Can 100TH Really be the Next ASICMiner? In a Word: No

Disclaimer: Please do not take this as financial advice. I have no idea what I’m talking about and you should not listen to anything I say. I may or may not hold shares in any company at any time, so as with everything you read, please be safe and assume that the author (in this case moi) has a direct benefit from a high or low share price. Do your own research, do not rush into investments until you understand the assets and the market, and never, ever, ever, ever, ever invest money you are not perfectly comfortable throwing out the window into a blazing pit of fire.

In the past couple of weeks, ASICMiner has seen a rocket like rise in price, trading at most over ฿3.3 which is a hefty 33 times its initial IPO value. Since then, it has subsided somewhat, and these days trade around ฿2.4-2.6 per share.

No wonder people have been looking for the next rocket to take off, and have been very curious to understand a relatively new mining operation called the 100TH project.

Can 100TH really be the next ASICMiner? In a word, no. In a few more words, no, 100TH is not the next ASICMiner because it is a completely different type of investment.

That doesn’t mean 100TH cannot be extremely profitable, though, just that they are two very different classes of assets. I’ve been doing some digging to attempt to understand the 100TH asset. Much of the research is based on the 100TH business plan as well as the discussions in the Bitcointalk forums. In addition, I have done some other research into the people behind the operation.

Let me share my findings in summary.

What is 100TH?

The 100TH project is the brainchild of two Polish entrepreneurs who together with a couple of other people decided to get into ASIC-based Bitcoin mining. Their first project was to build a 72TH mine, but that project didn’t work out. Instead, they re-launched the idea in January with a 100TH mine, this time in collaboration with Bitfury, a known entity in the community that designs and builds ASIC chips.

The 100TH mine is actually more like a bond than a share, so it is vital that you understand the differences. I’ll elaborate more on this when I compare 100TH to ASICMiner later in this article. The brief explanation, however, is that a share in 100TH is fixed at a predetermined rate of 200MH/s and will not increase over time unless the founders decide to change the asset completely.

Unlike ASICMiner, however, the 100TH project does not sell hardware. This is a plain Bitcoin mine, one with a predetermined output, making no attempts to stay competitive beyond those terms. As such, the evaluation becomes a bit simpler than ASICMiner because you need to focus on fewer areas to evaluate the stock.

ASICMiner versus 100TH

Before we begin comparing the two assets and their prospective revenues and profits, you need to understand the difference between the assets.

Note: I am explicitly not talking about the 100TH mine as a company because it isn’t one. Technically, neither is ASICMiner, but the shares act closer to those of a regular company. Bitfountain, of which ASICMiner is the publicly traded shares, is a real company.

100TH is a mine that has a given and fixed amount of hashing power per share. This amount will not increase over time, so what you are buying with a share of 100TH is exactly that hashing power for as long as the mine is operational.

ASICMiner is a company, or technically the name of the publicly traded shares of a company. ASICMiner both increases hashrate over time but in addition sells hardware when they have excess capacity that they can not otherwise utilize or when the market looks right.

Hashing Power

100TH gives 200 MH/s hashing power per share when it goes online in August.

ASICMiner currently has about 60 MH/s hashing power per share that is mining right now.

Dividends

100TH has no overhead for reinvestments, so after the management fee and costs are deducted, 100% of revenue goes out as dividends.

ASICMiner pays for costs, management, and other expenses plus they set aside a varying amount of revenue for future reinvestments before calculating a 90% dividend from the revenue.

Profitability

100TH is focused solely on yielding as much dividend as possible during its lifetime, knowing perfectly well that the lifetime will not be extended once the mining becomes unprofitable.

ASICMiner intends to run as a company over a long time and must take a longer lifespan into account when determining dividends and policy.

Halving Effect

The halving effect takes a moment to explain. In short, the block reward for mining goes down to half in late 2016, so at that point, revenue will most likely go down dramatically. As this date comes closer, the remaining profitability of a mining operation goes down. To some extent, this effect may be mitigated by increased adoption of Bitcoin which in turn may increase transaction rewards from mining.

To calculate the halving effect, take the number of months from now until November 2016 (when the halving occurs) and then divide half of the share price by that number of months. The result is the average cost of the halving effect if the block reward goes to exactly half of what it currently is. You may want to decrease this amount by some factor depending on the development of transaction fees ratio of the mining reward.

The formula is: (Current Price/2)/Months until 11/2016=Average halving effect loss per month

Example: ASICMiner trades at ฿2.5, with 43 months left until halving occurs. Assuming a halving effect of exactly 50%, we take ฿2.5, divide by two to get ฿1.25, and then divide that by the number of months left (at the time of this writing 43 months) to get ฿0.03. This is the value that ASICMiner will drop each month on average due to the halving effect.

Note: This is a simplified view of reality because only dividends are affected by the halving.

100TH will take the full blow of the halving effect and revenues will drop by approximately 50% when the block reward goes down.

ASICMiner may mitigate the halving effect by diversifying its business model, for example by maintaining hardware sales. The mining part of ASICMiner will bear the full blow of the halving effect.

Hashrate Increase

100TH will not increase it’s hash rate per share, regardless of what happens in the market, because it is a fixed rate asset. Adding hashing power is unlikely because it means the issuer is essentially giving money away for free.

ASICMiner may increase it’s hash rate per share by deploying new miners or develop new chips to yield higher efficiency. Adding hashing power is likely because the issuer also benefits from the higher revenue.

Battle of Numbers

In the end, any investment in mining always comes down to number crunching. In fact, other factors, like hardware sales in the case of ASICMiner, is so speculative that it is really close to impossible to predict with any accuracy more than a couple of months in advance.

Note: Please remember that these numbers carry with them certain assumptions. These assumptions may or may not hold true, but are required to make any analysis possible. Make sure you evaluate the assumptions and whether they fit your own research.

Which numbers are important? That greatly depends on your perception of the future, what other competitors enter the scene, how quickly ASIC hashing power becomes available to the masses, and a number of factors.

Let me set up a couple of examples here. In this scenario, I am using the average percentage of the total network power that an asset holds over three years because this simplifies the predictions to some extent.

Keep in mind that the percentage will likely be high in the beginning for fixed asset like 100TH and then decline over time as total network power increases. For ASICMiner, the ratio can be increased up to around 35% (but cannot under any circumstance exceed 50%).

Please note that in the scenarios below, hardware sales for ASICMiner is excluded. To determine dividends from hardware sales, divide the expected hardware sale by 400,000 (number of shares outstanding) and add to the dividend net yield projections below.

Current Situation:

Assumptions: None

  ASICMiner 100TH
Hashrate 24 TH/s 0 TH/s
Percentage 25% 0%
Price/share ฿2.5 ฿0.2
Dividends/month ฿0.06 ฿0
Halving Effect -฿0.03 -฿0.004
Net Yield per Month ฿0.03 -฿0.004
Yield per year 14% -2%

August 2013, 10% increase per month (low network increase):

Assumptions: 100 TH mining comes online as expected, 10% increase in network hash rate per month (total 116 TH/s) excluding 100TH, ASICMiner increase hashrate by 400%

  ASICMiner 100TH
Hashrate 96 TH/s 103 TH/s
Percentage 43% 47%
Price/share ฿2.5 ฿0.2
Dividends/month ฿0.11 ฿0.099
Halving Effect -฿0.03 -฿0.004
Net Yield per Month ฿0.07 ฿0.095
Yield per year 33% 570%

August 2014 10% increase per month (low network increase):

Assumptions: 100 TH mining mines as expected, 10% increase in network hash rate per month (total 468 TH/s) excluding 100TH, ASICMiner maintains 43%

  ASICMiner 100TH
Hashrate 200 TH/s 103 TH/s
Percentage 43% 15%
Price/share ฿2.5 ฿0.2
Dividends/month ฿0.11 ฿0.031
Halving Effect -฿0.03 -฿0.004
Net Yield per Month ฿0.07 ฿0.027
Yield per year 42% 166%

August 2014 20% increase per month (high network increase):

Assumptions: 100 TH mining mines as expected, 20% increase in network hash rate per month (total  1232 TH/s) excluding 100TH, ASICMiner maintains 43%

  ASICMiner 100TH
Hashrate 529 TH/s 103 TH/s
Percentage 43% 7.7%
Price/share ฿2.5 ฿0.2
Dividends/month ฿0.11 ฿0.016
Halving Effect -฿0.03 -฿0.004
Net Yield per Month ฿0.07 ฿0.012
Yield per year 42% 84%

A couple of things are worth noting about this last scenario.

First, regarding ASICMiner, to maintain a 43% part of the network, ASICMiner needs to grow to 529 TH/s. Using current technology where 1 TH/s costs approximately US$10,000 to put online, that means ASICMiner either needs to invent new technology or invest approximately $3,000,000 in current generation technology. At current prices of $132 per BTC, that means an average monthly cost of ฿946. This does not include hardware for resale so that cost will come on top. A price per BTC below $132 increases the BTC cost too, so revenues in a growing market will depend on a high BTC price.

Second, and this is very important, for 100TH, if network hashrate increases at this rate, the halving effect period will be much shorter than 2016 because the mine will be unprofitable long before that. This reduces the yield per year substantially and you need to look at the overall yield per lifetime instead, which will be shorter than three years.

Note: A 20% increase on average is extremely high and unlikely to be sustainable. To put it in perspective, this will mean that the network speed exceeds 11 PH/s (more than 120 times its current speed) by September 2015, just over two years from now. By October 2016, one year later, the network speed will exceed 117 PH/s or more than 1200 times the current speed. One day later, the revenue for all miners drop to half.

Incredible breakthroughs in technology must happen for that to be even remotely profitable.

To help understand that scenario, I’ve set up a table that can show the rate of return given the current trading price of roughly ฿0.2 per 100TH share and an average monthly increase in network speed of 20%.

image

(Click for full-size image)

The interesting part here is the total yield and the ROI, which shows you how much you get back for your investment. Total Yield is an absolute number and ROI is based on a price of ฿0.2 per share.

As you can see, at ฿0.2 per share and assuming the network crows in average by 20%, you’ll triple your money in a year and almost quadruple it in two years. Even then, the mine continues to be profitable for more than a year more, although the dividends total does not exceed 7% for the remaining time until October 2016, and the mine will probably shut down before that.

Note: Remember, this is based on the view that a 20% increase per month is sustainable for two years.

Even if you pay 0.5 for a share today, you’re still looking at more than 50% return on investment over two years, which incidentally beats NASDAQ composite by more than 300%. The majority of your return also comes back to you early so you’ll get you money back in just a few months and can reinvest in other interesting projects at that time.

If you’re very optimistic and possibly borderline naïve, you might want to imagine what happens if the network rate only increases by 10% on average per year. Well, here is the table for that.

image

(Click for full-size image)

I would not recommend you consider such a low number, but in this case, your ROI should reach 671% by the end of year two.

After July 2015, however, profitability for 100TH declines to almost zero, whereas ASICMiner may continue to impress with new technology for sale and ever higher hash rates. ASICMiner may yield lower ROI on its shares, but can maintain it for longer than 100TH.

The decision must be yours, as well as the assumptions on network size and how that will evolve. Both companies are great investments if everything goes according to plan. However, they are very different investments, so the decision about which company in which to invest will depend on your profile and your evaluation of the risks involved.

Speaking of which…

Risks

Like with all investments, there are risks you need to evaluate to see whether an investment makes sense. In the cryptocurrency world, there are far more risks that you need to consider. You should know about these general risks before you undertake any investments, but still there are asset specific risks that are unique to 100TH.

Let me briefly discuss a few of the risks as I see them.

Update: I’ve felt the need to add a very real risk on June 14 following a very strange move from the stock exchange at which 100TH trades. Please read on, and I’m sorry to say this is not as much a risk as a serious issue with an unregulated market now made manifest by Picostocks.

Market Manipulation

Picostocks, the stock exchange on which 100TH is traded, has a track record of market price manipulation whenever there are good news regarding 100TH. The price manipulation is done by dumping large amounts of shares on the market just above or even below current trading prices, preventing investors who takes huge risks from getting huge rewards from those risks.

Effectively, this kills off 100TH as an investment to me. As any experienced investor will know, you balance risk against potential reward, and usually expect a large risk to come with the potential for a large reward. With Picostocks manipulation and dumping of shares, this isn’t really the case anymore and investors only carry the risk without the potential reward.

Note: Picostocks is run by the same people that run 100TH. In fact, all the assets on Picostocks are run by the same people.

Tytus, the CEO of the operation, promised after the first dump in May to give advance notice to the market before dumping shares. However, on June 14, 2013, he broke that promise by putting up a massive dump of shares right after 100TH announced that the chips had shipped from the factory.

Of course, even when 100TH starts mining, there is no guarantee that this price manipulation will cease, so I’m sorry to say, this no longer is a viable asset to me.

Delivery?

100TH is still in development and has not started mining yet. In fact, they don’t even have completed chips at this point (May 26, 2013). Their scheduled start is sometime this summer; with full force mining scheduled from August 1. However, there is a risk that something goes wrong or the chips to not perform according to expectations. So far, Bitfury’s tests and simulations have been in line with what they expect, and the project has been keeping their expected timeline within reason.

In case the chips to not work, however, the backup plan is outlined in the business plan, as quoted:

“If the chips fail to meet the expected performance the manufacturer will provide the mine with additional boards to achieve the expected hashrate of 100TH/s. […] If the chips fail completely a substantial delay in mining will occur.”

Until the mine is actually up and running, a lot of things can cause delays or worst case stop the entire project. The main risk according to the business plan is failure of the chips.

Scam?

In the world of Bitcoin or cryptocurrency assets, the first and default state of any new idea is that “this must be a scam”. This is a cultural thing and a method for the community to protect itself because over the years, a lot of people have been trying and succeeded in scamming people out of their money.

It is important to understand that this is the default state and one every new idea must go through. Being called a scam is about as common as being called newbie. In this sense, you are guilty of being a scammer until you have proven yourself innocent, and any idea will be compared to every previous failure or scam imaginable. Presenting a new idea, especially one that means your clients must part with real valuables in return for some future benefit, means you must defend yourself against such accusations before you are given the time of day of any rational analysis.

You may agree or disagree with this attitude and approach, but unless you know about it, you can easily be scared into thinking that everything must be a scam because everyone says it is.

However, regardless of what the practice of the community is, there is always a risk that this can be an elaborate hoax to trick people into investing into air and hope. You should spend some time evaluating whether you want to trust the issuers and the project.

Operational Failure?

Even if everything turns out perfect, everybody is honest, the chips mine at the expected rates, and the mine comes up according to schedule, the mine can always run into operational problems. This can range from smaller problems with individual chips or boards to catastrophic failures that take the whole mine out. The business plan explains that there is a four year warranty on the boards, but in case of catastrophic events, mining may need to be stopped until replacement boards can be made, which in a time-critical industry like Bitcoin mining can lead to significant loss in revenue.

Profitability Decline

The most likely risk factor, however, is the profitability decline of the mine. In short, difficulty increases will mean that the 200 MH/s mining capacity per share will continually decline as difficulty increases. Because the hashrate is fixed, this decline is inevitable as long as more network power comes online, as explained in the Battle of the Numbers. Further, if new competitors arrive on the scene with either more efficient chips or more boards, this will rapidly increase the total network hashrate beyond what the mine business plan predicts.

The prediction from the business plan, however, is that the network hashrate will be 600 TH/s by the time the mine starts operating, and will increase by 200 TH/s per month throughout 2013. These numbers are very high and it seems unlikely that the network will reach 600 TH/s by August (which means an eight-fold increase in just over a month).

Further, adding 200 TH/s per month will mean that new technologies or massive new mines must come online, and knowing the pace at which ASIC development and deployment happens, this may also be on the high end of the realistic estimates at least in the short to medium term. We’re already pushing the limits of what is technically feasible with some chip producers now attempting to design and produce 28nm chips. ASICMiner, for example, uses 130nm chips, and lower is better but also massively more difficult and orders of magnitude more expensive.

Difficulty and total network hashrate is a highly speculative topic, so you want to do your own estimations on what you think is likely and whether the 600 TH/s by August plus 200 TH/s per month throughout 2013 is realistic. Perhaps you have different predictions? I encourage you to run the numbers yourself based on the model with which you are comfortable.

Despite this and the even higher numbers from this analysis, however, 100TH may remain profitable well into the summer of 2015.

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Disclaimer: Please do not take this as financial advice. I have no idea what I’m talking about and you should not listen to anything I say. I may or may not hold shares in any company at any time, so as with everything you read, please be safe and assume that the author (in this case moi) has a direct benefit from a high or low share price. Do your own research, do not rush into investments until you understand the assets and the market, and never, ever, ever, ever, ever invest money you are not perfectly comfortable throwing out the window into a blazing pit of fire.

16 thoughts on “Can 100TH Really be the Next ASICMiner? In a Word: No

  1. Thanks for your insightful analysis. As the datacenter service provider for the 100TH project, I just wanted to point out the significant competitive advantage provided by locating the mine in an area where power is so inexpensive.
    Very low power costs facilitate a very low management/colocation cost (see 100TH biz plan) and preserve mining profitability for longer into the future than could be done elsewhere.
    The megabigpower team has been working very hard to prepare for the arrival of 100TH in order to provide a ready-to-run environment with sufficient power, cooling and security in place. My pledge is to have 100TH hardware up and running with no delays and focus on maximized uptime – its best for the shareholders (and I’m a shareholder too).

    Best,
    Dave

    1. China’s electricity is really not that expensive, and honestly electricity cost is a pretty small part of this equation. A much bigger part of it is being the first on the scene with serious power.

      1. This is true, and predicting what the network power will be at a given point is very hard. That is the biggest uncertainty of the analysis. If both BFL and Avalon suddenly ships en masse, plus all the proposed and upcoming next-generation chips arrive as scheduled, then network hash rate may rise as quick or quicker as the most conservative estimate form this analysis.

        On the other hand, if BFL and Avalon continue to delay and the proposed new chip types do not arrive as quickly as their designers hope, then that completely changes the picture and makes 100TH much more profitable.

        .b

        1. I’m a shareholder who purchased during the IPO. I would be very interested in your projected ROI numbers for the 0.04BTC scenario (also the $15USD/BTC era)

          M.

          1. Milo,

            If you look at the lifetime charts, the ROI is there already. The percentage is based on a given price, but the BTC based return is the same, regardless of what you paid for it :-)

            As to what the real ROI will be, well, predicting that is outside the scope of this article and probably beyond most people’s abilities due to the uncertainty of the difficulty evolution.

            .b

    2. I live in WA state, and I am also a shareholder. Is there ever a chance for the public to see the mining equipment in action? I just think it’s so cool that a place called “The Buckle of the Power Belt of the Great Northwest” is going to be minting many new bitcoins right in my backyard, and all by the might of water and gravity!

      Discovering that the equipment was going to be hosted here was a big reason I invested actually.

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  3. Let’s say that 100TH successfully deploys 100THash/s of hashing ASICs.

    Then what?

    We now have a company with a working ASIC design. Developed, tested, deployed. Are we to believe that they will sit on this knowledge, mine away at a soon-to-be measly 100TH?

    The logical thing to do would be to keep building new ASICs. As long as they can either mine profitably with these devices, or sell them for a profit, there is simply no reason that they should stop at 100TH.

    And for every new “100TH”-style bond they issue, the value of all other 100TH-bonds decline.

    I think this is relevant information for any investor in either ASIC devices, or stocks that aim to provide a certain hash rate per the production and deployment of ASICs.

  4. You seem fairly confident that this will be profitable, even with the most pessimistic hypothesis regarding development of the networks hashing power. In other words the prices today (around .2-.3 ฿ per share) should still be fairly cheap, right?

    1. Cheap or expensive are subjective terms. It is very expensive at ฿0.1 if you are completely risk averse, but very cheap at ฿0.9 if you like a gamble. That’s why I can’t say whether it is a good buy or throwing money out the window; it greatly depends on your apptetite for risk versus reward, the profile of your investment portfolio, how quickly competitors can catch up, and so on.

      I have bought some shares because this stock fits my investment profile and I’ve spent weeks and months learning about the market to understand how this particular asset fits into my risk profile. That is solely based on my profile, though, and it should be irrelevant to everyone else, thus I won’t post anything about that profile nor my personal prospects for this investment.

      .b

  5. Well-written article but there are a number of important factors that you omitted in your analysis.

    1) Your initial network hash rate for your projections starting August 1st is absurdly low. We are currently at ~107 TH, and with the 100 TH project expecting to bring on an additional ~103 TH, the lowest possible hash rate would be 210 TH.

    In your financial projections, you started out at 209 TH and 218 TH for the 10% and 20% increase in TH rates respectively. The total network hash rate has increased by about ~20 TH per month over the past few months, it’s inconceivable to think that the hash rate will go down or stay the same for the next two months. The best case scenario, assuming an August 1st start date is a total network hash rate of 250 TH (which I believe to be unlikely).

    2) The math on your network hash projections is incorrect. For the 20% increase, starting at 218.2 TH, would yield 261.84 TH. Please correct these.

    3) Tytus recently posted in the bitcointalk thread that, ” I doubt the mine will make 100 BTC in the first two months.” The business plan states that the mine was planned to start on July 1st, if we assume this is still the case and that the mine just simply won’t be 100% operational until September 1st, it must be accounted for in our analysis. This statement should worry prospective investors…

    With the ask price for shares at about 0.295 at the time of this post, this is an incredibly speculative and risky investment.

    1. Aedius,

      Thanks for your compliment, I’ll answer in numbered fashion…

      1) We’re currently (when I wrote this) at 96TH/s. I wrote explicitly for each scenario that 100TH is excluded because the 100TH will _not_ increase in size and should thus be excluded from the increasing. In other words, the network growth must be calculated withouth 100% or double (to 40% per month) to coved the fact that 100TH does not grow.

      2) My math for 20% increase is just copied from Excel so I believe it is correct if it is correct for the 10% increase.

      3) Tytus (one of the primary people behind 100TH) posted a lot of things in the past couple of weeks, and I’m not sure it was all based on a clear head. 100 BTC in two months is… Well, not very much (4 blocks). In comparison, ASICMiner put out almost 100 times as much. If 100TH will not produce 100 BTC in two months it will be considered one of those disaster situations as mentioned in the risks below. I believe this statement from Tytus was a typo or that he menat something else. At the very least, I doubt he has inside information to say that the mine already is going to be a failure.

      Finally ‘incredibyk speculative’ is a subjective term and I try to avoid those as what is one man’s ‘highly speculative’ is another man’s ‘safe bet’. Readers should determine this for themselves, but I appreciate that you offer your personal view on this investment :-)

      .b

  6. Thanks for the response.

    For point one that is fine, but if you’re going to exclude 100TH from the total, you should do the network calculations independent of the total yield and ROI.

    The 10% increase calculation is also incorrect, 208.6 TH increased by 10% is 229.5 TH, not 219 TH.

    Tytus’ recent posts have been a bit all over the place recently and another user stated that he may have meant 100k BTC in the first two months (which he said he doubts they’ll achieve). I would definitely agree with him on that, as the total network will return approximately 216,000 BTC over two months and having 100k of that would be 46.3% of the network! Having that large of a percentage of the total network hash rate would be dangerous for Bitcoin, because if another large mining operator went offline 100TH could have more than 50% of the network.

    My reasoning for using that terminology is that there are a lot of unknowns in this investment, which increases the risk significantly. Anyone who considers this a ‘safe bet’ is delusional.

    This could very well turn out to be a great investment and I hope it does, but the lack of information is disconcerting.

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