04 Dec '12, 8pm

Difficulty based derivatives and insurance: What would the basis of difficulty derivatives and insurance be? Lik...

When miners invest in mining hardware, they get a device that generates hashes at a rate of X, essentially forever. What they will get from it is X times the integral from now to infinity of a*B*P/D, where P is the value of a bitcoin, D is the difficulty, B is the block reward and a is a proportionality constant. The future values of P and D are unknown, and so what they will get out of mining is unknown. This can be abstracted by saying they have a speculative mining position of X, and they want to hedge their position by investing in instruments that negatively correlate with the future income of mining. The more aligned the speculative instrument is with actual mining, the more efficient the hedging will be. The most efficient instrument, then, is a mining bond - an asset which pays the expected output of mining with a given hashrate, deterministically and perpetually. ...

Full article: http://bitcoin.stackexchange.com/questions/5596/difficult...

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