Why Miner corps, bonds and other assets are THE WORST INVESTMENT YOU CAN MAKE.

[MPOE-PR]

To grasp the obvious we must first understand the wonders of depreciation. Suppose you have a single use Polaroid camera. If this camera is used to make a picture all its value is consumed, and it is subsequently worth zero (maybe a little more for its usefulness as a doorstop). Thus, if you take your Polaroid to the nude beach, take a picture of a naked lady and sell that picture for $10 you have not made $10. You have made $10 minus whatever the Polaroid cost you. If the Polaroid cost one dollar then you made nine. If the Polaroid cost twenty you lost ten. It's what it is.

Now suppose Jane, Joyce, and Josephine each have one thousand bitcoins on April 13, 2012 (it's a Friday).

Jane goes out and buys miner gear, either directly (FPGA or w/e) or indirectly (buys shares in mining company, buys miner bonds, w/e). Joyce invests her money in any non-mining related bitcoin denominated assets. Josephine just sits on her bitcoins.

Today is August the 13th (not a Friday) and the comparison between the girls is as follows:

Jane owns about 66% of the mining stuff she used to own (she nominally owns exactly the same amount, but the increase of diff from 1.5mn to 2.1 mn has taken a bite out of it). To add insult to injury, the new market value of this 66% fraction of what she used to own is a little under half. To wit, if one item cost 100 dollars in April it could be bought with ~20 bitcoins. Today, due to BTC being ~12, the same item can be bought with a little over 8. Thus, what used to be worth 1000 bitcoins back when Jane bought it (on a Friday) is now worth 1000 x 0.66 x 5 / 12 = 275. That's right, an eye popping QUARTER of what it used to be.

This is depreciation.

If Jane's investment paid her dividends of 10% each month, calculated in BTC at the nominal value she has 400 BTC to sweeten the 725 BTC loss, leaving her to eat about half that. By comparison to Josephine, who just sat on her BTC, Jane has realized a 32.5% loss through depreciation provided her mining stuff did in fact pay 10% a month. If it paid a more actually-in-the-market 3% she's looking at a 50% loss. In fact, in order to fully compensate her depreciation, Jane's assets would have needed to pay no less than 181.25 BTC each month, which is a nominal 18.125%.

So, when comparing her yields with Joyce's, Jane is well advised to subtract 18.125% monthly. Obviously if Joyce invested on GLBSE the odds are pretty good she realized a negative too, but that's obviously a story for a different time.

Fun?

[1714126998]

1714126998

[1714126998]

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[puffn]

OP's TL:DR  Mining corporations in their current state have currency risk.

Nice job pointing that out. Hate to piss you off, but wouldn't the value of those assets go up a lot if we go back to June prices? According to EMH this is just as likely as us doubling again.

TL:DR Duh!

Can you talk about how people who bought BFL stuff on preorder are screwed over for the same reason?

[ciuciu]

 Obviously, investments on the "THE BTC Stock Exchange" would have made you 100% profit.

[MPOE-PR]

Hate to piss you off, but wouldn't the value of those assets go up a lot if we go back to June prices?

Why'd that piss me off lol. If BTC went back to 5 then Jane wouldn't have to contend with the 5/12 part, just with the 1.5/2.1 mn part. And if difficulty also went down, it'd be even. And if she also recanned a can of worms in a smaller can than the original she'd prolly make pancakes out of water droplets and spontaneously materialize unicorns and nice thoughts.

There's a reason nobody [without the backing of the free money printing press] buys Spanish or Italian bonds IRL. That reason is "currency risk".

[puffn]

I think the part we are all overlooking here is that there is a camera with a naked ladies picture on it, and I haven't read anything about the picture being developed to put on the internet.

[odolvlobo]

If Jane's investment paid her dividends of 10% each month, calculated in BTC at the nominal value she has 400 BTC to sweeten the 725 BTC loss, leaving her to eat about half that. By comparison to Josephine, who just sat on her BTC, Jane has realized a 32.5% loss through depreciation provided her mining stuff did in fact pay 10% a month. If it paid a more actually-in-the-market 3% she's looking at a 50% loss. In fact, in order to fully compensate her depreciation, Jane's assets would have needed to pay no less than 181.25 BTC each month, which is a nominal 18.125%.

I agree with what you are saying in general, but your example has some problems. Specifically, if you account for depreciation monthly, your loss due to exchange rate changes is lower, because after each depreciation, there is less to depreciate the next time. But more importantly, if you reinvest the depreciated amount into new equipment, there is no loss because the value of the equipment remain constant (in BTC terms).

Edit: I am not an accountant, but the more I look at the line above the less I believe it

BTW, this is a good lesson in economics: a high rate of deflation is just as bad as a high rate of inflation, because high rate of deflation seriously impacts investment.

[Bitcoin Oz]

If Jane's investment paid her dividends of 10% each month, calculated in BTC at the nominal value she has 400 BTC to sweeten the 725 BTC loss, leaving her to eat about half that. By comparison to Josephine, who just sat on her BTC, Jane has realized a 32.5% loss through depreciation provided her mining stuff did in fact pay 10% a month. If it paid a more actually-in-the-market 3% she's looking at a 50% loss. In fact, in order to fully compensate her depreciation, Jane's assets would have needed to pay no less than 181.25 BTC each month, which is a nominal 18.125%.

I agree with what you are saying in general, but your example has some problems. Specifically, if you account for depreciation monthly, your loss due to exchange rate changes is lower, because after each depreciation, there is less to depreciate the next time. But more importantly, if you reinvest the depreciated amount into new equipment, there is no loss because the value of the equipment remain constant (in BTC terms).

BTW, this is a good lesson in economics: a high rate of deflation is just as bad as a high rate of inflation, because high rate of deflation seriously impacts investment.

So theres a case for an inflatacoin (such as freicoin)  wrt investments at least.

[Wiper]

Hate to piss you off, but wouldn't the value of those assets go up a lot if we go back to June prices?

Why'd that piss me off lol. If BTC went back to 5 then Jane wouldn't have to contend with the 5/12 part, just with the 1.5/2.1 mn part. And if difficulty also went down, it'd be even. And if she also recanned a can of worms in a smaller can than the original she'd prolly make pancakes out of water droplets and spontaneously materialize unicorns and nice thoughts.

There's a reason nobody [without the backing of the free money printing press] buys Spanish or Italian bonds IRL. That reason is "currency risk".

Currency risk in our case is really Inflation risk or something like foreign exchange risk depending on how you look at it.

Also no one buys Spanish or Italian bonds now because of the high returns and huge risk.

[MPOE-PR]

For those of you that aren't on IRC:

BTC-Mining mircea, for example, gigamining share holders will be able to pay 0.25 BTC to switch their 1 BTC IPO share (5 mhash each) to 4 shares (25 mhash each) for 20x the hashing.
BTC-Mining when ASICs are out
BTC-Mining and there is already over 0.30 BTC paid back per share
mircea_popescu BTC-Mining still not a bond, sounds more like a sort of stock option ?!

BTC-Mining Not to count difficulty was relatively stable before bitcoin prices raised
mircea_popescu yes but as the guy rightly points out, in order for something to be a bond it needs to meet some criteria.
mircea_popescu these are 1. fixed principal and 2. maturity date.
mircea_popescu absent either it ain't a bond.

BTC-Mining Well, he had GPUs, but he bought a lot of FPGA which is tradable for the new ASICs from BFL
mircea_popescu i think he still has the gpus

BTC-Mining So for that part, upgrade was already paid by investors
BTC-Mining yeah, but he'll have to lose them with raising difficulty
mircea_popescu maybe so.
mircea_popescu none of this is really germane to the issue tho.
mircea_popescu if i lend you a car i haven't sold you it, i've lent you it
mircea_popescu if i tack on the option for you to turn it into an airplane
mircea_popescu it's still not a sale.

BTC-Mining Well yes and no. It's technically a sale of power, but the equipment is managed by Gigavps who has a margin vs what he gets with what people paid.
mircea_popescu ...
mircea_popescu but he makes no representation he will return a certain btc value at a certain future date.

BTC-Mining He could do it that way: I've sold you a contract for X mhash. Equipment remains mine, and I'll trade it for 20x more mhash, but won't give you anything
BTC-Mining Or he could go: Well you did pay for the equipment I'm trading in. I'll raise to Y mhash on those contracts and keep a similar margin
mircea_popescu yes, it could be a bond in the very tenuous theory where hash power is a currency
mircea_popescu except i don't think it is.

BTC-Mining It is a bond, that's where you see the community is small and run by single individuals.
BTC-Mining I can hardly see a corporate entity acting like this
mircea_popescu i don't take your meaning ?

BTC-Mining They've sold a contract for X something, it will stay a contract for X something.
mircea_popescu yes, but unless its for X something money it's not a bond.

BTC-Mining They wouldn't upgrade to Y something on the pretense X something is now upgradable
BTC-Mining Because they sold X, not the underlying equipment that is upgraded
BTC-Mining All employees within a corporation are employed to get more money for the corporation.
mircea_popescu a different way to express this would be "the issuers realised how badly they're screwing so called but not really investors
mircea_popescu and by the theory you can fleece a sheep many times but skin him only once, are now sweetening the deal"

BTC-Mining Goodwilling decisions are not acceptable, unless otherwise it would tarnish them and cause a loss of revenue
BTC-Mining Well in any case, mining so far has been constantly profitable. And so far I see no real loss for any long term miners. GPUs can be resold, although if you bought just before FPGA/ASICs, it's pretty much a loss.
mircea_popescu hey, i've made profits too, but the point remains : they aren't really bonds.

BTC-Mining Indeed
mircea_popescu they're in fact very sophisticated financial instruments
mircea_popescu that people in general aren't capable to correctly value.

BTC-Mining Well yes, indeed
mircea_popescu im not arguing that "they're bad" or anything.
mircea_popescu im just saying, its NOT something random q citizen comprehends.

BTC-Mining The contract is that of a bond, but the issuers (at least the most reputable ones in the bitcoin community) decided not to leave them as fixed bonds.
BTC-Mining They are more like floating bonds moving up and down according to the operation's state I suppose.
mircea_popescu they are somewhat like floating bonds except really they're more like floating warrants
mircea_popescu which as far as i know was never yet used irl
mircea_popescu and if someone tried the house/sec/etc would have a weeklong fit

noagendamarket Its like issuing a bond on a used car ...
BTC-Mining warrant? It's not optional, it's quite simply a direct weekly coupon for X mhash of mining... seems like a floating coupons bond...
noagendamarket its never going to increase in value
mircea_popescu well in theory it's principal backing is that you have the option to directly realise your underlying mh/s
mircea_popescu (by selling the bond and buying the machinery)
mircea_popescu you don't have capital per se
mircea_popescu your only semblance of capital is this "option"
mircea_popescu which is really virtual anyway

BTC-Mining I'm just not following you on that last bit...
mircea_popescu noagendamarket actually if the asic companies run off with everyone's money it might increase
mircea_popescu btc-mining lemme elaborate :
mircea_popescu if i hold a treasury my ownership extends over a certain sum of us$.
mircea_popescu if i own a mining "bond" my ownership extends over no sum of us$ or btc

BTC-Mining Ah, true, true
mircea_popescu my only ownership is over the theoretical output of a theoretical machine
mircea_popescu so it's a "sort of" warrant for that machine
mircea_popescu which is never physically settled, yes, but by the cash value
mircea_popescu but yea, it's really very contorted to define in fiat-terms what a mining "bond" is.
mircea_popescu "floating coupon virtual warrant" FCVW for instance...

BTC-Mining A bond is a loan, it's tied to pay coupons AND pay back the full principal
mircea_popescu yes.
BTC-Mining Ah, who started with giving those the name "bond" to start with?

mircea_popescu im not even sure. maybe bitbond ?
mircea_popescu i think giga got it from amazingr.
noagendamarket A mining bond means you pay the operator for priviledge of loaning them money
mircea_popescu lol

[MPOE-PR]

the high returns and huge risk

Exactly.

As to the theory of inflation being beneficial (or at least there being a market for inflationary currency): all this is an accounting artifact, the underlying realities aren't changing by introducing inflation. It's just that one hundred years (next year will be a century since 1913!) of inflationary practice has made everyone used to that particular paradigm.

Especially people who are technicians (as in, not doctors in finance, they merely learned some simplified and practical finance-related trade based on some assumptions) suffer the most, in the sense that this entirely new paradigm is pretty much rendering all their training useless.

The fact of the matter is that an inflationary bitcoin has little advantage over traditional fiat (in the sense that if you are going to have inflation it is better for it to be fixed by someone competent than to have it baked in and unchangeable). This observation is how we ended up with central banks and Bernanke in the first place, if you think all that is bad (or corrupt, or whatever) you have not really considered the sort of havoc a FIXED and PERPETUAL inflation rate would wreak on humanity. In the end all the forms of finance bitcoin is disrupting were improvements in their heyday.

[cuz0882]

To grasp the obvious we must first understand the wonders of depreciation. Suppose you have a single use Polaroid camera. If this camera is used to make a picture all its value is consumed, and it is subsequently worth zero (maybe a little more for its usefulness as a doorstop). Thus, if you take your Polaroid to the nude beach, take a picture of a naked lady and sell that picture for $10 you have not made $10. You have made $10 minus whatever the Polaroid cost you. If the Polaroid cost one dollar then you made nine. If the Polaroid cost twenty you lost ten. It's what it is.

Now suppose Jane, Joyce, and Josephine each have one thousand bitcoins on April 13, 2012 (it's a Friday).

Jane goes out and buys miner gear, either directly (FPGA or w/e) or indirectly (buys shares in mining company, buys miner bonds, w/e). Joyce invests her money in any non-mining related bitcoin denominated assets. Josephine just sits on her bitcoins.

Today is August the 13th (not a Friday) and the comparison between the girls is as follows:

Jane owns about 66% of the mining stuff she used to own (she nominally owns exactly the same amount, but the increase of diff from 1.5mn to 2.1 mn has taken a bite out of it). To add insult to injury, the new market value of this 66% fraction of what she used to own is a little under half. To wit, if one item cost 100 dollars in April it could be bought with ~20 bitcoins. Today, due to BTC being ~12, the same item can be bought with a little over 8. Thus, what used to be worth 1000 bitcoins back when Jane bought it (on a Friday) is now worth 1000 x 0.66 x 5 / 12 = 275. That's right, an eye popping QUARTER of what it used to be.

This is depreciation.

If Jane's investment paid her dividends of 10% each month, calculated in BTC at the nominal value she has 400 BTC to sweeten the 725 BTC loss, leaving her to eat about half that. By comparison to Josephine, who just sat on her BTC, Jane has realized a 32.5% loss through depreciation provided her mining stuff did in fact pay 10% a month. If it paid a more actually-in-the-market 3% she's looking at a 50% loss. In fact, in order to fully compensate her depreciation, Jane's assets would have needed to pay no less than 181.25 BTC each month, which is a nominal 18.125%.

So, when comparing her yields with Joyce's, Jane is well advised to subtract 18.125% monthly. Obviously if Joyce invested on GLBSE the odds are pretty good she realized a negative too, but that's obviously a story for a different time.

Fun?

If the price of bitcoin goes up. It does not make items you purchased with bitcoins lose value. I don't know why some people can't understand the math going on with mining and bonds. If you purchase a bond for 1 bitcoin ($11.70). In a month you will earned ruffly 10% in dividends. If the price of btc goes up or down, it should not effect the dollar value of the bond. You can then sell your bond for $11.70 in btc. Now you have ($12.87). If the bitcoin price had doubled during the time you held the bond from ($11.70) to ($23.40). You would have earned probably a little more in dividends but you would still end up with ruffly ($12.87). If you had just kept your money in bitcoin you would have ($23.40), on the other hand if bitcoin price had dropped in half. Your bond investment would still be ($12.87) vs the ($5.85) if you had kept your money in bitcoin.

If you give money to bond issuer, they will immediately turn around and purchase equipment with a dollar value. My bond and my mining equipment have kept the same dollar value since I started. Miners and bond holders are not taking the same risks as people investing in bitcoins. Comparing them the way you are makes no sense. Even investments with gpu equipment also hold there value pretty well, and they definitely pay for themselves quickly. I don't buy gpu's any more but last june I purchased 20x 5970's, they all paid for themselves and still hold a good value.

[MPOE-PR]

Maybe some people who invest in BTC are completely disinterested in USD based accounting?

[cuz0882]

Maybe some people who invest in BTC are completely disinterested in USD based accounting?

Then investing in mining equipment is not a good idea. There is no way to make mining equipment hold a btc value. It's not logical for me to charge a higher dollar amount per bond just because the value of btc goes up. Per hash it still costs me the same dollar amount to purchase the equipment. Until a company starts selling mining equipment for a fixed amount of btc regardless of its value, that's just the way it is.

[MPOE-PR]

I'm not sure why you think your problems as a miner matter two shits from an investor's perspective, seriously.

[odolvlobo]

Saying that investing in bonds, etc. is the "worst" investment is an exaggeration. If you compare mining bonds to USD-based investments, they look very good. Even though their values in BTC have dropped by half, their values in USD have still gone up. Add in the dividends and you are doing well.

The issue is that the values of mining bonds have not increased as much as the value of BTC, so just holding BTC has resulted in better returns than investing in bonds. In BTC terms, it looks like you are losing money, but in USD terms, you just aren't making as much. Both are equivalent.

As far as BTC vs. USD, it is much more convenient for investors to stick to BTC because the investments are made in BTC and the dividends are paid in BTC. It is more complicated for a miner because the equipment and operating expenses are paid in USD. However, the reason that equipment and everything else should be valued in BTC when dealing with investors is that if the company is liquidated, the value of the company (including the equipment) would distributed in BTC, so it should be listed in BTC. In the end, whether it is BTC or USD, the results are equivalent even though the numbers are different.

[cuz0882]

I'm not sure why you think your problems as a miner matter two shits from an investor's perspective, seriously.

The price of the equipment is used to determine the price of the bonds. It's pretty straight forward. Even if bitcoin was the only currency in the world, you would have the same situation. If the price doubled, people with bitcoins could purchase twice as much. People who spent their bicoins on bonds, cars or whatever would only receive half the number of bitcoins if they sold those items. Compared to before the price jump.

[smoothie]

I agree with OP. Depreciation goes along with mining difficulty increase and hardware aging and better hardware being sold/released on the market.

[MPOE-PR]

Saying that investing in bonds, etc. is the "worst" investment is an exaggeration. If you compare mining bonds to USD-based investments, they look very good. Even though their values in BTC have dropped by half, their values in USD have still gone up. Add in the dividends and you are doing well.

Again: USD-based accounting is completely irrelevant. We are discussing BTC investments here. You're basically arguing that since the Zimbabwe dollar went from 1k per USD to 1bn per USD this means that some used car you bought made you a lot of money during the time it was slowly rusting in your front alley.

[ciuciu]

Saying that investing in bonds, etc. is the "worst" investment is an exaggeration. If you compare mining bonds to USD-based investments, they look very good. Even though their values in BTC have dropped by half, their values in USD have still gone up. Add in the dividends and you are doing well.

Again: USD-based accounting is completely irrelevant. We are discussing BTC investments here. You're basically arguing that since the Zimbabwe dollar went from 1k per USD to 1bn per USD this means that some used car you bought made you a lot of money during the time it was slowly rusting in your front alley.

Coming from a porn website operator, your ideas are very welcome!

[BitcoinINV]

The key to any business is upkeep, letting your equipment or strategy stay the same the whole time will cause you to loose a market share in any sector. This is the same for bitcoin mining believe it or not. For a mining company to be viable investment, they must A) be shares not bonds. Thats just because of what the OP talks about. B) The company must use some of the profits to Grow, Replace, and develop new practices. The reason for this is simple yet I see it overlooked here every day. There is more equipment being put online everyday, thus the difficulty goes up. Now you 10Ghash is not getting the same return as before. But if new equipment is added it will either maintain the same output or grow profits every time. Most of these mining company's say they will just issue new shares or bonds. Problem with that is your profit never changes it just adds more people to the dividends list and its usually called stock dilution.