Monthly Archives: June 2013

What is the Halving Effect in Bitcoin Mining Investments?

Disclaimer: Please do not take this as investment advice. I am not a lawyer or financial analyst. Do your own research, consider every source as potentially having vested interests, and do not invest more money, especially in cryptocurrencies, than you can afford to lose.

When analyzing a Bitcoin mining investment, it is vital to understand one key factor; the halving effect. In short, the halving effect is the effect that the periodic block reward halving has on the potential long-term revenue of a mining operation.

I have mentioned the halving effect in my analysis of the 100TH mine, but it seems that there is still some confusion about how or even if this effect will influence pricing. I’m here to tell you how this effect works and what, how mining operations are affected, and in a fair market, the effects should be.

Block Reward and Transaction Fees

The income from mining operations is defined by the current block reward plus any transaction fees levied on transactions since the previous block. The block reward is currently 25BTC and the transaction fees are currently around 45BTC per day, which means a transaction reward per block of around 0,32BTC for a total mining reward of 25,32BTC.

This mining reward will be distributed for every block that is solved by the miners and thus represent an upper boundary for how much a mining operation can earn.

However, this mining reward isn’t fixed. First, the transaction reward varies depending on how many transactions are performed, which in turn depends largely on Bitcoin adoption but also on miners’ willingness to process transactions.

Note: Miners are free to set policies on how much they want for each transaction and reject transactions for any reason they see fit.

The bigger impact, however, comes from a built-in halving of the block reward. The current block reward is 25BTC per block, but this hasn’t always been the case, nor will it be. In fact, initially, the block reward was 50BTC and it dropped to half in November 2012.

This halving is due to Bitcoin’s built-in anti-inflation policy. To control the production of new money and make Bitcoins more and more scarce, the block reward halves roughly every four years. The next time this happens is in late 2016, at which point the block reward will be 12.5BTC per block.

You may be excused for thinking this is far into the future. After all, Bitcoin mining moves at an incredible rate and we’ve only just seen the first doubling ever a few months ago. Who cares about what happens in 2016?

Well, the problem is, it affects the price you pay today, and it lowers your value very day.

A Bit about Mining Asset Valuation

As with any security traded anywhere in the world, investors expect to get a return on their investments (ROI). This isn’t even limited to securities, it applies to anything we do. We want to do something because it gives us more in return, whether that is more money, a loving spouse, better health, or a good conscience.

With mining investments, the return is quite simple. Assuming you don’t buy shares, contracts, or hardware for the sentimental value, your ability to receive a return is based on how many Bitcoins, Litecoins, or other cryptocurrencies your investment produces. You invest because you evaluate that the ability of the company allows for a return higher than your goal.

However, what happens if that ability is suddenly reduced by 50%? Obviously, your ability to get an ROI is also cut in half.

If a company produces 100 dollars in dividends per a year, you may wish to invest 1000 dollars, knowing that each year, you get a return on investment of 10%, a fair number if a reasonably safe investment.

However, if the company suddenly loses half the ability to produce dividends, your investment of 1000 will now yield only 5%. Of course, other investors looking to get 10% too will only pay $500 for your stake, so effectively you’ve lost $500 on your shares’ value unless you decide to hold the shares and be satisfied with the lower return.

If you knew in advance, however, when the yield would drop, you could calculate the drop in share price along the lines of (Y/X)2 per year, where Y is the price of your shares and X is the number of years until the drop happens. For example, if you know that the rate of return drops by 50% in 5 years and you paid 1000 for your shares, the formula would be (1000/5)/2, or $100 per year.

The problem, of course, is that now those $100 per year doesn’t really give you any ROI yield at all. You get $100 per year in return but your shares fall $100 in value too. Effectively, you are lending money to the company with no interest or chance of return. Obviously, you need a much higher return rate than 10% if these were the numbers.

In Bitcoin and cryptocurrency mining investments, you face this exact situation every four years. At that interval, the block reward halves and thus the bulk of the income for miners goes down.

See how the halving effect effectively reduces the value of your asset over time? this is the halving effect that affects all mining assets, whether it is mining contracts, ASICMiner shares, or hardware you purchase.

Your Questions, Please

I’m guessing you have questions. That’s fine, I’ll be proactive and answer some of them right now.

But Four Years is a Long Time!

Well, not really, but the time doesn’t matter. The effect happens every year. In fact, with Bitcoin investments, you can even calculate this per week or day if you want and you’ll see the expected drop in value every day.

You may, of course, gamble that the market doesn’t know about this effect (or doesn’t find this article) or that they don’t take it into account. However, if the market doesn’t take this into account now, it will definitely do so closer to the next halving when calculating ROI over even one year  means including the profit drop.

If the market ignores this effect until then, the drop will just be that much higher at once. Rather than drop $100 per year, it will drop $500 in one year, but the drop will still be the same.

But it Didn’t Happen Last Time!

When the first halving in Bitcoin history happened in November 2012, several mining assets were operating already. However, there wasn’t a massive drop in prices just when the halving reduced potential profits by 50%.

There may be several reasons for this. Most mining assets at the time was either issued and purchased within a year of the halving so people may have been aware of the effect and priced that into their calculations. Another reason may be that a lot of mining operations were growing at the time, so the halving effect would be cancelled out by increasing market share.

The simple fact, though, is that as long as market share remains steady, the halving effect will reduce a mining operation’s ability to generate revenue.

But the Transaction Fee Will Counter That!

Well, if it does, it actually only makes the situation worse.

You see, the transaction fee doesn’t follow the block halving, it follows Bitcoin adoption. The transaction fee is simply a mechanism to control supply and demand; miners are already free to charge whatever fee they like so they could easily charge 25BTC per block if they so desires. They won’t because there are simply nobody willing to pay that amount to transmit Bitcoins, so adoption isn’t nearly high enough to make demand for transaction processing expensive.

If it comes to that, however, the situation doesn’t improve. Transaction fee increases happen gradually unless all miners come together and decide at the same time to increase transaction fees, and it takes only one of them to disagree to cause cheaper transactions to just slow down and not stop completely.

Of course, if Bitcoin transactions became very expensive or slow, people would look to other coins for transactions, such as Litecoin. In effect, Bitcoin demand would again drop to a level where demand was lower and transaction fees could no longer be levied at the same level.

Back to the transaction fee increase; it will most likely happen over time and thus will either begin before the halving (making return on mining increase artificially just before the halving, or it will start after the halving, in which case revenue will drop due to halving before recovering later.

Either case will cause a substantial loss in mining revenue at the halving time in late 2016. No matter how you look at it; unless demand skyrockets to a point where the bloc reward is insignificant, transaction fees will not counter the effect of the block reward dropping.

But You’re Selling a Mining Asset!

Yes I am. BFMines is indeed a mining contract. And I am acutely aware of the halving effect, which is the main reason I sold out of ASICMiner a couple of months ago.

However, when I do my calculations for BFMines, I’m using a time frame shorter than the next halving. This is for two reasons

  1. In all likelihood, the future earnings of BFMines will have dropped to a level where calculating profitability isn’t really important. In fact, I may have shut down and bought out the contracts by then.
  2. Even if profitability remains at a reasonable level, speculating about the difficulty changes (which is the key factor in mining contract value) so far into the future is futile.

As such, I’m am very aware of the halving effect and that it does indeed affect my asset too. However, by focusing on achieving a good return on investment before the next halving, the effect will be less important.

All long-term assets, however, for example ASICMiner, and mining contracts or equipment bought closer to the date of the block reward halving will need to take this effect into account or be very surprised about their profitability a few years down the line.

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Announcing BFMines – A Competitively Priced Mining Bond with Bonus Dividends

Disclaimer: If you’ve ignore all my disclaimers before, read this one. Really. This article contains information about a mining asset that I have a strong interest in seeing people buy. In fact, it is my own asset and I have a direct benefit from you wanting this asset like it’s free sex and beer. DO NOT simply assume that everything in this article is written for your benefit. ASSUME that I want to influence your buying decision. RESEARCH on your own to find out whether what you read here is true or false.

I’ve been fascinated by the perpetual mining bonds (PMB) for quite some time and have written two previous articles about this phenomena, which is somewhat unique to Bitcoin mining. If you haven’t read those articles before, I strongly encourage you to do so.

What are mining bonds?

Are PMBs scams? Not really

After seeing the first results of Bitfury’s chip tests, however, I’m happy to announce that I’ve decided to offer my own ASIC mining hardware up as backing for a new PMB called BFMines.

What Is It?

BFMines is a simple way for investors to get a piece of the Bitcoin mining pie without having to buy and operate dedicated hardware. In short, you buy a share of my mining operation and receives in return the output of 1 mh/s of Bitcoin mining per share.

This type of contract is sometimes called a perpetual mining bond, although the term ‘bond’ is somewhat misleading. What you need to know, however, is that you buy a share and I’ll mine for you. You get a return or dividend based on the hash rate. What that output is in terms of Bitcoins depends on the mining difficulty and it’s a fixed formula which means that as long as you have the current mining difficulty, you know exactly how much dividends you’ll get.

You also get these dividend payments every day, and you get them ‘perpetually’ which is another one of those somewhat misleading terms. The term ‘perpetual’ in this sense means that the mine will continue to give you daily dividends until the operation closes down, but you will not get your original investment paid back once the operation closes.

Instead, upon closure, you get 110% of the price for which the shares have been traded over the previous 7 days. If difficulty rises, this will likely be less than what you paid, so keep that in mind as you are considering this investment.

Note: You really should read the articles listed earlier to understand the full picture.

In short and simple terms, however, think of this more as a payment for me mining on your behalf and taking away all the hassle and risk of running your own mining operation.

Why Another PMB?

It is no secret that there are many competing mining bonds on the market. In fact, just a few weeks ago, ThickAsThieves released his TAT.VirtualMine asset, which is a perpetual mining bond priced at 0.007 per mh/s, a very competitive price from a reputable operator.

So why would we need another one? Well, I believe there are several reasons.

For PMBs, price is really the most important factor. Lack of competition means that prices can be kept artificially high by lack of options for those that wish to take part in mining without having to manage, host, and bear the risk of physical mining hardware. Simply having more options will ensure that prices stay competitive.

PMBs also need to be a real alternative to owning mining hardware. They don’t need to be cheaper (and cannot, due to the operator still needing to buy the hardware to mine) but they do need to be reasonably competitive. BFMines is priced just below ASICMiner’s Blade Erupter ASIC blades which are the only currently available ASIC miners widely available (priced at 0.005BTC per mh/s), but not lower than the cheapest alternatives out there.

Further, I intend to run this asset as I would like to see other cryptostocks run, with proper information management and investor relations. Even the big dog in the pen, ASICMiner, doesn’t have a web page and other assets lack in their information management by quite a lot, to put it mildly.

The first step in this is the new web pages at http://bfmines.com/ where I’ll be posting updates on status, contracts, descriptions, and so on so that new or potential investors can learn about their investments.

I hope this operation can serve as an inspiration for other asset operators to take their investors more seriously. To me, it’s a matter of pride and a sign of appreciation for those investors that choose to trust me with their money.

What Are the Catches?

There are a few things of which you should be aware, though.

BFMines is not scheduled to start operating immediately. In fact, the mining operation is backed by hardware that doesn’t exist yet!

Does that scare you away? Don’t worry, I’ve put failsafes in place to protect your investment and compensate you for the delay.

First, any funds received during the IPO phase will go into an escrow account held by the exchange operator of BTCT (where the asset is listed). This means that the funds are locked until the time when the mining hardware arrives and has been proven to operate as expected.

If that does not happen, you get all your funds back.

Second, the mining hardware runs well above the amount of hashing power that the asset consumes. The assets sold are limited to 100GH/s but the miner is rated for 120GH/s. The surplus capacity will be used to cover operational expenses but anything abode that will be paid out as a bonus dividend for the first six months of the operation.

Note: The exact amount depends on the final operational parameters of the equipment, which hasn’t been set in stone yet.

Finally, and this doesn’t apply specifically to my asset but to all PMBs and mining hardware, difficulty may rise quickly rendering the investment less profitable than it appears initially. There’s nothing I or any individual can do to affect this, so you should make absolute sure you  make the best estimated you can about future difficulty before you invest in this asset, other PMBs, or buy hardware.

Where Can I Buy BFMines?

Right now, BFMines is still awaiting peer review before it is approved at BTCT. Until then, there really isn’t much you can do to buy shares.

However, once the asset is approved, I’ll announce it here on my blog and also on the official pages and in the Bitcointalk thread for BFMines. I’ll leave a few days for investors to place initial bids (listing will be at 0.004 BTC per share) and then I’ll release the shares for trade.

When that happens, you can buy shares on the official BTCT BFMines asset page.

.b

100TH Went from Great Investment to Disaster in One Act

Disclaimer: When reading articles that discussed financial aspects, always assume that the writer (e.g. me) has hidden motivations. Do not take this as the sole advice in any investing. I am neither qualified not skilled enough to give financial advice. Additionally, as you’ll see in this article, investing in any unregulated market carries massive additional risk compared to traditional market. Do your own research. Be careful. Read this disclaimer at least once per day.

On June 14, 2013, the 100TH project went from being one of the potentially best mining investments on the planet to being a complete disaster for any investor, all by a single event.

You may think that this was because someone hacked an account or leaked insider information or something like that. You’d be wrong. In this case, it was just good news and how the 100TH mine management handled that good news that completely killed off this asset as a worthwhile pursuit.

Note: I have asked tytus, the main person behind 100TH to offer comments on this article but he has not gotten back with a request to neither see the article not offer comments on it.

So what happened? We need to look a few weeks back to understand what went so wrong.

The Story So Far

100TH is a Bitcoin mine that issued shares in its profits closely resembling the behavior of perpetual mining bonds. I’ve previously written an analysis of 100TH showing that it can be a great investment but also carries some risks of which you should be aware.

Note: Before you react to the term perpetual mining bond as a negative thing, please feel free to read my article on whether PMBs are scams (and they aren’t).

100TH is traded on a single exchange only, the Picostocks exchange. As it happens, the same people run all the assets on Picostocks, lead by Polish entrepreneur tytus. Picostocks has a novel approach to trading, with complete transparency in all trades so everyone can study the strategies of successful traders and learn from them.

Everything is not great in the lad of Picostocks, however, as we initially saw in late May 2013, when tytus after some good news decided to start dumping shares onto the market. tytus officially commented on this saying that he felt that the price was too high and that some people were buying out of fear of being left behind and that liquidity had to improve to stabilize the price.

The shares that tytus dumped on the market went up blow the current ask price. In other words, tytus offered his shares cheaper than anyone else. At the time, the shares had been trading at 0.367 BTC per share, and tytus dumped his shares first at 0.2 (almost 50% lower than the market was willing to pay) and then at 0.23.

This act alone was very serious. In a free market, it is that market that must decide how to price a share. Elements include risk, potential reward, news, and other factors. In fact, the market is free to include any aspect in their valuation of a share. If it believes a share should be priced higher because it rained on Monday, then that is up to the market.

tytus effectively interfered with this freedom by limiting how much investors could sell their shares for and how much buyers could pay. In any regulated market, this is called market manipulation, and tytus effectively took away the reward for risk that early investors had expected.

After a few comments and interchanges on the Bitcointalk forum, tytus apparently saw the errors of his ways and promised that in the future, he would announce at least 48 hours in advance when he wanted to sell shares.

This, however, wasn’t what he did.

Good News/Bad News!

The one big question that has been lingering in 100TH investors’ minds are whether the Bitfury chips will perform as expected. Needless to say, when Bitfury and 100TH announced that the chips were ready and are underway to testing, this was very exciting news for those that had risked their money by investing in a very uncertain future.

The share price immediately shot up around 30% from trading around 0.3BTC to just short of 0.4BTC. However, the joy was short lived as tytus immediately put up yet another wall of 4,000 shares at 0.4BTC.

Note: A wall, although not technically the correct term, is used to describe when a huge buy or sell order is put on the market, effectively limiting the upwards or downwards movement of an asset price.

The wall was taken down fairly quickly, but the mistake was already made. Tytus had not only broken his promise to the market but had indicated that he could not be trusted to abide by his own words and that he would willfully continue to manipulate the market as he pleases.

This was a very grievous action by tytus and one that seriously undermines the 100TH mine as a viable investment for anyone. You may not see the gravity immediately, so let me elaborate a bit on why this is considered highly illegal and carries jail sentences in regulated asset markets.

Wanna Bet?

100TH is a non-existing mine that has great potential but also huge risk. That risk is taken by the investors that buy shares in the 100TH mine, and they have done so from the time of the IPO, at which point the risk was massive just like the upside to just now when the risk is much smaller but the potential reward is also rapidly diminishing.

The risk works a bit like a lottery. You buy a ticket in the lottery for a chance to win big. You don’t know how big the price will be because that depends on how many others take a risk as well. Your chance of winning depends on how the market values the price. In this lottery, the price of a ticket increases as time goes by.

I don’t want to drag the analogy too far, but imagine if a lottery came out and said that “Sure, you won, but we don’t think it’s fair to all those that didn’t bet earlier so we’re going to sell them some cheaper tickets after all”.

You would likely feel a bit cheater, right? After all, you took on the risk very early, knowing full well that your bet might turn into nothing, but hoping that it would rise a lot by other people noticing the lottery and placing their bets as well.

In the 100TH situation, this is exactly what happened. tytus put an upper limit to how much you could win, taking away much of your reward for risking your money with him and his mine.

Note: Remember that tytus isn’t just a holder of a lot of shares, he is a key insider in 100TH, and he is the operator of the only exchange where you can buy his shares.

In a regulated market, this is called market manipulation and is investigated as a criminal offence. When it is the operator of the stock exchange itself that commits this act, well, I’m certain the authorities would slap the operator so hard they wouldn’t wake up in this century, at least not as a free man.

But is it really all that bad? Let’s look at some potential consequences.

Really Bad or Just Annoying?

The first factor I want to mention is the complete reversal and outright breaking of the promises that tytus made to investors. Keep in mind that in an open and free market, investors rely on the ability to sell their investments to a market.

Tytus broke that confidence, and didn’t just do it once, or twice, he actually manipulated the market on three occasions; twice in May and once in June. This shows that he is willing to manipulate the market and cannot be trusted to abide by his own rules and promises.

The second factor is what this means to people buying now. They know that there is no way for the price to rise further. Isolated, this may not be such a problem; after all, most investors buy for the chance of dividends, not for a price increase.

However, there is still a lot of risk to be taken by investors buying now. The chips are not tested, the miners have not been built, the data center isn’t operational. A lot of things can go wrong that can greatly reduce the shares’ potential to generate income.

Most investors will want to be compensated for this risk, but tytus has effectively taken away your ability to reap such compensation. In other words, if you buy now, you have to accept that you either get nothing or you get something, the amount of which is still highly unknown. You get no reward for accepting the risk, because that reward is controlled by tytus and he has deemed that if you buy now, you have received enough.

Note: If you want to review possible scenarios for 100TH you can check out my previous article discussing 100TH compared to ASICMiner.

Third, this is a serious blow to Picostocks the platform. In every regulated market in the world, market manipulation is strictly prohibited. In the US, such activities has been forbidden for almost 100 years.

tytus also operates Picostocks and hasn’t just allowed this activity to happen, he has perpetrated it himself. From the perspective of the exchange, this is the equivalent of Robert Greifeld, the CEO of NASDAQ, saying that “I think people are paying way too much for Apple shares so we’re dumping the price”. Such an event would cause the immediate firing of that individual, to be followed by investigations from the SEC, and probably a jail sentence.

Finally, think for a moment what this means for the reputation of the shares. The owner, not having been able to start the operation, says that the shares aren’t worth more than he can get for them on the market, so he’s bailing out.

tytus knows more about 100TH than anyone else; he runs it after all. When he’s selling, as an insider, that sends a very strong message to the market: You will probably not get more from this share than you do by selling now.

Of course, this could be a rare case of altruism, where tytus really just wanted to give more people a chance to buy in, but if he truly believes that the value of the shares are higher than they are now, why would he sell?

If he wanted to give money away, he could do so through an extraordinary dividend payment out of his own pockets.

If he wanted to get more people on the market, he could announce, like he promised, well in advance that he wanted to put more shares on the market.

And if it is like he says that he didn’t want the price to go too wild to protect investors, why doesn’t he mass buy when there are bad news? In recent weeks, we’ve had numerous delays in chip production and Bitfury even lost his 100 BTC bet on Bitbet.us. These events could have dropped the price of shares considerably, but tytus didn’t put up a buy wall to protect investors then.

Instead, he broke his promise, conducted explicit and everywhere else illegal market manipulation, and implicitly telling people that they probably won’t get their money back by buying now. He’s torn away any trust the market has in him and demonstrated that at any time, he can dump more shares for whatever reason, despite anything he has said or says now.

That’s why one action lead to 100TH going from an incredible opportunity to a complete disaster in just one act.

I’m sorry to say, but I’ve sold all my shares in 100TH and I can’t recommend anyone to buy in. Not in 100TH and not in any of the other assets traded on Picostocks. Only if tytus is removed from any abilities to directly manipulate the market would I consider buying back in, and I don’t see that happening.

However, remember that this is just my opinion, one I’ve hopefully clarified and founded in this article. You should and must make your own decisions and form your own opinions.

Are Perpetual Mining Bonds Scams? Not Really

Disclaimer: I’m getting a bit tired of saying this, but please do not take this as financial advice. Do your own research, make sure you understand what you are buying, the risks and rewards involved, and the factors that affect market pricing.

In a previous article, I explained what mining bonds are, but if you didn’t read that, think of mining bonds as a loan where you, as the investor, lends money to the issuer, and the interest you get in return is defined by some number of hashes of Bitcoin or Litecoin mining.

I posted that article based on a discussion around a certain mining bond PAJKA in which I currently hold a position (that means I own bonds for all you inexperienced investors).

Note: That was my disclaimer about having an explicit interest in PAJKA.

The result of that article was that one investor in particular got a bit of panic, sold of a substantial amount of his bond at whatever price he could get, and went on to claim that all perpetual mining bonds (PMB) are scams.

Well, PMBs are not scams and I’ll tell you why and try to answer the most common questions around why PMB may be a great investment or may be your worst nightmare.

Perpetual Difficult Climb

Perpetual mining bonds yield a fixed and pre-determined return based on a number of hashes per bond. However, if mining difficulty increases, that means the return will diminish. The faster the difficulty increases, the less return the bond will yield.

This may seem like an obvious scam because we all know that difficulty will keep rocketing into the sky forever, right? After all, technology becomes better and more and more people will mine, so the difficulty must go up forever just like the total number of computers on the planet, right?

Well, that’s the first mistake and false assumption.

The difficulty of mining Bitcoins has gone up significantly in the previous few months. This is largely due to the introduction of ASIC mining, a huge leap in technology that renders all other mining equipment significantly less valuable.

Note: To learn more about ASIC mining and why it is so important to Bitcoin, you can read my article “What are ASIC Miners and Why are they So Important?”

ASICs are certain to change Bitcoin mining forever, but it won’t drive difficulty into perpetual rise. The reason, in fact, is that ASICs are just computer chips that are bound by the same limitations that other computer chips are. You can only make them so small and so efficient before you start running into problems of sizes of atoms.

Currently, the most powerful scheduled ASIC miner is developed by Swedish KnCMiner. Their ASICs are built on a 28nm technology. Currently, the best normal CPUs use 20nm technology, and those chips are extremely difficult to make.

ASICs may be simpler devices, but it is still difficult to get much smaller than the 28nm without investing significant money into development. As such, the rapid increase in ASIC efficiency is bound to slow down significantly very shortly.

However, this doesn’t mean that you can’t build more chips. Distribution can easily counter any lack of technological progress, especially in Bitcoin and Litecoin mining where every computer is part of the same network and runs towards the same goals.

Of course, as more and more miners come online, difficulty will keep rising, and pretty quickly, the profitability of mining equipment drops to zero or below. After all, you wouldn’t want to buy an ASIC miner for $10,000 if during its lifetime it would only give you $1,000 back, would you?

So, as more miners come online, the incentive to add more miners will drop, thus reducing the rate of network difficulty increase. At some point, adding more miners will not make sense and network mining difficulty will stop increasing.

The whole Bitcoin network was designed to be marginally profitable to miners. There’s a gold rush right now because ASICs represent so much of an advantage, but sooner or later, they will become unprofitable too.

And guess what; no matter when that happens, you still have your mining bond that will continue generating money. You don’t pay for electricity, you have no risk of hardware failure, you just sit there and watch as your Bitcoin or Litecoin wealth grows.

Note: Some mining bonds have buyback policies that allow the issuer to buy back bonds under certain conditions. carefully read the contract before you buy in and understand the terms under which an issuer can buy back bonds.

Yes, the value and thus return of your bonds will drop as difficulty grows. No, you won’t reap 50% yield per year, but c’mon, any semi-experienced trader knows this is an insane return on any investment. In PMBs, you have virtually no risk. Find a risk-less investment in a traditional market and you’re lucky to get 3-4%.

The reduction in profitability applies to any mining operation, regardless of whether you buy bonds or buy hardware to mine yourself.

Speaking of which…

Buying Hardware is Cheaper!

A second argument against PMBs is that buying the hardware yourself is cheaper than buying a bond. For example, a 1 mh/s bond from TAT.VirtualMine at this time costs around 0.0079. If you buy a 7950 GPU costing around 2BTC, you get 500 mh/s. To get 500mh/s from TAT.VM, you need to buy bonds for almost 4BTC. Clearly it is cheaper to buy a GPU yourself, especially if you have cheap electricity, right?

Well, yes, in cost it is cheaper to buy hardware, but this again is a mistake and false assumption. Let me use a somewhat contrived example to show you why.

It is also cheaper to dig for oil yourself rather than buying shares in Exxon to drill that oil for you. If you buy into Exxon, with some fancy math magic, you get approximately $0.007 dollar per day in dividends. Compare that to the return you would get from drilling your own oil where you get 100% of the profit, or almost $100 per barrel of oil!

Sure, Exxon drills oil on a much larger scale, but c’mon, per barrel you’re getting those $0.007 divided by the roughly 4 billion barrels of oil Exxon mines every day. You’re getting scammed by buying shares in Exxon!

Nobody in their right mind would make such a claim because after decades of experience, society knows that to drill oil, you need a lot of skill, investment in expensive equipment, the knowledge to maintain that equipment, the market in which to trade your product, and so on.

Buying hardware, running, and operating a mine, taking on the risks of equipment failure, ensuring the power and internet connection stays on 24/7, having a heck of a time if you need to leave three weeks on vacation… Operating a mine is hard work! It comes with a lot of risk and burdens, and for some, it is simply not an option.

Add to that the cost of time you need to invest in learning how to operate that mine safely, the time you need for maintenance and optimization, and the risk you have solely on your shoulders if something breaks, and the cost isn’t as cheap as some would like to imagine.

Perpetual Mining Bonds are Never Meant to be Profitable for the Investor!

For obvious reasons, I can’t speak about the intentions of any asset issuer. However, the profitability of perpetual mining bonds are exceedingly easy to calculate. What is difficult is predicting the difficulty of the Bitcoin mining network, and the guesses from various parts of the community ranges from “nah, it’ll never go beyond 200 million” to “it will rise to 1 billion by next week and continue to rise at 100% every day for the rest of eternity”.

Neither of these predictions will likely be correct, but you, as an investor, is tasked with finding the middle ground. This is the research part you need to do. If you believe in perpetual difficulty growth then clearly buying mining bonds is a bad idea. However, if you believe that mining difficulty will stop and decline immediately, then mining bonds will yield incredible results.

For an issuer, however, the reverse is true. If they believe that mining difficulty will continue to rise at incredible speeds, then issuing a mining bond makes sense because it will be very cheap financing. If they believe the difficulty will drop then issuing a bond denominated effectively in that difficulty is a bad idea.

The main difference, however, is that in lieu of a buyback option, a PMB is always going to be a loss to the issuer given enough time. Granted, if difficulty rises enough, the sun may burn out before that becomes a serious issue, but in the end, a mining bond will always return a profit to its owners, albeit a small one.

Let me briefly mention PAJKA again as an example. PAJKA was initially issued in June of 2012, so roughly one year ago. During that time, the bond has paid out its principal (meaning the amount the bonds cost) plus a healthy profit for its owners. Even today, PAJKA returns over 50% at current trading prices, with absolutely no operational risk to its owners.

How would it be possible for the issuer of PAJKA to predict that in a year, difficulty would suddenly get a surge? The simple answer is that it is impossible to know.

If PMBs like PAJKA were scams, it would be the worst scam in the history of mankind, where the scammer ends up giving more money to his victims than they risked. It would be like a bank robber heading into a bank and screaming “THIS IS A ROBBERY! HERE, TAKE THESE $100,000 OR I SHOOT!”

So no, PMBs aren’t scams. If you want to be cynical, they are really bets, where you, as the investor, bets that the difficulty will not rise enough over a long time that your profitability goes away, and the issuer, well, the best interest of the issuer is that difficulty shoots through the roof forever, securing cheap financing of the bond.

But it’s not a scam.

.b