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Views Article – Sharenet Wealth

South Africa

Bitcoin Mining: An SA Perspective

 

With all the hype around Bitcoins’ amazing performance, (which we have covered recently here and here) quite often the topic arises if Bitcoin mining is worth it. As with many of these questions in the financial field the answer is always “It depends”. It depends on a lot of things actually:

1. Your country
2. The Dynamics of the Bitcoin ecosystem
3. The price you pay for Bitcoin and mining assets
4. The price you pay for electricity & cooling
5. The legitimacy of your providers
6. Your market knowledge about Bitcoin & mining
7. The many cryptocurrency risks

Our analytics team has been experimenting, researching and developing software with blockchain and more specifically Bitcoin for the last 2 years now and it’s safe to say we have done enough hard yards to be called “Bitcoin Warriors”. From this aspect we have experimented with not-insignificant real hard dollars and across multiple solutions, providers and continents, and we have painstakingly documented and tracked results over the last 2 years to the level that our research subscribers have become accustomed for our Equity research.

There have been middling to outright fantastic results depending on which providers and equipment you use. And luck and timing plays a big part. Everytime we thought we had a foolproof model waxed, the environment reconfigured to send us back to the drawing board. It’s a standing joke in our team how our foray with Bitcoin makes the equity market seem so safe. And yes, we have lost money to scams and some pyramid schemes in the discovery process and downright silly mistakes. Like getting a new phone and stupidly wiping the old one to resell it without saving our Bitcoin Wallet keys – oops, money gone. Forever.

However, the 2 years has been rewarding and enlightening and we have at least three legitimate methods known to work (at least now) with real money and auditable wallets, including our Bitcoin High-Yield Model Portfolio (BTC-HY) that delivered 39% return on initial investment for the month of May. In a nutshell, this was started with a R10,000 cloud-mining investment on 30 April 2017 and returned 122% since against Bitcoin (ZAR) returns of 86.9%:

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The Miner Net Asset value (NAV) is the price we can obtain for our mining assets should we liquidate them on the open mining market on the day. The Bitcoin holdings are essentially the coins found by the mining assets. The portfolios NAV is thus that of the mining assets plus the coin. As the coin grows, and the mining assets eventually depreciate we will in time have a portfolio equally balanced between mining assets and coin for diversification. The Bitcoin currently represents 18% of the portfolio now:

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The green line in the below chart shows how the Bitcoin obtained from mining “paid down” the initial R10,000 miner investment whilst the black line shows how our return on initial investment grew during the course of the 30 days to around 39% on 30 May 2017:

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Most mining setups pay out daily, but the BTC-HY makes payouts roughly every 70 minutes when a block is found. We have however summarised the daily payouts in the below chart. Its important to remember that the daily payout depends on the Bitcoin price in US$ (for calculating the electricty and maintenance and pool fees), how lucky your mining pool was for the day (how many blocks it found), what the Bitcoin price is in your local currency (most emerging markets trade substantially above the $ price) and of course your local currency exchange rate against the dollar (which impacts the Bitcoin price in your local currency.) That’s a lot of moving parts, so we prefer to take the 7-day takings and multiply that by 30.4/7 to give a smoother monthly income projection. So the R10,000 investment is currently yielding a R4,000 per month income.

Whilst this mining operation we have specifically structured in a high yield configuration, we must reiterate that May’s performance is unlikely to be matched again. The conditions for mining are currently highly favorable, with the Bitcoin pricing rising far faster than mining difficulty and we have yet to encounter a serious correction in Bitcoin prices. Additionally the market for mining assets appreciated somewhat as shortages of hardware led to people wanting to get in on the mining action bid prices up 20% beyond hardware replacement value. Having said that, similar high-yield mining operations run by our Bitcoin Lab team (with real money) in the months before May were regularly returning 15-20% per month, with some configurations having paid off the initial investment months ago already.

The two amazing things of these mining operations is (a) you can start with as little as R1,000 and (2) once they are setup you dont have to touch them or attend to them at all. It goes on autopilot. You are more likely to be constantly logging in to see what is going on and how much coin you accumulated for the day than to change any configurations.

The long and the short of it is that executing a successful Bitcoin investment/mining operation is no different to being successful on the high risk small-caps sector of the stock market. If you don’t know what you are doing, don’t know what you are buying, do not have the right discipline & risk management approach for a speculative asset and do not research and keep up with the market enough to know when it’s risky or ripe for the taking, you’re going to come a cropper. With that in mind, let’s go through the six “it depends” points above briefly, as they are important.

1. COUNTRY

Is Bitcoin legal in your country and if so, how do the authorities approach it from a tax standpoint? Luckily, SA is one of 86 countries where Bitcoin is unrestricted. SARS has also explicitly explained its approach to crypto-currencies in a policy paper. We also have a continuously 6%p.a depreciating currency and as the reference price for Bitcoin is in US$, Bitcoin can act as a rand-hedge.

Bad news however is if you import mining hardware into SA you are going to cough. We bought a $2,000 miner 18 months ago that implied a cost of R21,000 at the prevailing exchange rate at the time. By the time we were finished with courier & shipping charges, disbursement costs, duties, VAT and insurance that machine landed at a cost of R42,000. And if it should go faulty for any reason, we would have to write it off as the costs of shipping it back to the manufacturer would be too prohibitive.

2. BITCOIN ECOSYSTEM

The trend of the price of Bitcoin will have a huge impact on your returns. No different to the stock market, except that Bitcoin can easily move 20% up/down in a single day. So it’s far more volatile on a day to day basis, and as we saw this last month, moves of 50% per week can be common. But if Bitcoin rises for a few months it will weigh very favorably on your mining returns, provided it is rising faster than the network difficulty. The Bitcoin network raises or lowers a difficulty metric depending on how much mining power is being connected to it, to ensure one block is generated every 10 minutes. The steepness with which difficulty rises, impacts your mining returns and thus your payback periods. For more details on the importance of the relationship between Bitcoin price and its network difficulty, see this VIEWS article.

3. PRICE YOU PAY

This is no different to the stock market. If you buy assets when their prices are high or have risen too fast or are too far above intrinsic value, your returns and risk profile will be affected negatively. Whilst it is common knowledge that the price of Bitcoin varies greatly, it’s not common knowledge that mining assets do as well. There is a deep and liquid market for mining hardware and quite often it gets irrational, just like any other market, and discounts of up to 40% on mining hardware can be had on occasion if you watch closely enough. This makes a massive difference to your mining yield.

4. RUNNING COSTS

Mining hardware needs a sound proof room, not insignificant amounts of electricity and some cooling. Electricity is not cheap in SA. If you import gear you will need spare fans and power supplies because those things fail. Regularly. And a machine that’s down is not producing coin to pay itself back. And with mining difficulty rising all the time, downtime of 2-4 weeks has a huge impact on your payback period.

5. LEGITIMACY OF YOUR PROVIDERS

Mt. Gox was a Bitcoin exchange based in Tokyo, Japan. Launched in July 2010, by 2014 it was handling over 70% of all Bitcoin transactions worldwide, as the largest Bitcoin intermediary and the world’s leading Bitcoin exchange. Approximately 850,000 Bitcoins ($450m at the time, but worth $2Bn now) belonging to customers and the company were missing and likely stolen in a hacking incident. The lesson here is never keep large Bitcoin holdings at your exchange but keep them in a secure wallet where YOU control the keys. If you don’t control the keys, the Bitcoin is not yours. There are literally only 3 industrial strength wallets we have found and used that meet this criteria.

There are many suppliers offering mining hardware on the internet with fantastic claims of processing power. There is a 90% chance these claims are false and most likely come from a scam operation. Similarly, if you opt for cloud based mining or hosted mining, where your assets are in a facility run by a third party with cheap electricity and adequate cooling, security and spares, then there is better than 80% probability you are dealing with a scam or pyramid scheme operator. Even the handful of operators we have confirmed as legit over the last 2 years have varying degrees of transparency in what is essentially an unregulated environment. And maintenance/hosting costs vary significantly from provider to provider which has a massive impact on mining return on investment. As far as we are concerned there are only 3 viable operator currently in this space for joe soaps like you and me.

6. KNOWLEDGE

The only way I know to be successful on the stock market without paying it any attention is to give your money and funds to a professional to handle for you. Unfortunately, this doesn’t exist yet in the Bitcoin world, so you had better come to the realization that if you want to dabble in Bitcoin you had better know what’s going on or at least ask an expert, or guys like us who followed the trial and error route, having paid some “school fees” already.

Your easiest option is to set aside a safe amount you can afford to speculate with, say example 5% of your free investable cash. Just like you were treating it like any other single share in your diversified portfolio. Then buy the Bitcoin on a credible local exchange and send it to a safe wallet and forget about it for 3-4 years. If Bitcoin crashes you’ve lost 5-10% but if it goes up 200-500% then you are smiling. This is a good risk reward ratio, but it doesn’t work so well when your initial investment is the kitchen sink or money you can’t afford to lose.

The more sophisticated approach is to split your portfolio among mining and coin accumulation as with the BTC-HY portfolio. Whilst emotionally & financially rewarding (mining  is really a fun hobby) there are more dimensions to this approach that are going to require some bare bones knowledge coupled with the many tips and clever techniques such as those our team has developed over 24 months. Your knowledge and attention to detail coupled with enjoyment/passion will have a direct correlation with your results in this regard.

7. THE MANY CRYPTOCURRENCY RISKS

Ok, this is the most important. Bitcoin investing/trading should be viewed as any other speculative “high yield alternative investment”. It comes with many health warnings, listed in our opinion from highest (most likely) to lowest (least likely) risk:

  1. The Bitcoin price could collapse 60% as in the 2013 bubble and require 2 years to recover
  2. You have a 80% probability of been scammed by a cloud-mining operation if you dive into things
  3. Your mining hardware and/or fans/power supplies will get faulty at some point
  4. You could easily make stupid mistakes like losing keys to your wallet and with it your money
  5. The amazing returns from a lucky run or inital foray will hypnotize you into putting in more than you should
  6. Your local currency may appreciate strongly against the dollar
  7. The Bitcoin network developers could disagree on the current scaling issues leading to a “hard fork“.
  8. Your cloud mining provider could go bust, so you are taking on their balance sheet risk
  9. Your wallet or Bitcoin exchange could get hacked.
  10. Regulatory environment. Unless you are Japan where Bitcoin is fully legal tender, your government or tax authority could suddenly change the rules
  11. Some other ground breaking crypto-currency is launched that displaces Bitcoin
  12. The Bitcoin community get fed up with the current network delays and transaction fees and abandon it for something else.

8. CONCLUSION

My personal approach on this matter is get my mining assets paid off as fast as possible. After this, I don’t give a damn what happens to Bitcoin or its ecosystem. If it collapses I’ve lost nothing but time and effort. If it shoots to the moon as the dominant new global reserve currency most Bitcoin enthusiasts think it will, then I’ve gained everything. But at some point you must draw a line in the sand with how much you throw into mining and start drawing mining proceeds out into segregated Bitcoin reserves to de-risk your mining. And taking profits and converting some Bitcoin holdings into your local FIAT currency when Bitcoin has clearly been on a tear and two standard deviations from just about every metric you can think of is also not such a stupid idea either.

So, in final summation, experimentation and research is ongoing as the Bitcoin ecosystem and market evolves. It’s literally the wild west and anything is possible both to the upside and downside. We learn something new every month. Even with 2 years’ hard yards we are probably still amateurs. We might look back on this article in 3 years and have a real chuckle at how naive we were. There is no guarantee what works now will work in 6 months’ time. We can’t help but feel we are in the midst of a massive bubble that could end next month or in six months’ time or in 3 years’ time. Every time we call for Bitcoin to collapse, it shoots up again. I’ve given up calling Bitcoin tops to be honest. More worrying, just about everyone I speak to talks about “Have you heard about this Bitcoin thing?” It’s debatable how many people actually dive in and buy bitcoin, but I reckon it’s a lot. The SA Bitcoin price regularly trades at 30% premium to the US$ price. That tells me speculation levels are high in SA (but it does offer some great arbitration opportunities). In the end, it can be fun and highly interesting, but needs to be treated like a very, very sharp knife. Handle with care.

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Dwaine
Dwaine van Vuuren
Retail-side Research
RecessionAlertPowerStocks Research

Dwaine van Vuuren is a full-time trader, global investor and stock-market researcher. His passion for numbers and keen research & analytic ability has helped grow RecessionALERT.com (US based) and PowerStocks Research into companies used by hundreds of hedge funds, brokerage firms, financial advisers and private investors around the world. An enthusiastic educator, he will have you trading and investing with confidence & discipline.


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