Why BFMines is a Better Mining Investment than a PMB

Disclaimer: This post promotes an asset of which I am the issuer. I have a direct, personal benefit from you buying BFMines. Do you own research, always listen to multiple and contradicting opinions, and do not invest more than you can afford to lose.

During the design of BFMines, my mining contract asset traded on BTCT, I thought it would be easiest for potential investors to use the term perpetual mining bond (PMB) because the community seemed to understand how PMBs worked and would see the differences themselves.

It soon became apparent, however, perhaps due to me continuously comparing BFMines to PMB-style mining operations, that there was still a significant confusion among both investors and the community. I even wrote an article explaining the differences between mining contracts and PMBs, which was more of a general comparison and doesn’t speak specifically to BFMines.

In this article, I’ll explain specifically why BFMines offer significant advantages over traditional PMBs.

Virtual versus Real Mining

The first and possibly least obvious benefit is that BFMines does actual mining. I’m mentioning this right away because it is a significant difference but also a benefit to Bitcoin itself.

Bitcoin depends on miners to verify transactions, and miners are rewarded for their contributions based on their assistance in verifying these transactions. Bitcoin can only be healthy if there is a large number of miners that distribute that power globally.

Virtual mining operations like DMS.Mining and TAT.VirtualMine does not contribute to the diversification because they either don’t do mining at all or are simply backed by existing mining operations. As such, and although a minor benefit, a real mining operation like BFMines contributes to the overall health of Bitcoin.

Note: This difference isn’t true for all PMBs, though. PAJKA, for example, does at least partial real mining.

One particular case where this becomes apparent is with DMS.Mining. DMS.Mining, although an interesting speculator’s tool, is designed to fail if mining is profitable. The dividends you get from DMS.Mining is the same funds you pay when you buy the shares or when someone else (or you) buy shares in the sister asset DMS.Selling. If it turns out that mining difficulty does not grow indefinitely, DMS.Mining will close down because it won’t actually have more funds to pay out.

Update: Deprived, the operator of DMS.Mining (and its sister) commented on my explanation in the BFMines forum. I would like to stress that my explanation is by far a complete description of the DMS assets (and they are very complex), so I’ll include two paragraphs of Deprived’s clarification here:

“That’s not accurate.  The funds available are MORE than what you pay when you buy a DMS.Mining – depending on how you look at it, they’re either ~400 days of current dividend OR the funds from the sale of one DMS.Purchase OR the funds you pay PLUS the funds someone buying (or holding) a DMS.Selling paid.  All three descriptions amount to the same thing – however you look at it, DMS.Mining share at any point in time are backed by significantly more than what they sell for and ALL of those funds are available to DMS.Mining investors if difficulty change is favourable.

Your paragraph pretty much states that all they can ever get back is what they paid for the share – that’s a lie when expressed as a generality.  If difficulty immediately stopped rising now then DMS.Mining shares would receive back well over double the price they currently sell at and would probably receive it all within the next few months.  Conversely, if difficulty keeps rising rapidly for a long time then when difficulty finally levels off they WOULD receive a final payment but the dividends by then would be near irrelevant compared to what they receive now.”

You can read the full post here.

Transaction Fees versus Formula

Transaction fees are part of the reward that real mining operations get in return for their services. In short, transaction fees are what users pay to have money sent between each other. The more transactions happen, the higher the total transaction fees paid out to miners.

PMBs do not include transaction fees as part of their calculations because they aren’t doing any mining at all, or simply ignores the transaction fees when calculating dividends. In fact, PMBs that do actual mining or are backed by real mining just keep the transaction fees themselves.

Transaction fees are a large benefit for BFMines because if Bitcoin succeeds and gains widespread adoption, the transaction fees go up and thus yield a higher dividend to contract holders.

Even if Bitcoin fails, however, and transaction fees are low for years ahead, there is no loss to BFMines contract holders over PMBs because the minimum you get from BFMines is the maximum you get from PMBs.

Right now, transaction fees are around 1.1%, but during the boom of April 2013, transaction fees were on average almost three times as high as they are today, and around 3% of the total reward. This would increase the dividends from BFMines by 3% but go straight in the pocket of PMB operators.

Miner’s Luck

Mining is essentially based on the random chance that you find a block at any time. Because of the laws of big numbers, on average, this means that you get a certain predictability in your output.

Even in large mining operations, there is always an aspect of variance due to luck. Sometimes you get less and sometimes you get more. This is called Miner’s Luck.

For PMBs, there is no luck because they pay a fixed amount based on a mathematical formula that doesn’t change. This may be an advantage over normal mining operations, especially unlucky ones.

However, BFMines removes any effect of bad luck by guaranteeing at a minimum the output from a stable operation. Not just that, but BFMines also pays out any good luck, so you can only be better off than a PMB, never worse. In fact, if BFMines doesn’t find a single block or share of a mining operation, you still get the same as you would with a PMB.

Miner’s luck is an uncertain amount, though, but variance can be as high as 10-20% from top to bottom. Because there are no bottoms with BFMines, you will always get half of the miner’s luck paid out. On a very lucky day, you can get 10% or even more over what you’d get from a PMB.

Operational Security

Because BFMines is backed by real mining operations using real hardware, there is always an element of risk that equipment fails, power goes out, or internet connectivity goes down. This isn’t an issue with PMBs because they don’t have, most of the time, any real hardware that can cause issues.

However, BFMines again has protection to prevent disasters. There is always a minimum of 20% excess capacity in the hardware over what is required. That excess capacity goes to pay for operational expenses, but also to protect the operation by building up funds that can be harvested if disaster strikes and until replacement hardware arrives.

Note: During the first 6 months of operation and while the hardware has a warranty, this excess capacity is paid out as a bonus dividend to contract holders.

If the hardware fails and a replacement costs exactly the amount of funds built up, you never notice anything. However, if the excess capacity exceeds the requirements for protecting the operation, the funds will be used to the benefit of contract holders.

At the time of this writing, I have no idea about how stable the hardware is and thus neither the need for backup funds. I have set aside a significant portion, more than I suspect is required, but I cannot guarantee how much will be left over.

However, I am certain that whatever remains after risk has been handled will go to the benefit of contract holders. This can mean increasing the hardware capacity to increase hash rates, bonus payments, or investing into more stable and long-term hardware.

Regardless of how much is in excess, however, this is a clear benefit of BFMines or at the worst (and that would be close to a disaster) has no effect over PMBs.

Fun!

PMB style assets pays out based on a mathematical construct. You memorize that formula and the only thing you can do is watch the difficulty increase reduce your dividends. In my mind, that’s a somewhat boring approach to investing, but your opinion may differ.

BFMines, on the other hand, is a more dynamic and organic asset. I’ve taken significant measures to ensure contract owners are never worse off than a traditional PMB, but that doesn’t mean I can’t exceed that minimum. In fact, using the excess capacity, the transaction fee addition, the potential for good luck, and there are far more factors that make BFMines an interesting asset merely from the psychological perspective of having a good time.

Will you discuss how to get the most out of any additional profit with your PMB asset operator? Of course not, that additional profit belongs to the operator only. Will you watch with excitement the mining reports from a PMB? Of course not, you get a number each day, and that number won’t change until the next difficulty change.

In short, PMBs are a bit boring. BFMines, on the other hand, may evolve to make your investments even more valuable, profitable, and interesting over time, all the time while ensuring you will never be worse off than a PMB.

In Summary, Then…

Here are the reasons why BFMines is a better investment option than PMB style assets:

  • BFMines benefits Bitcoin as a whole
  • BFMines pays out transaction fees
  • BFMines guarantees only good luck
  • BFMines has surplus capacity that will benefit contract holders
  • BFMines is more fun!

What else would you need to make your decision about whether to buy a PMB or a BFMines mining contract? Let me know in the comments below and I’ll try to answer.

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Comparing Bitcoin Mining Contracts and Mining Bonds

Disclaimer: This article talks about investments, and in particular an investment of which I am the issuer. You should assume that I have a vested interest in you making a particular investment decision and always double-, triple-, and quadruple-check everything yourself. Don’t invest anything you cannot afford to lose.

When I designed and launched BFMines, my mining contracts over on BTCT, it became apparent that people didn’t quite understand what that asset was. I thought that the community would be able to relate to it easier if I described it as a mining bond, but apparently, that was just enough to get people to misunderstand when they wanted.

As such, I’m writing this article to clarify what the differences are between a mining contract like BFMines and a Perpetual Mining Bond (PMB).

Before you read on, you should make sure you have read my article on what PMBs are and how they work. If you think mining bonds are scams, you should also read my explanation of why that is not so. I’ll assume you know that and skip the basics. I’ll also name a few competing mining assets in this article; I do so because they are representations of classic PMBs, not because I would vouch for or berate them specifically.

Similarities

When you first look at PMBs and mining contracts, they may look very similar. Both are denominated in some hash rate, both promise regular pay based on Bitcoin mining with that hash rate, and both are simple ways of getting involved in Bitcoin mining without the hassle of owning and operating your own mining equipment.

Further, at least when it comes to publicly traded mining contracts, you can easily buy and sell them through some form of exchange. Have some spare cash you want to set aside? Buy a few extra bonds or contracts. Need some additional funds for the weekend? Sell off some assets and cash out.

You’ll also realize that the price of both PMBs and mining contracts drop as the difficulty of Bitcoin mining increases. Because both asset types represent a certain hash power, the less that hash power can produce, the less return on investment (ROI) the assets yield, so the less people are willing to pay for them. Of course, this also means that if difficulty were to drop, prices should also rise.

Finally, both PMBs and mining contracts pay frequent dividends. PMBs are easier to predict so they most often pay daily dividends, but with either asset type, you should expect to have daily or weekly dividends.

These similarities make it tempting to compare the issues side-by-side. In fact, I’ve done so already when I compared BFMines to other mining assets. However, there are differences between the asset types too, which are important to understand to pick the right asset.

Differences

However, despite being similar at first glance, mining contracts and PMBs are different enough that it can influence your investment decision. I’d like to focus on three aspects that are important; transaction fees, stability, and performance.

Transaction Fees

PMBs are not necessarily backed by actual mining like I explained in the article on whether PMBs are scams. In fact, most of them are not, and that’s quite OK.

This also means that they never actually do any mining, and your coupons/dividends are based on a formula that has a fixed output based on a fixed block reward.

This is a great benefit in predictability because you know weeks in advance what return you will get. It is easier for the PMB operator too because when there is a difficulty change, they can just schedule all the dividends up to the next change. No fuzz, no checking of actual output, no suspicion of manipulation.

However, the downside is that you also lose out on transaction fees. In short, what a miner earns is based on two parts; the block reward and any transaction fees accrued since the previous block.

Right now, the transaction fees are around 1.1%, which is income you lose if you have a PMB. If Bitcoin grows in popularity, however, the transaction fees will go up, and you’ll lose out even more. As such, you can say that investing in a PMB is better if Bitcoin does not grow too much.

BFMines specifically pays out everything that the miner produces, both transaction fees and block rewards. If Bitcoin succeeds and grows large, that’s a benefit to you as a contract holder.

Stability

Every miner knows that mining is a fluctuating business. There are good times and bad times, and operating and monitoring hardware is a lot of work, often resulting in downtime and lost income. The stability of the operation depends on continuous work, but even in the best of times, hardware, power, or internet connectivity may fail.

Because a PMB does not have hardware backing its operation, or at least is completely independent of any hardware, there’s no stability issues to talk about. You get a certain dividend based on the hash rate, and that’s it. Whether there even exists hardware is irrelevant, and if there exists hardware and it breaks down, that’s not your concern.

Mining contracts like BFMines, on the other hand, are backed by hardware. That means that if the hardware fails or power or connectivity is lost, the miner does not produce any output. Similar to mining companies, this risk is carried by the investors.

For BFMines, there are some plans in motion to mitigate this risk. What everyone knows, or can find out, is that BFMines is backed by more hardware than is required to pay out the promised dividends. The surplus mining power will be used to cover expenses but also be set aside to fund contingency plans if something goes wrong.

Note: During the first six months, while the hardware is still under warranty, the surplus mining power  in BFMines is paid out as a bonus to contract holders, meaning that for half a year, contract holders get more dividends than guaranteed.

Performance

Mining assets based on physical hardware have a fluctuating output to some extent. Mining is essentially based on luck, so with physical hardware, there’s always an element of chance. If you’re lucky, you can have higher output than what a PMB will yield because the PMB is based on a fixed difficulty and reward.

However, this also means that the miner may suffer streaks of bad luck. All mining operations are essentially based on a certain randomness, so at times, the luck will cause dividends to be lower and sometimes it will be higher. In theory, this means that you can end up with zero output, but can also mean you get incredible output, at least in the short term.

On average, however, this luck should balance out and have a negligible effect on the total output. You should be aware that for PMBs, you always get the same output whereas for assets backed by hardware, there will be slight fluctuations in return over shorter periods.

If the predictability of output is vital to you, PMBs offer that, but if you like a slight gamble, mining contracts offer a bit of entertainment and excitement waiting for the results.

Note: For BFMines, I’ll be announcing a mitigation against the risk of zero output as we get closer to the release date.

Which to Pick?

What type of asset you should chose depends on the investment profile you like. Both assets give you a piece of Bitcoin mining without the need to buy, operate, and manage physical hardware, worry about hosting options, stability of power or internet connections, noise, heat generation, or theft. Both assets should appreciate or depreciate based on the same factors. Both assets on average provide a similar output.

Here are some scenarios that may help you decide.

If you are depending on predictable output, PMBs are more stable at the cost of the possibility of higher output.

Do you feel lucky? Mining contracts offer the chance of higher output at the cost of the possibility of lower output.

Are you laying awake at night wondering whether the hardware will keep working? PMBs avoid that by not being dependent on underlying hardware (if it even exists) at the cost of transaction fees.

Do you feel safe that the hardware will work or that its operator has backup plans available? Mining contracts offer transaction fees at the cost of the risk of catastrophic failure.

Do you think that Bitcoin will rise in popularity and gain widespread adoption? Mining contracts give you transaction fees that increases as Bitcoin gains traction, at the cost of the risk of hardware failure.

Are you more concerned that Bitcoin will fail and want at least a certain stability and no risk out hardware, power, or internet failure? PMBs will yield a steady income at the cost of any benefit from rise in Bitcoin popularity.

Feel free to let me know if you have comments or questions.

.b

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.

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.

BFMines Bitcoin Mining Contracts – Here’s How You Should Evaluate Investing

Disclaimer: I am the asset issuer of BFMines and have a direct interest in selling as many shares as possible. Keep that in mind while reading this. Do you own research. Listen to other voices, especially those that disagree with me. There is a large risk that you may lose money, with this investment as with any investment.

After a few weeks of delay, BFMines is finally ready for trading. If you don’t know, BFMines is my first publicly listed mining contract. You’ll be able to buy these mining contracts from July 3, 2013 at 6PM UTC.

I’ve worked very hard to design an asset that would be fair to all parties based on the risk we’re all taking. As much as I think I have succeeded, however, I would like to let you know about how you should evaluate this asset so you know what risks you are assuming.

What is a Mining Contract?

Lots of people want to get involved with Bitcoin mining but don’t know where to start. Mining contracts are a way to take all the hassle out of doing Bitcoin mining yourself, by essentially purchasing a stake in the future profits from a mining operation.

A mining contract gives you one ‘share’ of the stated profit, usually denominated in a certain amount of hash rate. You can buy multiple such contracts so you can invest in as much or as little hash power as you like.

This is different from buying shares in a mining company, however. A mining contract gives you a predefined number of hashes where a mining company’s hash power can change depending on several factors (buying more hardware usually increases hash rates while hardware or connectivity issues can decrease hash rates).

Further, a mining contract gives no votes or control of the operation whereas shares in a company may. Further, most mining contracts either run perpetually (to the extent it is practical) or for a fixed time, whereas shares in a company exist for as long as the company exists.

The TL;DR version, though, is this: You pay me to mine Bitcoins for you. Every day (or other periods for other assets) you get whatever amount of Bitcoins the mining operation has yielded that day.

Sounds too good to be true? Well, read on and I’ll explain why you should think carefully before you jump in.

There are three major factors you need to consider to understand the risk of this asset; difficulty, scams/fraud, and non- or late delivery.

How Difficult Can it Be?

As with any mining investment, however, the key deciding factor in whether you make money is how much difficulty increases in Bitcoin mining. It does not matter whether you buy shares in a company that in turn yields 1mh/s or you buy a mining contract that yields the same. The decline in profitability for the same hash power is the same no matter which investment option you choose.

However, that difficulty can render the investment completely unprofitable and you may never get your investment back. Nobody knows how much the difficulty will increase because it depends on far too many uncertain factors. It is safe to say, however, that it will increase over the next years.

So how do you determine how much difficulty will rise? Well, you need to know how much hash power comes online in the future. We do know that at some point, there will be a lot more hash power, but we also know that there are always issues with delivery, older equipment going offline, and people just getting fed up with working for diminishing returns.

I encourage you to explore the Bitcointalk forums and read up on the various projections, but let me give you a few key factors to consider:

  1. What is the total scheduled hash power coming online and when?
    We know that around 1-1.5 PH/s is scheduled to come online this year.
  2. Will perpetual proportional growth be possible and if so, how much is reasonable to expect?
    Perpetual proportional growth means that hash rate increases by a certain percentage each month forever.
  3. What is the life cycle of mining investments and at what point will older equipment be retired?
    We know that CPU and GPU mining is already unprofitable due to maintenance and electricity cost. Early FPGA and ASIC miners may also approach unprofitability over the next months.
  4. Will the announced hash power actually be delivered and would you bet that it does or does not?
    We know that traditionally ASIC equipment has been delayed, often for months.

So What Will the Difficulty Be?

Like everyone else, I have no idea. There are predictions all over the board, so in the future, you can be sure there will be a lot of “I told you so!” no matter what happens.

I’ll tell you what I don’t think will happen, though. I don’t think all the scheduled hash power will come online. For that, the history of ASIC mining power is far to volatile. We may reach 1,000TH/s by the end of the year, or it may take 12 months.

I don’t think the perpetual proportional growth theory has any merit either. For this to happen, deployment needs to accelerate perpetually, and there is just not enough money to fund such an expansion. For example, to support perpetual proportional growth of 20% per month until February 2014 (just 8 months from now), the community would have to invest $200 million worth of the most powerful mining rig available today (the KnC Jupiter), more if KnC can’t deliver that many.

Finally, BFMines and other mining contracts are now cheaper to buy than most current generation hardware (for example ASICMiner blades). Because BFMines comes out just a couple of months later than the first sale of AM’s blades, if this asset isn’t going to be profitable then the blades bought then or even now certainly won’t (because they are more expensive and has the over head of owning hardware, see below).

That also means that mining investments will become unprofitable for new hardware buyers. At that point, investing more would be throwing money out the window and thus the increase will stop.

On the other hand, it is virtually impossible for difficulty to stagnate in the short term. For that to happen, every single ASIC vendor must fail completely, which is not even considered as an option, even if one or more of them do get delayed.

So, the most likely scenario for difficulty evaluation in my opinion is somewhere well below the perpetual proportional growth theory but also well above current levels. Difficulty will likely rise for a bit and then likely flatten out and remain flat for a long time. Perhaps the difficulty will rise to 500THs by the end of the year, perhaps more, but remember that at that point, for a perpetual growth of 10% per month to continue, you have to deploy a third of what the entire Bitcoin network is today.

Then There is Trust…

Nothing prevents me from taking your money and running. You give it to me in return for something in the future. I hold it, own it, and I can disappear overnight leaving no trace but a group of angry investors. You have no recourse; this is an unregulated market after all.

This applies to any security in an unregulated market, though. Imagine a company such as ASICMiner, which is run by someone known only as friedcat, in a country that is not exactly famous for its rational handling of legal issues, holding a value of close to $200 million.

There hasn’t been a lack of scams and outright thefts in the history of Bitcoin investing either. Millions of dollars have been stolen, and all investors had to show for it were bruised wallets and possibly a bit of wisdom.

Still, people trust friedcat with their money. Truckloads of it every day. Perhaps the possibility of infinite riches clouds people’s eyes so that they are willing to risk someone running away with their money.

My response to this is very simple. You know who I am. You can probably very fast figure out where I live. I’m a well-known person in several communities, Bitcoin not withstanding. I am open about who I am, what I do, why I make the claims I make, and have done so for more than a decade online.

I would have a lot to lose if I ran away with your money; far more than the funds I would possibly get from an IPO of BFMines. In fact, the business in which I work when I need to pay bills, hourly rates of $200 is about as common as grains of sand on a beach. I would utterly kill my opportunities in that business if I was to run away (or even grab your money and hold it).

Finally, the funds you invest are not mine until the mining begins. They are held in escrow, and I can’t access them. BTCT makes sure of that. If the mining equipment fails to start, you get your money back, and that’s completely out of my control. I can beg and plead as much as I want, but BTCT will ensure you get the listing price back.

I can’t promise, though, that you’ll be rich from BFMines or that you’ll even make money. I’ve designed the asset to be fair to investors and give a reasonable return for a reasonable risk. It can go very bad and you may lose everything and it may turn into a gold mine of epic proportions. More likely, however, it will be somewhere in the middle.

What If the Hardware Doesn’t Work or Arrives Late?

The BFMines security is designed around hardware that doesn’t exist yet. Because of this, dividend generation does not start until that hardware arrives and has been tested as working. The contractual arrival of the hardware is by October 2013.

The obvious risk here is that the hardware does not work at all or even worse, that the hardware I’ve bought is part of an elaborate scam. If so, there will be no mining, no dividends, and no rolling in virtual cash. Slightly better, but still bad is that the hardware arrives too late.

To mitigate the risk of non-delivery, all funds that are paid into the IPO are held in escrow like I explained earlier. If, for any reason, the hardware fails or the manufacturer runs off with my money, you get your IPO investment back.

Note that you get back what the listing price of the contract is, regardless of what you paid for it. In other words, if you pay more for your contracts than the IPO price, you risk not getting your entire purchase price back. If you pay less, well, there’s also a chance you get back more than you paid if the hardware fails.

The second risk, however, that of late delivery, is more difficult to mitigate. The scheduled arrival of the hardware is somewhere in September. Because mining does not commence until the hardware arrives, any delays will cost you money.

To mitigate this and the fact that mining does not commence immediately, I have added a bonus dividend period of 6 months. The bonus works like this:

The BFMines asset will be backed by at least 120% of the hardware required to pay the dividends you get. In other words, if all 100,000 initial contracts are sold, I have 120,000mh/s of hardware to back that up.

The surplus hash rate (20,000mh/s if all contracts sold) are used to cover the running costs of the hardware. I’m anticipating the running costs to be in the area of 5-10% ongoing, so I have to keep the extra hardware to pay for those expenses. Any surplus of the 20,000mh/s minus expenses goes straight into my greedy pockets to cover the risk I’m assuming for hardware failure and things like that.

However, for the first six months, those greedy pockets will be emptied out and given to you as a bonus dividend. How much you get depends on two things; the final hash rate of the hardware and the final running costs. Most ASIC hardware is rated at one level but perform better in real life, but there’s no guarantee of that. I also want to add some insurance against power failure and internet connectivity problems, so I’m spending a bit of the surplus on that.

The rest is yours for six months, as a consolidation for not getting dividends from day one.

Why Not Just Buy Hardware?

For some people, investing in their own hardware is a reasonable alternative. However, it is a far stretch to compare it directly to owning mining contracts.

It is very true that owning hardware costs much less than buying mining contracts. This isn’t any different from other industries; it is more profitable to own a pineapple farm than to buy pineapples in the store. It is cheaper to dig your own gold than to buy a gold ring at a jeweler.

This comparison isn’t directly applicable, however, because there’s a limit to how many pineapples you can consume. You wouldn’t buy a pineapple farm just because you wanted a single pineapple, even though the price per pineapple would be a fraction of the store price. You simply couldn’t consume all the pineapples yourself.

In Bitcoin, you’re mining money, and money you can always consume. A better comparison would be the gold mine because you can consume as much gold as you want.

When you buy hardware, there are several things to consider.

First of all is risk. Your hardware may break at any time, and even if you have a warranty, you will at the very least lose income while the hardware is repaired. You can mitigate this by having insurance, but I have yet to find anyone willing to insure Bitcoin mining equipment for its real income.

Then there is electricity cost. Mining equipment consume electricity and you have to pay for that, something you avoid in a mining contract. In effect, you are getting free electricity for your Bitcoin mining for as long as the mining contract lasts.

There is also the plain overhead of having mining equipment running. You need a place to host it and you need to protect that location. Already people have had break-ins in their houses after someone realized they had ASIC mining hardware. Hardware also makes noise and generates heat, and that may not be worth it for small apartments or if your spouse does not approve.

You also need to be online 24/7 with your mining equipment, or you lose money. Is your power always stable? Mine certainly isn’t, and if your power or internet connection goes down, you’re not making money.

And of course time is also valuable, depending on your situation. Monitoring and supporting hardware, even your own, takes time. Are you ready to take a few hours off work to fix an issue with your electrician, your mining pool, or your ISP?

But you’re right, buying hardware is a lot cheaper than buying mining contracts. If you prefer to run a mining operation yourself, then you can save a lot of money (in my case the ratio of cost to price is about 1:4, meaning my cost is around 100BTC to get the 400BTC in value from a fully sold IPO, not counting the work involved).

To Sum Up

Consider most of all the following:

How will difficulty evolve? Do you believe in the perpetual proportional growth theory? Are you willing to bet that at least one, preferably more ASIC vendors are not able to fulfill their promises? Are you willing to bet that Bitfury and Metabank deliver on their promises? Do you trust me not to run away with your money?

Buying mining contracts is effectively a bet that the following are true:

  1. Hash rate does not increase more than what will allow you a good return on investment, likely because one or more of the ASIC vendors fail to deliver quickly.
  2. Bitfury and Metabank do deliver on their promises. Even better if they deliver quicker than projected.
  3. I do not steal your money.

If, after reviewing this article and having done your research regarding the factors affecting the BFMines asset, you are still willing to purchase these contracts, then don’t wait and head over to the official exchange and pick up your BFMines mining contracts today.

.b

What is the Halving Effect in Bitcoin Mining Investments?

Disclaimer: Please do not take this as investment advice. I am not a lawyer or financial analyst. Do your own research, consider every source as potentially having vested interests, and do not invest more money, especially in cryptocurrencies, than you can afford to lose.

When analyzing a Bitcoin mining investment, it is vital to understand one key factor; the halving effect. In short, the halving effect is the effect that the periodic block reward halving has on the potential long-term revenue of a mining operation.

I have mentioned the halving effect in my analysis of the 100TH mine, but it seems that there is still some confusion about how or even if this effect will influence pricing. I’m here to tell you how this effect works and what, how mining operations are affected, and in a fair market, the effects should be.

Block Reward and Transaction Fees

The income from mining operations is defined by the current block reward plus any transaction fees levied on transactions since the previous block. The block reward is currently 25BTC and the transaction fees are currently around 45BTC per day, which means a transaction reward per block of around 0,32BTC for a total mining reward of 25,32BTC.

This mining reward will be distributed for every block that is solved by the miners and thus represent an upper boundary for how much a mining operation can earn.

However, this mining reward isn’t fixed. First, the transaction reward varies depending on how many transactions are performed, which in turn depends largely on Bitcoin adoption but also on miners’ willingness to process transactions.

Note: Miners are free to set policies on how much they want for each transaction and reject transactions for any reason they see fit.

The bigger impact, however, comes from a built-in halving of the block reward. The current block reward is 25BTC per block, but this hasn’t always been the case, nor will it be. In fact, initially, the block reward was 50BTC and it dropped to half in November 2012.

This halving is due to Bitcoin’s built-in anti-inflation policy. To control the production of new money and make Bitcoins more and more scarce, the block reward halves roughly every four years. The next time this happens is in late 2016, at which point the block reward will be 12.5BTC per block.

You may be excused for thinking this is far into the future. After all, Bitcoin mining moves at an incredible rate and we’ve only just seen the first doubling ever a few months ago. Who cares about what happens in 2016?

Well, the problem is, it affects the price you pay today, and it lowers your value very day.

A Bit about Mining Asset Valuation

As with any security traded anywhere in the world, investors expect to get a return on their investments (ROI). This isn’t even limited to securities, it applies to anything we do. We want to do something because it gives us more in return, whether that is more money, a loving spouse, better health, or a good conscience.

With mining investments, the return is quite simple. Assuming you don’t buy shares, contracts, or hardware for the sentimental value, your ability to receive a return is based on how many Bitcoins, Litecoins, or other cryptocurrencies your investment produces. You invest because you evaluate that the ability of the company allows for a return higher than your goal.

However, what happens if that ability is suddenly reduced by 50%? Obviously, your ability to get an ROI is also cut in half.

If a company produces 100 dollars in dividends per a year, you may wish to invest 1000 dollars, knowing that each year, you get a return on investment of 10%, a fair number if a reasonably safe investment.

However, if the company suddenly loses half the ability to produce dividends, your investment of 1000 will now yield only 5%. Of course, other investors looking to get 10% too will only pay $500 for your stake, so effectively you’ve lost $500 on your shares’ value unless you decide to hold the shares and be satisfied with the lower return.

If you knew in advance, however, when the yield would drop, you could calculate the drop in share price along the lines of (Y/X)2 per year, where Y is the price of your shares and X is the number of years until the drop happens. For example, if you know that the rate of return drops by 50% in 5 years and you paid 1000 for your shares, the formula would be (1000/5)/2, or $100 per year.

The problem, of course, is that now those $100 per year doesn’t really give you any ROI yield at all. You get $100 per year in return but your shares fall $100 in value too. Effectively, you are lending money to the company with no interest or chance of return. Obviously, you need a much higher return rate than 10% if these were the numbers.

In Bitcoin and cryptocurrency mining investments, you face this exact situation every four years. At that interval, the block reward halves and thus the bulk of the income for miners goes down.

See how the halving effect effectively reduces the value of your asset over time? this is the halving effect that affects all mining assets, whether it is mining contracts, ASICMiner shares, or hardware you purchase.

Your Questions, Please

I’m guessing you have questions. That’s fine, I’ll be proactive and answer some of them right now.

But Four Years is a Long Time!

Well, not really, but the time doesn’t matter. The effect happens every year. In fact, with Bitcoin investments, you can even calculate this per week or day if you want and you’ll see the expected drop in value every day.

You may, of course, gamble that the market doesn’t know about this effect (or doesn’t find this article) or that they don’t take it into account. However, if the market doesn’t take this into account now, it will definitely do so closer to the next halving when calculating ROI over even one year  means including the profit drop.

If the market ignores this effect until then, the drop will just be that much higher at once. Rather than drop $100 per year, it will drop $500 in one year, but the drop will still be the same.

But it Didn’t Happen Last Time!

When the first halving in Bitcoin history happened in November 2012, several mining assets were operating already. However, there wasn’t a massive drop in prices just when the halving reduced potential profits by 50%.

There may be several reasons for this. Most mining assets at the time was either issued and purchased within a year of the halving so people may have been aware of the effect and priced that into their calculations. Another reason may be that a lot of mining operations were growing at the time, so the halving effect would be cancelled out by increasing market share.

The simple fact, though, is that as long as market share remains steady, the halving effect will reduce a mining operation’s ability to generate revenue.

But the Transaction Fee Will Counter That!

Well, if it does, it actually only makes the situation worse.

You see, the transaction fee doesn’t follow the block halving, it follows Bitcoin adoption. The transaction fee is simply a mechanism to control supply and demand; miners are already free to charge whatever fee they like so they could easily charge 25BTC per block if they so desires. They won’t because there are simply nobody willing to pay that amount to transmit Bitcoins, so adoption isn’t nearly high enough to make demand for transaction processing expensive.

If it comes to that, however, the situation doesn’t improve. Transaction fee increases happen gradually unless all miners come together and decide at the same time to increase transaction fees, and it takes only one of them to disagree to cause cheaper transactions to just slow down and not stop completely.

Of course, if Bitcoin transactions became very expensive or slow, people would look to other coins for transactions, such as Litecoin. In effect, Bitcoin demand would again drop to a level where demand was lower and transaction fees could no longer be levied at the same level.

Back to the transaction fee increase; it will most likely happen over time and thus will either begin before the halving (making return on mining increase artificially just before the halving, or it will start after the halving, in which case revenue will drop due to halving before recovering later.

Either case will cause a substantial loss in mining revenue at the halving time in late 2016. No matter how you look at it; unless demand skyrockets to a point where the bloc reward is insignificant, transaction fees will not counter the effect of the block reward dropping.

But You’re Selling a Mining Asset!

Yes I am. BFMines is indeed a mining contract. And I am acutely aware of the halving effect, which is the main reason I sold out of ASICMiner a couple of months ago.

However, when I do my calculations for BFMines, I’m using a time frame shorter than the next halving. This is for two reasons

  1. In all likelihood, the future earnings of BFMines will have dropped to a level where calculating profitability isn’t really important. In fact, I may have shut down and bought out the contracts by then.
  2. Even if profitability remains at a reasonable level, speculating about the difficulty changes (which is the key factor in mining contract value) so far into the future is futile.

As such, I’m am very aware of the halving effect and that it does indeed affect my asset too. However, by focusing on achieving a good return on investment before the next halving, the effect will be less important.

All long-term assets, however, for example ASICMiner, and mining contracts or equipment bought closer to the date of the block reward halving will need to take this effect into account or be very surprised about their profitability a few years down the line.

.b

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.

.b

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 🙂

.b

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.