Why I Sold My ASICMiner Shares

DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

A few months ago, I posted an article on how to acquire ASICMiner shares. Since then… interesting things have happened in the cryptostock community and you’re now left with Havelock Investments as your only reliable option.

At the time, ASICMiner traded at around 0.8BTC per share. I have put a, to me, considerable amount of my BTC into ASICMiner and say a huge rise in value. And then I sold.

Yeah, I sold at 1.8BTC per share. The price later rose to over 5BTC per share, but I was happy to have gotten out when I did, and here’s why…

Fundamental Investing

I don’t know too much about investment strategies. In fact, I started with investments when I got into Bitcoin, mostly as a learning experience. I’ve since read tons of material about how people construct their strategies and discovered to my amazement that I was following an already established strategy of investing based on fundamentals.

What is that you ask? Well, it’s a fairly simple strategy. Find out what something is really worth. Buy at a price that is lower than that and sell at a price that is higher than that. Simple, right? Like anything that is simple, though, there is a lot of homework required to get to that real worth number.

For example, in a mining company, you need to look at what is the long-term outcome of the mining operation. It doesn’t matter than a mining company churns out cash like it’s going out of fashion because if they follow the pattern of most mining operations, that churning will quickly diminish and will do so long before you get your share price back.

Finding the fundamental value of a share requires a lot of research, a lot of calculation, and a fair amount of guessing, at least in a market that is as volatile as Bitcoin mining. However, once you find that value, investing is mostly a numbers game; a cheap share is a certain value so you buy (or don’t sell) and an expensive share is another certain value so you sell (or don’t buy).

What fundamental investing doesn’t take into account, though, is people. Crowds tend to follow the moment of the crowd and that drives prices up or down regardless of what the fundamental value really is. In fact, all investors tend to bet on this to a certain extent.

ASICMiner Fundamentals

At the time, which was early April 2013, I looked at a few important factors of ASICMiner. First and foremost, I looked at their ability to deliver long-term. In April, the mining scene looked like a giant vacuum, and any ongoing mining operation was cash cows for their owners.

Friedcat had estimated that ASICMiner would hold an average of 15% of the total network hashrate throughout 2013. This was an awesome amount, but even that seemed too low as they were in the process of reaching the famed 51% limit and had to start selling their blade miners to keep below that limit.

15% of the network for 9 months is the equivalent of 864,000 BTC. Deduct a modest 10% in operational costs, salaries, and so on, and you end up with 777,600 BTC. Divided by just 400,000 shares and you’re looking at profits of almost 2 BTC per share, and that’s just for 2013.

However, the big question remained: would ASICMiner actually be able to keep this share of the network? A lot of people seemed to think so, and it’s easy to understand why. ASICMiner kept up with the growth in the network and had kept their promises and even exceeded them considerably.

In hindsight, it is equally easy to see why it had to fail. With the insane amounts of money ASICMiner generated, other companies and investors would want a piece of the cake. That meant huge investments into Bitcoin mining, leading to much higher pressure on ASICMiner.

Those investors also learned from another mistake ASICMiner made. ASICMiner was using outdated technology, which meant that even if they could produce huge amounts of hash power, that technology also required huge amounts of power and facilities, which were very expensive and difficult to operate. The competitors opted to use more modern technology and eventually rode in circles around ASICMiner in terms of performance.

In fact, this lack of updated technology and the vacuum created by ASICMiner’s initial success continues to create problems for ASICMiner. Their strategy of sticking with cheaper and faster to produce chips hasn’t given them much in terms of catching up, and right now, ASICMiner is just a few percents of the total network hashrate, diminishing by the day.

When considering any long-term investment in Bitcoin mining, one needs to take into consideration the halving effect. In short, the halving effect comes as a result of the halving of the Bitcoin block reward for miners, that happens sometime in 2016. At that point, a ballpark estimate is that miner income drops to 50% of what it is now. In effect, any mining investment loses half its value overnight.

To account for this effect, investors should calculate how much that effect is and increase their expected output each month so that they get enough back to counter the halving when it occurs.

Note: I’ve written an article that explains the halving effect in more detail.

The bigger the profit, the higher the impact of the halving effect. ASICMiner was slated to be one if not the biggest player, so the impact of the halving would be massive. This effectively reduced the dividends by several percentage points each month, so although ASICMiner at times had expected ROIs of 75-80% in a year, the real number was much closer to 30-40% over time.

Based on this, I estimated ASICMiner’s real value to be somewhere around 1.20-1.35BTC per share, depending on how optimistic I was. Of course, I wanted to make a profit on my investment at 0.8BTC, so I sold when I saw the price climb to 1.8BTC.

Before you run off to buy ASICMiner shares now, and thinking that the current price of around 0.6BTC must be an awesome bargain, keep in mind that at the time, I was estimating ASICMiner’s share of the network for 2013 to be 5-10%. Right now, it is not even 2%, and it’s dropping every day.

I’m not going to make a prediction at what I think the price will be, but you may want to consider that I haven’t bought back into ASICMiner at this point.

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DISCLAIMER: As always, do not take financial information from me or anyone without doing proper research yourself. Always assume that anyone giving you such information has ulterior motives that benefit them rather than you.

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