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Author Topic: Mining securities and depreciation  (Read 528 times)
odolvlobo
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July 29, 2012, 09:45:27 PM
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I have looked at many of the mining securities that are offered on GLBSE and none of them account for depreciation of the hardware. I see that as a problem. As the rig gets older, its value (and therefore the value of the mining company) goes down, and this information is hidden from the shareholders. For example, if a mining company decides to liquidate, shareholders will lose because the hardware has lost most of its value. Depreciation will offset that loss.

In case you don't know what depreciation means, it means that the company subtracts a small portion of the value of the hardware from the revenue each week. The benefit is that shareholders have a better idea of how much the company is worth, and they will get the book value of their shares if a company decides to liquidate. It also allows the company to upgrade its rig without having to sell more shares. That is how a business normally operates.

Here's why it is a good idea:

The value of the hardware goes down as it gets older. After a few years, a company probably won't be able to sell its hardware for very much, so its value will be close to $0. If the company liquidates, its shareholders will get nothing for their shares because the hardware (and therefore the company) has no value. That possibility makes  shareholders nervous. However, if the company depreciates the value of the hardware, then as the hardware's value goes down the value of the depreciation goes up by the same amount. As a result, the total value of the company's assets (hardware + cash from depreciation) always stays the same.

Also, it is perfectly legitimate to use the cash from depreciation to upgrade a company's rig. This is because the value of the hardware will go up and the total value of its assets (hardware + cash from depreciation) will stay the same. Of course the company has to depreciate the upgrades, too. The benefit is that the company doesn't have to sell more shares to upgrade its rig.

Here is how it works:

When a company buys some hardware, it figures how much it would cost each week to pay for that hardware over 3 years. Then it deducts that amount from the revenue each weekly dividend for 3 years. It must track the cash from depreciation and the value of the hardware because they are part of the value of the company. For example,  a company buys FPGAs for 1000 BTC. If it depreciates the value over 3 years (156 weeks), then it deducts 6.41 BTC from the weekly revenue to account for the loss in the value of the FPGAs. In a few years, those FPGAs are going to be worthless, but the company will still have value because it has cash instead.

In summary, the benefits are:
  • It improves the stability and legitimacy of the company and its securities (and of GLBSE and bitcoin, in general).
  • It increases the value of the company even though dividends are slightly lower. Please note that people are willing to accept slightly lower dividends for more accurate information.
  • It provides a source of money for upgrading equipment.

The drawback is more paperwork: the company has to keep track of and report this stuff.

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July 29, 2012, 10:31:48 PM
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Short version:

This would give the security a buy back value at the end which would allow it to be bought/sold/have value right up until it closes.

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July 30, 2012, 12:05:29 AM
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You should look at MOORE. Its issuer has guaranteed that it won't depreciate; the issuer will always buy it back for 0.5 BTC. Plus, the hashrate grows over time.

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July 30, 2012, 01:52:33 AM
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When a company buys some hardware, it figures how much it would cost each week to pay for that hardware over 3 years. Then it deducts that amount from the revenue each weekly dividend for 3 years. It must track the cash from depreciation and the value of the hardware because they are part of the value of the company. For example,  a company buys FPGAs for 1000 BTC. If it depreciates the value over 3 years (156 weeks), then it deducts 6.41 BTC from the weekly revenue to account for the loss in the value of the FPGAs. In a few years, those FPGAs are going to be worthless, but the company will still have value because it has cash instead.

In summary, the benefits are:
  • It improves the stability and legitimacy of the company and its securities (and of GLBSE and bitcoin, in general).
  • It increases the value of the company even though dividends are slightly lower. Please note that people are willing to accept slightly lower dividends for more accurate information.
  • It provides a source of money for upgrading equipment.

The drawback is more paperwork: the company has to keep track of and report this stuff.


Very interesting idea
I think your Depreciation time might be a little high I would think that 2 years Max would be a better figure.
We are talking about something running 24/7 after 3 years thats almost 25K hours.

I'm going to try to add a depreciation to my Assets so that a better idea of Asset value can be determined to stock holders.
But thank you for pointing this out (I put aside 40% of revenue for growth/replacement  Grin )
odolvlobo
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July 31, 2012, 08:09:24 AM
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You should look at MOORE. Its issuer has guaranteed that it won't depreciate; the issuer will always buy it back for 0.5 BTC. Plus, the hashrate grows over time.

Nimda, I think you have missed the point. If the person running MOORE wanted to shut down his operation, he would have to come up with cash to pay the shareholders (4000BTC or so, less the value of the hardware) out of his own pocket. Depreciating the hardware would solve that problem. Anyway, I don't see anything in the contract that says the issuer has to buy the shares for 0.5BTC.

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