Pricing ASICs for Cryptocurrency Mining
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Cryptocurrencies that are based on Proof-of-Work rely on special purpose hardware (ASICs) to perform mining operations to 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 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. Finally we construct a portfolio of coins and bonds that provides returns imitating an ASIC, and evaluate its behavior.
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