Comparing BFMines to Alternatives

Disclaimer: The BFMines asset is my own asset, so assume I’m trying to influence your decision into buying. Always do your own research, verify claims, run your own numbers, and so on. This should not be seen as financial advice.

Earlier this week, in preparation for the IPO of BFMines, I published an article outlining the risks I saw as most relevant to my BFMines mining contracts. That article sparked some comments in various forums, including one comment from Bitcoin investment luminary Deprived where he requested that I posted a comparison between BFMines and other mining investment opportunities.

Note: Deprived also requested that I added a risk factor regarding the BTC/USD exchange rate. However, that risk is not specific to BFMines but applies to any cryptocurrency investments, so I’m not going to address that specifically.

I’ve been hesitant to post specific numbers on both comparisons to other investment opportunities as well as difficulty speculations. The reason is that both of these numbers will be relevant only at the very minute the article is written, and changes almost on a daily basis. This is why it is very important that you run your own numbers.

However, as more and more people are requesting this, I’m going to comply with the following disclaimer: The numbers presented in this article are current as of this moment and change on a daily basis.

Make sure you review the numbers when you plan your investment.

Assumptions and Method Used

In this comparison article, I’m comparing numbers only. I’ll write a brief statement about each asset compared, but those statements have not been taken into account beyond what is explicitly stated.

For example, I may say that “Asset A has a risk of default” or “Asset B has a larger than normal volatility”. These statements focus on opinions only, and you should review them as part of your investment decisions. However, they may or may not make a favorable impact on the asset or on BFMines, depending on how you evaluate the statements.

For east asset, I’m focused on one number only; the price per mhs. BFMines is effectively denominated in mhs, so to have a reasonable comparison, this should be your main focus.

I’m providing some additional figures as well to give you some indication of the profitability potential. I am also using the highest sale price over the previous 24 hours as reported by BTCT.

Finally, I’m basing the price of BFMines on that everything goes according to schedule and that there is an average difficulty increase of 15% per month from now and until mining begins. After that, every asset denominated in hash power will have the same profitability evolution, so difficulty speculation beyond that should not affect which asset in which you invest (only whether you invest in mining at all).

Note on Bonus: BFMines has a bonus dividend which will be at a minimum 15% and likely more for the first six months. However, difficulty is expected to increase, so the ‘likely more’ is removed and I’m using 16.6% for six months to make it easier to calculate.

I am accounting for this by subtracting 1 month of September dividends from the price, and do the same for other mining contracts for the expected dividends paid until September 1.

Mining companies are assumed to keep their current percentage so dividend calculations are based on today’s dividends from mining. This means that although ASICMiner and Cognitive will increase their hash rate, I’m using the decline in profitability due to difficulty increase to counter this. As such, I have not included price adjustments for the mining companies.

Asset Comparison

I’ll compare BFMines to two classes of assets; mining contracts and mining companies. The difference may seem subtle, but mining companies may have better protection against difficulty increases as they may increase the hash rate to stay at the same relative rate, whereas mining contracts in general will not.

I have chosen two mining companies and two mining contracts from BTCT. The mining companies are ASICMiner and Cognitive and the mining contracts are TAT.VirtualMine (TAT.VM) and PAJKA. For Cognitive and PAJKA I have included their projected upgrades as well, as these may affect your calculations.

Note: One asset, called DMS.Mining is currently cheaper than all mining assets. However, this is a somewhat different asset that carries additional price volatility risk to holders, so I’m not including it here. Read more about the DMS assets in this article.

The conclusion, if you’re impatient, is that BFMines is right now the second cheapest mining asset when comparing yield from mining alone. TAT.VM is slightly cheaper at the moment, and the break-even point today (and this goes down every day) is 0.00483BTC for TAT.VM. If TAT.VM goes up to 0.00483, BFMines is again the cheapest mining you can buy.

Update, July 8, 2013: Due to a miscalculation in my initial model, I’ve updated the chart below and included updated numbers based on the situation as of July 8, 2013 at 7:43 PM CST. I have also included DMS.Mining in the comparison, but please not that this is neither a mining contract or a mining bond, so the price paid behaves differently.

The full overview is here, and note that in the final column, a lower value is better:

image

BFMines

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,004000 0,000479 0,003521 1,00 0,0035209 0,000016 165,54 % 100 %

Statement: This is the baseline to which I compare other assets. Note that the adjustment is based on one month of dividends in September as explained in the note.

ASICMiner

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 5,170000 0,000000 5,170000 155,00 0,0333548 0,002475 17,47 % 947 %

Statement: The engine of Bitcoin stock markets is ASICMiner. ASICMiner has plans to keep their current percentage of overall mining, but will likely not exceed 35% of the total network. Note that dividend estimates are based on mining alone, not hardware sales. I have based returns on their purchased 62THs, not today’s rate (which is just 30THs)

Cognitive

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 0,400000 0,000000 0,400000 10,50 0,0380952 0,000168 15,30 % 1082 %

Statement: Cognitive is a mining company with more incoming hash power, but also with some issues related to the trust in the issuer. Will likely increase hash power further and has a dedicated fund to support such increases.

Cognitive Upgraded

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Company 0,400000 0,000000 0,400000 58,00 0,0068966 0,000926 84,51 % 196 %

Statement: See also Cognitive above. This calculation is based on the ordered hardware (7xBFL 60GHs miners) which should arrive in two weeks (and that’s a joke playing on BFLs continual promise to deliver in two weeks; I have no idea when it will arrive).

TAT.VirtualMine

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,004680 0,001308 0,003372 1,00 0,0033719 0,000016 172,86 % 96 %

Statement: TAT.VM is slightly cheaper than BFMines at present. The price adjustment is to account for the expected dividends paid from today and until September 1. Note that this adjustment goes down every day, so the difference goes down each day.

Update July 4: A forum user commented that mining contracts do not pay transaction fees. This is not true for BFMines as this is a real mining operation, not a virtual one, so all income, both block rewards and transaction fees, are paid out. I asked TAT about his asset, and he confirmed that TAT.VM pays only block reward. This gives BFMines a slight advantage equivalent to the transaction fee, which right now is somewhere between 0-2%.

PAJKA

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,062000 0,003924 0,058076 3,00 0,0193585 0,000048 30,11 % 550 %

Statement: PAJKA has been a long-running mining contract that got a recent price adjustment due to a certain investor getting panic an selling a large portion of the shares. Note that PAJKA also is scheduled for an upgrade so check below.

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PAJKA Upgraded

Type Price Adjustment Price Adjusted Hash/Share Price/mhs Div/share Yield/year Cost/BFMines
Contract 0,062000 0,019622 0,042378 15,00 0,0028252 0,000240 206,31 % 80 %

Statement: When PAJKA gets its new hardware in two weeks (that’s still a joke), the issuer will upgrade the contract to 15mhs. At that point, the current price will compete with both BFMines and TAT.VM. Note that the adjustment is based on receiving the hardware today (which isn’t likely) and thus that the final adjustment will likely be lower and thus less competitive.

17 thoughts on “Comparing BFMines to Alternatives

    1. How about adding in resale value. Yep you have the 3rd cheapest PMB on the market, but you are not hasing yet. Resale is speculation and a gamble at best, but you asset will decline rather than rise. And at the wost AM and cog will decline slightly. Or at best yours will decline slightly and AM and cog will triple over the next year

      1. Not sure why you couldn’t understand what was written. Did I not explain this already?

        Also, I’m happy about your ability to predict the future. I’m not in such a lucky position, so I refrain from doing it.

        .b

  1. I just do not understand why PMBs are worth buying. Taking realistic numbers, 1Mhash costs at least about 0.004BTC and gets you a daily 0.000025 in dividends. That is (less than because difficulty changes come more often than 2 weeks) 0.00035 within a 2-week period of constant difficulty. Now if we assume that at each change the yield becomes a factor c times less than the one before, the total amount that can be earned by the 1Mhash bond is the sum of a geometric series which is 0.00035/(1-c). This is assuming that it is operated for an infinitely long time. By that time the difficulty will be such that the value of the bond is practically zero.

    Putting all this together, even for the cheapest PMBs the break even point is when each time the difficulty increases on average less than about 8%! This is not very likely to be so, especially in the next couple of months. And then there are all sorts of unquantifiable risks involved.

    And by the way, this reasoning also holds true for most of the ASIC miner equipment sold these days.

    1. You are assuming a PPG model (perpetual proportional growth). That model assumes also an infinite availability of money and some strange ideas about physics. If this is true, Bitcoin is dead because nobody will ever invest in mining anymore, so no need to worry, really.

      This model, for example, assumes that the investments in mining equipment over the next 8-10 months is $200 million and for the following 12 months, it will be roughly $3.4 billion, just to put that in perpective.

      Believe it if you will, I don’t.

      .b

      1. No physics involved here, just high school maths. On the other hand, you are right that if you take my story literally, it assumes a constant growth rate for infinite time. However, if the present growth rate is sustained only for a year, my calculation is accurate to 5%. I.e., the same hashing power will yield 5% of what it does now and it will have generated 95% of the yield I calculated for infinite time.

        Of course, I cannot predict how the hashing power will grow during the next year and cannot even estimate what investment is needed to keep up the present growth rate. However, I know that ASIC has just started and I also know that the manufacturing of new chips needs a large initial investment and then after mass production started it is relatively cheap. So I find it very likely that the growth rate will not slow down considerably in the near future.

        1. I understand what you are saying, but I find it extremely unlikely that we keep up the current growth for a year. That would imply we’d need to invest more than 3 times as much in mining as we have over the entire Bitcoin history in less than a year. Keep in mind that most of the rate growth recently has come from efficient hardware (ASICs) so evolution in technology will play a much less important role in future increase.

          To reach the 6 PHs you assume, then KnC or Bitfury needs to sell the equivalent 15,000 of their most powerful miners. As these are at their cheapest priced at $9,600, we need, as a community, to invest $144 million in ASIC miners over the next year or so, or $12 million per month.

          If we assume that most of today’s power comes from the currently least efficient hardware (AM Blades at 50BTC/13 GHs and I’m using the least efficient to make the current investments as high as possible) the community has so far in its history invested roughly $40 million in Bitcoin mining.

          This is the absolute best scenario. It ignores all Avalons, BFLs, or other more efficient miners.

          If we ran the same numbers with BFL 5GHs miners at $249, we’ve invested $9 million in mining, and would need to multiply that by 10x over the next year to keep up your assumptions.

          If we assume that future mining power comes from Avalons priced at 75BTC/66Ghs, the future investments would cost just short of $500 million.

          In other words, I don’t think we’re going to see numbers like these, or anywhere near that.

  2. Your assumption that difficulty will only rise 15% per month is totally false and almost none of the ordered asics are mining as we speak.

    The difficulty rise is more 20% every two weeks atm and will likely explode toward the end of this year !

    I do like your blog though 🙂

    1. Tamis,

      If you are right, then no Bitcoin mining investment will ever repay itself. If no Bitcoin mining will ever repay itself, why would people invest? If people do not invest, why would difficulty climb?

      .b

      1. Bjørn,

        difficulty is climbing and will explode because of all the asics entering and getting ready to enter the network.

        You also have the mining companies that will wreak havoc for small/medium miners and you can also add to that the asic sellers testing (mining with) their equipment before sending them to the buyers.

        Difficulty will not lower because asic owners will let them on even for small profit and soon new technology or lowered prices of existing techs will keep up the steady rise.

        This is why as tempted as I was I did not buy one of the 25gh starter kit from Bitfury this afternoon. This is too much of a lottery !

    1. If you mean PMB, I don’t have one 🙂

      Mining contracts and PMB have by design no increase in rate, however. In other words, what you buy is what you get. This is always true for PMBs, although some, like PAJKA, has a contractual increase when certain events happen.

      For BFMines, although it isn’t a PMB, there is a surplus mining capacity that may be used to increase hashrate or pay additional dividends, but the guaranteed minimum revenue will remain at 1mhs.

      .b

  3. I understand that the BFMines contract is for a fixed hash amount of 120GH/s. That the contract will run for as long as it is profitable, more likely until Nov. of 2016 when the halving occurs.

    Now what I have done is bought a 5GH/s indefinite contract with a 25% reinvestment every month. This was purchased for $500.00 from http://www.BitcoinFrenzy.com. What happens is 25% of my profit (bitcoins) will be reinvested into additional 500MH/s each month. The contract will continue for the rest of my life, but realistically until end of 2016. At this time at only 12.5 btc / block I have not ran the numbers, but until then I will be adding 1GH/s every other month to my overall hashing total.

    The company currently has 4000GH/s up and online and are looking to expand with an additional 6300GH/s scheduled for delivery in Aug of 2013.

    I figure the most this is going to cost me is the $500 bucks, as this is my first foray into the Bitcoin environment. The risk is that the company is for real and not a scam. I am getting emails still from Arun C, but so far that is all. Have you heard anything about BitcoinFrenzy.com? Just wondering.

    Regards,
    Lloyd Faver (okiefromokc in the bitcointalk.org forum)

    1. Lloyd,

      I’m not sure why you think you can’t reinvest 25% of your monthly profit into just about anything you want, including additional BFMines contract to increase your overall output.

      There’s no principal difference between the operator doing that for you and you doing it yourlself. The difference being that with BFMines, you can choose to do so (or not). You also don’t have to commit to keeping your investment there for a year or forever; you can sell your contracts on the market any time you need to free up your resources.

      Finally, there’s nothing preventing BFMines or other mining investments to be profitable beyond 2016. I’ve used 2016 to calculate likely profitability scenarios, but I have no idea what happens two months from now, let alone three years from now. The halving effect will reduce block rewards, but for all we know, transaction fees have compensated for this by then. Also, even if transaction fees do not account for the complete loss, profitability will halve, but if the contracts yield 15-20% ROI per year, a halving will still make these investments profitable at a rate of 200-300% more than NASDAQ composite, for example.

      This is purely guesswork at this point, though, and anyone claiming to know are either time travelers or idiots 🙂

      .b

      .b

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