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.