CME Patent Sees Derivatives Opportunity in Bitcoin Mining

Screen-Shot-2017-04-17-at-9.25.38-AM-e1492435593290
17 April 2017

Derivatives giant CME Group is looking to patent a way for bitcoin miners to hedge against operational risks.

As detailed in a patent application published last week by the US Patent and Trademark Office, the proposed system would receive data from the bitcoin network as a means of keeping contracts up to date – monitoring metrics like network difficulty and price.

CME previously launched a pair of bitcoin price indexes last year.

The filing is notable as bitcoin mining, the process by which new transactions are added to the bitcoin blockchain, is a kind of commodities production. Miners expend energy and manpower in exchange for newly minted bitcoins.

Yet, the ever-rising difficulty of mining can mean ever-encroaching costs for for miners.

With the mining derivative, “a miner can lock in a projected growth rate of the difficulty factor”, the patent filing reads.

The application goes on to explain:

“If the network hash rate grows faster than anticipated, the income from mining may fall, but the variation and settlement of the futures or the funds received by exercising a cash-settled call option contract would cover the loss. On the other hand, if the difficulty factor grows more slowly than anticipated or falls, the contract would lose value or the call option premium would expire as worthless, but a miner would make more money than expected on mining operations.”

Per the application, CME envisions the bitcoin mining derivative as a way to position against the depreciation of mining hardware as well.

“…as the difficulty factor rises, mining computers may become less marketable, so taking a long position in the generated contract, or being long a call option on the generated contract, would allow manufacturers to lock in a projected growth rate of the difficulty factor and hedge against the risk of falling hardware prices,” CME continues.

CME first applied for the patent on 13th October, 2015. Mansoor Ahmed, Ryan Pierce and Sandra Ro are listed as inventors.

Disclosure: CoinDesk is a subsidiary of Digital Currency Group, in which CME Group is an investor.

Image Credit: Felix Lipov / Shutterstock.com