Cryptsy’s Mining Contract One is Horrifically Overvalued

It’s pretty rare that I feel the need to step up and talk about something like this, but it’s just way too obvious, and people who don’t do their research are losing money. I’ll break it down for you, because there are two reasons why Cryptsy‘s new Mining Contract One (MN1 ticker) is currently way, way overpriced.

1. Mining Contract One is almost identical to Cex.io 1GH/s

The difference between the two is simple: Cex.io charges a maintenance fee. In their calculations, it comes out to currently 20% of mining profits.

Cryptsy’s MN1 is much more discrete about what is going on backstage: they only are announcing per-share payouts. I assume that since they are not announcing any fees being taken on their payouts, that they are not taking any. This would be the best-case scenario for Mining Contract One. If they are taking fees, and they are similar to Cex.io’s, this whole comparison is even sillier. I’d love for them to clarify, and I tweet’ed to Cryptsy about it. Retweet or tweet in separately if you want info–I dislike opaque activities like that.

So anyway, back to the comparison. Aside from mining fees, they both provide the same thing: the dividends of 1GH/s worth of mining power. One would assume, then, that Mining Contract One would cost more, but not much more, than the Cex.io version.

Wrong, apparently. Cex.io is (as of this writing) around .0105 GHS/BTC. On the other side, MN1’s IPO was at .0185 MN1/BTC. They sold out quickly. Currently, MN1 is sitting at an incredibly disturbing .025 BTC per share. That’s completely insane. MN1 is currently valued almost 150% higher than the equivalent item on Cex.io. 150%! Even if you assume that MN1 is charging no fees (a dubious assumption at best), the 20% difference in payouts =/= 150% difference in valuation. This is just people going crazy, and nothing else.

2. Math on Mining Contract One Instead of Comparison

Comparison is great for showing when something is mispriced, but it’s not the only way. Obviously MN1 is not really worth 150% more than a GHS/BTC on Cex.io. But what is it worth?

Handy-dandy mining calculator time!

At current difficulty and hash rate, 1 GH/s earns about .000082 BTC / 24hrs. Pretend for a moment that this ran at that rate for 180 days, with no changes in the network. How much would we earn?

.000082 * 180 = .01476 BTC.

So after 6 months, the MN1 shares, at current prices, assuming optimal network conditions (read: impossible), we have earned back about 60% of the price of our contract. Let’s keep looking, though. Pretend that after those 6 months, network difficulty has increased at half the rate it has increased recently. So, in other words, we’re no longer assuming optimal, only very favorable. This would mean the difficulty is increasing by about 8% every two weeks, instead of the 15-20% it has been doing. So, 6 months of 8% per two weeks.

That would mean the difficulty is up 250% since when we started. In other words, instead of earning .000082 BTC / 24hrs, our 1GH/s is only earning us ~.000033 BTC / 24hrs. It only gets worse from here, as well. If we again pretend that nothing changes, we get 6 more months like this, and we earn ~.005 BTC more. We’ve now earned almost .02 BTC from MN1.

In other words, we’ve still not recouped our investment. And remember, this math I did? It’s all made up. Reality is far, far, far worse. Compounding difficulty increases happening every other week, not magically at 6 months. Our profit is, in reality, declining over time. All the time.

A share of MN1 bought at .025 is a sure loser. It is mathematically infeasible for it to ever create more value than it has cost.

So, to end: do the math before you invest money, people. Seriously.

Comments

  1. Jon says

    Don’t be hating because you missed a chance at profit! MN1 has doubled and also generated the buyers BTC in the mean time. I think it’s funny when people like you don’t understand speculative investments.

    • says

      It has doubled because the market is behaving irrationally. It is empirically overvalued because the same item at Cex.io is 0.0093 BTC while it costs 0.0225 on Cryptsy. It’s just nonsense.

      FWIW, I did actually profit from it. I saw how quickly it was selling during the IPO, bought at 0.0185 and sold at ~0.0205. I’m perfectly happy to profit from other people behaving irrationally, but that doesn’t make it any less irrational on their parts. MN1 is empirically overvalued–no speculation about it.

  2. says

    I agree that it is acting pretty irrational. Glad to see you still made some money. Thanks for writing this, I hadn’t even thought about it.

    • says

      Definitely (although I was happy to see people arbitraged MN1 into line with MN2), thanks (I’m glad too), you’re very welcome.

  3. nick says

    I feel like such a fool for buying MN1. A buddy of mine and I have a joint account where we have been saving up a roughly 200$ in mining profits over the last few months and traded about 3/4 of that into MN1. Since then the value of a single MN1 has more than halved. Its not a lot of money lost, but it feels so much more significant considering how much effort was put into gathering that coin with two crappy GPUs.

    But such is the game of altcoin.

    • says

      Sorry to hear about that misfortune. MN1 was a dangerous game, for certain. You’ve got the right attitude though–everyone takes losses just like everyone puts their pants on one leg at a time.

  4. says

    I also lost out on MN1 contract. I rushed and bought in too early. To be honest I think mining contracts in general are still finding their feet and correct value in the market. Great article.

Leave a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>