The problem with PMBs, ie "Perpetual Mining Bonds"

Saturday, 06 October, Year 4 d.Tr. | Author: Mircea Popescu

A miner by definition controls some computing power. Due to the nature of mining this computing power is commoditized ; unless you're a miner any two rigs outputing the same hash/second are equivalenti. Due to the close relation to BTC computing power is actually pretty much fungible, and often discussed in terms of shares (as from a mining pool) rather than straight hash/second.

The business of mining has some significant capital costsii. The significant pressure rapid obsolescence places on mining equipment lifecycle further increases miner's need for capital. Due to the significant risks involved many are unwilling to acquire fiat-denominated debt to finance their mining operations (even if favourable moves in the BTC-USD ratio are likely on the long term).

The perfect solution to all these problems was the invention of the PMB, or Perpetual Mining Bond. While it sounds benign enough, pretty much the only factual part of that name is the word "mining", and this in maybe half the cases.

A PMB is an unconditional promise to pay to the holder a periodic dividend (weekly is common, daily is not unheard of) equal to the theoretical mining results a theoretical machine with given specifications would have achieved in the interval. Due to the way Bitcoin works, it is trivial to calculate this mathematically : The block reward (currently 50 BTC, likely to halve around November the 30th) times the hash output divided by the difficulty times two to the power of thirty two.iii

This is a perfect solution indeed, but only from the point of view of the miner, as he is now completely insulated from all risk : he takes in the investment, expends it as promised, delivers the dividends as they accrue and that's all.

From the point of view of the investor however, these are absolutely horrible investments. Suppose Jane "invests" 100 BTC in PMBs on July 1st, 2012. Bob the Miner takes the 100 BTC, turns it into ~500 USD and acquires mining gear, then proceeds to pay dividends. By October 1st, when one BTC is worth about 12.5 USD, the equipment is worth maybe 40 BTC, in the best of circumstances, and so Jane faces a 60% loss. If there is any obsolescence whatsoever (and there is plenty in bitcoin mining equipment) then those 40BTC might be a gross overstatement, as the rig worth 500 USD on July 1st may be worth 2-300 USD on October 1st. In short, Jane has lost at least 60% of her BTC capital, and quite possibly 80%.

To compensate for this she has been receiving weekly dividends, to the tune of about 1% of her investment, or just a little under that. Since three months contain roughly fourteen weeks, she maybe has 12% of her original capital paid back in dividends. Any way you turn it, this works out to a 50% loss over three months, and we've not even discussed the situations where fraudulent or downright farcical operations just take everyone's money and run. After all, it's not rocket science to figure out that you could issue these bonds even without any equipment, or any intention to ever aquire any equipment. "Proof" can be easily furnished by showing people some pictures, bought or just found on the Internet as well as by renting hashing power for momentary "proof runs".

Carrying debt that you don't have to ever repay (hey, they're "perpetual", right ?), but only service to the tune of rapidly diminishing returns (due to difficulty raising) is in fact the best sort of Ponzi : insane expectations on the part of the victims (who really don't expect a majority of their capital ever being returned) allow it to extend into the eternal future. And obviously if network difficulty were to take a sudden plunge, sending the valuation for all this useless paper into the stratosphere everyone would just default, as was the case with the many "independent" funds, "banks" and whatnot borrowing at 1-2-3% to "invest" in a Ponzi scheme at 7%.

People have been saying this for a long time, obviously. Suckers always know better, obviously, and so PMBs were a good chunk of the Global Scam Exchange at the time of its demise (which was just announced minutes ago).

Other than that, all is well in BTC finance.

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  1. There used to be significant differences back in the "old" GPU days last year due to differing cooling requirements, general reliability and overall finnicky-ness, but since FPGAs have pretty much taken over people have been mostly getting rid of the marginal GPU rigs and the equivalence holds more and more true. []
  2. We could for instance estimate the total dollar value of the Bitcoin mining network somewhere in the 10 - 20 million USD range given that the total output is 20.483 Thash/s as of this writing, the GPU cost per Mh/s is in the 0.3 - 1 USD range and the FPGA cost per Mh/s is in the 0.5 - 1 USD range. []
  3. By this formula a 5 Mh/s bond (a particularly popular denomination) would pay out weekly :

      mircea_popescu .py (50 * 5 * 1000000 * 3600 * 24 * 7) / (3054628 * 2**32.0)
      markac 0.0115248054167

    so about 0.011 BTC. []

Category: Bitcoin
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5 Responses

  1. [...] lists some miner bonds on GLBSE. GLBSE implodes. Gigamining attempts to reconstruct things somehow, which in any possible [...]

  2. [...] the path : hard work and stfu. [↩]And since we’re on the topic, neither does buying PMBs nor overpriced mining equipment which you then use in a pool. [↩] Rubrica: Bitcoin [...]

  3. [...] perspective and people whose opinions I respect most highly on Bitcoin finance have posted on the problems of securitizing mining investments. I just kind of get tired of seeing n00bs hear about Bitcoin and thinking mining is some magical [...]

  4. [...] with an acquaintance from collegiate times who insists in offering to me the fiat equivalent of perpetual mining bonds, except without the guarantee of a fairly controlled [...]

  5. [...] it’s a measly webwallet? Colour me disappointed. I was kinda holding out for Scrypt-based perpetual mining bonds… Now, we’ve gotten our first glimpse of those details.  An intuitive interface and simple [...]

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