Important UpdateNoted below is a culmination of several weeks of thought. I've been trying to figure out what the best course of action is in such a turbulent, and slowly centralizing, mining environment. What I've put together represents
my thoughts on where we stand and my concerns going forward, but more importantly I'd like to hear from the community.
Formatted PDF Version (including working links):
https://drive.google.com/file/d/0BxnW49twNMNbZlVRN3Y1WGZXYTQ/edit?usp=sharing-----BEGIN PGP SIGNED MESSAGE-----
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Abstract
Korb and Co. Investments, DBA Korb Enterprises, is looking to liquidate all mining gear and cease operations as a Bitcoin mining organization.
Overview
To many of you who have kept apprised of the changing Bitcoin environment, I’m sure this comes as no surprise.
The past two months have been difficult as we’ve been operating at a net loss. While I was aware this was going to happen, I didn’t plan for such a drastic decrease in the BTC/USD exchange rate. This drop greatly effected both our ability to reasonably cover expenses and our ability to purchase new hardware, all using Bitcoin of course. With no new hardware coming online, coupled with an increase in BTC expenses (when converted from USD) and an increase in network difficulty, it’s becoming infeasible to continue for very much longer.
All net losses have to be reconciled somewhere in order to pay dividends, and in this case it has been pulling from the leftover funding I set aside for dividends under the old KCIM model in 2012. As planned, this source of funding is coming to a close, and it was never intended to be anything other than a crutch during slower months.
In order to maintain the previous dividend model (paying 0.000025 Bitcoins per share after expenses, per two week period, 26 periods total) KCIM needs to operate roughly 0.006% of the network at any given time. During the early months (December 2013 – February 2014) this was fairly easy (very minor net losses and gains over the period), but unfortunately also very short lived as hardware delays mounted and our overall purchasing power decreased.
As it stands right now we are still operational, but given our current circumstances I voice these three concerns:
Mining Difficulty, Public/Private Interests
The most daunting challenge in Bitcoin Mining is predicting where the network is headed. The number of variables that can go into such an equation are often numerous and volatile; factors such as the BTC/USD rate, current difficulty, energy costs per kWh, past difficulty increases (averages per 2016 blocks), number of ASIC device manufacturers, and cost per device should all be considered.
When considering the number of public manufacturers currently (including “supposedly”) working on development and shipping, there are several prominent companies in the industry. Serious companies to consider are: KnCMiner, ASICMiner, BitMain, Spondoolies Tech, BitFury, Bitmine, and CoinTerra. Other contenders (including dodgy companies at this point) are: BlackArrow, Buttefly Labs, Avalon, Hashfast, Dragon, and several others.
Combined, we start to see a picture of what they’ll be shipping, spawning threads like these in their wake:
https://bitcointalk.org/index.php?topic=283820.0 and
https://bitcointalk.org/index.php?topic=387533.0Most of the well-known developers have numerous Petahashes worth of hardware on order, including news from ASICMiner that put their current on-order wafers at 100PH/s, with possible expansion into the Exahash range (1,000PH/s) over time.
Aside from publicly disclosed details, we’re also encountering a substantial amount of private and semi-private interest in Mining. GHash.io / CEX.io is the most prominent known example of this, but Cloudhashing.com, MegaBigPower.com, KnC Miner’s datacenter, CoinTerra’s datacenter, BitMain Tech’s operations, and ASICMiner also come to mind.
So long as there is money to be made, organizations with the knowledge and resources will look to take advantage of that fact, ultimately reaping the benefits sooner than anyone purchasing retail devices, putting smaller mining organizations at a disadvantage. This isn’t uncommon, however, and it is a trend that will continue so long as the Bitcoin economy continues to grow.
As it stands right now, all of our equipment is still marginally profitable, which is why liquidating now is beneficial; the devices still have market value.
Lack of Resources
While we do have some dedicated space in our datacenter (limited, but flexible), we do not have the capital required to continually purchase hardware to store there. Ultimately, we are unable to purchase any meaningful amount of hardware to achieve and maintain a 0.006% share of the Bitcoin network, especially as it continues to grow exponentially.
These issues have led to a gap in our incoming orders, and soon a decline in our share of the network. The larger the gap, the harder it will become to catch up to our minimum requirement.
This is not for lacking of trying, however. With our purchasing power based solely in Bitcoins, and hardware based primarily in USD (a few companies notwithstanding), we have to contend with an ever changing BTC/USD exchange rate. As it stands in this moment, no hardware purchased using Bitcoins at today’s prices (~$450-470 via Coinbase, May 18th) will ever recoup the original cost to purchase said hardware (in Bitcoins). Continuation requires a vast increase in price that my not come soon enough.
Between January 1st, 2010 and May 12th, 2014, the network difficulty has increased an average of 20.34% per 2016 blocks. Using a BitMain AntMiner S2 (1TH/s) as an example (as stock is on hand and ready to ship), at the time of writing they’re priced at $2,424 (5.51 Bitcoins, May 13th 2014). At this continued rate (and including energy costs @$0.15/kWh), the device would be mining at a loss when network difficulty reaches approximately 60 billion, bringing in a total net income of 2.69 Bitcoins by that point: goo.gl/QYI0N9
It’s easy to assume such an exponential trend cannot continue indefinitely. As such, calculations at even half that increase (per 2016 blocks) still yields disappointing results; the miner has only earned 4.91 Bitcoins during the time it took to reach a difficulty of 60 billion: goo.gl/moIGKE
United States Regulatory Concerns
When this venture officially started at the end of October 2012, Bitcoin-denominated Securities presented a legal ‘gray’ area, to the point where I even wrote a brief, though dated, analysis on the subject after consulting with a local Securities lawyer.
Since then, the Securities and currency regulators in the United States have become more aware of what Bitcoin is and what it can be used for. 2013 marked the year when FinCEN and the Securities Exchange Commission stepped in to voice their position on the virtual currency, as well as the Federal Court ruling in August of that year that Bitcoin was money. In 2014 so far, we’ve seen an update from FinCEN regarding Money Transmitter laws and an IRS ruling on how gains and losses in Bitcoin should be taxed.
What that leaves us with, however, is an outdated list of rules we should be abiding by. Unfortunately, I no longer have the time, knowledge, or financial capability to properly bring this organization up to current standards, leaving us unable to adhere to the rulings presented over the past 12 months.
While this is something that solely lies with me, it is still a concern (both in the present and future), and certainly something I must acknowledge. With that, I want to make it perfectly clear that I have NOT received any notification or contact from the United States Securities and Exchange Commission, Financial Crimes Enforcement Network, Internal Revenue Service, or any State or Federal Court Circuits regarding a cease and desist for current operations. While this may not presently be the case, it is better to be proactive and open about the situation.
At this point in 2014, any individual or organization based in the United States who is looking to build a crowdfunded mining farm will have trouble proceeding legitimately, I have no doubt about that. Be wary of these investments.
Afterword
I’ve always been a ‘one man’ operation, and I’ve always been as forthcoming as I could about what I know and don’t know. Along the way, community members have pointed out my mistakes and offered criticisms, but at the same time they’ve also offered solutions, strategies, and praises. For that, I couldn’t be more grateful for what I’ve learned over the years, and I’m proud to be a part of such an intelligent community.
Along with this, I’m also quite impressed with how far Bitcoin has come over these past few years, from media attention and network growth, to general value and applications. I certainly imagined some growth when this project begin, but nothing as epic, turbulent, and stunning as what we, as a Bitcoin mining organization, have gone through.
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I'd love to hear what others think on this matter. Any comments, questions, concerns, or general opinions are more than welcome, and I plan on being around for much of today and tomorrow to address each one as I can. I'm also on FreeNode IRC, #HavelockInvestments
