Disclaimer: I am the asset issuer of BFMines and have a direct interest in selling as many shares as possible. Keep that in mind while reading this. Do you own research. Listen to other voices, especially those that disagree with me. There is a large risk that you may lose money, with this investment as with any investment.
After a few weeks of delay, BFMines is finally ready for trading. If you don’t know, BFMines is my first publicly listed mining contract. You’ll be able to buy these mining contracts from July 3, 2013 at 6PM UTC.
I’ve worked very hard to design an asset that would be fair to all parties based on the risk we’re all taking. As much as I think I have succeeded, however, I would like to let you know about how you should evaluate this asset so you know what risks you are assuming.
What is a Mining Contract?
Lots of people want to get involved with Bitcoin mining but don’t know where to start. Mining contracts are a way to take all the hassle out of doing Bitcoin mining yourself, by essentially purchasing a stake in the future profits from a mining operation.
A mining contract gives you one ‘share’ of the stated profit, usually denominated in a certain amount of hash rate. You can buy multiple such contracts so you can invest in as much or as little hash power as you like.
This is different from buying shares in a mining company, however. A mining contract gives you a predefined number of hashes where a mining company’s hash power can change depending on several factors (buying more hardware usually increases hash rates while hardware or connectivity issues can decrease hash rates).
Further, a mining contract gives no votes or control of the operation whereas shares in a company may. Further, most mining contracts either run perpetually (to the extent it is practical) or for a fixed time, whereas shares in a company exist for as long as the company exists.
The TL;DR version, though, is this: You pay me to mine Bitcoins for you. Every day (or other periods for other assets) you get whatever amount of Bitcoins the mining operation has yielded that day.
Sounds too good to be true? Well, read on and I’ll explain why you should think carefully before you jump in.
There are three major factors you need to consider to understand the risk of this asset; difficulty, scams/fraud, and non- or late delivery.
How Difficult Can it Be?
As with any mining investment, however, the key deciding factor in whether you make money is how much difficulty increases in Bitcoin mining. It does not matter whether you buy shares in a company that in turn yields 1mh/s or you buy a mining contract that yields the same. The decline in profitability for the same hash power is the same no matter which investment option you choose.
However, that difficulty can render the investment completely unprofitable and you may never get your investment back. Nobody knows how much the difficulty will increase because it depends on far too many uncertain factors. It is safe to say, however, that it will increase over the next years.
So how do you determine how much difficulty will rise? Well, you need to know how much hash power comes online in the future. We do know that at some point, there will be a lot more hash power, but we also know that there are always issues with delivery, older equipment going offline, and people just getting fed up with working for diminishing returns.
I encourage you to explore the Bitcointalk forums and read up on the various projections, but let me give you a few key factors to consider:
- What is the total scheduled hash power coming online and when?
We know that around 1-1.5 PH/s is scheduled to come online this year.
- Will perpetual proportional growth be possible and if so, how much is reasonable to expect?
Perpetual proportional growth means that hash rate increases by a certain percentage each month forever.
- What is the life cycle of mining investments and at what point will older equipment be retired?
We know that CPU and GPU mining is already unprofitable due to maintenance and electricity cost. Early FPGA and ASIC miners may also approach unprofitability over the next months.
- Will the announced hash power actually be delivered and would you bet that it does or does not?
We know that traditionally ASIC equipment has been delayed, often for months.
So What Will the Difficulty Be?
Like everyone else, I have no idea. There are predictions all over the board, so in the future, you can be sure there will be a lot of “I told you so!” no matter what happens.
I’ll tell you what I don’t think will happen, though. I don’t think all the scheduled hash power will come online. For that, the history of ASIC mining power is far to volatile. We may reach 1,000TH/s by the end of the year, or it may take 12 months.
I don’t think the perpetual proportional growth theory has any merit either. For this to happen, deployment needs to accelerate perpetually, and there is just not enough money to fund such an expansion. For example, to support perpetual proportional growth of 20% per month until February 2014 (just 8 months from now), the community would have to invest $200 million worth of the most powerful mining rig available today (the KnC Jupiter), more if KnC can’t deliver that many.
Finally, BFMines and other mining contracts are now cheaper to buy than most current generation hardware (for example ASICMiner blades). Because BFMines comes out just a couple of months later than the first sale of AM’s blades, if this asset isn’t going to be profitable then the blades bought then or even now certainly won’t (because they are more expensive and has the over head of owning hardware, see below).
That also means that mining investments will become unprofitable for new hardware buyers. At that point, investing more would be throwing money out the window and thus the increase will stop.
On the other hand, it is virtually impossible for difficulty to stagnate in the short term. For that to happen, every single ASIC vendor must fail completely, which is not even considered as an option, even if one or more of them do get delayed.
So, the most likely scenario for difficulty evaluation in my opinion is somewhere well below the perpetual proportional growth theory but also well above current levels. Difficulty will likely rise for a bit and then likely flatten out and remain flat for a long time. Perhaps the difficulty will rise to 500THs by the end of the year, perhaps more, but remember that at that point, for a perpetual growth of 10% per month to continue, you have to deploy a third of what the entire Bitcoin network is today.
Then There is Trust…
Nothing prevents me from taking your money and running. You give it to me in return for something in the future. I hold it, own it, and I can disappear overnight leaving no trace but a group of angry investors. You have no recourse; this is an unregulated market after all.
This applies to any security in an unregulated market, though. Imagine a company such as ASICMiner, which is run by someone known only as friedcat, in a country that is not exactly famous for its rational handling of legal issues, holding a value of close to $200 million.
There hasn’t been a lack of scams and outright thefts in the history of Bitcoin investing either. Millions of dollars have been stolen, and all investors had to show for it were bruised wallets and possibly a bit of wisdom.
Still, people trust friedcat with their money. Truckloads of it every day. Perhaps the possibility of infinite riches clouds people’s eyes so that they are willing to risk someone running away with their money.
My response to this is very simple. You know who I am. You can probably very fast figure out where I live. I’m a well-known person in several communities, Bitcoin not withstanding. I am open about who I am, what I do, why I make the claims I make, and have done so for more than a decade online.
I would have a lot to lose if I ran away with your money; far more than the funds I would possibly get from an IPO of BFMines. In fact, the business in which I work when I need to pay bills, hourly rates of $200 is about as common as grains of sand on a beach. I would utterly kill my opportunities in that business if I was to run away (or even grab your money and hold it).
Finally, the funds you invest are not mine until the mining begins. They are held in escrow, and I can’t access them. BTCT makes sure of that. If the mining equipment fails to start, you get your money back, and that’s completely out of my control. I can beg and plead as much as I want, but BTCT will ensure you get the listing price back.
I can’t promise, though, that you’ll be rich from BFMines or that you’ll even make money. I’ve designed the asset to be fair to investors and give a reasonable return for a reasonable risk. It can go very bad and you may lose everything and it may turn into a gold mine of epic proportions. More likely, however, it will be somewhere in the middle.
What If the Hardware Doesn’t Work or Arrives Late?
The BFMines security is designed around hardware that doesn’t exist yet. Because of this, dividend generation does not start until that hardware arrives and has been tested as working. The contractual arrival of the hardware is by October 2013.
The obvious risk here is that the hardware does not work at all or even worse, that the hardware I’ve bought is part of an elaborate scam. If so, there will be no mining, no dividends, and no rolling in virtual cash. Slightly better, but still bad is that the hardware arrives too late.
To mitigate the risk of non-delivery, all funds that are paid into the IPO are held in escrow like I explained earlier. If, for any reason, the hardware fails or the manufacturer runs off with my money, you get your IPO investment back.
Note that you get back what the listing price of the contract is, regardless of what you paid for it. In other words, if you pay more for your contracts than the IPO price, you risk not getting your entire purchase price back. If you pay less, well, there’s also a chance you get back more than you paid if the hardware fails.
The second risk, however, that of late delivery, is more difficult to mitigate. The scheduled arrival of the hardware is somewhere in September. Because mining does not commence until the hardware arrives, any delays will cost you money.
To mitigate this and the fact that mining does not commence immediately, I have added a bonus dividend period of 6 months. The bonus works like this:
The BFMines asset will be backed by at least 120% of the hardware required to pay the dividends you get. In other words, if all 100,000 initial contracts are sold, I have 120,000mh/s of hardware to back that up.
The surplus hash rate (20,000mh/s if all contracts sold) are used to cover the running costs of the hardware. I’m anticipating the running costs to be in the area of 5-10% ongoing, so I have to keep the extra hardware to pay for those expenses. Any surplus of the 20,000mh/s minus expenses goes straight into my greedy pockets to cover the risk I’m assuming for hardware failure and things like that.
However, for the first six months, those greedy pockets will be emptied out and given to you as a bonus dividend. How much you get depends on two things; the final hash rate of the hardware and the final running costs. Most ASIC hardware is rated at one level but perform better in real life, but there’s no guarantee of that. I also want to add some insurance against power failure and internet connectivity problems, so I’m spending a bit of the surplus on that.
The rest is yours for six months, as a consolidation for not getting dividends from day one.
Why Not Just Buy Hardware?
For some people, investing in their own hardware is a reasonable alternative. However, it is a far stretch to compare it directly to owning mining contracts.
It is very true that owning hardware costs much less than buying mining contracts. This isn’t any different from other industries; it is more profitable to own a pineapple farm than to buy pineapples in the store. It is cheaper to dig your own gold than to buy a gold ring at a jeweler.
This comparison isn’t directly applicable, however, because there’s a limit to how many pineapples you can consume. You wouldn’t buy a pineapple farm just because you wanted a single pineapple, even though the price per pineapple would be a fraction of the store price. You simply couldn’t consume all the pineapples yourself.
In Bitcoin, you’re mining money, and money you can always consume. A better comparison would be the gold mine because you can consume as much gold as you want.
When you buy hardware, there are several things to consider.
First of all is risk. Your hardware may break at any time, and even if you have a warranty, you will at the very least lose income while the hardware is repaired. You can mitigate this by having insurance, but I have yet to find anyone willing to insure Bitcoin mining equipment for its real income.
Then there is electricity cost. Mining equipment consume electricity and you have to pay for that, something you avoid in a mining contract. In effect, you are getting free electricity for your Bitcoin mining for as long as the mining contract lasts.
There is also the plain overhead of having mining equipment running. You need a place to host it and you need to protect that location. Already people have had break-ins in their houses after someone realized they had ASIC mining hardware. Hardware also makes noise and generates heat, and that may not be worth it for small apartments or if your spouse does not approve.
You also need to be online 24/7 with your mining equipment, or you lose money. Is your power always stable? Mine certainly isn’t, and if your power or internet connection goes down, you’re not making money.
And of course time is also valuable, depending on your situation. Monitoring and supporting hardware, even your own, takes time. Are you ready to take a few hours off work to fix an issue with your electrician, your mining pool, or your ISP?
But you’re right, buying hardware is a lot cheaper than buying mining contracts. If you prefer to run a mining operation yourself, then you can save a lot of money (in my case the ratio of cost to price is about 1:4, meaning my cost is around 100BTC to get the 400BTC in value from a fully sold IPO, not counting the work involved).
To Sum Up
Consider most of all the following:
How will difficulty evolve? Do you believe in the perpetual proportional growth theory? Are you willing to bet that at least one, preferably more ASIC vendors are not able to fulfill their promises? Are you willing to bet that Bitfury and Metabank deliver on their promises? Do you trust me not to run away with your money?
Buying mining contracts is effectively a bet that the following are true:
- Hash rate does not increase more than what will allow you a good return on investment, likely because one or more of the ASIC vendors fail to deliver quickly.
- Bitfury and Metabank do deliver on their promises. Even better if they deliver quicker than projected.
- I do not steal your money.
If, after reviewing this article and having done your research regarding the factors affecting the BFMines asset, you are still willing to purchase these contracts, then don’t wait and head over to the official exchange and pick up your BFMines mining contracts today.
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