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.
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.
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.
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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