Building my Bitcoin pipeline

Author's note: This article is part of an ongoing blog about my adventures in the world of alternate currencies.

I mentioned before that I own a fair amount of TAT.ASICMINER shares. I don't know all the ins and outs of the company and all that's going on in the industry right now, but I do know enough to feel confident that it's a solid investment. My strategy is simple: buy, hold, collect dividends.

At the moment the price of the shares is dropping. I noted this price decrease and decided to go straight to the horse's mouth. The founder and owner of ASIC Miner is active on the Bitcoin Forum, going by the username friedcat. I looked up his latest posts and found this update from just yesterday.1) It seems to me that things are progressing as planned and there's no particularly good reason to dump the stock. There's even a totally rational reason for a decrease in dividend payments.

If I do anything at all about the price drop, it will just be to buy up more shares at a better price and keep collecting the dividends.

I had a similar thing happen with one of my assets on Cryptostocks, a site I am increasingly thinking about as my playground. The Bitcoin denominated assets there tend to be unpredictable… to say the least. One asset I own pays out exceptionally large dividends compared to what the asset costs. For a while it was paying out these dividends every day. Then for some unknown reason it went over two weeks without paying out a single dividend. During that time the share value plummeted to almost zero. When it had a three day run of paying dividends again the price rallied, though not quite to the extent that it was before. Although I know much less about that asset than I do about TAT.ASICMINER, I'm OK with holding onto it long term and collecting the dividends, which means share price fluctuations don't ultimately impact me that much.

Still, these experiences have made me realize that one disadvantage of putting my Bitcoin into stocks is that they provide no principal preservation. If the asset fundamentals are good, the dividends will not be affected by the day to day fluctuations in share price. So if I bought the share for the dividends, then as long as it pays out, I'm getting what I want. ASIC Miner has a proven track record of paying out dividends every Wednesday.

This all works out really well until one day I decide that I want to pull my Bitcoin out of a particular asset and spend it somewhere else. That's all fine and good as long as the asset sells for what I paid for it or better. However, if the asset happens to be going through a price drop then I can't get out of it without losing a significant portion of my principal. If I sell off my TAT.ASICMINER shares now I stand to lose half my value. This means that I either need to take a substantial loss, or hang onto them until the price rallies (which I believe it will), and miss whatever opportunity might have presented itself now.

Stocks have the potential to pay out great dividends and they can go up in value, giving the holder the ability to sell at a huge profit. They can also lose value. They have no built-in principal preservation. Watching my principal erode substantially for the time being made me realize how important the ability to preserve it is.

I spent some time on Bitcoin Trading Corp's website and located a really nice little bond that almost meets the principal preservation requirement. It's called LTC-ATF.B2. It's a bond with a face value of 0.01 BTC (though it sells for a bit more than that) which pays out a daily dividend of 500 satoshis. This works out to around a 17.5% annual return, which is not too shabby considering a traditional savings account might pay 1-2% interest.

The issuer of the bond (a very reputable sort) guarantees that he will buy the bond back at 0.0099 BTC pretty much anytime, and he maintains a buy wall at that price. This means that the worst case scenario is that when I want my principal back I get 99% (a little less since I bought higher than face value) rather than all of it. That's certainly much better than only half of it. If I hold onto the bond long enough the dividends I earn each day will help me recover some of that loss. However more than likely I will be able to sell the bond for much closer to the actual face value, even slightly higher.

So when it comes to principal preservation a bond is definitely much better than a stock. The downside of course is that the annual yield from dividends is lower compared to what the stock yields. TAT.ASICMINER has anywhere from a 25 to 35% annual rate of return.

But even a bond falls short. What do I want, really? I want a way to earn from my Bitcoins and be able to recover my original Bitcoins any time I want.

It took me a while to figure it out because it's been years since I last thought of this as an investment. When was the last time someone referred to their savings account as an investment vehicle? Even certificates of deposit are notoriously low-yielding.

But in the Bitcoin world, something like a savings account can actually yield a wonderful rate of return and preserve your principal.

I discovered CoinLenders about a month ago, opened an account and then did nothing with it for a while. CoinLenders is a business which loans Bitcoins to people who want to start businesses or do other useful and worthwhile things with Bitcoins they don't have themselves. If you take out a loan from CoinLenders, you are going to pay it back at an interest rate you'd expect from a credit card. CoinLenders needs to get the funds to issue loans from somewhere.

Enter you or I, the depositors. We deposit our Bitcoins with CoinLenders, allowing them to issue loans. To reward us, CoinLenders passes on much of that awesome interest rate to us. Right now the annual interest rate for deposited funds is just under 23 percent. Interest is paid out daily and compounded, meaning that the interest that was paid out yesterday will earn interest today. You can cash out your deposit any time (though if it's a huge amount it might take some time) and your balance only goes up. There is no scary fluctuation in the value of your balance.

There is one drawback: you only earn interest when your balance is 1 BTC or greater. Since one Bitcoin is valued right around $100 these days, that is a significant investment. It's not going to be a good place to accumulate your micro-earnings unless you are willing to somehow first acquire an entire Bitcoin–it can take forever to earn an entire Bitcoin by visiting all the earning and faucet sites! But once you get that first Bitcoin, then any micro-earnings you add to your account will also earn interest.

Three days ago I decided getting that first entire Bitcoin was important enough to temporarily overcome my refusal to sell off my Devcoins for less than a certain price. I gathered up a bunch of Devcoins I had sitting on Vircurex and traded them for Bitcoins at the gutter price of 48 and 49 satoshis each. It took more than two million Devcoins but I got that Bitcoin.

I deposited that Bitcoin into my CoinLenders account and have been watching my balance grow ever since. I earned 0.00056333 BTC that first day. That is the equivalent of what I'd earn on a really good day on BitVisitor. The second day I earned 0.00056590 BTC, 260 satoshis more because of the interest from the first day plus interest from whatever small earnings I'd added to my balance.

Now my micro-earnings earn interest. All I have to do is deposit them. That is why it was worth buying that one Bitcoin. All the faucet and earnings sites pay miniscule amounts of Bitcoin. Yesterday I spent way too much time hitting faucets and earned an entire 0.001 BTC, or ten cents. I could have beefed up my per hour earnings to 50 cents on BitcoinGet, but I'm really not a fan of working for way below minimum wage!

But if I knew those puny earnings could earn interest for me every day for the foreseeable future, then suddenly it becomes worthwhile to spend the time earning them, at least some of the time. Trading over two million Devcoins for that one Bitcoin accomplished just that. Now my earnings do not ever just sit idly. No more having to wait until I accumulate enough to buy a stock or bond. Every evening I transfer whatever I earned that day to my CoinLenders account and put it to work.

Here's just one example of how micro-earnings which earn compound interest can make a difference. If I visit just ten CoinBox faucets, those 2500 Satoshis would earn me one Satoshi a day in interest. One Satoshi is not much, but let's say the next day I visited ten more CoinBox faucets. Now I'd be earning two additional Satoshis each day, one from the first day's faucet run and one from the second day's faucet run. Now imagine I visited ten faucets each day for an entire year. By the end of the year I'm earning 365 additional Satoshis each day–actually more because when I earned the first 2500 Satoshis, they started kicking off an additional one each day. That's the beauty of compound interest; it's the gift that keeps on giving.

There is no way I'd limit my earnings to just ten CoinBox faucets a day! I would combine my faucet visits with BitVisitor and CoinAd earnings at least. Thanks to my CoinLenders account and my starter Bitcoin I can now make every last Satoshi I earn count. I can put every last one to work for me immediately and consistently, something I now realize I've wanted to be able to do from the very beginning of my Bitcoin adventure.

I still plan to buy more TAT.ASICMINER shares and other assets. But now I plan to use my CoinLenders earnings instead of directly using Bitcoin I've earned or acquired from selling Devcoins. That one Bitcoin deposited with CoinLenders is the beginning of my growing Bitcoin pipeline.

Devtome Writers

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