Disclaimer: This article contains information about investments in cryptocurrency assets. Investments such as these are extremely risky and you should carefully read and understand all aspects of investment and what makes cryptocurrency investments even more risky. Also, the author is an issuer of a cryptocurrency asset and may (or probably does) have vested interests.
So, you’ve become interested in the Deprived Mining Speculation, or DMS, securities have you? DMS.Purchase, DMS.Selling, and DMS.Mining seem to get a lot of attention these days, but can you quickly tell me which asset does what?
Well, you’ll be forgiven for not fully understanding how it all works because this is a very complex set of assets that confuse seasoned investors to no end. Add to the situation that a lot of community participants have very wrong ideas about what these assets do, and you’re pretty close to a guarantee of misunderstanding what you’re actually buying.
Note: Please read the update at the end of the article as it reveals how deceptive these assets can be.
Don’t worry, though, because in this article, I’ll explain it as easy as I can. I’ll take some shortcuts around the math as usual by using some silly numbers, while maintaining the integrity of the idea behind this security. Also, I’m assuming you have a fairly good understanding of what Bitcoin mining is, so I’ll skip the basics of explaining that.
An Executive Overview
DMS is a set of three correlating assets that works most of all like a bet. The three assets are DMS.Purchase, DMS, Selling, and DMS.Mining, and each work as a separate investment opportunity.
The bet is on whether mining investments will ever make money at all. The buyers or holders of DMS.Selling believes mining investments will never make back what their buyers have paid. The buyers or holders of DMS.Mining believes that mining investments will be profitable.
DMS.Purchase is a bit different because it is the entry point of each of these bets. Buyers of DMS.Purchase gets one share of each of DMS.Selling and DMS.Mining and would be smart so sell the share against which they bet.
However, unlike what many people seem to think, though, there’s no Bitcoin mining involved. The confusion stems from the fact that under certain conditions, DMS.Mining may appear to act like a mining bond and people seem to want to compare it to other mining bonds and contracts based on this fact. Doing so, however, is at best a bit naïve and at worst deceptive; there’s no mining involved, simply a dividend payment that mimics that of a bond under certain conditions. In fact, as I’ll show you later, there’s no way you can reap the benefits of being right in your bet on DMS.Mining.
What’s more confusing is that DMS.Selling, which is the bet against DMS.Mining ever making more than 100% return-on-investment, only pays out if the situation is such that DMS.Mining keeps acting like a mining bond. If that situation stops, DMS.Selling won’t get any more money and shortly thereafter DMS.Mining will shut down.
Confused yet? Let me see if I can clarify, one asset at a time.
The DMS.Purchase asset is by far the easiest to explain because it is simply the way new shares are issued onto the market.
The purpose of a DMS.Purchase share is to give you one share of DMS.Selling and one share of DMS.Mining. In other words, the price of DMS.Purchase should always be the sum of one DMS.Mining and one DMS.Selling.
For the sake of the example, and silly numbers, let’s say that DMS.Selling and DMS.Mining both sell for 1BTC each. The price of DMS.Purchase will thus be 2BTC.
You can exchange one DMS.Purchase into one DMS.Mining and one DMS.Selling at any time, and really, this is usually the only thing that makes sense. The funds received will be invested in a very conservative way with just a few investment options being on the approved list. Considering the low-risk returns from investment and the management fee of 3%, the return from holding DMS.Purchase would be lower than simply investing in the underlying investment options directly.
DMS.Purchase receives dividends equivalent to what both DMS.Mining and DMS.Selling gets. However, because the price and thus resale value of DMS.Purchase options are defined by the price of DMS.Mining and DMS.Selling, which in turn is designed to go down as dividends are paid out, the price of DMS.Purchase will not rise.
Contrary to what many seem to believe, DMS.Mining is not a mining asset. However, it does represent a bet that Bitcoin mining assets will make money.
The way this bet works is that DMs.Mining pays dividend as if it were a mining bond with 5mhs hashing power, at least based on a formula for what an average of mining output would be, sans transaction fees, miners luck, and pool fees.
Note: This isn’t the same as a 5mhs mining contract or operation. Read more in my comparison of PMB and mining contracts.
The first question you should ask yourself is this; if there is no mining going on, from where do the funds come to pay the dividends?
The answer to this, as I eluded previously, is that the money comes from people buying DMS.Purchase, which may mean you if you got your DMS.Mining shares from swapping in a DMS.Purchase.
This may sound a bit sneaky, but it works as a way to speculate. After all, you pay 2BTC, get one share of DMS.Mining and one share of DMS.Selling. If you want the mining equivalent income, you can just sell your DMS.Selling for 1BTC.
You can, of course, also buy 1 DMS.Mining directly from the market and skip the DMS.Purchase route; the effective price you pay is the same. Regardless of which path you choose, DMS.Purchase has received the funds from someone and those funds will later be used to pay out dividends.
So now that we’ve explored DMS.Purchase and DMS.Mining, the rest should be easy, right?
Sorry to disappoint, but there is a major twist on the last leg of our exploration, and that is DMS.Selling.
You see, the entire DMS portfolio is a bet on whether Bitcoin mining assets will ever make money. Those that buy DMS.Selling believe that this will not be the case, so they should get some for of reward if they are correct, right?
Well, they do, and here is how it works.
The dividends paid to DMS.Mining goes down as Bitcoin mining difficulty goes up. That means that the price paid for DMS.Purchase may never be exhausted if the mining difficulty goes far enough up. In other words, if difficulty rises so much that a DMS.Mining share will never get back more than you paid for it plus what someone paid for DMS.Selling, then those excess funds will be paid out as dividends to DMS.Selling share holders.
In theory, this makes payments very difficult because who can say whether DMS.Mining will ever get paid enough to get all the funds paid in? After all, eternity is a very long time.
In practice, DMS solves this by introducing several steps of coverage. This coverage is determined by how many days of DMS.Mining dividends are available.
For DMS.Selling dividends, as long as the funds from sales of DMS.Purchase exceeds 400 days of dividends to DMS.Mining, any excess funds are paid out as dividends to DMS.Selling.
To understand how this calculation works, let’s imagine that 500 people buys DMS.Purchase for 0.4BTC each for a total of 200BTC and the immediately converts those DMS.Purchase shares to DMS.Mining and DMS.Selling shares.
If each DMS.Mining should get 0.001BTC per day, for 400 days, this amounts to a funding requirement of exactly 200BTC (500 shares x 0.001/share x 400 days). Because this is the same amount paid for buying the DMS.Purchase shares, no dividends are paid.
However, if difficulty then rises so that the payments drop by 10% to 0.0009 per day, the funding requirement for DMS.Mining is now just 180BTC. The excess 20BTC are thus paid out to DMS.Selling share holders, for a total dividend of 0.05/share.
The numbers aren’t quite so easy to understand, though, because the funds available obviously goes down as DMS.Mining dividends are paid out. Also, dividends to DMS.Selling won’t be paid out until there is more than 410 days of DMS.Mining dividends available.
In short, however, as long as difficulty goes up and does so by a certain amount, DMS.Selling will get dividends.
Now that we’ve explored the assets, let me explain why this becomes a very tricky investment.
Where’s The Catch?
You may have several questions at this point, and if you don’t, you have either cheated and read the contract already or you’re far smarter than me.
For the rest of us mortals, however, let’s consider some of the consequences of this bet. I’ll also show you why DMS.Mining isn’t a mining asset and is doomed to lose, regardless of whether you are right in betting that the difficulty rise will slow down.
First, what happens if difficulty doesn’t go up or even goes down? After a relatively short time, the 400 days will expire, especially if difficult goes down because this will increase the dividends to DMS.Mining.
Well, if the funds available in DMS.Purchase at any point gets below 100 days worth of dividends to DMS.Mining, all the funds will close immediately and DMS.Mining gets whatever remains in a lump sum payment. In other words, you won’t get any more dividends but you get just over three months of dividends paid out right away.
This may sound generous but there’s a catch. You see, if you buy or keep DMS.Mining, it is likely because you believe mining will be profitable. If DMS.Mining closes, and it would do so because mining has become too profitable, you’ll probably want to move your funds into a different asset.
However, the situation that may make mining profitable is a stop in the rise of mining difficulty. If that happens, all mining assets suddenly becomes vastly more profitable and thus prices will rise rapidly.
At the same time, everyone will know that DMS.Mining will stop operating and pay out a lump sum but will have no chance of reaping the potential huge rewards that a stop in rise or even a drop in mining difficulty will cause.
There’s no reason for anyone to pay more than dividends for whatever time remains until DMS.Mining closes plus 100 days, so prices for DMS.Mining will not rise. Thus, the funds you get from selling or liquidating DMS.Mining will certainly not be enough to buy an equal share of hashing power in a different asset, which by then will have risen dramatically because they can reap rewards from lower difficulty forever.
Let’s run a thought experiment again, where the funds in DMS.Purchase is now 1BTC and only one DMS.Selling and DMS.Mining exists. Dividend payment for DMS.Mining is 0.0025 so the DMS.Purchase funds are enough to secure 400 days of dividends. The price of a DMS.Mining share is 1BTC and a competing asset ACME Mines also cost 1BTC and pays exactly the same dividends.
Then, disaster strikes. Godzilla lays waste to Tokyo and several Chinese cities and takes out 50% of the Bitcoin mining network. This means that the profitability of mining for the remaining network doubles immediately and in a rational market, that would also double the prices. Of course, if ACME Mines is backed by hardware located in Tokyo, the hardware will also be lost, but that is a risk of any hardware based mining.
However, because the funds in DMS.Purchase are limited to 400 days (and now 200 days due to the drop in difficulty) a buyer knows that there is no possible way to get more than 200 days worth of dividends out of a DMS.Mining share. Even if dividends are paid out immediately, the maximum that can be paid is 1BTC.
For ACME Mines, however, the drop in difficulty means that long-term profitability will skyrocket. In fact, the return on investment (ROI) of ACME Mines bought for 1BTC is now 91.25%, which is an insane return for any investment (NASDAQ Composite usually does 4-7% per year).
In two years, someone buying an ACME Mines share will not just have gotten back everything they invest but a healthy 82.5% interest on their investments on top of that, and they can keep reaping that reward until they retire. Prices on shares like that go through the roof and probably double overnight.
Why DMS.Mining Will Always Lose
For DMS.Mining, however, well, there’s no such future. In just three months, the fund will forcibly close and you’d get another three months and a bit worth of dividends plus probably a pat on the back and a ‘thanks for playing’ from Deprived. You’ll at most get 200 days or just over six months of dividends, representing just 1 BTC.
ACME Mines shares on the other hand, and assuming its hardware is not residing in the bowels of Godzilla, now cost 2BTC. Effectively, you’ve lost 50% of your mining investment even if you were right in your bet.
Note: Keep in mind, I’m using silly numbers to exaggerate the example to show how DMS.Mining is not a mining asset and only behaves that way if you are wrong in your bet on mining profitability.
The idea behind the DMS assets is that DMS.Selling should represent a bet that difficulty will go up and that DMS.Mining should represent a bet that difficulty will not rise by too much. Both assets reward investors who are right. In other words, if you believe mining to be a profitable undertaking, you’ll want to buy DMS.Mining shares.
This is correct, as long as you only consider DMS and not what happens in the rest of the Bitcoin investment world. If you believe in mining profitability and you’re right, you’ll want to reap the rewards.
However, as I’ve just explained, this won’t happen. If you are right, you’ll get a fairly small amount in payment from DMS.Mining and may even be stuck the shares because nobody will want to pay a dollar now for a dollar in the future so you’ll probably need to sell for less than you’ll get in dividends and lump sum over the next months.
Other mining assets will rise, though, so your ability to cash out and earn from being right is limited at best and completely gone at worst.
So, the brutal result is this: If mining difficulty keeps going up, DMS.Mining will lose the bet. However, if mining difficulty goes down or even flattens out, DMS.Mining will also lose the bet. There’s actually no way that DMS.Mining can win this game.
It is very important to understand this catch. DMS.Selling is the only asset that in reality can actually make money in DMS. If DMS were the only assets available in the world, then yes, DMS.Mining could earn money, but in a world where other mining assets exist, the loss in rising prices of those other assets will quickly and brutally cancel out any earnings from DMS.Mining.
So, DMS.Mining is not a mining asset and doesn’t behave like one, except when you are slowly losing money by holding it due to difficulty increases. If difficult slows down, you’ll only lose money faster.
Sounds harsh? Indeed it may be, but now at least you know. You also know why I really don’t consider DMS.Mining a mining asset and thus don’t want to compare it to BFMines.
Update August 10, 2013:
Deprived, the issuer of DMS, was apparently being less than completely honest about the outlook of his assets and in several drunken posts on Bitcointalk admitted that there is no way that DMS.Mining would ever make money and anyone investing in DMS.Mining were idiots. Interestingly, his claim is that there was no way DMS.Mining would make money until now so if you believe him this time, you should definitely run over and buy.
If you believe this article, of course, you wouldn’t.
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