
The Information has not been prepared or tailored to address, and may not be suitable or appropriate for the particular financial needs, circumstances or requirements of any person, and it should not be the basis for making any investment or transaction decision. The Information is not a recommendation to engage in any transaction. The digital asset industry is subject to a range of inherent risks, including but not limited to: price volatility, limited liquidity, limited and incomplete information regarding certain instruments, products, or digital assets, and a still emerging and evolving regulatory environment. The past performance of any instruments, products or digital assets addressed in the Information is not a guide to future performance, nor is it a reliable indicator of future results or performance.
All derivatives brokerage is conducted by Ooda Commodities, LLC a member of NFA and subject to NFA’s regulatory oversight and examinations. However, you should be aware that NFA does not have regulatory oversight authority over underlying or spot virtual currency products or transactions or virtual currency exchanges, custodians or markets.
BitOoda Technologies, LLC is a member of FINRA.
“BitOoda”, “BitOoda Difficulty”, “BitOoda Hash”, “BitOoda Compute”, and the BitOoda logo are trademarks of BitOoda Holdings, Inc.
Copyright 2023 BitOoda Holdings, Inc. All rights reserved. No part of this material may be reprinted, redistributed, or sold without prior written consent of BitOoda.