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

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

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.

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.

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 exchange 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.

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.

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.

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.