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Author Topic: What happens if an owner sandbagging his own listing?  (Read 1549 times)
dottom
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June 05, 2012, 04:27:54 AM
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The idea of an IPO and bond coupons sounds great when everyone is getting paid, but I don't see what prevents an owner to do something on purpose to harm the price of his own shares/bonds and then either buy it on the open market (say with another account) or just exercise the buyback provision.

For example: "had W malfunction with mining rig, production will be down for at least X weeks in order to perform Y repairs at Z cost".  Insert whatever scenario you want here for W X Y Z variables.

The price plummets for a couple weeks and then the owner can how execute buy back provisions or buy it outright on the open market.

There is reputation but other than that, what else?  Civil liability can be difficult to enforce, and may not be worth it for most investing less than 2k BTC or  so.
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Stephen Gornick
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June 05, 2012, 04:42:29 AM
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Civil liability can be difficult to enforce

Especially when you have no legal claim against any profits.  Can you tell me what legal entity you own shares of?

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June 05, 2012, 04:46:56 AM
 #3

This is most easily circumvented by the bond issuer doing a buyback at the weekly or monthly average, offsetting X. Other than that, there is little to prevent an issuer from doing this, aside from morals.

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June 05, 2012, 06:45:33 AM
 #4

This is most easily circumvented by the bond issuer doing a buyback at the weekly or monthly average, offsetting X. Other than that, there is little to prevent an issuer from doing this, aside from morals.

Nice idea...

dottom
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June 05, 2012, 07:13:00 AM
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Oh man. That doesn't even scratch the surface of unspoken accounting practices of public corporations.
But GE and IBM can't just run away with your money.  There are rules that limit what they can do with "unspoken accounting practices" and there are laws like Sarbanes-Oxley that can send execs to jail.  Insiders at a company can't sandbag the earnings reports, drop the stock a ton, and then buy it up only to see it bounce back. 

But these same protections aren't available in Bitcoin trading.  I'm simply exploring the what-if scenarios here.  Let's assume the owner of a GLBSE listing isn't going to just disappear into the night, because obviously that's always a risk.

Let's say instead they do something like stop paying dividends for 3 weeks in a row, watch the listing plummet, then issue a buyback at the 15-day average.   Heck, what if the owner redirects the hashing power to his own personal pool on purpose and 'pretends' there's a technical problem.  He makes money from the hashing, he makes money from the buyback, he makes money from buying on the open market. 

My question is that aren't we all overpaying for shares and bonds on GLBSE?  Paying 100% PPS makes no sense because the investors take all the risk, while owners lock in capital.   Your answer may be "whatever the market will bear" and my reply would be the market is dumb.  When the first sizable listing goes belly up, people will stat realizing earning 100% PPS does not compensate the investor for risk.
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June 05, 2012, 08:20:44 AM
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My question is that aren't we all overpaying for shares and bonds on GLBSE?  Paying 100% PPS makes no sense because the investors take all the risk, while owners lock in capital.   Your answer may be "whatever the market will bear" and my reply would be the market is dumb. 

Idle bitcoins seem to be burning a hole in people's wallets.

So there's an oversupply of bitcoins that people want to "put to work", and a shortage of "investment" opportunities.

Just too many bitcoins chasing too few opportunities. 

I had seen the string of IPOs and figured there would be lots of rotation into the "IPO"s, and the older issues would suffer.  Hasn't really happened.

What is wild to remember is that an issue that stays at the same value but the exchange rate goes up 5%, means that the issue essentially went up 5% (relative to the dollar) as well.

cryptoanarchist
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June 05, 2012, 03:59:18 PM
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The idea of an IPO and bond coupons sounds great when everyone is getting paid, but I don't see what prevents an owner to do something on purpose to harm the price of his own shares/bonds and then either buy it on the open market (say with another account) or just exercise the buyback provision.

For example: "had W malfunction with mining rig, production will be down for at least X weeks in order to perform Y repairs at Z cost".  Insert whatever scenario you want here for W X Y Z variables.

The price plummets for a couple weeks and then the owner can how execute buy back provisions or buy it outright on the open market.

There is reputation but other than that, what else?  Civil liability can be difficult to enforce, and may not be worth it for most investing less than 2k BTC or  so.

I love it! Now people are forced to invest in people they actually know and/or feel good about, without just leaving it to a monolithic government to eliminate risk.
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June 05, 2012, 04:06:17 PM
 #8

My question is that aren't we all overpaying for shares and bonds on GLBSE?  Paying 100% PPS makes no sense because the investors take all the risk, while owners lock in capital.   Your answer may be "whatever the market will bear" and my reply would be the market is dumb.  When the first sizable listing goes belly up, people will stat realizing earning 100% PPS does not compensate the investor for risk.

There is no price where a 100% PPS bond makes sense?
They tend to average ~0.3 BTC per MH/s.  So at 0.1 BTC per MH/s they still don't make sense?
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June 05, 2012, 08:23:21 PM
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There is no price where a 100% PPS bond makes sense?
They tend to average ~0.3 BTC per MH/s.  So at 0.1 BTC per MH/s they still don't make sense?
Of course, there is a price that makes sense! Smiley

I'm simply suggesting that the current prices being offered are too high relative to the risk.   The bonds lock the investor into paying current price for MH/s but enables the mining company to upgrade.  For example:

  • Mining company issues 10,000 BTC of bonds, equivalent to 33.3 GH/s of mining capacity (0.3 BTC per MH/s)
  • Using that 1000 BTC, mining company buys next generation FPGA hardware which has a 2-3 month shipping delay.
  • 2-3 months later, new hardware arrives and the BTC/share for this new FPGA technology is actually 0.12 BTC per MH/s
  • Mining company can either issue more bonds and repeat the cycle, or just keep the new technology for itself and buyback the bonds issued.

In the above scenario, the investors are carrying the risk while the mining company gets a mostly "free" technology refresh to better hardware, i.e. more hashing power for same dollar.  ("Free" in quotes because there is operational cost.)

What I'm suggesting is that the bonds being issued should allow the investor to benefit from the rewards.  "Whatever the market will bear" is the free market response and I partially agree. I think once people figure this out you will either see a lot more mining companies (requiring current ones to offer a better price), or more creative dividends such as giving current bond issuers a % cut of future mining capacity in the dividend.  For example, a mining company could reserve 10% of hashing power for their "B" bond and pay that as dividend to the "A" bond.  Then issue 90% of the hashing power of the new gear, which has 3x the hash/cost ratio as the old gear, so mining company still coming out way ahead.

EDIT: Changed 1,000 BTC to 10,000 BTC above.  Also see example below which is based on actual numbers for FPGA equipment.
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June 05, 2012, 09:14:25 PM
 #10

  • 2-3 months later, new hardware arrives and the BTC/share for this new FPGA technology is actually 0.12 BTC per MH/s

I don't see any scenario where the lifetime operating cost of a miner is "actually 0.12 BTC per MH/s" anytime in the near future.  Maybe they are over priced but any miner trying to purchase hardware by selling shares @ 0.12 BTC per MH/s is likely going bankrupt (and taking shareholders along with him).
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June 05, 2012, 10:01:57 PM
 #11

  • Mining company issues 1000 BTC of bonds, equivalent to 33.3 GH/s of mining capacity (0.3 BTC per MH/s)

Math fail, which is all to common around here, that would be ~10,000 BTC as 1gh/s would be 300 BTC (1000mh/s *.3).
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June 05, 2012, 10:16:03 PM
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I don't see any scenario where the lifetime operating cost of a miner is "actually 0.12 BTC per MH/s" anytime in the near future.
But that's just it.  These bonds are not guaranteed to pay out forever, so "lifetime operating cost" is really a misnomer.  The buyback provision puts all the risk on the investor for limited gains.  If MHash production was expected to be variable over time (like say commodities) then the risk is bi-directional.  But BTC/MHash costs will always go down in the future, and bitsream improvements will further lower the BTC/Mhash costs.  The only way BTC/Mhash would go up is if currency increases, but then that uplifts both investor and miners and is different risk than what I'm referring to here which is cost-for-production lock in.

Let me give you a 0.12 BTC example. 

1. Today, I go buy 20 GH/s of mining capability.  I pay 5060 BTC for it.  This costs me 5060 BTC.

2. I then create a mining company and issue "perpetual bonds" for 100% PPS at a 0.30 BTC per MH/s.  I just received income of 6000 BTC.  On the surface it sounds like a great deal for the investors as I am now responsible for "lifetime operating costs".

3. But I take the 6000 BTC and buy 50 GH/s of new mining capacity, which will take 3-months to deliver.  So I operate the existing 20 GH/s for 3-months and make nothing from that.

50 GH/s at 6000 BTC = 0.12 BTC per MH/s

4. 3-months later I start mining at 20 + 50 GH/s = 70 GH/s.  I either stop here and enjoy my new 50 GH/s profit, while servicing the 20 GH/s imperpetuity; or I buy back the previous shares and delist the bond.  At 50 GH/s it would take 160 days to buy back the original 5060 BTC in bonds.  Odds are that the price of the bond has actually declined as other mining companies will have also brought online more efficient gear and are offering bonds at a lower price.

This above is the "ethical" example.  The non-ethical one (purposefully sandbagging the price of your own listing to enable cheaper buyback) obviously is much more harmful to the investor.
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June 05, 2012, 10:37:27 PM
 #13

A lot of assumptions in there.

The first is you assume the investors "lost".  The reality is that likely earned 20% over 90 days. (~0.02 BTC per MH/mo). 
In essence the miner was borrowing money for his new rig at 75% APR plus electrical cost and labor.  Not exactly a one sided deal.

The second thing is you claim 0.30 per MH is a bad rate yet used it in your example.  Try doing your math with investor offering 0.12 per MH.

The third thing is you assume some 50 GH/s rig will be available in 90 days for $30K.  Had you made that assumption 90 days ago you would have been wrong.

Both sides are taking a risk.  The miner/issuer isn't operating risk free.  He is borrowing against his hardware at a pretty high vig and it only works out if
a) he priced the offering right
b) he is able to parlay that into cheaper/faster hardware in a timeline manner.
c) someone else doesn't come out with even cheaper/faster hardware and undervalue his investment.
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June 05, 2012, 11:00:56 PM
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In essence the miner was borrowing money for his new rig at 75% APR plus electrical cost and labor.  Not exactly a one sided deal.

So if I start a mining company and issue bonds at a cost of 0.25 BTC per MH/s instead of the going rate of 0.30 BTC, you'll be first in line?

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The first is you assume the investors "lost".
Investors took on too much risk for the gains in the best case scenario.  A less than best case scenario is that the bonds are devalued and it takes even longer to break-even.

What do you think will happen to all the current bond holders when the next generation FPGA rigs start coming online?  New bond issues and pricing starts dropping across the board.  Mining company has little risk, investors have all the risk.

Quote
The second thing is you claim 0.30 per MH is a bad rate yet used it in your example.  Try doing your math with investor offering 0.12 per MH.

If the cost is 0.12 BTC per MH/s, but investor has to pay 0.30 BTC, who's getting screwed?

Quote
The third thing is you assume some 50 GH/s rig will be available in 90 days for $30K.  Had you made that assumption 90 days ago you would have been wrong.
And had I made this assumption 90 days ago, and I was the mining company, I'd still have little risk.  It will take longer to bring my equipment online, but I have risk free loan - just the operating costs which are minimal.

Plus, I am not making this assumption 90-days ago.  I am making this assumption TODAY after having talked to FPGA mining companies and knowing their progress and lead times and getting quotes from them.  Further, if I made this assumption 90-days ago i would not have had to commit $30k, it would have been less than $30k (discount for early adopts and/or several companies willing to take a deposit as commitment until they entire production cycle - typically 2-4 weeks before shipping).

To be conservative, I can simply wait for the new equipment to be proven mining online and then make the purchase.  Butterfly Labs is not the only game in town with this price/performance ratio (just the first to announce and deal with the online critics).  And even if you went with a different FPGA vendor and your cost wasn't 0.12 BTC per MH/s but something else, say 0.18 BTC per MH/s, my entire scenario above doesn't change -- the investor is not compensated for future rewards.  The investor is taking on a lot of risk for locking in current production.

Quote
Both sides are taking a risk.  The miner/issuer isn't operating risk free.  He is borrowing against his hardware at a pretty high vig
I don't see it that way.  The miner/operator could just shut down if all goes to hell, what's the liability other than bad morals and reputation?

Assuming there was some form of civil liability and that a miner/operator wouldn't just disappear into the night, the vig is not very high.  You can use my exact same example above and issue just 90% of current hashing capacity and keep 10% to pay for operational costs.  Yes, there is the miner/operator's time, but other than that, I don't see the high risks you're talking about.

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June 06, 2012, 05:57:22 AM
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Assuming there was some form of civil liability and that a miner/operator wouldn't just disappear into the night, the vig is not very high.  You can use my exact same example above and issue just 90% of current hashing capacity and keep 10% to pay for operational costs.  Yes, there is the miner/operator's time, but other than that, I don't see the high risks you're talking about.

Isn't a bond a debt?   If the issuer is an individual (sole proprietor), that that person is responsible for repayment (regardless if the funds from the bond were raised for this commercial endeavor or not).  Now if the operator is in a different jurisdiction or operates anonymously where you cannot prove that's where the proceeds of your bond purchase went then good luck with getting any relief.

And then those perpetual bonds ... I suppose the only claim there is on the revenue lost from the interest payments missed?

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June 15, 2012, 07:06:43 AM
 #16

So what are your opinions now that bond prices are dropping as issuers add more capacity, issue more bonds, and have benefited from what I've been saying: bond holders are locked in and take on all the risk, while bond issuers benefit from ever improving hash performance.

Bond issuers are also at risk that increasing hash performance allows bond issuers to buy back the bonds at a discount as price drops.  Here are two comments from the current Gigamining bond price drop:

It is a great deal for Giga, that's for sure.  Buy hashes at $.60/MH (mini-rig and GPU) and sell bonds against it at $1.00-1.50/MH.  Makes for one hell of a profit margin.  Easy to finance expansion this way as well.

The GIGAMINING bond is a debt instrument with a buyback clause and not an equity interest. As gigavps's operation grows it increases the network hash rate which increases difficulty and decreases the bond coupon thus reducing his debt burden. Everything else being equal the larger gigavps's operation grows the less GIGAMINING bonds are worth per unit. Therefore, it is in gigavps's financial interest to make the GIGAMINING bonds yield the least amount of bitcoins, consequently be worth the least amount possible so that he can then retire the debt instrument through exercising the buyback clause and still perform according to the terms of the bond contract exactly and honestly.




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June 15, 2012, 07:38:53 AM
 #17

For example: "had W malfunction with mining rig, production will be down for at least X weeks in order to perform Y repairs at Z cost".  Insert whatever scenario you want here for W X Y Z variables.
This is one of the reasons why I think deterministic bonds are, where applicable, superior to companies. Issuers of a mining bond can't do that - their entire datacenter can blow up and they will still pay coupons normally (assuming they're honest of course).

The price plummets for a couple weeks and then the owner can how execute buy back provisions or buy it outright on the open market.
Re buyback, this is why I think buyback provisions should be sane and not the 105% 7-day average nonsense you see sometimes. Also, ideally the buyback price should be independent of the traded price.

This leaves the option of buying, but again this assumes there is anything an honest issuer of a deterministic bond can do to depreciate them (other than issuing more bonds, which is counterproductive if he wants to call them).

For companies there is little point in doing this, because they're not committed to anything - they can always close shop and distribute any remaining assets among shareholders.

What I'm suggesting is that the bonds being issued should allow the investor to benefit from the rewards.
As I mentioned elsewhere, bonds should be priced cost-side based on the cost of the latest hardware offerings.

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June 16, 2012, 02:33:06 AM
 #18

Re buyback, this is why I think buyback provisions should be sane and not the 105% 7-day average nonsense you see sometimes. Also, ideally the buyback price should be independent of the traded price.
+1.  Brilliant and totally agree. 

I also love the idea of MH increasing over time as hashing capacity only increases for same dollar investment and never decreases.  Combining both those ideas would make me love bonds.

There are too many ways a bond issuer can force the price, even of a deterministic bond, to drop by selling his own shares, issuing more bonds at a lower price such as with private deals. 

Another approach is any private deals should not be allowed to sell on the exchange.  Only those who buy on the exchange can sell.  This prevents various scenarios of sandbagging (by the bond issuer) and flipping (by large investors).
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June 16, 2012, 06:55:23 PM
 #19

I also love the idea of MH increasing over time as hashing capacity only increases for same dollar investment and never decreases.  Combining both those ideas would make me love bonds.
Bonds such as MOORE which have hardcoded hashrate increase are interesting but they're basically speculation on the part of the issuer, as he can't know what will be the actual decrease in the cost of hashrate (and any chosen value will be arbitrary and nonstandard). With fixed-hashrate bonds, the issuer knows how much it will cost him to provide a given hashrate, and the reduced risk allows him to offer the bonds at an affordable price. If he wishes to expand he can always issue more bonds, and if the investor wishes to maintain/increase the value of his investment he can always buy them.


I've also commented here on what a better buyback provision could look like.

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June 18, 2012, 07:01:53 AM
 #20

E caveat emptor.

If a miner has a 10 GH/s mining capacity, he's producing ⊅6.35 a day, according to PPS.
30% for electricity, ⊅1.90, 8%-10% for difficulty swings ⊅0.635.
If the existing hardware is paid for that means their is a total of ⊅3.815 available per day.

Let's say someone offers this guy 12 5970's for ⊅672@$5.8/⊅, a decent deal.
This would add 9 GH/s to the setup, giving him an additional ⊅5.76 a day.
Realistically, he has to spend an additional ⊅172.5 to get those 12 5970's running, making the real cost ⊅844.5.
30% of the new mining goes for electricity, ⊅1.73, 8%-10% for difficulty swings, ⊅.58, leaving ⊅3.45.

The total net available is ⊅7.26. If he doesn't take any profit for himself, how much stock can he issue to do this deal?

For Bitcoin to be a true global currency the value of BTC needs always to rise.
If BTC became the global currency & money supply = 100 Trillion then ⊅1.00 BTC = $4,761,904.76.
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