Nothing Personal, it’s just Mining: Business Models Review

Mining has long ceased to be entertainment for geeks and a narrow circle of people associated with the development of blockchain technologies. Despite a protracted market decline, the cryptocurrency world is increasingly stepping on the toes of the financial world. Recently, one of the most popular exchanges, Binance, announced revenues significantly exceeding the income of Deutsche Bank, and the mining giant Bitmain reported a net profit of $4 billion, leaving many of the old players of the IT industry in the dust.

Whether we like it or not, mining has become a serious industry where serious money is churning through it. The era of home farms from five years ago, which could well make their owners rich in just a few months, is over (at least when it comes to BTC mining). At the same time, there are many services and companies that allows everyone to earn on cryptocurrency mining.

Today, we’ll take a look and try to analyze the business models of these companies and examine their vulnerabilities and benefits.

What’s wrong with private mining

The first question that anyone who wants to engage in mining should ask themselves is this: “Why do these guys sell me equipment if they could mine and earn money on it themselves?”

The more you think about this problem, the more disturbing it becomes. Really, what if the equipment that was sold to me is already outdated? What if mining is not profitable anymore and everyone knows it but me?

Or maybe this cloud-mining company is just a long-lived financial pyramid scheme?

Without falling into paranoia, I will note that these fears can be quite reasonable (we will return to them when we take a look at the Bitmain model).

As you know, during the California Gold Rush, the most stable and easy income was earned not by those who mined gold, but by those who rented the equipment for its production. At the same time, if the miner was lucky, he paid for his equipment costs and retained a hefty profit. A win-win for everyone.

Bitmain

Bitmain is the living embodiment of the inevitable process of the consolidation of mining companies. According to some reports, up to 41% (!) of the Bitcoin hashrate is controlled by this leviathan, which has located its mining centers throughout the world. If at this point you thought of a 51% attack, then you are not alone: such fears exist. Bitmain is so huge that the sudden stop of its processing power is likely to permanently paralyze the Bitcoin blockchain.

Bitmain is also an example of a super-successful corporation, the so-called unicorn, which in just a few years managed to increase its profits to $4 billion. Recently, the company announced plans for an IPO, which will further strengthen its position and will finally legitimize its activities in the world of large finances.

The “filling” of Bitmain’s business is much less fascinating than its revenues. Recently, the company has been facing serious charges related to the opacity of its actions.

The first, and perhaps the most important, of them is that the company allegedly uses the ASIC devices that it sells to the public in a closed mode for its own needs. They’ve used these devices for several months before promoting them on the market under the guise of a “brand new device.” Thus, Bitmain allegedly double-dippings from its own development, and then “fuses” its devices to the market, forcing users to buy outdated and used equipment under the name of an innovative product. As far as we know, this serious accusation has never been directly confirmed.

However, there are a number of facts indirectly indicating that Bitmain does use hidden miners for its own profits. In April 2018, the developers of the Monero cryptocurrency decided to hold a hard fork that would make its algorithm resistant to ASIC miners. The hard fork took place three months before the release of Antminer X3 in the free sale; it was a preventive measure. To the huge surprise of the community, the network’s hashrate fell by 80% after the code change. This was taken as a signal that Bitmain had full control over the blockchain the whole time time, providing the lion’s share of network power at the expense of its hidden devices.

Another stone in Bitmain’s garden is the controversial price of the devices they offer their customers. According to IT specialist Robert DeVoe, “Those who are able to buy the devices during the pre-order period for the standard retail price will then turn around and reset the devices again for double, triple, or sometimes even quadruple price.”

So, the main problem of Bitmain is the lack of trust on the part of the end users. Despite the huge demand for Bitmain devices, many have lost faith that a mining сorporation of this level will play by the rules. Regardless of the high profits, the company’s reputation is nowhere near perfect.

Cloud mining

If buying a dedicated miner or graphics card in 2018 is comparable to buying gold mining equipment during the Gold Rush, then investing in cloud mining is a much less transparent act. Imagine if someone told you: “I have every bit of equipment need for gold mining. I even have a team of prospectors. If you pay me up front, I promise to regularly give you a little bit of the gold we’ll get in the future. No, I’m sorry, I can’t show you the crew and the equipment.”

Absurd, I know. But that’s the way it is with cloud mining.

Cloud mining is provided as a service where the client is paying a fixed fee to the company to lease its computational power that will be used for mining. Management costs are generally high (and not very transparent) and this lowers the investor’s returns. In fact, the owners of such companies sell their users a “pig in a poke.” After all, most investors are not terribly concerned about the technical part of the process. It’s just important for them to invest money, and cloud mining is a great opportunity to do just that: the account is gradually dripping cryptocurrency and all the mathematics of the business stays behind the scenes.

Cloud mining is simple and convenient. At the same time, however, there have been comments about its unprofitability for the end user. The recent history of the Hashflare cloud mining service (which ceased its operation due to the excess of expenditure over the inflow of new funds) is illustrative of this fact. It turned out that the idea that “cloud mining gives profits to only cloud mining companies” is incorrect: sometimes the company itself goes in the red and terminates the operation (by the way, Hashflare was the one of the largest representatives of the segment). According to what is known about the situation, the main cause of Hashflare’s collapse was the low competitive ability of their miners compared to the devices from Bitmain.

Of course, the prolonged decline in the market (during which Bitcoin regularly returned to its annual lows) also played a role, putting every mining company in a difficult position.

Crowdfunded mining

Recently, projects have begun to appear that offer a new business model for mining, an alternative to the previously considered schemes. It is based on crowdfunding through the issuance of the project’s own tokens.

Crowdfunded mining enables users to mine cryptocurrencies without managing the hardware. The mining rigs are housed and maintained in a facility owned by a mining company. This makes it similar to cloud mining, but the difference here is that there is no fixed fee for using the company’s computational power. Instead, a procedure is held that resembles an IPO in a world of traditional finance: the customer needs to register and purchase mining contracts or shares to get some fixed part of the company’s profit.

A striking example of such a company is Securix. The main object that a Securix investor has to deal with is the SRXIO token. It gives the owner access to the Securix mining service and, in turn, grants him or her the rights to a percentage of the total mined cryptocurrency (gross mining revenue) each month. No less than 45% of the gross revenue will be distributed equally to SRXIO token holders. As long as an investor owns the tokens, the company will transfer a portion of the revenue in Ether to his/her wallet each month through an Ethereum smart contract in order to ensure the transparency of all transactions. Securix has a full-transparency policy, which differs greatly from what other cloud-mining companies suggest.

In the long term, Securix’s token pool quantity will decrease through regular token purchasing and burning, and the monthly gross revenue will be divided across a smaller token pool. Such an approach is a distinctive feature of the crowdfunded mining compared to other models. It stimulates the demand for the project’s token, thus attracting more investors. This will increase both the value and output per token, and it will potentially make holding SRXIO tokens more profitable than holding BTC directly.

An important detail for all mining-connected projects is the location of the team. The crypto industry already has an example of a “bad” project in this regard — Mineredge. They are pretending to be in Canada, however, Canada no longer accepts mining operations. In fact, their team is scattered around the world, but most of them live in India; a strong red flag. That’s why the Securix management team chose to live in the same country as their mining operation: the Netherlands.

The location wasn’t chosen at random either. It allows Securix to purchase green energy directly from solar and wind generators, without the need for costly intermediaries. Their environmental impact is a top priority for the company, and this initiative positions Securix for increased responsibility, sustainability, and profitability in its mining operations.

To sum everything up, the rapid development of the crypto market has generated a variety of business models. Both centralized giants like Bitmain and cloud-mining projects seem to have serious flaws in transparency and profitability for the simple user. This is why the visible crowdfunding model appears to be the most effective one from this perspective.

About the author:

Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.