How the Fleet Hedge and Principal Hedge protect scheduled debt service and investor principal, with the reference data behind it.
The Principal Hedge: laddered put options around the operator's breakeven, recovering residual principal at the strike.
A falling BTC price weakens the borrower’s ability to pay and reduces the value of the collateral behind the loan at the same time. The hedge is designed to create value during that decline.Prime Lending uses two hedge layers, each protecting a different part of the structure.
Fleet Hedge
Delta-neutral hedging of fleet production. Stabilizes mining revenue so a BTC decline does not starve scheduled debt service. Protects the revenue that services the debt.
Principal Hedge
Laddered put options around the operator’s breakeven price, targeting residual principal recovery at the strike. Protects investor principal directly.
A financed mining fleet behaves like a portfolio of BTC call options with changing production notionals and moving breakeven strikes. Profitability rises when BTC trades well above the fleet’s breakeven and contracts toward zero as spot approaches the level at which operating a machine no longer makes economic sense.That exposure drives both scheduled repayment capacity and the BTC sensitivity of the collateral base. As BTC declines, fiat operating expenses consume more of the BTC produced, debt-service coverage falls, and secondary-market ASIC values decline because buyers capitalize lower expected mining margins. Recovery becomes more dependent on controlled BTC, hedge assets, and discounted hardware sales. The two hedge layers are designed to interrupt that sequence.The same correlation is why credit markets do not lend against mining hardware. A lender secured by machines would be seizing an asset whose value is falling for the same reason the loan defaulted. Because the hedge is built to generate value during that decline, it offsets the exposure that makes hardware unacceptable as security, which is what allows the fleet to be underwritten into the collateral package rather than requiring the borrower to post 150% in Bitcoin.
The Fleet Hedge protects the revenue that services the debt. It hedges the price sensitivity of expected mining production by holding delta-neutral short BTC exposure equal to the sum of the fleet’s option deltas across expected production. That short exposure gains value as spot falls, replacing part of the mining margin lost during the decline and preserving BTC available for scheduled debt service.As BTC declines toward breakeven, the position is rebalanced and the buyback realizes gains accumulated during the decline. With lender approval, those realized gains can support scheduled debt service, which delays or prevents the liquidity draw that would otherwise appear as spot approaches program breakeven.
In the 3,000-path reference simulation, the Fleet Hedge reduces modeled payment-default frequency from approximately 44.5% unhedged to approximately 3.3%, subject to the stated assumptions and cure rules. Its primary credit function is cash-flow stabilization, which makes it a default-risk control.
The Fleet Hedge is executed against a BTC notional target at institutional derivatives desks on competitive pricing, with the position sized from the modeled rally distribution and required buffer rather than from the cheapest available exposure.
The Principal Hedge is options-based and targets the operator’s breakeven to recover residual principal. Where the Fleet Hedge protects the mining cash flow that services the loan, the Principal Hedge protects the balance that remains exposed after controlled collateral, realized principal repayments, and eligible banked Fleet Hedge gains are credited.It is implemented as laddered put options struck around the operator’s breakeven price, so that residual principal is recovered at the strike. A long put converts the carrying requirement into an upfront premium, establishes a defined strike floor, preserves upside above the strike, and carries no margin requirement. Put spreads, laddered puts, and call overlays adjust the premium, coverage band, and retained upside. Structures that add a short option leg, such as collars and verticals, reintroduce a margin requirement on that leg. Options-based strategies are executed at institutional derivatives desks on competitive pricing.The required protection is sized against the distance between current spot and the program strike. When spot sits well above the strike, each BTC of exposure can earn a large gain before price reaches breakeven, so the required protection is smaller. As spot approaches the strike, the required protection rises, capped at 100% of residual principal so the hedge never protects more BTC than the lender is owed. The Principal Hedge’s primary credit function is recovery enhancement: it lowers loss severity when default does occur.
The combined structure runs both layers together. It calculates each leg on an equivalent BTC-delta basis and credits Fleet Hedge protection before sizing the Principal Hedge, which prevents the program from paying twice for the same protected principal.The two legs also offset naturally in a rally. The Fleet Hedge generally adds short exposure as fleet delta rises, while the Principal Hedge reduces exposure as the gap between spot and strike widens. Total program exposure remains bounded by expected production plus residual principal. In the reference stress scenarios, running both layers produces the strongest modeled lender outcome, extending payment performance through the Fleet Hedge and adding Principal Hedge recovery protection to the remaining balance.
The modeled protection is not automatic. Its effectiveness depends on sufficient hedge margin, reliable counterparties, disciplined execution, and enforceable control of collateral and hedge proceeds. Reporting separates target risk, the difference between the replicated fleet exposure and the model’s intended short, from execution risk, the difference between that target and the hedge manager’s actual position after slippage, venue limits, and timing delays. The control account reconciles outstanding principal, controlled BTC, realized repayments, banked hedge gains, and the current hedge target after every rebalance, giving one observable residual-principal figure.Modeled performance remains strongest when program breakeven stays well below spot, hedge margin remains fully funded, counterparties perform, and collateral control remains enforceable through the stress period. The Performance Across Market Cycles page shows how the structures behave across the reference scenarios.
