[Idea Discussion] Hashing Power Market Making

[friedcat]

Background

The Bitcoin mining market is essentially a hashing power market. However, different mining companies have different advantages and drawbacks, and the pros&cons are multi-dimensional, so different kinds of shares are not very convertible. Fortunately, the mining bonds become popular, which are much more fungible than normal mining company shares. Until now, they are merely alternatives to mining company shares to most of the investors/speculators. However, we could make use of their fungibility to mitigate the lack of liquidity on GLBSE.

Have you ever bought mining bonds on 0.6/share, then when you want to cash out, you find that there are only a handful of shares priced more than 0.6/share though the close price seems very high?

And have you want to invest in mining bonds, but missed the IPO opportunities, then you find the market has no reasonable price for a serious amount of investment?

Idea

Imagine there's a market maker, who simultaneously asks and the bids shares each of which represents 1MH/s of (fungible) hashing power. For example, he buys 1MH/s of hashing power with 0.28BTC, and sells 1MH/s of hashing power with 0.32BTC, and guarantees a certain number of volume on each side. The asking and bidding price are constantly changing to reflect the supply and demand.

Then the customer could sell any mining bonds to him. Each share of bonds are converted to MH/s according to its actual hashing power. The customer could also buy hashing power from him, but the customer could not ask for a specific portfolio, which means it is the market maker's right to decide how the total hashing power should be composed by different mining bonds, as long as the total sum of hashing power is correct.

Discussions

1. Is this idea interesting to you at all?

2. How could the market maker hedge his own risk on sudden price drops of the whole mining bonds market?

3. Could someone give some suggestion on how to make it fully automatic?

Note that I'm just coming up with premature ideas, I just found it interesting. So to MU shareholders, I won't be distracted by this from running MU. But of course it might be a part of MU's business in the future if the risk could be properly hedged.

[brendio]

How would the market maker deal with difference in counterparty risk between different bond offers? 1 MH/s of gigamining is worth more than 1 MH/s of "Joe Bloggs Noob Mining".

[friedcat]

How would the market maker deal with difference in counterparty risk between different bond offers? 1 MH/s of gigamining is worth more than 1 MH/s of "Joe Bloggs Noob Mining".

It could be dealt using weighting. Or the market maker could just refuse to accept some of the mining bonds he does not trust.

[Meni Rosenfeld]

I don't think there is any planned activity to be done here. When there is enough trade volume in the bonds, market makers will emerge naturally to make profits. They can also do arbitrage by buying one bond and shorting another, thus equalizing the prices (taking into account, of course, any differences between the bonds).

What I would like to see eventually, as I alluded in the PureMining OP, is a dedicated hashrate exchange which revolves around margin trading and accurately distributing rewards. It will be operated by a registered company (for the sake of accountability and signaling commitment for indefinite operation) which does not issue bonds itself, but rather merely allow investors to trade among themselves (the total hashrate in the exchange is 0; in the beginning the only way to buy is if someone else sells on margin).

Such an exchange should be able to operate on a much larger scale, improving liquidity.

[brendio]

This thread, and Meni's other recent thread, have given me an idea that may help you and any would be market makers out there. I'm formulating my thoughts about it now while I should really be sleeping. Stay tuned!

[MPOE-PR]

You're pretty much describing some sort of mining fund.