If price shoots up, lots of new miners join, difficulty shoots up, they can no longer produce enough bitcoin to cover their shorts, they lose a ton of money on the shorts.

Commodity futures only work when you produce a consistent amount.

There's a worst-case for the difficulty adjustment, right? Just hedge your expected worst-case production through shorting the future, then.

Not really. If they release a new miner that's an order of magnitude more efficient the difficulty will shoot up as soon as enough units are online.

Hmm. I thought I remembered reading something about two weeks, but that's the time period required without enough blocks to make difficulty fall.

It adjusts every 2016 blocks, but if new miners come online that could in theory be mined in a day instead of two weeks.

I haven't looked too closely at how difficulty adjusted after previous order of magnitude efficiency gains, but the risk is certainly there.

they are cash settled Bitcoin futures not settled in BTC

That doesn't change the economics. Either way they have short exposure to BTC and no guarantee they will be able to produce BTC, which could hurt them if market moves against them too quickly.