Bitcoin Miner Difficulty, Call Supply, and Options Volatility Skew

Summary

This report examines whether increases in Bitcoin mining difficulty coincide with changes in options pricing. It proposes that miners facing tighter margins may sell out-of-the-money calls to raise near-term income. The report uses the SABR smile’s Rho parameter to track call-versus-put skew, comparing its history with network difficulty and studying market responses around difficulty increases of at least 9%. It reports that skew moved toward puts after such increases, with the shift beginning beforehand, plausibly because miners could anticipate difficulty changes from estimated hashrate.

The authors also describe average declines in perpetual swap prices and increases in at-the-money implied volatility after difficulty spikes, while noting that the latest episode differed in perpetual price behavior. They suggest dealer hedging of purchased calls as one possible link, but present miner selling and hedging as interpretations rather than demonstrated causes. The evidence is historical and based on a limited set of episodes; the report itself highlights unresolved differences in volatility exposure and dealer hedging behavior.

Key ideas

• The report proposes that miners may sell out-of-the-money calls to help cover operating costs.
• It uses the SABR Rho parameter to describe the options smile’s skew between calls and puts.
• In the reported history, large difficulty increases coincided with a shift in skew toward puts, beginning before the difficulty change.
• Perpetual swap prices and at-the-money implied volatility showed average responses that the authors link to possible dealer hedging.
• The proposed causal chain is speculative, and the latest difficulty increase did not match the typical perpetual price response.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.