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Author Topic: Interest in securities betting on long-term mining difficulty speculation?  (Read 1180 times)
Deprived
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May 30, 2013, 08:00:49 AM
 #1

It seems there's still demand for fixed-rate mining bonds.  There's also plenty of people who believe those are generally sold at prices where they make no sense for investors (I fall in this latter group).

Is there interest in a set of investments that allow investing/betting on BOTH sides of this argument?  This would allow those on both sides of the discussion to put their money where their mouth is - and would also allow the market to define what it considered a fair price for fixed-rate mining bonds.

I'd do this by issuing either TWO or THREE securities - all from the same issuing account and with a shared wallet.  I'm not going into the detailed math or specific numbers here - just the principles.

Security 1 : Acts pretty much like a fixed-rate mining bond.  Weekly pays out based on current difficulty.  Has a buy-back clause giving right to repurchase at 100 times current weekly payment.
Security 2 : Is betting against security 1.  Retains the wallet contents after repurchase of security 1.  May also receive dividends prior to that IF the wallet contents exceed 100 weeks' payment by a large margin.  Has a monthly vote on whether to exercise the buy-back clause (so investors get to choose).

In the two security model I'd sell both securities.  So investors in security 2 would be trusting my judgment on what a profitable (for them) price-point was for security 1 - but would get to choose when to close out security 1 and either take a loss or collect profit.

In the three security model there'd be a third security.  More sophisticated investors would buy that on the market then transfer the share(s) back to me and receive in return shares of BOTH securities 1 and 2 (in a fixed ratio).  They could then sell whichever they chose on the market.  Those who wanted to bet/invest only on one side would be buying from these investors - so the prices of both sides would entirely be set by the market (I'd buy some myself at start to give some initial liquidity).

Note that I CAN'T list all three securities AND directly provide shares for sale in 1/2 - as that would destroy the value for investors in security 3 (which comes from them being able to bet on their own judgment being better than the market's).

In the two-security model my fee would be a percentage of PROFIT made by investors in security 2 - i.e. unless they received back more than they invested I'd get nothing.  So I'd be gambling myself that I could sell security 1 at a price unfavourable to investors in it - which is what most mining bonds/shares do anyway.  As the terms of security 1 would be absolutely fixed there'd be nothing I could change for investors to create a conflict of interest.

In the three-security model I'd take a small fee on ALL dividends (as I'd also be subject to the pricing judgment of investors in 3 and would also have a bunch more work to do transferring shares).

There's a whole bunch of checks and balances that would need to be in place (in terms of when shares could be issued and dividends paid to investors in 2 etc) but that's minor detail that I already know the answers to.  Is there any interest in the concept to make it worthwhile for me to flesh out the contracts and front up the listing fees?

Advantages for investors in 1 over 'traditional' fixed-rate mining bonds:

No CP risk to third parties such as manufacturers.
Immediate dividend payment - no waiting for hardware to arrive.
Investing doesn't itself increase network hash-power - investing here rather than in a normal FMB means lower difficulty and more profit.
No possibility of default because of events such as fire, theft of hardware, massive hardware failures etc.
Cash backing the bonds always present and verifiable.
If redemption happens it would be immediate and in cash - no waiting for buyers of hardware.
Likely to be cheaper than bonds backed by actual hardware.

Disadvantages for investors in 1 over 'traditional' fixed-rate mining bonds:

CP exposure to the exchange on which the funds sit idle.
Not actually contributing to securing the Bitcoin network.
Maximum receivable limited to wallet contents - meaning if bitcoin disastrously fails for some reason you'd get a lot less (albeit near worthless) BTC back.
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TradeFortress
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May 30, 2013, 08:03:16 AM
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I'd be interested in buying into security 2 assuming the IPO price for security 1 is similar to the recent PMBs. I think it'd be a better idea to only issue shares once, if you want to do it again then make a new class.

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May 30, 2013, 08:15:24 AM
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I'd be interested in buying into security 2 assuming the IPO price for security 1 is similar to the recent PMBs. I think it'd be a better idea to only issue shares once, if you want to do it again then make a new class.

Issuing once is inefficient in terms of listing fees and management time. 

It's also not good for investors (in 2 especially) - the rate of sale of 1 and 2 needs to be managed so as to ensure that at all times there's sufficient cash to back security 1 but not a ton of cash sitting idle (as that would mean I'd sold too many security 2 and so was diluting profit for no benefit).  So there wouldn't be a huge wall of both placed up at once anyway (security 1 couldn't - because of lack of backing capital until 2 sold and 2 wouldn't as it would be bad for investors if security 1 sold slowly).
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May 30, 2013, 08:20:54 AM
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What about issuing one security 2 for each security 1, with the price of security 2 being something like 2x security 1?

Buying in security 2 would be equivalent to issuing your own PMB at that difficulty.

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May 30, 2013, 08:34:17 AM
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What about issuing one security 2 for each security 1, with the price of security 2 being something like 2x security 1?

Buying in security 2 would be equivalent to issuing your own PMB at that difficulty.

That's pretty much what security 3 is - and how I'd be doing it anyway in the 2 security model.  In the 2 security model I'd sell some security 2s then sell however many security 1s they backed (which would change over time as difficulty rose).  I'd buy a bunch of 2s myself at start so as to be able to immediately sell some security 1s.

Security 3 represents placing cash on deposit allowing you to sell your own no-hardware PMB - you'd get some each of security 1 and 2 (numbers don't matter - but have to be a fixed ratio based on current difficulty and the denomination of sec 1) then would presumably want to hold your secuiryt 2s and sell your security 1s (though if prices moved too far in one direction the opposite COULD actually make sense).  Your secuirty 1s represent the PMBs you are entitled to sell and your security 2s your right to the remaining capital after the security 1s have been bought back (and to dividends in the meantime if the obligation to security 1 falls so as to make capital available which can't be used by selling more Sec 1s at a good price).

From a purist perspective I like the 3-security model as the market completely gets to set the prices of both meaningful securities (sec 3 is just a mechanism needed because exchanges don't allow me to sell a bundle of 2 different securities).

I'd be looking to sell sec 1s at just under whatever price hardware-backed PMBs were selling at (unless I believed it to be unprofitablt to sell at that price) were the 2-sec model used.
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May 30, 2013, 09:17:09 AM
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Ah. For security 3, instead of having to transfer the shares to you and getting security 1 & 2 some time later, you could set up a simple automated site that dispenses Sec1 and 2.

Use the transfer_asset API call in btct.co, or perform HTTP POSTs (login, transfers) for BitFunder.

You don't want to spend your time dealing with requests that could be automated, and it should take around 20 minutes to cook this up anyways. No account system needed, just enter your username and you get an address to deposit to. For security reasons, you don't even need to give the site access to the private key, it just needs to query the blockchain to see if the appropriate amount has being received or not.

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May 30, 2013, 09:29:20 AM
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Ah. For security 3, instead of having to transfer the shares to you and getting security 1 & 2 some time later, you could set up a simple automated site that dispenses Sec1 and 2.

Use the transfer_asset API call in btct.co, or perform HTTP POSTs (login, transfers) for BitFunder.

You don't want to spend your time dealing with requests that could be automated, and it should take around 20 minutes to cook this up anyways. No account system needed, just enter your username and you get an address to deposit to. For security reasons, you don't even need to give the site access to the private key, it just needs to query the blockchain to see if the appropriate amount has being received or not.

Well if it takes off I'd do it via a bot anyway.  Bot would just look for transfers in on my account then do the correct transfers out (been meaning to write this for a while as part of my long-delayed trading bot update from the old GLBSE one I wrote).

Problem with doing initial sales off-site are two-fold:

1.  Extra risk for investors (that my code is buggy, that my wallet gets hacked etc)
2.  Reduced transparency (can't immediately verify total balance in one place) and ability to be audited.
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May 30, 2013, 10:14:25 AM
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A bit busy at the moment, but you've got my attention. I'll ready more thoroughly later.
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May 31, 2013, 12:09:41 AM
 #9

I am interested too.
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June 02, 2013, 01:08:25 AM
 #10

I'd be interested in this.

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June 02, 2013, 06:15:52 AM
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June 02, 2013, 06:18:15 AM
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subscribing
Deprived
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June 07, 2013, 05:31:21 PM
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Thread is being locked as I'm now listing securities to provide the functionaility in my OP here.

I'm going with a slightly modified version of the 3-security model detailed in my OP.

Thanks to those who provided feedback on the suggestion (either here or by PM).

https://bitcointalk.org/index.php?topic=228327.msg2403532#msg2403532
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