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Author Topic: Bitfinex TH1 Contract - Hot Potato Theory  (Read 4672 times)
nrd525
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September 23, 2014, 06:48:13 PM
 #1

I'm still confused as to how the fact that you can short the Bitfinex TH1 mining contract adds value to it.  So this is the explanation I've developed.

In an extreme case, say you have an asset worth $1 today that will produce zero income and be worth $0 tomorrow.  You clearly paid too much for this asset. However, you can lend it out to shorters. If there is a limited supply of the asset, a shorter will pay you very close to $1 (or a 100% swap rate) to borrow it and return it tomorrow.

So the contract holder pays a premium for an asset - has the money sit around earning a zero return, and then gets almost all of their money back.  The shorter makes a very tiny profit (say 10% APR).  Both of them have expected zero return rates that will vary in actuality based on mining difficulty.  However after fees (notably the 15% of the swap rate) the expected return rate is negative.

According to this logic - so long as TH1 owners are willing to earn an average zero return rate (speculating that mining difficulty won't increase at the same rate it did previously) - the only thing Bitfinex can do to bring TH1 prices down to their mining return is to issue more shares.  This is in fact what they did early on and caused a 40% price drop.

It is possible that over time, TH1 owners will realize that their return rate is low and this will reduce demand and the price.

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nrd525
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September 23, 2014, 09:59:24 PM
 #2

BFX just added 100 shares of TH1. Probably because the bid wall is strong - 120 demanded shares at 1.15.

Who are these crazy people buying it at 1.15?   Short all the mining contracts!

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Odalv
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September 23, 2014, 10:11:59 PM
 #3

BFX just added 100 shares of TH1. Probably because the bid wall is strong - 120 demanded shares at 1.15.

Who are these crazy people buying it at 1.15?   Short all the mining contracts!

I do not know, but maybe they can rebuy them 3 months later @ $0

Edit:
I would lend for 0.5%/day =>  1.005^90 = 1.57, but I'm not sure if I understand contract.

Edit2:
1.57 * $0 is still zero :-)

Edit3:
maybe borrower pays interest daily in $
nrd525
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September 23, 2014, 11:11:16 PM
 #4

The current TH1 swap rate is around 0.21%/day and is falling.  I guess it's going down to 0.03-0.05%.

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September 23, 2014, 11:43:06 PM
 #5

The current TH1 swap rate is around 0.21%/day and is falling.  I guess it's going down to 0.03-0.05%.

Can you explain ?
a) how borrower can make profit
b) how lender can make profit
Xiaoxiao
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September 24, 2014, 01:05:04 AM
 #6

I'm still confused on how mining contract works....
nrd525
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September 24, 2014, 02:08:42 AM
 #7

The current TH1 swap rate is around 0.21%/day and is falling.  I guess it's going down to 0.03-0.05%.

Can you explain ?
a) how borrower can make profit
b) how lender can make profit

Borrower (aka shorter) profits if the mining contract falls to its real value (and does so before they pay too much in swap rates - which is hard to predict).

Lender makes profit if mining difficulty doesn't increase (as compared to the expected 10% increases).

Don't day trade.
btceuropen
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September 24, 2014, 02:36:40 AM
 #8

According to your logic, correct to say that value comes from gambling.  Cheesy
nrd525
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September 24, 2014, 02:51:28 AM
 #9

I've finally figured out who loses. When you buy a contract to short it you are selling it back to the market. So the person who buys this contract is paying too much!  It's kind of like "pass the hot potato" and the person who gets left with the hot potato loses.  In this case the person who is left with a $1 contract at the point where it becomes worth $0 loses.

There is a transfer of $1 from the person stuck with the worthless contract to the contract issuer who manages to sell the contract at a $1 premium.  In our case Bitfinex is making this profit at the expense of the contract holders.


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information999
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September 24, 2014, 03:13:25 AM
 #10

You get paid dividends in BTC if you are long the TH1 contract, or if you are short you must pay the mining dividends.

So when it goes to zero at expiration, you can have more BTC from dividends, than you spent on the mining contract.
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September 25, 2014, 02:45:30 PM
 #11

Having a look at the mining contract size increase notice, seems that additional contract DOES NOT directly hang on the order book nor even transact. In fact the whole orderbook right after the effective time doesn't really change and doesnt sum up to >100THS

refer to BFXdata for details

effective time: 
after 322327 is #322503 @ 2014/09/25 11:13
after 321969 is #322181 @ 2014/09/23 11:23

So where the F are they?

nrd525
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September 25, 2014, 06:45:54 PM
 #12

I'm guessing they use the new contracts to fill bid orders.  The ask side is pretty weak.

I think someone wrote that they market-sold the first additional 100 shares.

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ElectricMucus
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September 25, 2014, 08:27:56 PM
 #13

Nice find, OP.

I'd say that's the most interesting thread in this forum this year so far.
It's a bold proposition that leveraged trading can give a truly worthless asset face value just by itself and I think you are right.

First they ignore you, then they laugh at you, then they keep laughing, then they start choking on their laughter, and then they go and catch their breath. Then they start laughing even more.
nrd525
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September 25, 2014, 10:44:33 PM
 #14

It looks like the last 100 TH1 contracts might not have been sold?

They aren't listed on the mining_stats page for the last set of dividends.  Could easily be a typo as well.  But I thought I saw "400" in the Asset Size last time I checked.
https://www.bitfinex.com/pages/mining_stats

Don't day trade.
wonkytonky
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September 26, 2014, 02:26:02 PM
 #15

i'm trying to get my head around this..  

keep it simple for me :
so i buy 1 TH1.  when it expires..  i only have what the dividents returns right?.


so lets this example :
September 16, 2014 - 03:08:44 AM CEST   320898   3,428.01   100   25.062   0.73109187
1TH would give me 0.7 /100 per day  right?   0.007btc.

so if difficulty asuming would be stable .. it will take  1/0.007btc   = 142 days to break even.. if you bought 1th for 1btc

so how long are those th1 contracts running..

am i making mistakes in my calculations?



bitfinex discount code : FvwrZ545k2
nrd525
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September 26, 2014, 05:59:31 PM
 #16

The contract currently yields around 0.0141 BTC/day.  The return varies due to luck.  For instance, one day the pool mined four blocks and another day it mined one block.

Don't day trade.
001sonkit
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September 27, 2014, 12:10:20 PM
 #17

This hot potato is more like french fries.... what the heck is wrong that people valuate at 1.25BTC, thats even not reasonable if 0% difficulty increases

(Until it's too late that you've got cancer in your wallet with those "french fries")

superbit
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September 28, 2014, 02:28:07 AM
 #18

This hot potato is more like french fries.... what the heck is wrong that people valuate at 1.25BTC, thats even not reasonable if 0% difficulty increases

(Until it's too late that you've got cancer in your wallet with those "french fries")

There are some people that believe difficulty may go down if BFL labs is offline now.  Not saying it's true just some peoples logic.

https://bitfinex.com/?refcode=UInJLQ5KpA <-- leveraged trading of BTCUSD, LTCUSD and LTCBTC (long and short) - 10% discount on fees for the first 30 days with the refcode
My feedback thread: Forum thread
nrd525
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September 29, 2014, 07:14:16 PM
 #19

I started a new thread in the Securities section to speculate on the TH1 value:
https://bitcointalk.org/index.php?topic=802718.msg9020038#msg9020038

Don't day trade.
Bonez0r
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October 01, 2014, 02:45:13 PM
 #20

i'm trying to get my head around this..  

keep it simple for me :
so i buy 1 TH1.  when it expires..  i only have what the dividents returns right?.


so lets this example :
September 16, 2014 - 03:08:44 AM CEST   320898   3,428.01   100   25.062   0.73109187
1TH would give me 0.7 /100 per day  right?   0.007btc.

so if difficulty asuming would be stable .. it will take  1/0.007btc   = 142 days to break even.. if you bought 1th for 1btc

so how long are those th1 contracts running..

am i making mistakes in my calculations?



The miscalculation is in the second line of your example. The dividend (0.007BTC in the example) isn't paid once per day necessarily, but once per block found by the pool. On average, the pool finds something like two blocks per day, so you should double the number to 0.014BTC per day, or break even in 70 days (all very rough estimates). It will probably be more than 70 days though because of increasing difficulty. In addition to that you can also lend out the TH1 you own to make a little bit extra from interest (you also still get dividend for the lent out TH1).

What i don't understand is why the dividend per block seems to change only gradually. I expected a sudden drop at the last difficulty increase, but that didn't happen.  Huh
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