Category Archives: Investing

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.

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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

Understanding Mining Bonds

Disclaimer: Do not take this as financial advice. I have no idea what I’m doing and if I’m right, assume it is luck. Also assume that I have a vested interest in seeing you take some kind of action, for example because I hold shares in companies that directly or indirectly benefit from you taking said action. In fact, to be safe, assume that I’m out to get you, and you specifically.

You have been warned.

In the Bitcoin and Litecoin stock markets, nothing is as hot as mining operations. These typically come in two forms, either as mining companies or as mining bonds.

Note: If you have no idea by this time what a mining operation is, then you’ve like found the wrong article and should head over to something more basic.

Most people don’t really get the whole mining bond thing, though, so I thought I should write an article and explain how these work.

What are Bonds?

Most people understand what a share in a company is, but if you don’t, think of it simply as a partial ownership of the company. Whatever the company owns, you own, and whatever the company earns, you earn, of course relative to the number of shares you own and how many shares are issued. When the company decides it has sufficient free capital, they may pay out a portion of they money to share holders, and this payment is called a dividend.

When the company does well, either the price of each share goes up because the company has more money (and assuming a market that more or less prices a share based on company value) or the company has more money that can be paid out as dividends. Conversely, if the company does badly, the profit and thus value, price, and dividends go down.

A bond, however, is simply a loan that is issued as a stock market asset or security. Rather than going to a single bank or financial institution to get the complete loan, the issuer, who wants to raise money for something, issues bonds that are then purchased by multiple parties on a stock exchange or market. This reduces the risk to a single lender and is thus often an easier way to raise capital.

Note: They key difference here is that a share is ownership of the company while a bond is ownership in a loan.

For example, if someone wants to raise $1 million, rather than going to a bank to ask for one million in one application, they can issue 1 million bonds each valued at $1. Investors can then lend exactly as much as they want, anywhere from one dollar to a million dollars. Each share of the debt represents a an equal portion of the total debt.

A bond, as a loan, is also associated with payment of interest, often called the coupon. The issuer pays this interest to lenders to get the money. The interest can be variable, fixed, a combination the two, or any other form that is legally allowed.

Finally, bonds are most often redeemable, meaning the issuer can buy them back, which is essentially the same as repaying the loan. As for the coupon or interest, the terms of this repayment is subject to what is legal and desired by the issuer and the market.

And Mining Bonds?

Mining investments are one of the most popular asset types in the cryptocurrency world, but a lot of people do not seem to realize how they work.

Mining bonds are exactly like regular bonds in principle, but they often have a few differences from what the norm is in the financial markets. I’ll get back to those differences in a moment, but let me first explain briefly how mining bonds work.

In a mining bond, the interest paid for each bond is most often based on a certain output that mining produces. For example, a 1KH/s Litecoin bond will pay out whatever having a 1KH/s mining rig would earn you. The coupon or interest on a mining bond is variable and changes based on the difficulty of the mining of that coin. The higher the difficulty, the lower the coupon or interest.

However, one thing that many people seem to misunderstand is that bonds are not shares in the company. Once you buy a bond, you have a predetermined agreement that the issuer promises to pay. When you own a share in a company, the issuer promises to give you whatever is your share of the profits, but you don’t know in advance what this may be.

Because the rate of return is highly variable and also declining, assuming a rise in adoption and popularity of mining, mining bonds behave a bit different than regular bonds.

First, most mining bonds are perpetual whereas regular bonds are redeemable. This means that the issuer has no plan to repay you what you lend. Your only return from your lending is the coupon or interest. After all, as profitability of mining declines permanently and the equipment bought with the loan will fall in value, the issuer has no way of repaying the loan.

Note: The term perpetual is actually a protection for the issuer, even thought it sounds great to the lender because it sounds like you get money forever. To the issuer, however, it is a protection because it means they never have to repay the loan you give them.

Because of this lack of repayment, mining bonds often have incredible returns and may seem to be great investments compared to regular bonds. They may be, but for all mining bonds, the simple truth is that what you get in return will dwindle rapidly as the rate of mining increases globally.

Second, the return of your bond will never increase. This is important to understand and confuses people when they see that companies invest in ever growing mining farms while their bonds remain static at a certain level.

However, when you think about it, this is perfectly logical. Remember that the mining output is the interest on a loan. There is absolutely no reason why the issuer would want to increase how much they have to pay you no more than it would make sense for you to start paying more on your mortgage, even though the housing market may go down or up.

With a bond, you do not own what the issuer uses your money to buy. You own simply the coupon or interest  or that loan plus, technically, the loan value itself (although in perpetual bonds, this is never repaid and should be considered sunk cost).

As long as the issuer keeps paying what the terms of the contract states, you have no claim to any additional payment for any reason.

A couple of mining bonds play a little benign trick on you. The explicitly increase the payment over time, either through a reinvestment plan or by stating that on a certain date or under certain conditions, the coupon or interest will increase.

This isn’t anything different from regular bonds, however, that have coupons or interests that change based on some condition.

For example, let’s say you lend me $10 and I will repay you 10% interest per year, which is fine, and you know exactly what you’ll get. However, I’ll also include a clause that if I win in the lottery, I will increase that payment to 20%, and that if I lose my job, I will reduce that to 5%. This is still fine as long as those terms are known to you in advance.

For bonds that do reinvestment, the situation is still very simple when you think about it. The reinvestment will keep your return at a more steady pace, but that reinvestment comes from money you would otherwise have received in interest, so you are not really getting anything more than you would if you simply got a higher interest and purchased more bonds.

Are Mining Bonds Really Mining?

Now that you understand how mining bonds are just like regular bonds, and that all bonds are simply loans on which the issuer pays a predetermined return, here’s a thought for you:

Mining bonds don’t have to mine at all, and that is perfectly all right. It’s not a scam, nobody is trying to trick you, and it doesn’t affect the profitability at all.

Note: Speaking of profitability, calculating that for a mining bond is no different than calculating the profitability of investing in mining equipment. Find a good calculator, add the return from the hash rate you get in the bond, add the cost of the bond as the cost of the equipment, and you’ll have your profitability.

You see, you do not own the equipment that the issuer buys with your money. To you, the issuer can use that money to go on vacation for a year or buy a new car. In fact, some mining bonds today don’t have a single piece of mining equipment.

What you own is a predetermined rate of return, which is defined as whatever that certain hash rate would have given you, had you operated a mine. As long as you get that return, it doesn’t matter to you whether the issuer gets that money from actually mining or from growing pot in their backyard (financially speaking, of course).

It is actually easier for the issuer of a mining bond to not mine at all. Instead, they can get your money, put that into something that has a better return, and just give you the return to which you are entitled.

Some people see this as a scam, but really, it is nothing of the sort. A bond, no matter what you put in front of it, is simply a loan and you forfeit any decision over what the issuer buys with that loan the minute you sign the contract by placing a buy order.

I hope this helps clear up some of the confusion around mining bonds, but as always, feel free to leave comments if you have questions, comments, or other feedback 🙂

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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.

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.

Where to Buy Bitcoin and Litecoin Shares

Disclaimer: Do not take this as financial advice. I may or may not hold shares in any of these markets at any time. You should always do your own research before investing anywhere in any currency. Bitcoin and Litecoin stock markets are by nature unregulated and thus carries a significant risk in addition to traditional market. Please review the terms and conditions for each exchange carefully.

Be very, very careful about investing anywhere.

There, those disclaimers should indicate the seriousness with which you should take investing, especially when you are investing in Bitcoin and Litecoin shares.

With the recent rise in ASICMiner share prices, interest in cryptocurrency investing has increased and people are looking very hard for the next ASICMiner company.

However, you can’t research or invest anything unless you know where to go to find those shares, so allow me to give you a brief overview of the various market places.

Major Exchanges

At the time of this writing, there are four major cryptocurrency exchanges that offer a variety of investment options. All of the exchanges offer regular shares and some offer options and futures as well.

MPEx

MPEx has been around the block longer than any of the other exchanges that are currently in existence. Run by the arguably eccentric Mircea Popescu and sporting a user interface that would make a new investor cry blood. MPEx also requires a hefty fee for joining the exchange, currently at 30 BTC. The owner argues this keeps inexperienced investors away and maintains a high degree of seriousness among those that choose to trade here.

However, what MPEx lacks in beauty and user friendliness, it more than makes up for in volume and stability. MPEx offers trades in three shares only, including itself, but additionally offers options and futures trading on the BTC/USD exchange price, which is very useful in volatile times. Further, MPEx has a strict vetting policy for new listings, requiring a thorough review of new listings more like traditional stock exchanges.

Site: https://mpex.co/

Bitcoin Trading Corporation

On the face of it, the Bitcoin Trading Corporation, or BTCT, has a much higher volume than MPEx. However, at the time of this writing, the majority of that volume comes from ASICMiner Pass-Through trades.

Note: To learn more about pass-through shares, check out my article on How to Buy ASICMiner Shares.

BTCT sports a nice, clean interface, with security features such as two-factor authentication for bids, asks, withdrawals, and account changes. The exchange has a modest range of available shares, including the ever so famous ASICMiner pass-through shares, as well as pass-through shares to all the MPEx shares.

BTCT also offers option trading and a dividend reinvestment plan to turn your dividends into new shares automatically.

Site: https://btct.co/

Bitfunder

If variety of shares is what you favor most, then Bitfunder offers more shares than any other exchange currently on the market, including ASICMiner pass-through shares. Bitfunder also has pass-through shares to the MPEx shares and currently offers trades in more than 30 different stock.

Bitfunder’s interface is clean and fresh and offers multiple charting options giving you more options than the other exchanges. On the negative side, the funding process of Bitfunder is somewhat quirky and requires you to register an account with a different provider to which you will send your funds. As such, the process for trading shares is more cumbersome than BTCT although it is far easier than MPEx.

Site: https://bitfunder.com/

Note: Just as a reminder, please review each site’s terms and policies before you invest anywhere.

Litecoin Global Exchange

The only major, and I say major in the most generous sense, Litecoin stock exchange in the world, is the Litecoin Global Exchange, or LTCG. This exchange resembles BTCT quite a lot, and the simple reason for that is that the same person runs both exchanges. In fact, LTCG owns BTCT, despite the latter being orders of magnitude larger than the former.

Litecoin shares comprise a much smaller market than its big brother Bitcoin, but can still offer viable investments. Several shares traded on LTCG are pass-through shares to Bitcoin-denominated assets (like MPEx and SDICE) which complicate the process of determining the correct price. However, if carefully planned, this can serve as a hedge against volatility in the BTC/LTC exchange rate.

The features of LTCG closely resemble that of BTCT. LTCG offers around 30 shares for trade, including several mining companies and the exchange itself.

Site: https://www.litecoinglobal.com/

Minor Exchanges

In addition to the major exchanges, there are some smaller exchanges that offer very interesting shares too.

Picostocks

Picostocks is the brainchild of a small group of people that want to help hi-tech companies get public funding. Currently, only three companies are listed, including the exchange itself. The other two companies is a pharmaceutical company (Proteon Pharmaceuticals) and a mining company (100TH).

The user experience of Picostocks is in tune with the idea behind Bitcoin, with anonymous but public ledgers of all trades. This allows traders to look into the holdings of any other trader but without knowing the identity of that trader. The idea is that learning how the best traders work will help others learn as well, creating an informed user base.

Update: A word of warning, though, and a clear indication of how unregulated the Bitcoin stock market is. When a certain piece of good news comes through on Picostocks, the stock exchange itself has a tendency to dump large amounts of shares in the market, preventing any reward for risk-taking on this exchange.

As such, I cannot really recommend anyone investing on Picostocks.com as you can be certain that the reward you would normally get for accepting risk will be taken away.

Site: https://www.picostocks.com/

Havelock

Havelock Investments is a small exchange, both in volume and share diversity. However, it does offer pass-through shares to other shares, including a 1/100 pass-through to ASICMiner.

In addition, the Havelock user experience is very neat and looks extremely professional. While this may be unimportant to share prices, a smooth operation is important to get the right share for the right price and the right time.

Havelock also offers direct import of S.DICE (SatoshiDice) shares from MPEx, sports an optional two-factor authentication, lists IPOs separately from other shares, and shows financial reports for all assets that have them available.

Site: https://www.havelockinvestments.com/

What Else?

You know that disclaimed I stated in the beginning? Read it. In fact, to make it easier for you, I’ll repeat it right here:

Disclaimer: Do not take this as financial advice. I may or may not hold shares in any of these markets at any time. You should always do your own research before investing anywhere in any currency. Bitcoin and Litecoin stock markets are by nature unregulated and thus carries a significant risk in addition to traditional market. Please review the terms and conditions for each exchange carefully.

Be very, very careful about investing anywhere.

Why Investing in Mining is Always a Bet That Prices Will Drop

The one thing that really puzzles people when it comes to evaluating Bitcoin mining profitability is the fact that investing in mining equipment is always a bet that the prices of your chosen currency goes down.

I’ve tried numerous approaches to explaining why this is true, and I’m almost always met with either complete bewilderment (but, it’s free money, how can that not be profitable?) to rage (you simply don’t understanding mining, it’s all about difficulty/price/speed/etc) to weird math-related arguments (well, your calculations cannot be true because you didn’t prove it with my numbers).

As such, I’m going to explain this concept, hopefully in a way that makes it easy to understand.

However, to do so, I’m going to have to trick you.

Currency Trading

I want to start with a completely unrelated topic, just to make sure we have something relatively easy to understand. The topic is going to be currency trading with three currencies.

These three currencies are not to be understood as the traditional currencies you usually handle, like US dollars, Euros, or Pounds. To accomplish this, I’m going to call them A, B, and C.

Because we’re going to do some trading with these currencies, we need to establish an initial exchange rate between the currencies. I’m going to start with the following exchange rates:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:50
A:C 1:100

This table should be fairly easy to understand. If you have 1 A, you can trade that for either 2 B or 100 C. If you have one B, you can trade that for either 0.1 A or 50 C. If you have 100 C you can trade that for either 2 B or 1 A.

In fact, let’s start with 2 B and see what we can do. To make this simple, we trade only once per day, using the final exchange rates for that day.

Initial Status: Our holdings initially is 2 B, the equivalent of 1 A or 100 C

First Day of Trading

On the first day of trading, we decide to buy 1 A for our 2 B.

Day 1 Status: Our holding before day 1 is thus 1 A, the equivalent of 2 B or 100 C.

After the first day of trading, the exchange rates have shifted, making C 2.5 times more valuable. Our exchange rates now look like this:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:20
A:C 1:40

Dang! Our value measured in C is now down to 40 C. Even if we still hold 1 A, the exact amount we started with, the increase in C value means our starting sum now translates to a much lower amount of C.

In other words, our value of 1 A means we can get 2.5 times less C today than initially.

Second Day of Trading

Thinking that the C price surge on day one may be a flop, we decide to hold on to our A during day two.

Day 2 Status: Our holding before day 2 thus remains at 1 A, the equivalent of 2 B or 40 C.

After the second day of trading, it turns out we were right! The exchange rate of C drops down to only 10% to its original level, and our exchange rates thus look like this:

Currency Pair Exchange Rate
A:B 1:2
B:C 1:500
A:C 1:1000

Luckily, we didn’t buy into the C hype. If we did, we would still hold 40 C, but measured in A, we would suddenly hold only 0.04 A. Measured in B, we would have had only 0.08 B.

In other words, our value of 1 A means we can now get 25 times more C than yesterday.

Final Status: Our holdings after day 2 is thus 1 A, the equivalent of 2 B or 1000 C.

Do we understand each other so far? Everything looks swell? Happy with what’s going on? Good! Because it’s time for me to spring my trap.

The Trick

I mentioned earlier that I needed to trick you to explain how this all relates to investing in mining and how investing in mining is always a bet that the prices of Bitcoin or your favorite cryptocurrency will drop.

The trick here is that in the scenario above, there aren’t really three currencies. There are just two. One of the currencies, A, is actually a piece of mining equipment, for example a graphics card (GPU).

Hold on!” you say “That’s not fair! Mining equipment isn’t currency and you can’t trade it like that!

You’re right! However, you may notice that we didn’t trade A at all, we just bought it at the beginning. In the two days of trading, we used it only to measure how much of the other currencies we held.

Let’s see if my trickery goes further. What if we replaced currency B with US dollars, and currency C with Bitcoin or some other cryptocurrency? Let’s review our positions initially, after day 1 and after day 2.

Note: Remember that during day 1, the price of C, or our cryptocurrency, increased drastically while on day 2, the price of our cryptocurrency dropped like a rock.

Let’s just exchange our statuses with A being GPU, B being USD, and C being Bitcoin.

Initial Status: Our holdings initially is 2 USD, the equivalent of 1 GPU or 100 Bitcoin

Day 1 Status: Our holding before day 1 is thus 1 GPU, the equivalent of 2 USD or 100 Bitcoin.

Day 2 Status: Our holding before day 2 thus remains at 1 GPU the equivalent of 2 USD or 40 Bitcoin.

Final Status: Our holdings after day 2 is thus 1 GPU, the equivalent of 2 USD or 1000 Bitcoin.

See what happens here?

When the price of Bitcoin rises, our value denominated in Bitcoin drops drastically. When the price of Bitcoin crashes, the amount of Bitcoin our holdings represent goes through the roof!

In short, buying mining equipment yields far more reward in Bitcoins when the value of Bitcoins drop than if Bitcoins rise in value.

Your Questions Answered

As always, I’m anticipating, partially because I’ve been trying to explain this to people many times, that you have some questions. Let me get ahead of you and answer some of them right now. If you have other questions, feel free to leave them as comments below.

Q: You Forgot Mining, You Idiot!

Nope, I didn’t forget, I left it out because it would only add to your nightmare.

Go ahead, add mining into the equation. Let’s pick any number, say 10 Bitcoin per day. After day 1, you would have had 50 Bitcoins instead, an increase in Bitcoins of 25%! Amazing, increase, so mining must be profitable, right?

Well, after day two, you’d have 1020 Bitcoins, which represents an increase of Bitcoins of 1020% (yes, that’s one thousand and twenty percent) from our initial value. In other words, a price drop means you get 995% more Bitcoins than if you mine while the price goes up and manage to sell at the top. Clearly, a decreasing price yields far more Bitcoins than mining because a drop in price would add 900 Bitcoins, whereas mining would add 20 Bitcoins.

Q: It’s All About Mining Difficulty, You Idiot!

Not really. If the mining difficulty goes up, you get fewer coins, but even a doubling of the difficulty would only reduce your mining revenue by half. The theory seems to be that increased difficulty leads to a higher price because the cost of mining one coin goes up.

Note: This theory is far from certain, and looking at how major difficulty shifts in other cryptocurrencies have affected prices recently, there doesn’t even seem to be a correlation, much less a dependency between difficulty and price.

In any case, difficulty increase or decrease does not affect profitability anywhere near enough to compensate for the changes in price of a coin.

An increase in difficulty means you get fewer coins, which if the price/difficulty theory holds true means the price will rise. Of course, with fewer coins, that also means less effect of that price increase. Conversely, if the difficulty drops and the price goes down, you have more coins affected by the price decrease.

In the end, it does balance out, but if you think difficulty affects the profitability like that, just run the numbers yourself and see.

Q: You Forgot Equipment Depreciation, You Idiot!

OK, enough with the insults already!

Depreciation means that something loses value over time. For a GPU, you may expect a lifetime of 12 months, so you can on average expect the value of your GPU to depreciate 1/12 per month. The number of months may be different, but the idea is the same.

Let’s go back a couple of steps and look at the investment before my little text replacement trick. In our first example, depreciation would mean that the exchange value of our A would drop by, for example, 1/12 every month.

However, we would still have one A. Our value denominated in other currencies would drop over time, but our ability to mine with our A does not go down.

Our production from having a GPU increases over time when compared to the value of our GPU. For example, after one month, our A or GPU would be worth only 11/12 of the B/USD and C/Bitcoin value, and would give 10 C/Bitcoins. After 11 months, our GPU would be worth only 1/12 of its original value, but would still produce 10 Bitcoins, or whatever value you choose to use.

Q: You’re Using Made-Up Numbers! Use My Numbers, You Idiot!

This is the counter-argument that ultimately demonstrates whether you understand math or are just being argumentative.

Look, replace the numbers with whatever makes you happy. It’s not about whether there is a 1:2 exchange rate or a 1:45, 2:31, or 86:15 exchange rate. It doesn’t matter whether a dollar currently is higher or lower than a Bitcoin.

Try it and see! It’s very easy. Just replace the A:B exchange rate with the price of your favorite mining equipment in USD (don’t forget to convert the value to USD, regardless of whether you buy it using USD or Bitcoins), the B:C ratio with the exchange rate of US dollars to Bitcoins, and A:C with the price of your favorite mining equipment in Bitcoins. Then, do the same experiment, using higher or lower decreases and increases if you like.

Don’t trust me, trust the math.

Oh, and if Bitcoins isn’t your chosen cryptocurrency, just swap Bitcoin in the previous paragraph with Whatevercoin.

Q: Of Course I Want the Price of My Coins to be as High as Possible. Nobody Wants to Sell at a Low Price, You Idiot!

That is true, but tell me, would you rather have 1,000 coins or 100 coins to sell if the price was the same? You’re thinking right but ignore the acquisition of the coins completely.

Remember that when you sell your hardware, you are no longer a miner. You are a coin holder. The argument here is that a mining operation benefits from a falling price, but since your mining operation ceases the moment you sell your mining operation, the falling price no longer benefits you.

In fact, it’s the exact opposite when you just hold coins. You want the price to skyrocket! Until that happens, however, you want to gain as many coins as possible at the lowest price possible, and thus you gain more from a falling price than you do from a rising price.

In our simplified trading example, we stopped the analysis after the price dropped. Add one more day where you trade in your A for 1000 coins after day 2, and see what happens when the price of C or your chosen coin shoots up again on day 3 to the level it was after day 1:

Final Status: Our holdings after day 3 is thus 1020 Bitcoin, the equivalent of 25.5 GPUs or 510 US dollars.

If you were just mining at the rate of the 10 Bitcoins per day from the example in the first question, the results would be:

Final Status: Our holdings after day 3 is thus 1 GPU and 30 Bitcoin, the equivalent of 1.8 GPUs or 36 US dollars.

Mining yields a profit of 34 dollars while mining plus selling your hardware yields 508 dollars.

The End?

I doubt it, because this is a topic that seems to bring rage to miners all over cryptocurrency land. However, the short version of this article is this:

Mining is always most profitable when the price of Bitcoin goes down. If you invest in mining equipment your highest profit comes when the price of Bitcoin crashes.

That doesn’t mean that mining isn’t profitable when the price rises, only that you’re missing out on a lot of coins when that happens.

Still disagree? Leave your comment below and I’ll try to answer any question you have. Perhaps you know better? Heck, I might even update this article to include your question, and you’ll be famous for setting me straight!

.b

How to Buy ASICMiner Shares

Disclaimer: At the time of this writing, I am a shareholder with ASICMiner. I get a direct personal benefit from a high share price. Keep that in mind as you read this.

In fact, when reading anything about investment, it is a good idea to assume the author has an interest in promoting a certain message.

Also be aware that the Bitcoin stock market is, like Bitcoin, very immature and not regulated. The risks involved are far greater than for a traditional stock market.

With those disclaimers out of the way, thanks for stopping by, I’d be happy to answer your questions about how to get ASICMiner shares.

What is ASICMiner?

ASICMiner (AM) is a company that develops ASIC chips and equipment for Bitcoin mining. They currently both mine for Bitcoin block rewards and sell Bitcoin mining equipment to end users (albeit so far to somewhat technical end users).

If you don’t know what ASIC means, check out my article on what ASIC miners are and why they are so important.

ASICMiner is headed and fronted by friedcat, a user pseudonym on bitcointalk.org. It is owned by the public (holding 163,962 shares) and the shareholders of a company called Bitfountain (holding 236,038 shares).

Note: Technically, ASICMiner refers to the part of the Bitfountain company represented by the 163,962 shares, so the publicly traded shares are only that part of the full Bitfountain company. As such, ASICMiner is a virtual identity in which the public trades shares.

The first public announcement was made on August 9, 2012, on Bitcointalk.org. Since then, friedcat has kept the public informed on regular basis (often several times per week) on the progress of the development, plans for sales, as well as answering questions from the public. The thread has become quite long, but I recommend reading at least friedcat’s posts to make sure you understand the history and the company structure.

Today, ASICMiner runs mining operations at BTC Guild and OZCoin and have since February 2013 mined at a rate of between 6-8 TH per second.

At the time of this writing (April 26, 2013) ASICMiner is in the process of increasing their hashing rate to about 15 TH per second, and friedcat has also announced that ASICMiner will deploy 50 TH per second in the near future.

Further, ASICMiner also wants to sell ASIC mining equipment to end users. The first step in this plan was an auction sale held at Bitcointalk.org of 10 blades of ASIC chips called Erupter Blades. These blades, each with a hashing power of 10 GH per second, were sold for ฿75-76 each and were delivered immediately after the auction.

friedcat has stated that after receiving feedback from users, ASICMiner will start selling more Erupter Blades to the public, although the price has not been decided yet.

Finally, friedcat has also announced that they will sell a much smaller USB-stick type ASIC miner that hashes at 300 MH per second each. Pricing and availability is not clear at this point.

From an investor’s perspective, ASICMiner pays dividends on profit from mining operations and sales of equipment. Dividends are paid once per week on Wednesday, and dividends as well as dividend history are published on both stock exchanges that trade the stock (although stocks are traded as a pass-through. See below).

How Do I Buy ASICMiner Shares?

You have two ways of buying shares in ASICMiner. You can buy Pass-Through (PT) shares through two separate stock exchanges, BTC Trading (BTCT) and Bitfunder (BF). You can also buy directly from holders of real shares if you know them or they put their shares up for auction.

By far the easiest and quickest way is to buy Pass-Through shares at one of the two major stock exchanges, BTCT and Bitfunder. I personally prefer the former due to its easier interface, but either works.

On BTCT, the process of signing up for an account and starting trading is very quick. You simply sign up for an account with a username, password, email and a 4-digit pin code. You then fund your account by sending Bitcoins to an address provided by BTCT, and once those funds are confirmed (usually takes about 30 minutes) you can begin trading ASICMiner or other shares on the exchange.

For Bitfunder, the process is a bit more complicated, because Bitfunder uses an external service to handle its Bitcoins. Please review the Bitfunder process on their web site.

In either case, you should be able to buy your first ASICMiner PT share in less than an hour.

However, know that shares traded on both these exchanges are Pass-Through (PT) shares only. A PT means that you buy shares with someone who holds real shares with ASICMiner. Each share in the PT represents on ‘real’ share in ASICMiner and pays the same dividend less a fee to the PT operator.  In practice, a PT share is much the same as a ‘real’ share, but you don’t get voting rights, so keep that in mind. Also, the PT on BTCT has a 0.5% fee (which is waived for 90 days from March 5, 2013), whereas the PT on Bitfunder does not have any dividend fee.

Update: The BTCT and Bitfunder PTs no longer have dividend fees.

Note: Yeah, I know, a lot of abbreviations… These are the abbreviations that are used in the community, though, so you probably should learn them.

You should also know that PT operators may offer a conversion between PT shares and regular shares. That means that if you hold PT shares, you can contact the PT operator and request your shares be converted from PT shares to regular shares. You can also convert regular shares into PT shares. Contact the PT operator for information and terms.

Finally, you’ll also find several 100PT shares. These are just like normal PT shares, except each share represents 1/100 of a share (in other words, one hundred 100PT shares represent one regular share). Because each normal PT share can cost up to $200, a 100PT share makes it easier to invest the exact amount you want to invest.

Make sure you read up on the description of each PT share so you understand any fees and condition for that share.

For regular shares, ASICMiner do not sell those directly. They were sold initially at a now defunct stock exchange (GLBSE) which turned into a bit of a disaster. After that, friedcat decided he did not want the shares traded on any exchange for fear of similar accidents.

That said, there are a lot of people that hold regular shares, and these are sometimes put on auction over on Bitcointalk.org (check https://bitcointalk.org/index.php?board=73.0). If you participate and win shares in one of these auctions, the seller will transfer the sold amount by sending a message to friedcat with your email address and your Bitcoin address for dividends, and you are now the proud owner of ASICMiner shares.

I suggest using one of the escrow service providers on that forum to ensure the transfer goes smoothly and safely. Several escrow providers will do this for free, but it is customary to tip a few bitcents for their service. Look around in the forum and ask what their terms and availability are.

This process can take a few days, depending on how long auction lasts, but the transfer afterwards should be quick, and usually takes less than a day.

Now you can sit back and wait for the next Wednesday when you will receive your first ASICMiner dividends.

Dividends for PT shares are paid to your exchange account and directly held shares are paid directly from friedcat to your Bitcoin address on file.

Beyond that, ASICMiner does not have a web page per se, but they keep everyone informed several times a week here:https://bitcointalk.org/index.php?topic=99497.0

Like I said, be very careful about investing in Bitcoins and cryptocurrency stocks. There is no regulation, no recourse, and seldom any personally identifiable information. Oh, and always consult a tax advisor before investing in anything.

And again, for those that forgot:

Disclaimer: At the time of this writing, I am a shareholder with ASICMiner. I get a direct personal benefit from a high share price. Keep that in mind as you read this.

.b

Bitcoin Investment Complications

I have previously written about the dangers of investing in cryptocurrencies like Bitcoin. In short, DO NOT invest a single dime or cent you cannot easily afford to throw out the window while speeding down a highway, DO NOT see this as anything but a gamble, and most importantly, with the exception of this sentence, DO NOT listen to any advice I give when making financial decisions.

One reason why investing in Bitcoin, Litecoin, or other cryptocurrencies is complicated is that you need to think doubly about the effect that the price of a currency has. No only will you need to consider all the normal investment considerations, but you add what is often a completely opposite effect of your investment because of the exchange between currencies.

Even if you are a seasoned or even moderately experienced investor, you need to take into account a number of complications with cryptocurrency investments. Let me show you a few examples.

Currency Trade Complications

Let’s start with something that may seem simple, buying and selling cryptocurrencies at one of the virtual currency exchanges.

Most of the world still denominates value in fiat currencies (like US dollars, Euros, Yen, Pounds, and so on). You probably still pay your bills in such fiat currencies. That means that in addition to doing your regular investment planning, you need to calculate the effect that exchange rates have on your investment.

To make matters worse, if you hold a certain amount of currency units, whether that is US dollars, Bitcoins, Litecoins, or any other currency, you need to remember that when one currency goes up, the other currency of the exchange pair effectively goes down. In other words, if you hold your US dollars while the price of Bitcoin goes up, your relative value of US dollars goes down.

Currency speculators know this by heart, but for a novice, it may not be obvious that holding a ‘safe’ currency is almost as dangerous in terms of profit. If you trade, you double the risk and potential profit or loss.

Let’s start out with US$100, and a price of a Litecoin at $2 so you can buy 50 LTC for your money. You decide to hold on to your US dollars, thinking the price of Litecoin goes down. However, the price rises to $2.5 per Litecoin so you can now only buy LTC 40. Effectively, your dollar value measured in LTC has dropped 20% even if you did absolutely nothing. In relative purchasing power, you now have only $80 dollars.

Let’s further assume that the price drops back to $2 per LTC and you sell. You still have $80, right, so the loss hasn’t increased? Wrong! The only thing that changes is that you realized your loss, meaning you took the lost and made it ‘real’ by converting back to whatever value your had at the beginning.

RiseAndFallOfLitecoin

However, you have effectively lost double the amount you think. $100 initial value minus your current value of $80 is your realized loss of $20, right? You can now only buy 40 LTC which is 20% lower than initially.

Let’s say you didn’t buy LTC at all. You would no be left with no realized loss, and $100, which is obvious. If you didn’t buy at $2.5, but waited until the price dropped and purchased when the price fell back to $2, you would now have 50 LTC.

If, on the other hand, you had bought at the beginning and sold at $2.5, you would now be left with $125, and a price of $2 per LTC, meaning you can now purchase 62.5 LTC, or around 56% more than if you had failed to hit the top and bottom (or vice versa) completely. While the price of LTC was rising, your dollar value fell, and while the price of LTC was falling, your dollar value rose.

Even by not trading and just sitting still, you have ‘lost’ 20% profit, even if the price is now back exactly where it was when you began. If you trade and miss completely, your loss is 56%, even if the price rises and falls by only 20%.

Note: I know this can be said for any commodity, stock, or item that rises and falls in value, but it is even more obvious when you trade in currency because both are considered the same thing (money) and your loss becomes immediately visible.

Currency speculation is dangerous and complex, and it’s easy to get scared when you realize that even when you don’t buy in, you lose money. However, making mistakes may effectively double your losses, and unless you know very well how a currency will behave in a market (and frankly, nobody does with cryptocurrencies at this point), you’ll stand a high chance of risking such a loss.

Buying Stock

There’s also the psychological aspect of currency values. For example, let’s say you invest in a gaming company that pays our dividends in Bitcoin at an average rate of 0.5% per week and also charges their users in Bitcoin.

Lets now think that the exchange rate of US dollars to Bitcoin rises drastically (meaning Bitcoins become more expensive to buy with US dollars). What happens to your investment? Well, because dividends are paid in Bitcoin, you still reap the same amount of Bitcoins, but because each Bitcoin is more valuable, the dividend is worth more in terms of US dollar.

However, because the price rises, the cost for people playing the game also rises, meaning they will spend less in Bitcoin even if their spending in US dollar is the same. Suddenly a bet or purchase cost more in terms of US dollars and people will likely reduce their spending in Bitcoin. That means the rate of dividend will go down even if that dividend is worth more per coin than previously.

This complication is more difficult to understand than it may seem. The psychological effect that currency values have on people’s perception may completely throw normal investment ideas out the window.

Also, if you plan on investing in stocks denominated in cryptocurrencies, you need to realize that the cryptocurrency market is still very, very immature. There is by nature no government control and thus no government oversight of exchanges. Although there are a few reputable stock exchanges already, anyone can set up a new exchange without requiring any mandate or supervision from anyone.

Further, even the established and somewhat reputable exchanges have very few formal requirements for accepting new assets, and most of the requirements are based on community consensus which can be manipulated. You are essentially trusting the issuer of the asset that they will honor their commitments, and sadly, the short history of cryptostock exchanges have shown that you can’t always trust even those with the most honest of appearances. People have lost a lot of money and so may you.

Mining Operations

Lets say you consider investing in coin mining operations, and let’s say you have US$1,000.00 to invest and the current Bitcoin/USD exchange rate is 1 BTC = $100.

Note: Bitcoins, Litecoins, and other cryptocoins based on the Bitcoin code base, can be mined, or minted, by users using their own computers at home.

You may think that the US dollar price of a Bitcoin will rise, so you decide to buy mining equipment to get a piece of the action. You buy a new computer with a few suitable graphic cards, and start mining. Perhaps you mine a couple of Bitcoins over the course of a month.

It turns out, you were right about the price increase, and after the first month, the US dollar price for a Bitcoin has risen to $150. “Great,” you think, “I’ve gotten $300 free and that must have been a great investment”. You still have your new computer, valued at $1,000, and let’s assume it still holds its original value after just a month, and you have two free Bitcoins priced at $150 each for a total value of $1,300.

Not so fast, grasshopper. You have actually lost money on this operation.

Had you purchased BTC for $100, you could have gotten 10 of them, now valued $1,500. In other words, you ‘lost’ $150 on your investment because you paid for your computer in US dollars. Even if you sell the new machine for Bitcoins now, you would only get around 6.6 BTC ($1,000/$150) and even with your mining revenue of 2 BTC, you’d be down 1.4 BTC.

Ah,” you think, “I can just keep mining and the profit will skyrocket! One more month and I’ll be up 0.6 BTC

You may be right in thinking this, but you may also be forgetting that the difficulty of mining increases with time (or rather with effort) so your revenue goes down. In fact, for certain cryptocurrencies, the difficult has doubled, effectively halving revenue, within a week due to shifting and ever increasing effort for the network. What may seem like a great investment in April may be costing you more in electricity than you get back by June.

The Dangers of Investing in Cryptocurrencies

DO NOT under any circumstance take this as financial advice. I have no idea what I’m doing with regards to investing, I merely want to point out some of the dangers to you. DO EXPECT to throw money out the window unless you know very well what you are doing. ANY INVESTMENT is a dangerous game, especially for novices like me.

There, that should get the mood set.

In this article, I’ll focus on explaining to you some of the dangers of investing in cryptocurrencies. I’m doing this to warn you about the dangers involved, and maybe even scare you away from investing completely. This isn’t a beginners game and you will get burned if you approach it without proper preparation.

Investing Bits and Bytes? You’re Joking, Right?

You may be surprised that there is a thriving market for Bitcoin based investments. Even Litecoins now have dedicated stock and options markets. Why on earth would such a thing exist at all? It’s just numbers, right? Not real money?

Note: No, I’m not having the debate about the merits of Bitcoin, whether Litecoin has a place at all, cryptocurrencies in general, or other similar discussions now. My opinion is that there is a market need for cryptocurrencies, Bitcoin, Litecoin, or otherwise. Currently, Bitcoin and Litecoin are my favorites to lead this race, but don’t listen to me.

Well, as with all things subject to speculation, people will speculate, trying to make more of what they already have. Whether they speculate in the volatility of the market, or the long-term success of any particular cryptocurrency, these markets will pop up and as long as there are willing participants who believe they can benefit, they will thrive.

I would like to stress, though, that investing with and in cryptocurrencies is an extremely risky business. It is even more tricky and complicated than regular speculation because you also need to take into consideration the exchange rate between the various cryptocurrencies, and the exchange rate between cryptocurrencies and fiat currencies.

In other words, and make no mistake about this: DO NOT under any circumstance put money into cryptocurrency speculation that you are not completely comfortable considering lost the moment you buy in. Nobody understand this market, nobody knows where it is going, nobody has any relevant previous experience with cryptocurrency markets, much less with how stocks and options work.

So, Why Are You Investing?

Personally, I have a few Bitcoin and Litecoin investments, but like I explained, I consider these funds lost and have no hope of ever recovering them. I am using the investments to learn more about investing in general and about cryptocurrencies in particular. I have faith in cryptocurrencies as the future of commerce, and I want to learn as much as possible. I’m a learning junkie, in case you haven’t read anything I’ve written before.

At the time of this writing, I have yet to realize any losses on my investments, but I have also spent weeks and months learning and calculating, reading about investment strategies, how traditional markets work, how psychology plays into the game, and so on. I have spread my investments to balance any risks, and I’ve constructed an investment profile that matches my risk profile (which is ‘let it ride’, basically) with my expectations for the growth of cryptocurrencies.

I am a complete novice at this game; I expect to suffer heavy losses, perhaps even a complete loss, or, as it stands right now, even more than I have invested. I have spent considerable time learning, and that time may instead have been used for other, more profitable ventures.

I have, however, put in some of the legwork to understand as best I can how this game works, and it has taken considerable time. When I say I’ve worked weeks on this, I’m talking about 15-18 hour days, seven days a week. This probably makes me more informed than most first-time investors, but make no mistake; I am utterly incapable of making sound decisions, and I’m having to completely rethink what I’m doing on a daily basis. DO NOT take any of what I tell you as any kind of advice on what you should do, with one exception (two, counting the previous sentence): DO YOUR HOMEWORK.

Why is it So Complicated?

I’ll talk more about the complications of investing in cryptocurrencies in a later blog post, but be aware that investing in cryptocurrencies is more complex than regular investments. Rather than having an investment go up and down based on a single or few market conditions, you need to take the exchange rate into consideration, and that may move in any direction at any time.

Further, since Bitcoins and other cryptocurrencies are by nature decentralized and out of government control, you have no recourse if something goes wrong (recourse meaning your ability to get money back if you’re tricked or scammed). Plenty of people have lost plenty of money to scammers, but also to people who have had honest intentions but very little experience or just plain bad luck.

Also take into consideration that the cryptocurrencies’ exchange rates are extremely volatile at present. This is partially due to its size but also because it is a young market and nobody really knows what drives the exchange rate. Bitcoin Market Capitalizaion Snapshot from Blockchain.info

Many people lost large fortunes during April 2013 after what seems to have been a bubble in the Bitcoin/US Dollar exchange rate, even seasoned investors who thought they could ride the wave into the sky.

Finally, because the Bitcoin stock investment market is extremely young and small, but also due to its decentralized nature, it is to a large extent based on trust. You need to do far more investigations into the background of the issuers of stock denominated in cryptocurrencies than you would for a regular stock exchange, where you can trust somewhat in the exchange to do some of the due diligence for you.

The cryptostock market is definitely maturing in this area, but has a long way to go before its reputation and process for admissions is as strict as it would be for example for being traded on NASDAQ.

So, if I haven’t scared you off yet, I haven’t done a good job, but I would like to see that you’ve at least become more aware of the dangers inherent in investing in an unproven, highly speculative, and largely misunderstood market.

Be safe, and in the case of Bitcoin, Litecoin, or other cryptocoin investments, that may mean sitting on the bench for a while.

.b