Topic: So like...I don't get Mining Securities...can someone explain them to me? (Read 2272 times)

It is not possible to make ECONOMIC profits in perfect competition. This is significantly different that accounting profits.

D&T I believe you may be wrong. Mining is a potentially perfectly competitive marketplace. Electricity is just an input, those with lower input prices will squeeze out those with higher input prices. Solid plans will make some of the higher input guys harder to kill off than some of the lower input guys, but branding and other items will never effect the distribution.

I do not think it is perfectly competitive right now because of the high risk, and limited market for bitcoins.

Electrical costs make it a non-perfect competition.  Even if hashing power was deployed perfectly the input costs of participants is unequal.  I took great strides to test and perfect rigs which had a high electrical efficiency (MH/J).  That combined with below average electrical costs means my (and others) cost per hash.    While some miners were slapping together sloppy 1.5 to 2 GH/s rigs at <2MH/J and $0.24 per kWh I was building standardized 3.2 GH/s rigs @ 4 MH/J & $0.07 per kWh.  When the margins got squeezed there was a lot of gnashing of teeth about how mining was unprofitable but it wasn't by me (and other high efficiency miners).

For a miner what matters the most is not difficult or price but difficult/price.  When difficulty/price spiked I made less but the "marginal miners" would be operating at a loss and they would quit and difficulty/price would fall.  When it fell enough other "marginal miners" would join in and the cycle would continue.  The "marginal miners" saw continually feast or fammine.  Those with below average costs were never forced out.  There is a lag before hashing power is deployed or taken off line.  Those who could operate 24/7 profitably benefited from that lag.

Now FPGA and looming ASICs make a lot of this planning obsolete. They are the next evolution but my rigs are surprisingly still efficient despite being based on ancient 5970 GPUs.  They are less efficient and overall hashing power is declining as the rigs reach end of life.  Eventually I will need to shut them off.

Long story aside the mining economy will never be perfect because that would require perfectly competitive input costs AND perfect investors.  Given some investors are willing to build marginal rigs there will always be opportunities for those who run operations with higher than average efficiency.

Full disclosure:  
I am not buying any FPGA or ASICS and will eventually wind down all mining operations.  While not perfect mining is getting more and more competitive and as Bitcoin gets older the "risk premium" awarded to miners will decline.  Mining will become more commercial where only those with sufficient capital, solid business plans, and ability to operate in low cost environments will profit. The margins are just not as interesting.  My time is better spent in financial services where a significant risk premium is still paid.

I believe that the mining economy is an example of perfect competition and as such, it is not possible to make an economic profit in the long run.

In terms of BTC, yes, which is what I've been saying all along.

You're thinking in terms of USD.


Yeah I didn't call 100% going to hardware the correct price, just the best price for the initial investor.

Actually you raise a good point...I was thinking in terms of mining bonds, but it does apply to mining in general. Bonds just multiply it out.

That's not saying people haven't made a lot of profit mining...in USD...they have, but they just haven't made much, if any, profit in "BTC invested -> BTC out".

You could say "Who cares if you make profit in USD or BTC", and I would say "I do", because if you're only making profit in USD, then you're really just making profit in forex, and you would have made more if you never mined and just bought the coins instead.

You think the "correct" price is "100% going to hardware" where the two are not the same at all (although correlated).

Your point is being muddied by your refusal to clarify if you are attacking mining bonds specifically or mining in general. If you think offering a bond with no profit to the issuer is a losing proposition to investors, it means you think mining is a losing proposition. Judging by history you're wrong - Mining has been very profitable even taking into account hardware and all other costs. Now with the advent of ASIC we may see the first time that people investing in (non-ASIC) hardware may not get their investment returned.

Utterly false statement if true then all miners on the planet regardless of hardware are continually and perpetually mining at a loss.  Do you really believe that?  

If so then close this post and make what about what you really are trying to ask:   "So like ... I don't get Mining ... can someone explain it to me?"

Hint:
My mining operation has been very positive ROI (and thus had a positive NPV at the time of creation).  If I had sold a mining bond at cost for my rigs then obviously it also would have the same ROI% and the same positive NPV.  Nobody had even thought of it at the time but had I sold bonds at a premium (but not too high of a premium) both I and the investors could have both profited (although obviously the combined profit would be the same as the underlying hardware).

No, I read through and undestood your posts completely before responding. I wish you could do the same. You're saying they are overpriced, and I agree they are, but beyond the price there is a fundamental underlying negative NPV that applies at cost, even if the price was "perfect, with 100% going to hardware". In any case where the bond is overpriced, as you put it, the loss will be higher.

I agree they're an amazing deal for the issuer, which is partly why I don't understand how people are investing in them. It's like a tiny chance of profit vs massive chance of loss.

Lots of people cant do the maths which led to where we are now. However this creates a business opportunity to  release a bond based on the cost of production  not on the greed of the issuer

Why would they?  Say you have a widget and it costs you $0.10.  It sells out when you sell it for $1.00 why would you sell it for less than a dollar?  So you can still sell out and make less profit?  This is business 101.  If you are selling out then your price is too low.  You don't drop your price when the market (as stupid as the participants might be) is telling you your price is too low.

You completely misread or ignored the rest of my points so I think you have your mind made up.   Do the math yourself.  1 MH/s doesn't cost anywhere near what the bonds were IPOed at.  That is the ENTIRE POINT.  1MH/s going for 0.4 BTC.  That's ~$4.  A BFL Single is 832 MH/s or $3328 at those prices.  The actual selling price is $599.  Granted there are other costs (electrical, labor, hardware failure, host system, downtime, fees, etc) but that kinda shows you there is plenty of fat.  Now ONE MORE TIME ....  Take one of those "loser bonds" and recalculate the return if they were issued at 1/3rd the price per MH/s.  There is plenty of profit it just isn't going to the buyer of the bonds.  If I sell some Gold bonds at 1 share = 1 oz of gold and price the shares at $5,000 ea by your logic it is impossible to profit from Gold.  NO.  IT IS THE PRICE!

Obviously you want to believe otherwise so keep believing that.   Mining bonds at the current prices are amazing deal ... for the person issuing them.   As long as idiots keep buying them at the current price why would anyone sell one for less?  This will be my last post because it gets annoying to say the same thing over and over only to have the other person pretend like they want a discussion and instead just ignore everything and repeat the same false nonsense.

Have a good day.  

TL/DR version:
Your right.  All mining bonds at any possible price will lose money.  Therefore all mining is unprofitable too.

No, that wasn't an assumption, because you said:


Alright, so in MINE.A he bought 1BTC worth of equipment and in MINE.B he bought 100btc worth of equipment, to achieve the same MH/S per share for both. If he could achieve the same MH/S per share at 1/3 the intial price, yes, it's a better investment, but still not better than just buying coins and holding on to them. As you point out, the NPV is negative in all initial cases...and I guess I don't understand why people would pay to setup a mining rig "just to store their bitcoins at a slight loss". Is it because of the feel-goodery of balancing out hashing power away from attacks?


I'm saying it doesn't matter because I'm talking about a technical problem. I have no problem with making profit after setup (when you're buying from other investors at their loss, not the operator), and that's not what I'm talking about at all.

It boils down to this: Do you think the majority of mining fund operators could get 3-10 times the hash power if they weren't so greedy? Isn't there then easily room for huge competition? Where is it? I don't think they're being greedy...I think they're putting as much of the money raised into equipment as possible, and simply hoping the difficulty doesn't rise. It rises, baby.


Separate issue, but more so than just buying the coins and holding on to them?

Price of Bond =/= Cost of the Bond.

The price is the amount paid by investors.
The cost (both equipment and lifetime electrical) is the amount paid by the operator.
The difference is the operators profit.

You assume the price on MINE.B is 1/100th of MINE.A because it is more efficient (i.e. MINE.B cost is 1/100th of MINE.A).  What if they both use the exact same equipment, have same power costs, hell they are on opposite sides of the same warehouse with the same insurance, same security, same default risk. 

Maybe MINE.A is just priced 100x as high because the issuer is greedy.

I am not saying mining bonds should be priced cheaper because more efficient equipment will come along some day. I am saying mining bonds were massively OVERPRICED.  The up front premium was almost 500% of the hardware costs, granted the operator still had ongoing costs but the price certainly wasn't the cost.  If it was then mining is general not just mining bonds is unprofitable.  Once again take one of the existing "losing" mining bonds and pretend it had been issued at half the price is was.  Is it still a bad investment?  What about 1/3rd?

Lets say I offered you a "penny mining bond".  The bond pays 100 pennies after 30 days and then is halved every month after that.
100 pennies
50 pennies
25 pennies
12.5 pennies
6.25 pennies
3.125 pennies
1.5625 pennies
0.78125 pennies
0.390625 pennies
...

it pays into perpetuity.

What is the NPV of 1 share.  Well if we assume the time value of money is 3% annually (due to inflation we will assume no risk premium) then the NPV is 198.98 pennies.  If my penny bond was priced at 198.98 pennies it would be perfectly priced.  Now if I need money now I could sell shares for less than 198.98 pennies and pay a premium (over the life of the bond) to investors for their capital.  On the other hand if I am say the US treasury and people need a safe place to stick dollars I might offer the bond at LESS than 198.98 pennies.  Say 180 pennies.  In which case the investor is paying me a premium to keep their funds safe.

Saying price doesn't matter is silly.   If I offered you this bond at 120 pennies you wouldn't take it?  If I offered it at 500 pennies at IPO and it had traded down to 200 pennies just after the first dividend was paid it would still be bad deal even though it had fallen 60% in price.

Of course the price matters.

Quote
Actually thinking about your situation, are you considering initial cost? Possibly you don't, because you assume you can sell your gear.
No in my analysis I assumed a 24 month depreciation (i.e. the hardware will fail or be economically nonviable after 24 months of operation). A less accurate but easy way to do this is take the purchase cost of the rig and divide by 24.  If the rigs life is only 24 months and will be worth zero at the end then that is the monthly hardware cost.   The monthly hardware + monthly electrical cost = total monthly operating cost.   If the BTC produced in a month are worth more than the total monthly operating cost then the rig is profitable.

 My rigs have been solidly profitable including all hardware and electrical costs.  Eventually they will no longer be economical and I will turn them off.   They are based on 5970s which have been running for well over a year 24/7 so the resale value is negigible (especially since I won't turn them off until they can no longer be used for mining).   Anything I get (the PSU might be worth something) is just a bonus.

No, I'm getting it I just don't agree that price matters. I don't think you guys are getting what I'm saying.



Yes, both would be.

If MINE.B is 100 times more efficient than MINE.A (because it needs 1/100 the BTC per MH/S), it might be able to keep pace with the network hash rate growth for a term, but as a linear MH/S, it will still fail against an exponentially increasing hash rate and difficulty. It has a great chance of making it's money back, but not much of making much profit...and this is an extreme example. It may indeed provide profit, but the likelihood of it costing 0.01BTC is low. I'm not saying profit is impossible in any of this btw, just very unlikely.

In most comparisons, either both have access to the same equipment and it is a matter of scale (making ROI the same for both), or one has vastly superior equipment which will very quickly be matched in this massively parallel market. It's simply too easy to mine.


Yah I already understand what you're saying. If the dividends are the win, then it's all good. There are two problems with this, however.

1) The dividends just aren't going to be the win, mathematically, in the early stages of hash rate growth. Maybe in 50 years when bitcoins are mainstream and only a few people bother to mine this won't be the case, but right now, the network growth rate is spectacular compared to the ability of an operation to profit relative to it. I did the sums ages ago, and I guess I'm taking that for granted...I should probably dig them up but suffice to say they convinced me this was true for the time being.

2) It's not similar to the housing market, because what you invest in an operation scales perfectly with your earning power - the same cannot be said for housing. If the shares were sold at their true value (say...1%), because they are themselves the instrument of capital initially, there will be no operation to speak of. The only way to really profit in this case, is to have other people pay the operator full asking price for the stock, then the very next day buy it off the secondary market for 1/100th the price. Of course, you're only profiting from the initial buyer, not the operation itself.

As for that graph, I agree it's not a good comparison @ $32. If you ignore that price spike (above say $16-17), what I said still stands. The rate of change of difficulty is higher than the rate of change of price. Increased hashing efficiency will constitute a part of this, but there will also be a "long term saver" component too. You cannot assume difficulty will remain constant - it hasn't at all, yet, and that's exactly where I'm saying profitability is destroyed.

Actually thinking about your situation, are you considering initial cost? Possibly you don't, because you assume you can sell your gear. It's also possible that mining operations sell up all hardware after a certain amount of time and *that* makes up for the difference in lost profit somewhat. I can see that as potentially plugging the missing amounts in a few cases, so how many operations actually do that? I mean like literally sell all the hardware and repurchase all outstanding shares with the final balance? What about the operator's profit?

A couple things that might be skewing your data.  First is that it was profitable for me to mine every single day for the last two years.  There wasn't a single day where the current difficulty and price minus my electrical costs resulted in me mining for a loss.  Yes even at $2.  It was much less profitable but it was still profitable.  I also had (at the time) a very efficient set of rigs and low electrical power so I knew even if the price remained at $2 for a year there were less efficient miners and they would eventually be forced out improving my profitability.

The second is that drawing your graph from the $32 peak is kinda silly.  When prices fell 90% hashing power didn't fall 90% because the market had never reached equilibrium.

At the $32 peak my ROI on a new rig assumming 2 year depreciation, my MH/W and my electrical cost (built that day assuming price and difficulty remained constant) was 7200%.  Is 7200% ROI sustainable?  The reality is that when GPU mining hit the network difficulty exploded BUT relative to the efficiencies gained (MH/W and MH/$) it didn't explode "enough".  Mining was massively massively massively "too profitable".  Had price remained at $32 difficulty would have exploded to many magnitudes.  Difficulty lags price and we never remained at the peak long enough for miners to build enough hashing power to bring that 7200% ROI to a more realistic level.

So drawing a chart from the $32 peak is misleading because difficulty never reached its peak.  Had prices remained in the $32 range difficulties peak would probably been 3x to maybe 4x as high.  Before it could prices plummeted, new rig constructions stopped, and many poorly designed rigs went offline. 

Drawing your chart from July 2011 till to current would result in a different conclusion.

HeadHunter you still aren't getting it.  What Meni is saying is the PRICE is what matters.

Lets pretend there are two mining bonds (each are 1MH/s per share, neither has default risk, both have same liquidity).

MINE.A is 1 BTC per share.
MINE.B is 0.01 BTC per share.

You are saying both would be a net loss?

Obviously not.  Somewhere between 1.00 BTC per share and 0.01 BTC per share there is a price that for a given period of time and given future difficulty would break even.   If the security is priced below that you would profit if you bought it.  If the security is priced above that you lose if you bought it.    "Investors" on GBLSE buying mining bonds have been "stupid" to date massively overpaying for bonds and creating a scenario where even under optimistic conditions they are unlikely to be profitable.


And if before it aproaches zero the sum of dividends paid are > the the purchase price you would have a net gain.  Take one of those "losing" bonds and instead imagine it was offered at 50% of the price it was offered at.  Was it still a loser?  The securities were overpriced.  It is that simple.  They were overpriced and investors who poorly understood the risks and economics created enough demand that they sold out at these over inflated prices.  That led to other offerings at similar overinflated prices (I mean if you see a competitor sell out at 0.3 BTC per MH why would you offer your for less).  It is called price discovery.  Obviously (hindsight for some but foresight for many others) the offering prices were way way way too high and those investors were doomed to lose money.

Another way to look at it is NPV.  The sum of any periodic payments over any period of time can be expressed as net present value.  (i.e. $100 per month for the next 10 years is worth $x right now).  Calculating NPV for 1 MH/s of mining power is challenging because determining future difficulty is tough but all mining bonds have an NPV (even if unknown until after they stop trading).  If you buy it above NPV you lose.  If you buy it below NPV you win.


TL/DR simplified version:
There is nothing wrong with the concept of a mining bond.  However all mining bonds to date (and probably all mining stocks too) have been horribly horribly overpriced.  Many are probably still overpriced despite falling 30% to 50% since launch.  The mining bond market resembles the housing market.  If you just took asking price for a new home in 2007 you probably have lost money.  Does that mean the concept of owning a home is fundamentally flawed or does it simply mean you bought an asset at an overinflated price?

TL/DR even more simplifed version:
If you overpay for an investment you will lose money (or earn a lower return than you otherwise could have).  It isn't more complicated then that.

This is why I offer a growing mining bond: https://bitcointalksearch.org/topic/removed-due-to-glbse-closure-93711

Approximating how personal mining functions. If there is a change in hashing technology, I can adopt it and immediately pass on the MH/s gains. Also, my bonds should be seen as a way to get steady BTC by maintaining a share of the network, instead of looking at short-term fiat gains. Plenty of other options if you are looking for short-term fiat income.

Ok, perhaps it's not so obvious then. I understand what you're saying here, but since there is every incentive to put 100% of raised funds into mining gear; less would mean less return on more outstanding shares, and there's no real benefit to holding btc, it makes sense to put 100% of funds into hardware. The price that is set initially by the security is then directly proportionate to the hash rate of the eventual operation, modified by the BTC per MH/s you mentioned. My claim is that a good BTC per MH/s would still only mean a fund breaks even at best, because of the nature of the total network hashrate growing exponentially against this.

The difficulty is set not only by efficient miners, but nubby everyone else's inefficient hogs. These people don't care about the price of bitcoins, because they're mining and saving for the long haul (I did a forum poll here some time ago that showed this to be the case, but I've forgotten the exact ratios...maybe 25-50% or so). This can be seen in the network hash graphs, where today's hash rate is higher than a year ago, when the price was higher than today. You can also see that the hash rate never deflated as much as the price did, you can say it was still profitable for them to mine @ $2-3 /btc, but I did the calcs at the time, and I know that it wasn't...it was much much cheaper to just buy them, but people kept hashing.




Yes it's a bit of a paradox, although I think the second assumption there is false - there are more people willing to mine and hold than mine and sell for profit, as per the above graph. If a mining fund were very efficient, they could profitably increase their hash rate via re-investment only if its growth rate was higher than the total network hash rate's growth...which is still very unlikely given the rate at which the network is and has been growing. They would more likely be looking at a linear increase in shares/hash rate, against an exponential increase in difficulty. This is the crux of why I say mining funds are break even at best, and losers at worst...they simply cannot keep pace with the network growth rate.

Even during a massive drop in difficulty, the huge drop in price means the gains in hash rate due to people stopping would make it a big loss in terms of USD, even though it would indeed show some gains in terms of BTC. If an investor is interested in profit in USD, they still don't really get out ahead, because there are basically too many people hashing for saving.

This constant pressure to compete against growing difficulty on existing equipment means BTC returns are always going to trend to zero (in which case the shares are worthless and any value was paid out with the reducing dividends), or fight a losing battle against the exponentially increasing hash rates. A new massive (ASIC?) player on the market will also quickly destroy the future hashing power of an existing operation, and it's clear that people are hashing at a loss, making it more difficult for efficient operations to get any return at all. The funds just aren't given enough time to recoup investments before they're made worthless by the difficulty/$ ratio.  

Again, this sentence make no sense. "It's obvious that mining funds can't return an investment when bought at X BTC per MH/s" makes sense and is either true or false depending on the value of X.

Before these opened up you didn't know what price they would be traded at so you had no way to know if they would be overvalued or not.

However a lower bound on their initial traded price is what the issuers are willing to sell them for, which is above what it costs them to back up the obligation. So maybe what you're really trying to say is that mining can't be profitable.

But that also makes no sense because if mining isn't profitable, the difficulty will decrease until it is profitable again (to some people at least). You will always be at an equilibrium where some people think it's profitable and mine and some people think it's not and don't.

Having a different opinion from you doesn't mean being stupid. Being correct after the fact is evidence that your analysis was justified, but it is not conclusive proof of it.

In general, saying "I told you saw" is less useful than putting your money where your mouth is, by shorting the asset if you think it's overvalued or buying it if you think it's undervalued.

I guess it's as good a section as any.

Too many of these mining bonds were structured and priced in a way, their value would only go down in the previous 6 months.
With difficulty rising, their is no way they could stick to any half decent rate for long, if they are based on their X mhash/s for y btc.
The worst affected were any that priced themselves too high, didn't reinvest enough and didn't properly account for that rise in difficulty crippling their small margins of promised dividend payouts.

They can be a safe bet, some succeed better than others, just don't invest if it seems to be valued too high, that price will drop to a more reasonable number and it's you who will lose big if you invested at the high. As their realistically is no way it's going back up again.

I know that the market is deciding the prices, but the main point of my post is that pre-investment it's obvious that mining funds can't return an investment. I realized this 8 months ago before any of these even opened up, and they just confirmed what I already knew.

So does that just mean people are stupid? I mean I figured I wasn't getting something...but perhaps it's the other way around?


Yeah I guess I was...not why do they pay what they pay, but why do they think they'll get their money back.

wrong sub forum?

The traded price of a mining bond isn't fixed, it is determined by the market. If someone offers you a 1 MH/s bond for 1 BTC you shouldn't take it because it will generate much less over its lifetime. If they offer it for 0.01 BTC you should take it because it will generate much more. If it is currently traded for X BTC it means there are people thinking it is worth at least X BTC. They could be wrong and if you think it's worth less don't buy it.

This applies for every imaginable security, commodity or business venture. Nobody knows for certain how much profit will be made from it and hindsight is 20/20. The profitability of mining bonds correlates with the profitability of mining hardware and just like some people buy hardware hoping to profit, some people buy mining bonds. Whoever has the best ability to estimate what's coming profits on average as a reward for steering humanity's resources to the best venue.

If your question is really "why did people think mining bonds are worth X?" then, well, you should ask them.

Don't forget that a major contributing factor to the recent drop in bond prices is the ASIC announcement.

I don't understand the mining securities on GLBSE.

What are people actually expecting to get out of them?

Here is an example, where I buy 1000 shares of a mining group:

Gigamining:
1000 shares = 1500btc (april btc/share price) @ approx $5 per share (april $/btc price) = $7500 investment to start off.
Today, dividends would have amounted to approx 400btc since it opened,
and also today 1000 shares can be sold for around 900-950btc (if you're willing to wait a while, if not this is closer to maybe 500 btc).

Total: 1300-1350btc

But it's worth more! 1350 @ market price = $13,500! win!
If I'd just left my 1500 btc alone, it would be worth $15,000 in the same time frame. There is no scenario where the price matters, when the btc returned are less than the btc invested.

The equations give the same story for at least 2 other mining ventures (I worked them out, but cbf doing it again to paste here; you can calc it yourself to confirm).

At best, there is a break even, and usually there is a loss...but this is obvious even from a pre-investing perspective. All mining funds need difficulty to drop over the term of the investment to actually be profitable in btc, so are in fact bets that this is what's going to happen. The only scenario in which more btc can be returned is if the hash rate drops over time, and the only way $US profit can be made is if that happens simultaneously with price increases (yes, hash rate down while price goes up...).

The difficulty does drop when the price does, but in a dampened way - not as much as the drop in price, and it zooms when the price rises. If a person believed the price was going to drop, they would again be far far better off simply selling the BTC and rebuying when it's lower. The constant increasing pressure in hash rate absolutely guarantees the cost of 1 btc is going up (takes longer to earn 1btc for the same electricity), and since mining ventures are capped to initial funding, they cannot actually increase their hash rate without more money.

Mining securities make absolutely no sense what so ever for the investor, and yet here they are existing in plain sight. What am I missing that would explain all this?