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Author Topic: Buying bonds in mining farms  (Read 687 times)
IveBeenBit
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June 03, 2012, 01:36:42 AM
 #1

I've always been sort of interested in smaller, illiquid markets. Thus, the BGLSE I find really interesting, especially considering the extra currency exchange & counterparty risk that investors are taking on.

I can't figure out these mining bonds. I'm going to use Gigamining as an example since that seems to be the most popular mining farm that is selling securities.

Gigamining has paid out on average 0.02165 BTC per share for its past 3 weekly dividend payments.

Right now there are bids for shares of Gigamining as high as 1.4401 ea.

Each bond entitles you to profits resulting from 5 MH/s.

We'll ignore the first few small orders because I'll assume they are just people looking to buy a BTC-denominated bond for novelty value.

The first significant bid is 224 bonds @ 1.383 BTC, so an order worth about 310 BTC. I'm going to assume anyone offering 310 BTC on something has put some thought into what he's buying and that that's the best place for him to balance his desire for profit and risk.

So let's assume this order goes through. At a price of 1.383 BTC and 0.02165 BTC/week in dividends, he's bringing in 1.54% per week, which I can understand; that's a nice return. Even at that interest rate, though it's going to take him 65 weeks to make back his investment. In the mean time, the block reward is going to be halved and in a few months more miners & better hardware will come around enabling people to do the same number of hashes for cheaper. So the value of 5 MH/s today is not going to be the same as 5MH/s in December. Give it a few years and maybe I can get 850 MH/s on my smartphone...well, not really, but you get my point.

I suppose it's possible that Gigamining could keep bringing in just as many BTC in block rewards as they do now if people drop out of mining once the reward gets halved, but that seems an extra risky assumption to make since no one really knows how the bitcoin market will respond to the halving of the reward.

Can anyone give some thoughts & insights that an investor would have that I newb would not?
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June 03, 2012, 02:00:56 AM
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Do you mind if I hop on your thread? Wondering about the same thing. Plus:

Does GLBSE allow dividend reinvestment and if so, also partial shares?


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June 03, 2012, 02:35:43 AM
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Do you mind if I hop on your thread? Wondering about the same thing. Plus:

Does GLBSE allow dividend reinvestment and if so, also partial shares?


No partial shares, but you could reinvest in other smaller-denominated shares.

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June 03, 2012, 05:19:54 AM
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Yes, the block reward will decrease and the difficulty will increase, the question is how much. As with most other investments, nobody knows exactly what the reward will be and the investors are those who believe this will be profitable taking everything into account. Different people will have different evaluations of the situation.

As an extremely simplified model you can consider what happens if the difficulty remains the same forever and the block reward diminishes. A quick calculation shows that in this case 1MH/s will generate 1.04145 BTC over its lifetime.

Now lets assume that the BTC exchange rate remains fixed, while difficulty increases by a factor of 2 every 2 years due to hardware advances. When the block reward halves it will also necessarily have a negative effect on the difficulty - my guess is a factor of 2^(1/3) decrease for every halving. Taking all this into account, the lifetime reward per MH/s is 0.421304 BTC. Maybe the difficulty will climb faster due to some low-hanging fruit such as ASIC, maybe not. Let's just say that half a year ago some people expected the difficulty to soar due to the BFL products, but so far that didn't exactly happen.

Changes in the BTC exchange rate also complicate the dynamics. Difficulty follows price with some lag, so a price rally increases USD-denominated profits, but with a different profile than direct BTC investments.

The bottom line is that if you think mining bonds are currently overvalued, you shouldn't invest in them, and maybe even try to short them.

Does GLBSE allow dividend reinvestment
No, but you can just reinvest manually (or with the API).

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June 03, 2012, 12:51:53 PM
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With my GLBSE listed mining company - Red Star Mining (RSM) - you buy a share of the hardware when you a purchase a share.  I mainly set it up to attract micro investment from people who couldn't afford, didn't know how to or just didn't want to run there own FPGA farm.  So they could still profit from bitcoin mining without the big budget, know how or time of running their own farm.

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June 14, 2012, 03:56:28 AM
 #6

I was wondering about this myself.
If mining becomes unprofitable, then the value of your bond would surely drop - so preservation of principal would seem to be a concern.

At least mining yourself you can sell your GPU's if they stop being useful for mining.
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