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Butterfly Labs produces ASIC hardware for bitcoin mining. I guess it is cheap for them to produce a 1500 Ghash/sec machine. They could have many of them for a very reduced price. Why, instead of selling them, do not they use them for their own mining so they get more money?

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Any answer here will likely be speculative, but another important factor here is PR--Butterfly Labs' customers wouldn't be very happy if the company that made their ASICs was driving up difficulty before delivering them. It would feel like BFL was skimming the cream from the top of their customers' profits. –  eMansipater May 1 '13 at 20:57
    
@eMansipater actually, I disagree. RentFree's answer is pretty much a fact, no speculation. –  Lohoris May 7 '13 at 16:37
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11 Answers 11

They are choosing a less risky option. By selling now, they get the price of the machine no matter what happens to the BitCoin economy. They are defining their core competency as being in the hardware business not the cryptocurrency business.

The same could be said for people selling pickaxes during the Gold Rush. Why not use the pickaxes to mine gold? They got the money for the pickaxes up front, then they were out of the picture. They didn't have to choose a place to prospect and worry about how long the gold would last. They chose to be in the pickaxe business not the mining business. Incidentally, during the Gold Rush it was these peripheral entrepreneurs that made much more than your typical gold miner.

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this "gold rush" example is a very good metaphor, but I think that nowadays it is much easier to switch on asic machines an try to get some bitcoins that before was to mine gold –  flow May 1 '13 at 20:07
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That's what the miners that bought pick-axes thought, too, but many of them were wrong. –  Eyal May 2 '13 at 7:33
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That being said, I would expect that many Butterfly employees are buying the hardware and doing their own mining –  RentFree May 2 '13 at 11:39
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The greatest cost in mining is electricity: en.bitcoin.it/wiki/Power_Calc . If you sell the hardware, you recover your investment right away. If you use it for mining, it takes some time before you recover what you payed. It's like a taxi. The car is only a part of what brings the money. You need to drive it, pay the gas, be lucky and have clients... The car seller doesn't need to worry about that. –  halftimepad May 7 '13 at 15:38
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I agree with RentFree's answer, but another part of the answer is the cost of capital. ButterflyLabs did not have the cash on hand to build its ASIC design or to manufacture all of the rigs. That's why they had their pre-order process: collecting the money up front was the only way they could afford to build the rigs. (Once they had built them, of course, they could have defaulted on their promises and used the units to mine for themselves instead of delivering them. But that would have had long term consequences to their reputation. I don't think the question was really asking if they should commit fraud, just whether they should keep their design private.)

The question does raise the question of whether it would be possible for a different company other than BFL (say a private equity firm with deep pockets) might fund their own ASIC mining rig and not release it to the public. I wouldn't say it's impossible, but it does have several factors against it. Firstly, RentFree's answer: that a private ASIC design strategy would have a lot of inherent risk. But there's also the issue that much of the cost of building an ASIC rig is in the design of the chip. Once our hypothetic private equity firm has spent the money to design the chip, the margin on individual rigs would be fairly high. So, at that point, there would be little incentive for them to refuse to sell the rigs to others. (Even if it raised the mining difficulty for their private rigs.)

In short, while there is nothing to say the ButterflyLabs (or other ASIC manufacturers) might not use some of their rigs (or test rigs) for mining, the business model of these types of companies wouldn't work very well if they didn't sell the majority of their machines: the upfront capital costs are too high and the incremental profit margin is too tempting.

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I Would not be surprised if they collect cash up front for many orders, create a production run which takes 30 days, mine the units for 30 days, and then deliver. That's how I would maximize profit. They take no risk, but having the consumers pay for the costs (and more), they then have many many machines to mine or "perform QA (Quality Analysis) to make sure they work correctly while profiting them. After that, they package the units and send them to the consumer. If there's a spike it bitcoin value, I'm guessing the "QA" takes longer while mining is more profitable.

Just a speculation, but being a business owner, and having run production runs and QA through factories all over the world, this just makes sense to me.

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If you're going to do it for 30 days, why not 60? Why not keep them for a year, then sell them? –  Nick ODell Jul 25 '13 at 23:55
    
@NickODell Without production data, it's difficult to pinpoint this (which is the question you're raising, I believe). My economic intuition says that if the company chose to do this and if they were rigorous about it, they would find the balance that maximized profit (as the answer alludes to) by maximizing the amount they could mine while not costing them customers because of untimely delays in delivery. I wouldn't just blindly assume this is 30 days, though. I'm skeptical of any number without data, to say the least. –  user3930 Jul 26 '13 at 2:19
    
@JohnBensin If they keep the ASICs for one extra day, it costs their customers money - those customers could have had one more day of mining before those ASICs become obsolete. Would that lose them customers? I don't think so, if they could conceal what they were doing. –  Nick ODell Jul 26 '13 at 21:14
    
@NickODell Maybe not if they kept them for one more day, but if they kept them for three months? Six months? It seems reasonable to assume that that could have an effect. Even though it's difficult to pin down how many, if any, customers, they would lose at the margin, eventually, they would probably start to lose some. Theoretically, the company should want to find the point where keeping the ASICs and mining for an additional day earns them less revenue than they would earn from selling the ASIC a day sooner. –  user3930 Jul 26 '13 at 21:35
    
@NickODell (Don't get me wrong, this is just a theoretical point, because in practice, the production function isn't continuous. I'm just illustrating why I'm skeptical about the 30 days number without seeing data. Without data, it is just a theoretical point). –  user3930 Jul 26 '13 at 21:38
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I believe it's primarily because at such a large leap forward the bitcoin network would fail. I've read for starters that if someone owned over 50% of the hashing power the network would be compromised, I don't know this to be true or otherwise, but what I do know is, Bitcoins have little value if no one is trading them because their value is based on trust. If one company drove up the difficulty and also had a large majority of the coins out there then people would lose interest in the bitcoin network and therefore they'd not have all that much value either another network would ultimately just replace it.

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Gather too much hashing power in your hands, and you compromise the security of the Bitcoin network. If security of the network is compromised, the price of bitcoin falls through the floor, and no matter how much you can mine (or manipulate the network into giving you) you end up with millions of worthless bitcoins.

It's much smarter to distribute the hashing power between the users, keeping bitcoin price high, and earn cash for the product. With Bitcoin, as opposed to normal capitalist markets, monopoly is disastrous to the whole market including the monopoly owner, so any enterprise aware of approaching the status of monopoly will actively fight reaching it - for example, selling a part of their processing power.

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  1. Butterfly labs was / is a company that aims maximal profits.
  2. Guess they source & evaluate all options to make the maximal profit.
  3. I know major pool owners who are in direct conversation/collaboration with them, and as im aware they mine asic for a while now.

Just look at this charts http://bitcoindifficulty.com/ & http://blockchain.info/charts/hash-rate , it tells stories.

As stated above, butterfly labs has/had all options & time to evaluate the best strategy for maximal profit. Probably they took way more factors into account like bitcoin price, appreciation, acceptance, the option to sell another batch, development process etc.

And shipping asics is not same as shipping asics, they had all time to evaluate WHO to ship to depending on scenario.

Bottom line, its a cashcow money business and they will do anything to maximize profits either way.

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They do mine. Hashrates tripled during the last four months, and so did the difficulty. While this tendency continues, the difficulty will keep on rising. When you get your ASIC device from them, you are only able to mine $10 with two Jalapenos in one month. No sooner, no later.

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If you watch the video on their website, there is a server room with racks and racks of networked miners so its possible that they are. However, it also appears you can purchase processing power from them instead of the actual hardware. The network setup might be for that.

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It's totally possible that they have used hardware which they sold to customers for their own mining operation. Your gear may very well have gone to a warehouse somewhere for "testing". Once there's very little value left they ship it.

It would be unethical and likely illegal but by far the most profitable thing to do in their position. I would challenge BFL to prove they haven't done this by making their factory shipping manifests and bills of lading public.

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Just a thought. I'm not (yet) a miner but seen all the complaints in delivery time from BFL it makes me wonder if they really don't do some mining with the production units before delivering them. It seems normal a 6 month delivery time wait, what doesn't happen in any other kind of market... Would you wait 6 months to by a standard electronic device?

That's the dark side of this business, and the main reason I don't get decided to invest here...

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Consider also that BFL may be using the initial pre-order capital to invest in and use infrastructure prior to actually shipping. Unless you are purchasing one of the really, really big rigs, by the time you get your ASIC miner, it will be relatively worthless. Similar to what a cpumining is.

This is really a type of ponzi scheme. Before you get angry at me for saying it, really think about it...

Soon, bitcoin mining will only be really profitable for those who really have infrastructure... or for the mildly curious who don't care about making profit.

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Last user Gump got it right. They make sure nobody is ahead of the game before them. You'll be lucky to cover your investment. Just buy bitcoins or look elsewhere. –  user11953 Jan 8 at 18:29
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