Money Printing Machines for Sale, Only $30,000

04.15.2013, Business, Investing, Journal, Tech, by jeff.

Update: Nailed it! http://arstechnica.com/tech-policy/2014/09/feds-butterfly-labs-mined-bitcoins-on-customers-boxes-before-shipping/

So, I’m sure that by now you’ve read at least a little about Bitcoin. I’ve largely avoided Bitcoin because I understand that true arbitrage is more about being in the right place at the right time than it is about being clever or smart. If someone’s already writing articles about it, you’ve probably already missed the opportunity. In addition efficient markety hypothesis suggests that any real arbitrage opportunities in this bitcoin mining world will quickly disappear as the market of miners expands to fill the void. Essentially, for anyone who doesn’t have the capacity to manufacture highly efficient and specialized bitcoin mining devices, Bitcoin should be just another currency to bet on through an exchange. But, after the recent craze, I had to take a moment to read up a little more last night. For the most part things seemed about the same a the last time I checked in probably a year ago except for two things

the value of the coins is 5 – 10X more than the last time I checked in and
there is supposedly some crazy new hardward that was supposed to hit the market in the last few months, but is “running into problems”.

ASIC Mining

What used to be considered a nice little mining rig, but which now barely breaks even.

What used to be considered a nice little GPU based mining rig.

Take a look at this specialized Bitcoin mining rig by Butterfly Labs. Its retail price when they sold out of pre-orders was $30,000. A decent piece of real coin, but if you look at the specs that device is capable of making everyone’s current mining operation completely obsolete and worthless. Looking at those specs, that rig is supposedly capable of 1500 GigaHash computations per second while only using up 1500 watts of electricity. Those numbers are so staggering that I literally spent 5 minutes looking around many different places to verify that there wasn’t a typo. For comparison if you wanted to build a rig yourself from extremely powerful general use GPUs (the processors that run top of the line video games), it would cost you half a million bucks and eat up a few million a year in electricity to duplicate that performance. To duplicate that performance with the best available non ASIC machines you would have to buy 60 of them (for $15K a piece) and then and use up $6500 per month in electricity to run them and barely brak even at $100 per coin. So what does 1500GH/S actually mean? Well, with 1 of these 15000GH/s rigs, at the current level of network difficulty and the Bitcoin exchange rate, you could probabilistically churn out $10K worth of bitcoins a day. Now, when most of these rigs were pre-sold the market was a little different and one of them would only have only been able to churn out $1K a day worth of Bitcoin. Even as recently as January we were still talking about a low single digit thousands of dollars per day money printing machine with a break-even of over a month. But, with Bitcoin at or over $100/coin, the current break-even is 3 days.

To ship, or not to ship, there is no question.

So, with the advent of this new piece of hardware that is supposed to be about 60X faster than the best hardware currently available for the same electricity consumption, there manufacturer of these devices is now presented with an interesting proposition. They have pre-sold thousands of these 1500GH/s miners for $30K per unit and as a result have raised at least $15M in pre-sale revenue. But, since each unit is capable of churning out $10,000 per day fulfilling those orders is a losing proposition over just plugging the machines in and letting them mine. For every machine they ship, they’ve lost the pre-sale value of the device during the time it takes for the rig to get to the customer, and they’ve handed the customer a machine capable of printing $10K worth of money a day.

It’s no wonder then that the manufacturers of these rigs have recently run into “trouble” with the manufacturing of the machines that have been pre-ordered. I believe they legally need to eventually ship the device that was preordered to the customer, but I don’t believe they have any deadline to hit. In the meantime, if they actually have these machines in hand then they are just going to let them run and churn out money until the market corrects or mining coins becomes so hard that it’s no longer easily profitable to do so. (An interesting part of the currency is that mining necessarily becomes more difficult over time and as the supply of miners increases). Essentially, it’s now become foolish for a manufacturer like Butterfly Labs to actually ship their hardware to the consumer who pre-ordered because of the Bitcoin bubble. The result is that in effect, they have financed their own in-house bitcoin mining operation on the back of the consumers who wanted to purchase their miners, and are now refusing to send the miners to the people who paid for them while citing supposed issues with the devices. They even went to far as to setup a support thread to update people on the issues throughout January and February, only for that thread to go idle in mid march as they were supposedly about to send out the first shipments. The spot price of a bitcoin that day? $50. The break even for a mining machine that day? 6 days. Now they’ve gone radio silent for the last month as the price of BTC has stayed over $50, gone up to as much as $200, and is still hovering around $100 at the time of this writing.

An alternate, but unlikely, possibility

c/o bitcoincharts.com

There is one more possibility however, they could just be scamming people. Butterfly Labs is apparently run by a CEO who was convicted of fraud in the past, so it’s not too much of a stretch. Rather than the slimy act of not fulfilling their orders, they could just be partaking in the slimy act of not actually having the capability to produce these machines. Sadly, I actually find this to be the less disgusting proposition. If they are scamming people then they could just be your run-of-the-mill scammers; whereas, if they are taking pre-order money, building the machines, plugging them in, and collecting money, and waiting for the machines to no longer be valuable… then they are a different kind of scammer. They are a scammer who is more insidious than the first. They are a scammer who has a legitimate business with legitimate profits and legitimate margins but decided to throw all of that away in favor of printing bitcoins because they are one of the two small, elite groups of people on the planet (there is one other company that makes a slower, but comparable, product to the BFL rigs) capable of executing on this arbitrage. What’s even more sad is that this scam is probably legal as long as they eventually fulfill the orders. Looking at their online store, it appears as though they simply need to fulfill the orders eventually, or issue a refund, and will walk away clean. Considering the fact that they’ve had some people’s money for half a year, that ends up being a no-interest $15M loan on which seemingly legally financed their in-house mining operation.

My prediction

Eventually the people who preordered will get their mining rigs, but not until this company has made boatloads of cash taking advantage of being first to use these new miners for the months of March, April, and perhaps May and June. The difficulty to mine will go up and make them far less profitable than today, prompting the manufacturer to then ship their now less valuable mining rigs. If you were one of the early pre-order people you will still make some money, perhaps even $1K a day, but you will not make the $10+K per day that you should have made had this company actually shipped your device. Given that this is a relatively novel problem, I don’t expect successful legal action against these companies as long as they actually ship the devices. If the price of BTC stays high then they might just try refunding people their money and keeping the machines until margins are much lower (say BTC comes back down to $20 per coin). I also expect the current correction to continue and with the increase in price, margins for operating a rig will drop to where you’re making little more than a comparable investment in an S&P500 index fund.