Monthly Archives: November 2013

Use Namecoin (NMC) to Purchase Bitcoin Mining Power

Disclaimer: Don’t take any financial advice from one source only. Always research multiple opinions. The CEX.IO links in this article are affiliate links. If you prefer a non-affiliate link, look towards the bottom of the article. Finally, do not under any circumstance invest more money than you’re comfortable throwing out the window. You can lose everything overnight. don’t say I didn’t warn you!

I’ve previously written about CEX.IO, which is a new way of investing in mining power where you purchase Bitcoin mining hashrate as a commodity on an open market. In short, if you can’t be bothered to read the original article, this is a great way of getting started with Bitcoin mining without having to risk more than exactly the amount you need and with the added security that you can sell your hashrate back to the market whenever you want. Oh, and you start mining the moment you purchase the mining power.

A nice feature of Bitcoin mining is its ability to do merged mining with other coins. Without getting too technical, this means that Bitcoin miners can mine several other cryptocurrencies at the same time using the same mining hash rate. Effectively, you get multiple coins from the same mining effort.

One of the most widely known merged mining coin is Namecoin, or NMC. Namecoin is a cryptocurrency that is built to support anonymous domain (DNS) names. Right now, however, the use of Namecoin is limited and due to the fact that there is a huge amount of Namecoin in circulation, a lot of miners have spare NMC in their wallets.

Note: If you want to read my opinion on why we need multiple cryptocurrencies, here’s my take.

CEX.IO supports merged mining, so you get several merged mined coins as part of your output, currently Namecoin, Devcoin, and IXCoin. That is fine and all, but unless you can actually use those coins for something, they’re pretty much useless for anything but trading to other speculators for Bitcoin.

Now, however, CEX.IO has started selling Bitcoin mining power for NMC, so suddenly all those Namecoins can be turned into something useful. The GHS price is pretty much the same as it is for hashrate bought with Bitcoin, but because there’s huge amounts of Namecoins out there that is pretty much only used for trading with other cryptocurrencies, the ability to turn them into Bitcoin mining power at CEX.IO is pretty cool.

You can also trade your NMC in your CEX.IO account for BTC directly so you don’t need to transfer it to a different exchange, sell them for Bitcoin, and then transfer them back. The exchange rate hovers at around the same exchange rate as for other exchanges, but because the transaction is instant, you save significant time even if you can’t speculate in the difference between exchange rates.

I’m still hoping that CEX.IO will also support buying hashrate for the other two merged mined coins you get, though, because it would greatly increase the value of these coins to the cryptocurrency miners.

Want to get started with Bitcoin mining using your Namecoins? Here’s my affiliate link to CEX.IO. If you prefer to have the plain link, though, here it is: http://cex.io/.

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Why I Sold My ASICMiner Shares

DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

A few months ago, I posted an article on how to acquire ASICMiner shares. Since then… interesting things have happened in the cryptostock community and you’re now left with Havelock Investments as your only reliable option.

At the time, ASICMiner traded at around 0.8BTC per share. I have put a, to me, considerable amount of my BTC into ASICMiner and say a huge rise in value. And then I sold.

Yeah, I sold at 1.8BTC per share. The price later rose to over 5BTC per share, but I was happy to have gotten out when I did, and here’s why…

Fundamental Investing

I don’t know too much about investment strategies. In fact, I started with investments when I got into Bitcoin, mostly as a learning experience. I’ve since read tons of material about how people construct their strategies and discovered to my amazement that I was following an already established strategy of investing based on fundamentals.

What is that you ask? Well, it’s a fairly simple strategy. Find out what something is really worth. Buy at a price that is lower than that and sell at a price that is higher than that. Simple, right? Like anything that is simple, though, there is a lot of homework required to get to that real worth number.

For example, in a mining company, you need to look at what is the long-term outcome of the mining operation. It doesn’t matter than a mining company churns out cash like it’s going out of fashion because if they follow the pattern of most mining operations, that churning will quickly diminish and will do so long before you get your share price back.

Finding the fundamental value of a share requires a lot of research, a lot of calculation, and a fair amount of guessing, at least in a market that is as volatile as Bitcoin mining. However, once you find that value, investing is mostly a numbers game; a cheap share is a certain value so you buy (or don’t sell) and an expensive share is another certain value so you sell (or don’t buy).

What fundamental investing doesn’t take into account, though, is people. Crowds tend to follow the moment of the crowd and that drives prices up or down regardless of what the fundamental value really is. In fact, all investors tend to bet on this to a certain extent.

ASICMiner Fundamentals

At the time, which was early April 2013, I looked at a few important factors of ASICMiner. First and foremost, I looked at their ability to deliver long-term. In April, the mining scene looked like a giant vacuum, and any ongoing mining operation was cash cows for their owners.

Friedcat had estimated that ASICMiner would hold an average of 15% of the total network hashrate throughout 2013. This was an awesome amount, but even that seemed too low as they were in the process of reaching the famed 51% limit and had to start selling their blade miners to keep below that limit.

15% of the network for 9 months is the equivalent of 864,000 BTC. Deduct a modest 10% in operational costs, salaries, and so on, and you end up with 777,600 BTC. Divided by just 400,000 shares and you’re looking at profits of almost 2 BTC per share, and that’s just for 2013.

However, the big question remained: would ASICMiner actually be able to keep this share of the network? A lot of people seemed to think so, and it’s easy to understand why. ASICMiner kept up with the growth in the network and had kept their promises and even exceeded them considerably.

In hindsight, it is equally easy to see why it had to fail. With the insane amounts of money ASICMiner generated, other companies and investors would want a piece of the cake. That meant huge investments into Bitcoin mining, leading to much higher pressure on ASICMiner.

Those investors also learned from another mistake ASICMiner made. ASICMiner was using outdated technology, which meant that even if they could produce huge amounts of hash power, that technology also required huge amounts of power and facilities, which were very expensive and difficult to operate. The competitors opted to use more modern technology and eventually rode in circles around ASICMiner in terms of performance.

In fact, this lack of updated technology and the vacuum created by ASICMiner’s initial success continues to create problems for ASICMiner. Their strategy of sticking with cheaper and faster to produce chips hasn’t given them much in terms of catching up, and right now, ASICMiner is just a few percents of the total network hashrate, diminishing by the day.

When considering any long-term investment in Bitcoin mining, one needs to take into consideration the halving effect. In short, the halving effect comes as a result of the halving of the Bitcoin block reward for miners, that happens sometime in 2016. At that point, a ballpark estimate is that miner income drops to 50% of what it is now. In effect, any mining investment loses half its value overnight.

To account for this effect, investors should calculate how much that effect is and increase their expected output each month so that they get enough back to counter the halving when it occurs.

Note: I’ve written an article that explains the halving effect in more detail.

The bigger the profit, the higher the impact of the halving effect. ASICMiner was slated to be one if not the biggest player, so the impact of the halving would be massive. This effectively reduced the dividends by several percentage points each month, so although ASICMiner at times had expected ROIs of 75-80% in a year, the real number was much closer to 30-40% over time.

Based on this, I estimated ASICMiner’s real value to be somewhere around 1.20-1.35BTC per share, depending on how optimistic I was. Of course, I wanted to make a profit on my investment at 0.8BTC, so I sold when I saw the price climb to 1.8BTC.

Before you run off to buy ASICMiner shares now, and thinking that the current price of around 0.6BTC must be an awesome bargain, keep in mind that at the time, I was estimating ASICMiner’s share of the network for 2013 to be 5-10%. Right now, it is not even 2%, and it’s dropping every day.

I’m not going to make a prediction at what I think the price will be, but you may want to consider that I haven’t bought back into ASICMiner at this point.

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DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

CEX.IO – A New Way of Investing in Bitcoin Mining

Disclaimer: As always, do not take any financial advice from anyone without proper due diligence. Also not that link to CEX.IO in this article are affiliate links. If you prefer not to use the affiliate link, check the bottom of the article for a direct link. Oh, and please read the caveats and possible dangers before making any investment decisions.

With the rapid increase in Bitcoin mining power during the previous few months, most Bitcoin mining investments are not profitable. Investors seem to be gambling that somehow, mining will be less popular and thus more profitable for those that stick around.

Of course, this is an impossible dream; mining investments are driven by profitability, and once profitability is high enough, mining investments will increase, thus reducing profitability. In fact, the whole system is beautifully designed to create a balance where mining is barely profitable.

A big problem with investing in traditional mining equipment is that once you’ve placed your final order, you’re stuck with the equipment until you either sell it or take it offline. There are no partial refunds and it is complicated to sell parts of your equipment.

This is one of the reasons why group buys are popular. A group buy is essentially a person or entity that buys the mining equipment and then sells parts of that equipment to others. Shares of a group buys are easier to move around by selling or buying more to or from others.

Group buys are cheap and easy ways to get into mining, but has some serious drawbacks. First, the equipment must be bought, and when time is money, waiting for the group buy to fill up so the equipment can be bought can cost a lot of money. Then there is the question of trust; do you really trust the operator to pay diligently? Finally, you’ll always run the risk of hardware failure or operator death, especially when the group buy is run by a single person.

Similar to group buys are mining bonds. With a mining bond or contract, you get the output of a certain hashrate paid at regular intervals. Although most asset exchanges are now closed down, reselling outside of an exchange is certainly an option if you can find buyers. The operator does not necessarily have a certain piece of equipment but may fund the bonds or contracts through any means available, including other assets or multiple pieces of equipment.

Sadly, due to the rapid increase in network hash rate, most mining bonds and contracts have also turned out to be unprofitable, including my own BFMines (at least when bought at the IPO price).

However, a new option is now available for investing in Bitcoin mining without these drawbacks. CEX.IO allows investors to buy Bitcoin mining power by the GH/s.

CEX.IO appeals to me for several reasons.

Rather than wait for hardware to arrive, CEX.IO offers immediate mining start because the equipment is already in place. The operators have built, installed, and operate a huge mining farm so there’s no wait. I’ve bought capacity on CEX.IO and seen returns within hours of purchase.

There are no long-term commitments either, you can sell your hashrate back to the market whenever you want. This is quite unique as it allows you to enter and leave the market at a moment’s notice. You can even trade at fractions of a GH/s if you just like to get involved in a smaller scale.

In fact, this market is a very appealing feature. The hashrate available at CEX.IO is driven by traders just like yourself. That means that when the market thinks the hashrate price is going down, prices will go down, and when the market thinks rates will remain high, prices go up. I’m a proponent of market driven trading like this because it allows a larger group of people to decide what is a fair price.

Beyond just hashrate, however, CEX.IO also allows trading in Bitfury chip prices. This is like a traditional commodities market like oil or gold where you speculate in what prices the market is willing to pay for that commodity.

A great addition to the pro side for CEX.IO is that you also get merged mining alt-coins as part of your mining reward. Right now, you get Namecoin, IXCoin, and Devcoins as part of your profit, so effectively you are mining several coins at a time.

Finally, if you wish to operate your own equipment, you can actually redeem your owned hashrate into a physical miner sent to your home. When you own a certain minimum, you contact CEX.IO support and discuss shipping and handling costs, but you can thus turn your virtual asset into a physical Bitcoin miner.

Are there any drawbacks? Well, there are several risk factors.

First and foremost is determining whether your mining investment will make money at all. It is difficult to predict this and I’ve certainly failed in the past when I thought BFMines would turn a profit at IPO prices. Using a calculator like the mining.thegenesisblock.com may provide you with better insights. Keep in mind, though, that calculators such as these are available to everyone so their usefulness as a secret weapon are limited.

Second is the risk that the operators of CEX.IO may not be legitimate. The Bitcoin world continues to see large amounts of fraud and scams, even from the most seemingly trustworthy entities. We don’t know whether CEX.IO is a giant scam or legitimate, and it is very difficulty to prove either.

Finally, prices are driven by the market, and the market tends to be very well informed and wishing to make money. If you’re looking to beat the market, you need to beat the entire knowledge of the market, and that can be very difficult.

All in all, however, assuming CEX.IO is a legitimate operation, I think this platform is an excellent way to get involved in mining.

If you’d like to sign up and try, you can use my affiliate link, which will give me a small benefit from your investment too. If you’d like to do so, click this link.

If you’d rather just go directly without using my affiliate link, you can do so too here.