Matthew Williams, Head of Derivatives at Luxor Mining joins me to talk about Bitcoin Mining hashprice derivatives and what they will do for bitcoin miners: 

  • Getting into bitcoin mining
  • What is hashprice?
  • How hashprice shifts over time
  • What is a non-deliverable forward? 
  • Who should use an NDF?
  • Professionalising bitcoin mining



Stephan Livera links:

Podcast Transcripts: 

Stephan Livera 00:02:35 

Matthew welcome to the show  

Matthew Williams 00:02:38 

Thank you for having me appreciate it  

Stephan Livera 00:02:41 

So I know you guys are doing some interesting stuff around hash price derivatives and you know some interesting things there that we can dig into but let’s just start with a little bit on yourself do you want to just tell us a little bit of your background before you came to the world of Bitcoin  

Matthew Williams 00:02:56 

Yeah for sure I’ll try and be brief not bore anyone to tears but yeah so I spent most of my career in traditional Finance literally right out of high school worked at the Chicago Board of Trade spent a number of years as a Commodities Trader traded oil and gas for a number of years out in New York and then came back to Chicago again traded agriculture products so Commodities spaced pretty much the whole time spent a couple years at a company that built software for options Traders called option City and then went to work for CME Group the Chicago Mercantile Exchange worked on the corporate strategy side of things was on the digital asset team that helped launch Bitcoin Futures back in 2017 which is kind of how I got my start in this in the Bitcoin world and then the last two years I was at CME I was in the corporate Venture Capital side of things and we invested in a lot of fintech type startups which at the time was a lot of digital assets and in Bitcoin related companies and then spent two years at a regulator the National Futures Association before joining Luxor in May within about 14 years or 14 months now 

Stephan Livera 00:04:06 

Great okay and so interesting you mentioned having been at CME at the time they launched now that’s you know two cycles ago right like that’s back in sort of I guess that because I remember that you know being a big news item in let’s say late 2017 right like that was the big hype that was the big thing I’m curious if you have any insight you can share from what it was being inside CME at that time yeah it was crazy 

Matthew Williams 00:04:30 

Yeah it was crazy you know it’s cool to say that I was part of the team but it was chaotic at the time at the time there was a number of exchanges kind of trying to compete to be first to Market so you had the CBOE which actually beat us by like a week you had ice looking at it you had NASDAQ looking at it and a lot of it was like you know are you gonna have a cash sale instrument are you gonna have a physically settled instrument and then how are you going to deal with regulation and then what the real challenge was going around and doing education to all like the traditional Finance people so going to you know the FCMS and educating them on what Bitcoin was and you had that that crazy run where we would go to meetings and we would you know say we give them Bitcoin 101 and we would show charts and the chart you know look like this and an hour later our chart would be out of date because it was running so fast so it was it was super interesting you know it was coming from traditional Commodities it was like nothing I’d ever seen before but yeah it was it was a crazy time 

Stephan Livera 00:05:31 

Yeah and I think it’s subjective right but it felt like Bitcoin was way more volatile of a beast back in those days than it is today now for all we know there could be another cycle coming and the craziness comes back but I think at those times you’re right like the price would just be roller coastering up and down and I’m sure that would have made it a lot harder to try and teach someone because you might say the press as we speak today is ten thousand dollars and then like the next day it’s fourteen thousand dollars you know  

Matthew Williams 00:05:59 

It was crazy like you talk to these people and we’re talking to the people that are in charge of kind of just determining what kind of margin you’re supposed to require for people to trade these instruments and typically if you launch a new product you start at like a 20 margin which means like 20 of the value of the contract well these like we were starting the conversation at 50 and going all the way up to 100 just because the volatility was so crazy and no one really understood it and you’d get the typical questions like well this is a Ponzi scheme or what’s the intrinsic value of it and like trying to answer those you know intelligently at the time was it was a challenge to people that were kind of close-minded to it to begin with  

Stephan Livera 00:06:36 

Yeah great and so I mean I understand that from a financial markets perspective some of the Futures and forward agreements and things like this actually were formed from starting from as an example Farmers wanting to come and lock in their rate let’s say so do you want to just elaborate a little bit on that obviously you have a perspective as coming from the trading World yourself 

Matthew Williams 00:07:02 

Yeah well I mean it’s very relevant to the products we launched at Luxor but yeah to your point like every traditional commodity space there’s derivatives that exist for hedging and this dates back I mean like literally like a thousand years back to you know times in Egypt when people would use hedging but like the modern derivatives date back to like the late 1850s in Chicago and was kind of how the Chicago Board of Trade was formed as a way for Farmers to come meet you know with purchasers of their products and kind of agree to prices before delivery so they knew like they knew how to like you know lock in revenue and plan for their operations and that kind of exists in you know in corn it exists in energies it exists in metals and you know and if you look at Bitcoin as a commodity much as we do there’s definitely a need for that in the space and even more so in the hash rate space as well  

Stephan Livera 00:08:01 

Right and so then you have these natural participants right you have natural buyers and natural sellers in a sense and so obviously we’re talking about Bitcoin miners are the natural you know that they want some certainty on what they’re producing right and then do you want to just talk a little bit about who’s normally taking the other side of that trade 

Matthew Williams 00:08:19 

Yeah I mean to just to elaborate a bit on you know the risk exposures that miners have right they have you know they’re natural producers of Bitcoin whether or not they huddle completely or don’t huddle at all they still have price exposure right so one of their main probably the predominant risk is bitcoin price exposure but when you get down to the operational level you know a lot of your revenue is tied to your energy costs so you have an energy exposure as well and then you also have Revenue exposure which is where hash price comes in and so basically you know in a in a traditional commodity space you want to figure out ways to manage your Revenue so you can you can manage your operations you can manage your capex that doesn’t really exist in the Bitcoin mining world or it didn’t until very recently and so the mining space is needed you know they’ve had they have Bitcoin derivatives that exist right like you can trade them on exchanges you can trade them on you know soon to be ETFs like there’s a different variety of different  Doritos Futures options you name it hash rate not so much and then there’s a lot that goes into your hash rate risk and so you know we felt when we launched this product that we can get into a minute it felt you know it it fixed a gap that was existing in the space 

Stephan Livera 00:09:38  

Gotcha and so out of curiosity and maybe some people are curious about this as well why can’t they just use already existing derivatives you know let’s say they do a call or they you know maybe they sell a call or buy a put on the Bitcoin price on some derivative exchange without having a specifically hash rate derivative can you just explain why  

Matthew Williams 00:10:02 

Yeah I mean look you gotta kind of I think what I touched on a minute ago is you kind of have to break down the exposures that miners have right so you know historically you really only could well I’d take a step back miners I think miners have been averse to hedging to begin with right so it’s they kind of lived in a huddle culture where Bitcoin only goes up right number goes up and you don’t really worry about things and then historically like energy price has been relatively flat and so you didn’t have to worry about that and then Bitcoin you know you’ve seen some tremendous rallies in there so hedging you reverse to it because you don’t want to miss out on the upside and so and sorry as a long-winded answer your question but I promise I’ll get to the punchline you had some options right so you could either you know you could sell your Bitcoin outright you could trade options again so you could buy puts  you know the Futures launch you could hedge with Futures but really if you’re a miner that only that only covers one of your risk exposures and that’s basically your treasury risk right you still have you’re still exposed to difficulty your spills exposed to transaction fees and as I mentioned you’re still exposed to energy and then also like you’re exposed to Asic prices you know fluctuations as well which have a high beta to bitcoin so as a minor you’re like holy cow there’s all this stuff that I gotta manage but for us it was like there’s really no way to hedge out difficulty or transaction fees or bitcoin price all in one package and hash price you know the way we view it through our index encapsulates all those risk exposures and that’s the instrument that we went to Market with 

Stephan Livera 00:11:39 

Yeah I think that’s a great answer because in summary the previous options related only to hedging out the price when really that’s only one component of what a miner is dealing with right and so there are multiple components there and as you said historically it seems that Bitcoin miners would just YOLO it and basically ride the volatility and that requires you know a real iron stomach let’s say and maybe that’s not going to be as feasible for miners who need to seek financing or who are trying to professionalize or maybe you just don’t have the iron stomach right like because even if you personally have an iron stomach you know do all your employees have an iron stomach do all your you know and all of those other aspects it just I guess it gets very difficult to manage so let’s break it down a little bit for people because we want to keep it accessible for people what is Hash price what goes into hash price 

Matthew Williams 00:12:42 

yeah so touched on a bit but there’s four main components that go into hash price obviously bitcoin price is the number one transaction fees which have been very relevant lately with the introduction of ordinals in the BRC tokens and then difficulty obviously so actually I can bring them down one by one I’ll start with the simplest one the block subsidy so what are your awards for mining right and obviously we all know every four years those are get cut in half which is super important to Hash price and we have one coming up next year in April difficulty obviously the more people in the network the harder it is for you to mine so as more people are mining difficulty goes up and it becomes harder and harder as a minor transaction fees are actually the opposite right like the higher transaction fees the more Revenue that you’re getting from a minor and those will become more and more important as the having schedule continues and then bitcoin price so those are the four components and there’s a lot of math that goes into spitting out of value but hash price at a high level you can think of as the expected value of one pet a hash of hash rate per day so for example today it sits roughly around 73 dollars so you can expect one pet a hash per day at 73 dollars 

Stephan Livera 00:14:01 

Gotcha and just to give contacts for people let’s say of the latest line of let’s say at Miner or what’s miner how many machines makes up one per hash just like roughly are we talking like 10 machines  

Matthew Williams 00:14:14 

Well, let’s just say like what is tns 19 and it’s 100 Tera hash rate so 10 of those would get you one percent 

Stephan Livera 00:14:21 

Gotcha okay so that’s kind of this the scale we’re working with here so even if you are a home Miner or a retail Miner and you’ve just got you know 10 machines in your garage you’ve got about a per a hash and this is where you could get started thinking about or at least that’s yeah I mean we’ll get into that yeah 

Matthew Williams 00:14:37 

Yeah for us the smallest increment that you can hedge is one per a hash and so okay that’s probably you know we used to think in terms of Tera hash and I think there’s still a fair amount of people that still talk and Tera hash in which I think is kind of like more of a retail mindset which is nothing wrong with that but for us like our instrument is regulated by the CFTC and there’s certain requirements so we start you know we opted to Peta hash in terms of minimum increments  

Stephan Livera 00:15:10 

Yeah I see and so then I’m just curious as well like if you could offer any comment in terms of the cycles of hash price like would we expect hash price to fall over time just because the block subsidy is halving and just you know if you’re expecting you know a general downwards Trend with you know increasing efficiency increasing difficulty I guess obviously as you mentioned there’s all these factors that go into it right so the price could it depends on if the price just goes like crazy well then it can Trend up but I guess barring a massive price increase you would mostly expect it to come down over time is that right or how would you get it  

Matthew Williams 00:15:51 

Yeah 100 people kind of look there’s two terms that you would say you know in the shorter term say 0 to 12 months it kind of it trades in backwardation to your point so prices go down but there’s so many things working against hash price to make it go down and you pointed out a lot of them right like Network hash rate just continues to climb at a pretty fast rate you know the price of Bitcoin being relatively flat means that it’ll continue to go down if you did see like another 2017-2020 run in Bitcoin where you know it went up 3x or 4X you’d see a big uptick in bitcoin price but over time yes you’re going to see a slow grind not to zero because there there’s what they call a theoretical floor right at some point it becomes unprofitable and machines get unplugged or you could have like a macro event like the China ban that would have like an immediate impact to network cash rate so there’s a lot of things and then you know you have cyclical things like curtailment in Texas or you know weather patterns that affect it but those are all short-term so to answer your question yeah over the long term you if you look at a chart it’s a slow downward sloping hash price  

Stephan Livera 00:17:05 

Yeah I see but yeah as you said crazy outlier events can happen whether it’s the China ban or whether it’s you know 2017 Bull Run and the price goes 10x and all of a sudden like it’s now super profitable to be mining you know in that in that scenario when the price is pumping and or in the inscriptions and ordinals case there’s so much more transaction fees now it remains to be seen whether that’s a fad or whether it’s going to last you know how much is it really going to add let’s see but I think though just to I guess offer some context around what hash price is and how it has trended I guess that’s probably the key thing in terms of you know new miners being more efficient than before I guess we would say the efficiency gains are slowing down right like we’re hitting a marginal returns kind of diminishing marginal returns in terms of new machines right whereas in the early years of Bitcoin a new mining technology Asic mining technology could massively be better than before which would pump the difficulty which would in turn take highest hash price down right so I guess there’s all these things to think about but the broad trend is going to be lightly down in hash price I guess  

Matthew Williams 00:18:18 

Yeah no it’s true though but like I mean if you look at it from as let’s say you look at it as a derivative instrument like you know like the hash price forwards that we have it becomes super interesting when you have events like you know what happened in May with ordinals and brc20 where you saw a huge spike in hash price or the China band that we referenced or you know plays on efficiency if there’s a new you know new machines come out that are efficient or there’s new technology for cooling or new you know power supply units you name it like these all have Ripple effects on hash price and make it a more tradable instrument and so you know like you mentioned before like who are who are the buyers and sellers and obviously the miners or sellers of this and it’s a question we get asked quite a bit is you know who are the natural buyers because if you’d only have people using this to hedge you’re going to have all sorts of sell side pressure or not kind of an unstable Market but the truth is like you have people that you know it’s like a traditional commodity anybody that has upside exposure to a run and hash price would be a natural buyer of this and that could be a hosting facility that’s curtailing its miners it could be Cloud miners it could be it could be miners themselves it could be people that you know are buying Asics but don’t have hosting and want that temporary exposure like there’s a number of use cases it’s not like I wouldn’t say it’s analogous to corn or gold or energies because there’s more natural buyers than that ours is a bit unique in that there’s not a ton of natural buyers which makes the typically these markets trade a bit as a discount to spot and that the reason is like you get market makers or you get hedge funds that come in they’re expecting you know for them to take on these positions they’re expecting like a yield or or a discount to spot to be advantageous and so as a minor you kind of have to factor that in as part of your hedging strategy  

Stephan Livera 00:20:12 

Yeah interesting but yeah interesting  you mentioned some use cases like I remember people talking about mining you know years and years ago when people would say hey it’s like such a big deal that when I order these miners even if it takes two weeks for them to arrive from around the world that’s a big loss for me because I’m you know meanwhile you know there’s all these other miners who are plugging in machines all around the world and I’m losing out and maybe this is an example where that miner today can actually lay off some of that by you know getting exposure to the hash price in that meantime for the two weeks while they’re waiting for delivery or the one month or whatever 

Matthew Williams 00:20:48 

Yeah we see it we actually see it quite a bit we see miners come in a lot on the buy side of this and in in a lot of it I think is just what I mentioned like you might be waiting out Asic prices to get lower or you might have the Asics and looking for hosting but you have investors well not everyone but a lot of times you have shareholders you have to appease and if you’re worried about a run this can protect you on the upside so you can still participate in the upside run on a hash price as a hedge it you know it’s and sometimes it’s just miners that want to double up on their hash rate without buying action hash rate or we see it a lot more recently we’ve made a push into the institutional side so we see a hedge funds that were like all right we want to get exposure to this but we don’t want to buy the equipment or deal with the hosting or deal with curtailment it’s a synthetic exposure to the space  

Stephan Livera 00:21:37 

Yeah that’s also interesting as well because that’s another Dynamic I’m curious if you have something to offer on that as well just so inside because the way I’ve seen it is typically or at least historically you might see a halving calm you’ll see the inefficient miners basically have to turn off or get wrecked in some way sell their miners to somebody else and then typically what you’ve seen is if there’s been a big bull run it’s almost like the price is running up faster than the new the miners game plug-in machines right and so there’s there would be this funny dynamic in the cycle right because Bitcoin has these big Cycles I’m not saying it’s every four years but just the kind of herd mentality people running in and they’re running out so there will be times where the hash price is in a bullish Trend because the price is simply in a bullish trend 

Matthew Williams 00:22:24 

Yeah 100 I mean hash price has a high very high beta to bitcoin obviously because it’s the main component that goes in there and then Asics also have a very high beta to bitcoin right so as Bitcoins running so or Asic prices and so you know like all these kind of play into the fact that you need instruments to kind of help you manage those exposures   

Stephan Livera 00:22:49 

Gotcha yeah okay so let’s talk a little bit about the specifics of it then so the hash price delivery sorry the hash price derivative can you just spell out some of the details like as an example what does non-deliverable mean 

Matthew Williams 00:23:06 

Yeah so it’s a it’s not a very sexy word I guess I’ll say that’s we’ve kind of come to started just calling them hash price forwards But to answer your question a non-deliverable forward or it’s also called an NDF is basically a cash level instrument so there’s two types of Fords generally speaking there’s a physically delivered instrument and in This context it would be basically hash rate would be the physical delivery so you would actually physically Point your hash rate somewhere and deliver you know via that mechanism and there are examples of that in terms of the derivatives world like there are friends at blocker and have an example where you know someone can put Bitcoin up and get hash rate from a miner and a minor delivers and that’s a physical delivery ours is Cash settled so when we the reason we chose this we wanted to do something different than it already been done in the space we wanted to remove some complexities around curtailment and delivery and uptime and all that kind of stuff and then also going back to my time at CME when we launched the Bitcoin Futures contract we started off with an index so it was a spot index and we we let that we put that out there for a couple months let people digest it and then we built a derivative around that index and there’s lots of examples in the financial world around that so when I got to Luxor I was like cool we already have a hash price index it’s already widely referenced out in the space let’s just do the same thing and so we built these non-deliverable Fords meaning they’re cash settled to our index so we treat a derivative is basically a derivation of an underlying right and so in this case the underlying is the spot index which is the hash price index and so a non-deliverable four basically settles to that instrument is the simplest way of looking at it yeah 

Stephan Livera 00:26:40 

Yeah gotcha and so in terms of you know let’s say someone’s listening now and they’re a minor and they want exposure to this is it like they call you up or is there is it like all on a website or can you walk through the process like let’s just say just to make a simple example let’s say you know it’s a home Miner or a retail Miner and he’s got one peta  hash and he wants to you know sell an NDF what’s the process look like 

Matthew Williams 00:27:03 

Yeah so you can reach me pretty much anywhere you want you can reach me on Twitter you can reach me on telegram email on our website and we have a team that kind of handles these kind of requests but essentially let’s say you’re you know minor ABC and you want to hedge out you would call us we’ll kind of walk you through the Dynamics of the instrument there are some onboarding steps that are required that are kind of you know as I mentioned before regulated by the cftc we treat this as a commodity and so we have to kind of follow some regulatory steps so our onboarding package consists of what’s called isda documents that stands for international swaps and derivatives Association and basically it’s a series of documents that govern how you and I would trade together you sign off on those documents we onboard you on the team probably do kyc depending on the size of the minor and then and then we onboard you to our platform and then essentially the way we do it now if you’re interested in seeing where the markets are at like where the price Discovery is we we operate channels on telegram or on slack or a variety of other venues and we basically post markets every morning and then throughout the day so we give you updates based off where the underlying is trading and we have market makers that quote and so basically if you’re a miner you go through the onboarding process with us every day we send you messages saying you know here’s where the prices are and where you can hedge and then you have the option of trading different durations so if you want to hedge out for one month two months all the way out to six months we can facilitate that and then we so we kind of operate the marketplace so we sit in the middle we match buyers and sellers and so if a miner comes in says I want to sell say 10 peta a hash we show them the market and then we go to the rest of the participants and say we got someone you know looking to sell and match it that way and that’s essentially how it goes 

Stephan Livera 00:29:02 

Gotcha and then in terms of pricing is that just like on the website or is that more in the telegram channels that you will say okay this is the price this is the going rate today 

Matthew Williams 00:29:11 

Yeah so we officially launched in January so we’re still going through a bit of an evolution right now the price discovery that you know the prices that you asked for the order book is typically done through telegram but we are we have a front-end platform that we we’ve built out and we’re iterating through and we’ll be migrating that process to that or would be put in the order book in the UI probably later this summer within the next couple of months 

Stephan Livera 00:29:39 

Yeah, and speaking of the size of this market so as you said the bottom end is one pair of hash what’s the top end what are the limits that we’re playing with here yeah 

Matthew Williams 00:29:46 

I mean to be honest like we’re talking anywhere from you know miners that have 10 Peta hash to minors that have you know public miners that are in the exit hash conversation right now you know again it’s a nascent Market that we’re building out we can comfortably handle liquidity and a couple of exit hash and I would say by the end of the end of this quarter we’ll be in the several exit hash so yeah so it’s everywhere and in between our typical trades could be we could do three Peta hash one day and we could go up to an XS the next day 

Stephan Livera 00:30:17 

Yeah right okay cool and so in terms of I guess for some miners they might be thinking how much should they be laying off yeah right as an example because as you said before that minor might not want to totally lay off everything because then he’s giving up all his upside so what do they what’s like a typical strategy or is it does it really vary how much they want to sort of hedge outright  

Matthew Williams 00:30:48 

Yeah no it absolutely varies based off of you know what their mindset is what their strategy is what their huddle position is you know they typically they don’t want to hatch out anything right but like we’ve learned a lot we’ve learned a lot of lessons in the last 18 months right like Energy prices do go up and Bitcoin does go down and hash price revenue is variable right so I think the people that are still solvent and are you know trying to refine their strategies or spending a lot of time hiring the expertise to do what we’re offering and so to answer your question like I typically you know I think the best way of looking at it personally is you start with what your operating expense ratio is you know and like if that’s 30 or is it 60 or is it higher like you start there as your Baseline and work your way up and down so like I would never advise somebody unless I wouldn’t I typically wouldn’t advise someone to say hedge out 100 because you know people do want to participate in the upside and like if your goal is just to manage your operating expense though it doesn’t make any sense and so you know you start there and kind of work like I said work your way up or down and so I think we see people probably in the 30 to 60 percent of their overall Fleet is the typical area that people are hedging out now there are people that it’s a pure cash business and they’re just you know they’re just converting to bitcoin and like they don’t need to hedge out at all they’re just going straight you know from they’re converting Bitcoin to cash I should say but sometimes like they want to let it ride too so like this is an opportunity for them to have you know have some sort of a huddle strategy as well we like to say that like hedging enables huddling 

Stephan Livera 00:32:32 

Gotcha yeah, I mean at the end of the day it’s about survival too right if they were if you get too bullish in the ball cycle you can get wrecked right and like you can get wrecked if the cycle moves against you obviously and so yeah  

Matthew Williams 00:32:46 

It’s a mindset right like hedging it’s never sexy like if you’re at the bottom a hash price you’re worried that you’re locking in on profitability and if it’s running you’re worried you’re gonna miss out on the rest of the run right but like you have to kind of treat it as a as a business and lock in your solvency and lock in your certainty for so you can keep running operations and so you know to me it’s just like it’s a cost of doing business and it’s a cost of remaining solvent in the long run 

Stephan Livera 00:33:17 

Yeah for sure and so in terms of who needs to do this like we’ve been talking about who needs to do this obviously but who specifically needs to do this maybe in some cases if it’s a financing reason or maybe they are obviously if you’re a public Miner maybe there’s a certain standard of risk management that’s required of you and therefore your shareholders you know they will expect you to do this kind of thing so could you just elaborate a little bit on who really needs to do this stuff and for who it’s maybe it’s an option 

Matthew Williams 00:33:52 

Yeah no so the people that need and you touched on it a bit like we talk about this quite a bit the space is starved for Capital right it’s really hard for existing miners or new miners to get financing in any capacity and that’s due to the lessons that we learned over the last 18 months and part of that was bad actors on The Lending side and part of that was bad actors on the mining side but the truth is it’s very hard to get access to Capital these days and but as we talk to mining companies and also financiers if you have a hedging strategy in place you know either through via your energy costs or your Bitcoin treasury or your Revenue through us you’re far more likely to get financing like far and it’s there’s tangents to this in the oil and gas space you know if you’re in the oil and gas space and you’re trying to increase operations you absolutely have to have this hedging strategy in place and to show that you’re hedging production already I think the same thing is going to be relevant in this space and you’re seeing it more and more and so yeah to answer your question anybody trying to get new capital but like also people that are already stable and are trying to plan for the future it’s super relevant now who doesn’t I mean it’s people that already have you know really good treasury management really good balance sheets I would still suggest they do it but like they’re less likely to need it then then people that are trying to grow 

Stephan Livera 00:35:22 

Gotcha and then you could maybe do a smaller percentage because they’ve already got a big treasury to kind of tide them over if another bear cycle hits that kind of thing  

Matthew Williams 00:35:34 

Yeah exactly but I mean I still think regardless of your position you know you need to have some sort of hedging strategy and it needs to be dynamic too right like you change up your hedging strategy in a bull run and a bear run in a bear Market you change it based off of what your you know operational goals are it’s never ecstatic it should never be a static strategy 

Stephan Livera 00:35:51 

Yeah and I guess one other thing because we’ve been talking about it in the sense of if you’re looking for financing or maybe for a big public company but there’s also the aspect of if you have a concern that your energy provider is going to rug you well that’s another example where maybe having this might give you a little bit of protection at least in that one to six month period that you had the NDF on for 

Matthew Williams 00:36:17 

Yeah I mean that’s a great Point miners especially now are now post having are going to be super sensitive to Energy prices and so if you haven’t locked in Via PPA or energy derivatives and you have variable costs for your energy like you could be in trouble like you know a move from you know five cents to eight cents could be catastrophic for you so if you’re at a level of profitability and hash price and you’re worried about variability in your electricity like you absolutely should be hedging now if you’re you know if you’re locked in at three cents for a long time like you’re in a much better situation and that doesn’t apply to you but that’s not the case for most people 

Stephan Livera 00:37:00 

Yeah interesting because that’s the other aspect of it because I think people can be maybe overly optimistic about assumptions that they make right if they’ve got a spreadsheet and they’re punching in numbers and they’re saying if I’m getting this energy prize for five years and then all of a sudden something changes maybe something about the grid happens there or maybe there’s a political instability or political risk so I’m curious as well is your customer base around the world right or is it it’s not restricted to the US or anything 

Matthew Williams 00:37:28 

No, we are definitely in global in terms of customers we have people all over the place but yeah I mean you make very good points like you have Regional risk you know a minor in Norway versus a minor in Texas versus a minor in El Salvador Kazakhstan or yeah well for sure Kazakhstan Ukraine Russia I mean we don’t operate in Russia just for the record definitely not any anybody that’s a OPEC country is not on our list but to your point like yeah depending on where you are you definitely have different exposures in terms of risk and your hedging strategy will have to be different you know relative to that 

Stephan Livera 00:38:10 

Yeah, okay let’s get into curtailment so this is something which has I guess become a lot more popular in the recent let’s say two or three years at least as I understand it and as I understand it there are parts of grids around the world and famously in Texas where part of the argument that bitcoiners and Bitcoin miners will say is hey like you can build out your grid further than what you really need because like the peak load problem and then the idea is if there’s let’s say wind is not performing on that day we the Bitcoin miners will turn off and you pay out you Grid or you know you pay us to turn off that’s part of the case right and so can you just elaborate a little bit on that and how that plays into the strategy for Bitcoin miner who’s thinking about NDF. 

Matthew Williams 00:38:58 

Yeah I think it might be more relevant to the host you know if you’re treating it as a hosting facility for curtailment because like if you’re looking at well first of all like to answer the first part of your question I think people that are treating curtailment as such are thinking very smartly right so if it’s more profitable to sell to the grid then turn on mining machines like that’s a very interesting use case for Bitcoin in general but from a hosting facility and we heard this quite a bit in the early days is if you’re let’s say you’re hosting a bunch of minors and you owe them hash price effectively if you’re curtailing them you’re exposed to a huge run in you know if there’s a huge run in hash price you still owe them that value and so that’s a great use case on the long side for us from an NDF perspective because you can buy the NDF during a period of curtailment and many times you know in advance of when you’re going to curtail so you buy your NDF and it gives you upside protection so if you get a run and hash price you make up the money on the NDF and then you can pay out you know the difference to the miners and you’re fine like you don’t have to worry about it and you lock in that revenue from a minor perspective it really depends on the mining operation right like that what your hosting Arrangement is you know do you have control over the curtailment are you exposed to curtailment but yeah that’s it becomes an interesting Dynamic too because from a hedging perspective if you let’s say you have a hundred Peta hash online or 500 whatever the number is you know you have to start factoring your uptime percentage into that when you figure out how you wanna how you want to hedge using your NDF and so like a lot of it you know the whole when you think about all this stuff you know like what goes into hash price and you know like Asic prices and your operational costs energy like the mining space is it’s a tough position to be in you’re constantly going to have to be on your toes from a hedging perspective 

Stephan Livera 00:40:53 

Gotcha and so I guess we can think of it like there’s been development over time like in the early days people just yolo it and then maybe as they got a little more advanced they would maybe buy ports or sell calls on the Bitcoin price which only gives you partial hedging let’s say partial protection let’s say and then now we’re sort of evolving to this point where miners or let’s say to your point hosting providers and other interested individuals in the space can just get exposure do you see this as like a final evolution or is this the final stage or is there something else that’s coming you know the answer in this  

Matthew Williams 00:41:36 

From my perspective you mean yeah no I’d say we’re in the I mean if you want to use a baseball analogy we’re in the first inning like this is this is early days like if you look at any other mature commodity space that I you know like agriculture or energy or Metals you know they’ve had decades if not longer to maybe you know could be a hundred years where they’ve had hedging instruments evolve and so you have you know like when we were exploring what to go to market with we were like all right do we go with Futures we go with swaps do we go with options do we go with perps like there’s all sorts of things and from a hash rate perspective you know there’s not a whole lot like it’s growing like you’re seeing new things pop up you know you have you know I mentioned before there’s a few people doing physical forwards there’s a couple people doing you know tokenized hash power there’s you know Cloud miners but it’s super early days like even from our perspective we have aspirations to do you know other things like options or you know we get approached all the time by people wanting us to list our these as features on an exchange or you know there’s just there’s a lot of different ways you could go so to answer your question I think while I’m a huge believer in our product and we’re seeing a lot of growth this year it’s just the first and what I think will be many and I think there’ll be you know many more people trying to do similar things to what we’re doing which I think is great I think it’s good for minors to have multiple options on how to hedge like if you look at Bitcoin derivatives you know you just you know there’s multiple exchanges there’s multiple options exchanges there’s multiple strategies Structured Products there’s soon to be ETFs it’s a constantly evolving space and we’re probably you know five years behind it if not more  

Stephan Livera 00:43:27 

Yeah, and so out of curiosity is there could you articulate why NDF and not something else or is it or is it what did you say it more like this is the good first step  

Matthew Williams 00:43:40 

Yeah it’s both I mean we did months of product research before we even decided to launch what we decided and like we started off by like all right what exists already and there’s a couple of those physically delivered forwards but those are they’re complex and and there’s a you know huge discount to spot that’s implied in these and it was just kind of wonky and then we had seen some like tokenized stuff and then FTX had done a Futures product that was quickly delisted so we just wanted something simple we wanted something simple where people could understand what the underlying was being our index we wanted to be approachable we wanted to try and make it as low lift and remove as many barriers but for us the goal is always to bend a launch multiple products and to honestly to be like a One-Stop shop for minors where you can come in hedge out your hash rate expose or sorry your hash price exposure your Bitcoin exposure your energy exposure and we’re working towards that I’d say later this year we’re going to start offering you know Futures on bitcoin not you know not ones that already exist we want to provide these instruments or or energy derivatives to people so yeah sorry long-winded answer we view the NDF as the first step and it’ll probably always be our Flagship product but we want to launch many other ones  

Stephan Livera 00:45:02 

Yeah, gotcha and so I guess by creating this Market you’re hoping to in some ways make it easier for miners to be profitable or to stay alive let’s say at times when you know the weather and the industry can be buffeting them from different sides 

Matthew Williams 00:45:23 

Yeah, I mean it’s I will look at it a bit differently we want to help people remove risk right because we can’t control we meaning Luxor we can’t control the price of Bitcoin or how many people are on the network or the weather like these we just want to help people be able to mitigate those risks we want to be able to provide instruments that give you Revenue certainty or you know energy certainty or bitcoin price certainty like so you can operate as a business and have some comfort that you know what your revenue is going to be or at least a percentage of it for a given amount of time and like yeah you know you gotta remember this space if you’re talking about the mining space you know it’s only 14 years old and even like 14 is being generous right it’s probably closer to like seven or nine years old it’s got a lot of maturing to do still and that’s natural and then we just want to be part of that maturation process  

Stephan Livera 00:46:17 

Yeah and just in terms of the Luxa business model around NDF is the business model there that you know you’ll you’re making the market so you take a little bit on each you know like is that basically the business model or is there another business model there with that no it’s as simple as that we just we sit in the middle we try and be what’s called delta neutral like we don’t take risk we just match buyers and sellers and then we add a spread to the market in order to cover our operational costs and you know yeah not gonna lie you know we want to make some money with this creative  

Stephan Livera 00:46:51 

Yeah, there’s nothing wrong with that yeah okay great and so you mentioned as well working in a regulator before so I’m curious what was it like having to go work with the regulator to get this product approved what was that like  

Matthew Williams 00:47:04 

Yeah I mean it is so hard to launch a market from scratch I can’t even begin to tell you I was fortunate in the fact that I got to see this happen a lot at CME and then I also got to see it from a regulator perspective but I mean there’s so many things that go into this like there’s it’s dense to understand what regulation is when it comes to launching a product like is it a security is it a commodity and once you get past that like what you know what kind of designation are you as a Marketplace operator are you a swap execution facility are you introducing broker are you a swap dealer and then each one of those comes with requirements and so for me like having the background and the network that I had just made it exponentially easier I can’t imagine doing this without you know having those resources that I had and even with that like I wasn’t great when this started it’s Insanity like how much work that goes into this just building it all building the participants going through the onboarding you know talking with lawyers talking with Regulators fortunately for us like a lot of that you know I don’t want to knock on wood but a lot of its behind us and we can start growing you know from here but yeah it’s it’s challenging it’s super challenging 

Stephan Livera 00:48:21 

Right okay well yeah look I think it’s an interesting product and yeah I think that’s probably the key the problem there’s probably the key questions so if you’ve got any closing thoughts for listeners and where can people find you online 

Matthew Williams 00:48:34 

Yeah, so if you want to find me on telegram I’m @MattWilliams1 nice I don’t know how I got that one because there’s about a thousand Matt Williams in my town alone you could also go to Slash derivatives and you can locate us there yeah reach out to us we love walking people through this product and realize it can be a bit challenging to understand at first but like once you’re with us we like to help you out as much as possible we do a ton of research that we put out too through our blog we do difficulty forecasting we have premium Services through data that help you understand how to trade this instrument you know I’m fortunate to get to do awesome podcasts like yours Stephan  so reach us any way you can we’ll set up meetings yeah 

Stephan Livera 00:49:35 

Great okay yeah cool well yeah thanks for joining me and I’ll put the links in the show notes thanks for joining me Matt 

Matthew Williams 00:49:40 

Yeah, appreciate it thank you very much  

Stephan Livera 00:49:43 

Show notes are available at thanks and I’ll see you in the Citadels. 

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