Five business models predominate the mining craft

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Updated: 30 August 2020

Crypto enthusiasts often quip that there are only three ways to make money in the cryptocurrency space. You can trade various coins, at least the ones that are on exchanges. There are over 2,000 token programs in existence, but it is estimated that 70% of these may never be traded on an exchange due to poor brand recognition, the high costs for being a “market maker”, and simply the lack of liquidity. The second path to profits is investing in Initial Coin Offerings (ICOs), many of which are never traded, but the third method for making money has to do with mining, the inherent crypto process for auditing the blockchain and expanding it.

The mining process is a little more complicated than it may sound, but the decentralized aspect of blockchain technology requires a group of “miners” to confirm/validate changes and to create new blocks. For their efforts, miners are rewarded with transaction fees and/or coins. Miners tend to be in for the long haul, and, as a result, they typically hoard their rewards. When crypto values skyrocketed in 2017, the liquidity necessary to handle traditional investors that flooded the market came from the mining sector. Many entities then chose to cash in a portion of their earnings to date.

In the early days, entrepreneurs with the know-how jumped into the mining space with both feet, software was basically free. If you could assemble a rack of high-speed computers and obtain access to abundant kilowatts of electricity, then you could literally turn on the printing press for the coin system of your choice. Those glory days have been supplanted by competition. Operating margins are now thin, and for all the computing power that you can amass, someone else may still beat you to the finish line. In other words, there is a real possibility that your work may not be rewarded.

How does this competitive “game” play out in the mining sector? As soon as one moves into the domain of cryptography, 64-digit-hexadecimals, and complicated hash-tag totals, the ability to make simplistic explanations becomes a daunting task. It is the backbone, so to speak, of the entire blockchain approach to data sharing. The mining process involves compiling recent transactions into blocks and trying to solve a computationally difficult puzzle. The participant, who first solves the puzzle, i.e., wins the competition, gets to place the next block on the blockchain and claim the rewards.

Due to competition, operating margins have become very thin. As crypto valuations plummeted, margins took another hit, as well. Environmentalists and electric utility companies have also gone on the attack, and we have yet to discuss fraud in this industry area. Investors have been scammed by phony mining operations. Utility companies have been bilked by firms that ran off with their coins, but left behind huge unpaid electricity bills. The good news is that new mining alternatives could significantly improve what has been called the “Achilles Heel” of the crypto industry.

In the meantime, miners have had to resort to a number of illegal practices to stay afloat. Many of the five business models that follow are illegal or clever attempts to get by without bearing the full brunt of power costs. As a potential investor or future miner, it will be part of your due diligence process to be aware of what is out in the mining ecosphere, whether it is legitimate or not.

Business Model #1: Legitimate competitive mining

To make a profit the right way and stay above the law requires bigger, better, faster computers and more efficient software, combined with access to a low-cost power grid. The U.S. may not be competitive today. Places like Iceland with geothermal pools that lead to low-cost electricity and Iran where an abundance of fossil fuels can produce energy at ridiculously low prices are leading contenders. The trend now, however, is for local utilities to segregate miners in a different class and then bill them at higher rates.

Business Model #2: Subsidized mining

Ideal locations like Iceland, Iran, and others may not last for long. Washington State in the U.S. has also been a Mecca for the mining industry. In Grant County, the utility has had an abundance of excess hydroelectric power, which it had sold to places like Seattle and Los Angeles. The local commission recently instituted a new class of customer, which included nine crypto mining operations, and created a phased approach for dramatically increasing monthly charges over the next three years. The miners have decided to litigate the issue in court.

Business Model #3: Power by stealth

Stories abound of college students plugging into their dorms and earning mining rewards while in school. One creative man in China cut his electricity costs by running separate lines up utility poles and “borrowing” power on intermittent occasions. This fellow was caught and went to prison. Others have mined their coins, then disappeared in the night, leaving local utilities with millions in unpaid bills.

Business Model #4: Cryptojacking

As strange as this story may sound, there have been several instances of it appearing in the recent press. The process starts with a crook implanting a specific piece of malware on a victim’s computer by tricking them to click on a social media link or Internet ad. Preferably after midnight, the crook turns on his broad network of malware-connected computers and directs them to perform his calculations. Victims are totally unaware of this ruse until they receive their monthly utility bill. Security professionals claim this malware is now much better than the initial versions, so it is time to beware.

Business Model #5: Too important to fail scenario

When things become bleak in other industries, for example, the oil industry, participants are forced to operate at a loss until better prices prevail or technology saves the day. In some parts of the world, the state actually steps in to keep companies, which it deems too important to fail, alive and well, so-called “Zombie” companies. Crypto pundits have argued that mining is so important to the criminal element in our society that, if margins dropped so low as to make mining unfeasible, crime syndicates would step in to operate them at a loss. This notion may sound contrary to common sense, and it may well be. The various coin systems may have to be the ones to step up to the plate, if this were truly the case at hand. In the meantime, technology may be the saving grace that sits in the wings, promising a “solution”.

Concluding Remarks

Mining, the “backbone to the entire blockchain approach to data sharing” and the “Achilles Heel” of the crypto industry, is hurting financially. Margins are so thin that many operators have had to resort to illicit business models in order to survive. Either the process needs to change or be radically enhanced with new technology to ensure a legitimate path for ethical service providers.

On a positive note, improvements are under development, and a few select coin systems are presently using alternative schemes to achieve their necessary mining objectives. If you are a potential investor or mining participant, it would be prudent for you to follow the constantly evolving landscape of the mining trade.