Cryptocurrencies that are based on Proof-of-Work often rely on special
purpose hardware (ASICs) to perform mining operations that secure the system.
We argue that ASICs have been mispriced by miners and sellers that only
consider their expected returns, and that in fact mining hardware should be
treated as a bundle of \emph{financial options}, that when exercised, convert
electricity to virtual coins.
We provide a method of pricing ASICs based on this insight, and compare the
prices we derive to actual market prices. Contrary to the widespread belief
that ASICs are worth less if the cryptocurrency is highly volatile, we show the
opposite effect: volatility significantly increases value. Thus, if a coin's
volatility decreases, some miners may leave, affecting security. To prevent
this, we suggest a new reward mechanism.
Finally we construct a portfolio of coins and bonds that provides returns
imitating an ASIC, and evaluate its behavior: historically, realized revenues
of such portfolios have significantly outperformed ASICs, showing that indeed
there is a mispricing of hardware, and offering an alternative investment route
for would-be miners.Comment: 13 pages, 10 figures, 3 table
