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Author Topic: Mining Insurance Contract ?  (Read 1006 times)
Grant
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June 09, 2011, 12:02:29 PM
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I been reading a lot mixed opinions lately about both the sustainability of the BTC price, as-well as about forecasts of growth in difficulty is a great concern for you miners or potential miners. And as much as we do have bitoption.org its neither completely finished nor is it easy to use unless you have some experience with derivatives.

There seems to be a demand for a more "mainstream" way to guarantee that you have a profitable mining future.

To put it in simple terms, here's what i'm planning to offer (using flat example amounts for sake of simplicity):

- Let's say your current mining rig(s) push 10BTC a day
- Your operating expense requires a price of at least 10$ / BTC for your mining to remain profitable.

Now you wanna insure your mining operation to remain profitable for next 30 days. For that you pay me 10% of your current mining output (or 1BTC) a day, for as many days as you want to insure. Let's say now that you want an insurance for next 30 days to be profitable for you, that would then cost you 30BTC (or 30x1BTC). Now if during any of those days the price falls to below 10BTC i'd pay you the difference, in example:

- On your 2nd day after you signed the insurance, mtgox crashes to 5$/BTC, and you had prepaid for a 30 day insurance. For each of those 29 days i'd then pay you the BTC equivalent of $5 a day. If the price falls further down i'd endup paying you more, or if it recovers to $10 or above the insurance payout would then halt (until/if it falls again below $10).

Is this something that could be interesting for you ? Would you not agree that if you could get a guaranteed future price for your mining you'd dare to expand your mining operation ?

Please leave your feedback either here or in PM.

and PS: the numbers i use above are just examples.

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m4rkiz
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June 09, 2011, 12:16:58 PM
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that won't fly unless you convince us that you have brilliant way to invest that money/coins and have some serious fail-safe

whole point of insurance is to pay less that would cost me to cover loses myself, right?

so what you plan to do if you would have cover losses of many miners from your own poket?

in real world insurances are distributed evenly thorough many different people/areas (often mutually exclusive ie. flood\fire) so if 99% of people (that don't have their house, cars and anything else damaged) won't need to get any money from company - so company have profit as they can keep their money, spending a little of it to cover looses of those that were less lucky

but if you don't have a way to seriously profit in case that bitcoin looses its value you will end with 100% of your customers wanting their money back (plus extra), so you most likely disappear and we will never hear from you again...

convince me that it would be cheaper for me to insure that to cover it myself
and convince me that you will be able (and willing) to pay for it if it goes wrong for you
Grant
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June 09, 2011, 01:47:55 PM
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That's excellent questions, m4rkiz! Let me try to address them.

that won't fly unless you convince us that you have brilliant way to invest that money/coins and have some serious fail-safe

The same way RL financial institutions cover CDS/EDS (or Credit Default & Equity Default -Swaps), normally when they're not over-leveraged in the long run they more or less break even on the CDS/EDS by shoring calls and/or longing puts on the underlying. Additionally they trade with the extra cash-flow coming in to make a profit.

Since our underlying is the BTC price and there is growing interest for more complex derivatives attached to it, i'd do just that, bet against the bulls (whom there seems to be plenty of). Obviously right now that market isn't large enough to sufficiently hedge my risk on this but i don't plan to start off with this yet neither.

As an alternative or addition, to outsourse the unwanted risk i could package several mining insurance contracts, into high yield bonds, and list them at Glbse.com 


whole point of insurance is to pay less that would cost me to cover loses myself, right?

Indeed, relative to expected risk of course. (except in the unlikely event for: if theoretical risk that bitcoin will goto 0$ tomorrow = 100%, then a contract would be pointless to sign)

so what you plan to do if you would have cover losses of many miners from your own poket?

in real world insurances are distributed evenly thorough many different people/areas (often mutually exclusive ie. flood\fire) so if 99% of people (that don't have their house, cars and anything else damaged) won't need to get any money from company - so company have profit as they can keep their money, spending a little of it to cover looses of those that were less lucky

That's the risk insurers take to stay in business and retain or lose reputation. While diversification helps to reduce losses, it does lead insurers to underestimate their own ignorance (ie: financial sector insurers around the world were under the impression that if a mortgage portfolio is diverse enough there would be no great risk, that ignorance led to a systematic risk and the largest recession since great depression) . Instead of diversification i believe a much better result can be achieved by specializing on the one kind of insurance one does offer, and be more strict on not writing too many contracts. But again, i wanna emphasize i don't believe the tools available today are sufficient to achieve that on a large enough scale, at least yet.

but if you don't have a way to seriously profit in case that bitcoin looses its value you will end with 100% of your customers wanting their money back (plus extra), so you most likely disappear and we will never hear from you again...

convince me that it would be cheaper for me to insure that to cover it myself
and convince me that you will be able (and willing) to pay for it if it goes wrong for you

The goal here is to create a self-sustainable insurance company with a solid-reputation, that can offer you this service at a fraction of the price you'd have to pay to take the loss yourself, and saving you countless hours of it would take you calculating prediction/option markets to construct one yourself. For that to be realistic at this time, bitoption.org has to grow and other prediction/derivative exchanges have to be there.

Hope it clearifies a bit about the insurance model i'm planning to offer.
Thanks for your interest and input.

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