Vycid, on the last page,
you mocked a gentlemen for his surprise over the velocity of hashrate increase, framing it as a lack of faith in the free market. Presumably because...
...if every rational actor in the market sees an opportunity for profit, then the growth will necessarily exceed projections; there is a time lag between when the hardware is ordered and when it comes online (very large for preorders). Greed is considered a rational market response.
Then, you assert that, in fact, the market is not behaving rationally (mostly because of nouveau riche AM shareholders, but we'll leave that bit alone).
We are witnessing a strange irrational market that is the product of a non-equilibrium state. It will eventually adjust as more sophisticated actors profit from the irrationality.
So, don't you think you owe the gentleman an apology for maligning his inability to accurately predict hashrate growth in this greedy, but unsophisticated, rational, but probably irrational market environment?
None of these statements are incompatible. The market is irrational, despite the actors acting rationally (from their perspectives).
My point is that an expectation of anemic hashrate growth is a lack of belief that the free market can quickly and easily produce the competition that all free-market philosophies depend on.
I do not believe AM will stop benefiting from its position as a market facilitator, but it is vastly overvalued.
That begs the question of HOW to value a company.
The way I see it is that in an informed and transparent market, valuation is easy and players have a clear understanding on where the fair market value lies. However, in an unpredictable or opaque market, valuation is difficult and players tend to try to "position" themselves, instead of maximizing profits. (e.g. look at the dynamics in the gold market right now).
It it my understanding that the ASICMINER equity derives a majority of its valuation from it's role as a strategic asset class, because of the difficulty in the market to predict the future.
I admit that nobody can value a security with perfect accuracy, and certainly not myself.
My methodology essentially consists of: what is the current shareholder's equity, plus the annualized
IRR expectation value - discount rate (the discount varies based on industry) over ten years forward, with appropriate adjustments for certain risk types. Basically, it's a discounted cash flow method.
http://en.wikipedia.org/wiki/Discounted_cash_flowBased on my observations that the hashrate growth is being constantly underestimated, it is not difficult to arrive at how AM has become so overvalued - forward projections of revenue are unreasonably optimistic. Furthermore, I see reductions in margin coming much sooner than most. Within a couple of years I suspect we will see margins of 20-30% for companies operating in the cheapest electricity regions.
In light of this, and because AM has little shareholder's equity, I believe it must return its market cap within the next few years to be fairly valued. In combination with more pessimistic growth models for the hashrate, I obviously do not see that happening.
Normally, the expectation value calculation (
http://en.wikipedia.org/wiki/Expected_value) lends itself well to risky companies. For example, I own a significant position in Allied Nevada Mining (
http://finance.yahoo.com/q?s=ANV) which I mentioned a while back. I believe it is undervalued on shareholder's equity alone, but the real key is the expectation value element. Here is a very simple (and therefore
inaccurate) demonstration:
- We suppose there is a 20% chance that gold goes below ANV's cost per ounce at ~$1250, and ANV goes out of business;
- a 70% chance that gold stays around ~$1400/oz, and ANV's price level does not change because ANV is fairly valued at a P/E of ~10;
- and a 10% chance that gold returns to $2000/oz, and ANV quadruples in price based on the enormous profits per ounce.
If for ease of calculation we arbitrarily set the price level with a current P/E of 10 at $5/share (this is pretty close to the actual one), then our expectation value is (0.2 * 0 + 0.7 * 5 + 0.2 * 25) = $8.50/share. Therefore we consider ANV undervalued.
(A more sophisticated approach uses the premiums on gold options to calculate the odds. The P/E is easy to obtain for a given gold price based on published figures for costs per ounce and capacity.)
So why can't I apply this thinking to AM? Because the underlying "commodity" for AM (the Bitcoin) is a currency denominated in BTC. By contrast ANV is denominated in
dollars, not in ounces of gold. The opportunity cost of buying AM is Bitcoin-denominated, so even if bitcoin goes to $10,000/BTC and AM maintains 10% of the hashrate, you don't make much profit over BTC.
I am making no commentary on the valuation of BTC here. I do not know. But AM is overvalued.
