RFC: virtual mining bond and toxic mining (betting against mining bonds)

[P4man]

Hey all,

Im strongly convinced mining bonds on GLBSE are currently way overpriced;  the typical price for these bonds seems to be 12-18 months of coupon payouts (ie, mining revenue at current difficulty), which I think is totally absurd considering difficulty has been rising by ~8% monthly for the past 6 months, block reward is about to half and ASICs will probably arrive in the next 6 months. I cant see how these bonds will make a profit over the next ~12 months. Even at the current trend, so before the asic and block reward halving, difficulty is increasing faster than coupon payouts.

Since there is no obvious way to short these bonds, Im considering the following:

1.
Set up a virtual mining bond that is not necessarily backed by any hashing power (I actually do have some, but thats besides the point). These bonds will pay coupons based on difficulty, like any other mining bond; I would sell these bonds at prices slightly below current mining bonds to make sure they are more attractive (or as I see it, less toxic) than the other bonds out there. Dividends will be paid out of my pocket and from the bitcoins raised from selling these bonds.

Yes, I know how that sounds, but this wouldnt be a ponzi scheme; I would keep enough BTC at hand to buy back my bonds at any point in case my bet goes wrong. If people dont trust me enough for that, I may even put that in escrow somewhere. Now I would obviously run the risk that prices for such bonds will not drop, or not fast enough to offset the coupon payments, so I could very well lose money on it, which is obviously okay, the whole point is that I am betting the other way. I would not issue more bonds than I can easily afford to buy back at a predefined price.

Bond holders would risk no more than they would with any other mining bond, they would only risk that difficulty will go up faster than they expected, causing their bonds  to lose value faster than dividends make up for. Any mining bond carries that same risk (which I estimate to be huge). The fact that this bond would not be backed by actual hashing power is no extra risk, when you buy a bond, you dont own the mining hardware anyway, its not a share.


2.
Now I assume Im not the only one who believes that over the next ~12 months, these mining bonds will depreciate faster than coupon payments will compensate for, so I would also like to set up another asset where people can buy shares in this venture  (tentatively called Toxic Mining) . The capital raised from these shares would be used as collateral to issue more virtual mining bonds without creating extra risk to bond holders (the extra BTC from the share sale allow us to keep more BTC on hand to pay coupons or buy back bonds even if our bet goes the wrong way).

This asset would not make a profit and therefore not earn any dividends until our bet pans out and we can start buying back bonds at prices that are substantially lower than the original price + coupon payments, Investors in these shares will take the same risk I would, and therefore risk losing part of their investment, or potentially even all of it if something extremely unlikely happens (like difficulty decreasing by a factor 3 or so over the next 12 months) but they stand to earn substantially if we win our bet and difficulty explodes in the next 6 to 12 months.

This would also be a convenient way for miners to hedge their risk. If you are about to order ASICs, but are unsure if a large difficulty increases will kill your ROI, you could buy shares in this company to hedge against it.

Anyway, Im not much of a gambler, so I am not going to go all in on this, but im willing to put 100 or so BTC aside as guarantee for a first batch of virtual mining bonds to kickstart this; I would love to hear what other people think, both potential bond holder and share holders. I guess I could also use a hand formulating the contracts.

[Ben Walsh (beamer)]

Subbed.

Personal note - research and comment on whether escrow is necessary.

[Sukrim]

Concerning "ponziing" - please really do put the income either to an address you control (sign a message with the private key of that address) and promise to never move that, which can be audited by the block chain or do escrow with someone who does this for you (no pirate deposits etc. - just put it on an (offline) address).

In the end you offer a bet that:
You can sell now e.g. 1000 "1MH/s bonds" for let's say 15 bitcents each.
For the next 6 months you pay in total 3 bitcents per share in dividends, because difficulty rises etc.
Share value on the other hand drops to 5 bitcents because other "1 MH/s bonds" go down as well.
You buy back the 1000 shares for 6 bitcents and earned 6 bitcents per share in total from these early investors.

Your risks:
Difficulty not rising
USD <--> BTC rate swings
Mining bonds not going down, despite bad return rates
Noone buying your bonds
Running out of money for the dividends

Maybe you could offer this as a limited time contract from the beginning?
"Get the earnings for 1 MH/s for the next 12 difficulty changes!" - then you can still bet on difficulty rises via selling at a certain price.
Edit: Then you would put the income from that sale + the 100 BTC (or more, if you manage to raise more via the second issue) in escrow and pay out dividends from these. If you predicted correctly, you have more than 100 BTC left in the end, if you screwed up, you might even have to add more BTC to that fund, depending on how many % more you sold (how much these 100 BTC cover).

[GeoRW]

nice idea. So you plan to include a buyback clause into virtual mining bond contract? Personally I don't believe that there'll be a lot of people buying that bond but who knows.
BTW, you could set a certain profit percentage and put an order on the "buy" side to buy back the issued bonds with profit. After each dividend payment (once a week) you will decrease the price. For bonds that will be bought back, you may either pay dividends to "toxic mining" shares holders or issue them again at a higher price or both.

[P4man]

nice idea. So you plan to include a buyback clause into virtual mining bond contract? Personally I don't believe that there'll be a lot of people buying that bond but who knows.

And why wouldnt they? I know it looks ironic to be selling something you assume will generate a loss, but the terms would be at least as favorable as all the other bonds. At least Im honest about it . Most miners selling mining bonds wouldnt be selling if they were confident they could earn more by mining.

[GeoRW]

nice idea. So you plan to include a buyback clause into virtual mining bond contract? Personally I don't believe that there'll be a lot of people buying that bond but who knows.

And why wouldnt they? I know it looks ironic to be selling something you assume will generate a loss, but the terms would be at least as favorable as all the other bonds.

If you state, that it's not backed by an actual mining equipment and also if you add the buyback clause. That may put them off.

[brendio]

I have an idea that overlaps with this, but with some improvements that substantially decrease the risk for both buyers and the issuer. I've been working on the contract on and off for a month or two now. I really need to get onto it. Will be looking here to gauge interest.

[P4man]

If you state, that it's not backed by an actual mining equipment and also if you add the buyback clause. That may put them off.

Well,  I actually own higher hashrate than many bond issuers on GLBSE, but I fail to see what difference that makes. If Im acting in bad faith, I can run off with the money with or without having a farm. Its not like any bond issuer is giving his farm in escrow. 

As for a buy back clause. Which bond doesnt have that? If you are issuing a perpetual bond, there has to be one, no one lives forever.

[GeoRW]

If you state, that it's not backed by an actual mining equipment and also if you add the buyback clause. That may put them off.

Well,  I actually own higher hashrate than many bond issuers on GLBSE, but I fail to see what difference that makes. If Im acting in bad faith, I can run off with the money with or without having a farm. Its not like any bond issuer is giving his farm in escrow. 

As for a buy back clause. Which bond doesnt have that? If you are issuing a perpetual bond, there has to be one, no one lives forever.

I mean the buyback clause that is independent of the market conditions. Like, you will buy the bonds at the certain price no matter how market will value your bonds. So you eliminate the risk when the difficulty lowers too much for you to pay dividends and market will price those mining bonds too high at the same time. But maybe it's not much of a difference for anyone to care about.

[P4man]

I mean the buyback clause that is independent of the market conditions. Like, you will buy the bonds at the certain price no matter how market will value your bonds.

I meant dependent on market conditions, so at a price of x% above marketprice, just like any other mining bond. I would have to do that to allow me to cut my losses in case dividends would keep going up instead of down. If anything, that should attract investors, because they know I will have to buy them back at a premium if it starts going up too much.

[ciuciu]

Very interested.

[Meni Rosenfeld]

I've been thinking for a while about offering a deterministic negative mining bond, but the designs I've come up with so far imply a specific value for the positive bonds, which isn't very elegant.

There's a very simple way to offer people to short a mining bond - write a put option for the bond, with the strike price decaying with the coupons. Maybe I'll do that...

Mpex also have the interesting offers of put and call options for a given number of hashes, rather than hashrate. That can be used to bet that the difficulty will increase, though not specifically that the market value of bonds will decrease.