What is Synthetic HODL™?

Synthetic HODL is the use of instruments that create bitcoin equivalent exposure.

Say a miner wanted to give its investors exposure to bitcoin. In addition to the exposure investors get through mining rigs, the miner can also buy bitcoin and keep it on its balance sheet. Without hedging, and given bitcoin's volatility, both can lose value rapidly over a short period of time.

Now there is another option: Synthetic HODL™. If bitcoin value goes up, so does the value of the call option. If bitcoin goes down, the maximum loss is premium paid for the call option. A bitcoin call option is basically a bitcoin plus a put option designed to hedge downside risk:

Bitcoin call option = Bitcoin + Bitcoin put option.

Buying the call option is much simpler to manage.

Synthetic HODL provides additional value over traditional HODL in three respects:

  1. Risk management: maximum loss is limited to the premiums paid.
  2. Capital efficiency: the cost of a call option is only a fraction of the cost of a bitcoin, freeing up capital for growth and performance improvement without incurring the high cost of capital of raising funds in the capital markets.
  3. Natural leverage: when bitcoin price goes up, the value of the call option tends to go up more.

Unlike bitcoin, the bitcoin call option is time sensitive. While a bitcoin is forever once you have it, the call option only exists for a finite period of time, and that time sensitivity must be managed carefully.

Not only do call options behave in a similar manner to insurance, but it also enables a mining company to focus on strategically managing mining costs, developing operations, and purchasing new equipment. They are able to practice efficient mining and focus corporate efforts on growth strategies, while mitigating risk and keeping investors exposed to Bitcoin upside – simply by holding Bitcoin in a non-traditional manner.

Conventional HODL

  • Our BTC reserve are exposed to significant downside
    risk if unhedged (and hedging has a cost)
  • Drawdown risk can far outweigh the premiums paid for a BTC call option

Synthetic HODL

  • Keep building the BTC reserve (coins held in custody)
  • Use surplus cash to purchase long-dated BTC call
    options – provide supplementary, risk-managed,
    leveraged-upside to BTC outperformance

Call options create a right but not an obligation for the holder to exercise.
Therefore, the maximum loss is limited to the premiums paid.

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