Image: Shutterstock / Remix: Jason Koebler
I bought a little under one bitcoin (about 0.85 BTC) cheap, once; âcheapâ by todayâs standards, anyway. It cost around $400 USD, from what I remember. For two years it sat in a wallet as I waited for my big paydayâthe day when Bitcoinâs price hits however many hundreds of thousands it will take to not see John McAfee eat his dickâand I could cash out.As I waited, I thought about how people were investing in that dayâs most important cryptocurrency, which was once the butt of dismissive jokes about libertarianism. Seemingly everyone who didnât invest earlier was now just trying to make a quick return on a pricey investment before entirely exiting their position. More logical, I thought, was to put money into something thatâd return gradually, avoiding crashes and still pocketing bitcoins that could be sold at the most opportune time. I wanted in, but not in a way that meant that I was going to be constantly buffeted by Bitcoinâs volatility.With my one bitcoin just sitting there, I decided to run an experiment.After taking a (legally-prescribed) Concerta and muttering, âItâs time for some game theory,â I was reminded of playing a game of Craps. At a typical Craps table, there are those who bet on the six, eight and the pass line (with odds) and hope to not âseven out.â There are those who put lower amounts on the hard waysâtwo twos, threes, fours or fivesâhoping that a âsoftâ version of four, six, eight, or 10 wonât roll, or indeed a seven.So I wondered, what if I tried playing with Bitcoin like Iâd play at a Craps table? Iâd bring a bankroll, Iâd find a strategy that let me grind away and minimize losses, and hopefully not lose every cent I had. To be clear: Iâm not saying you should do this. I just saw it as the least stupid way to get on the table. And, maybe Iâd learn something about how this all works and where itâs going.*The mainstream reaction to Bitcoin and other cryptocurrencies has been frothyâthe hooting table in Vegas that attracts your attention. The difference between digital currencies and a casino table, though, is that thereâs very rarely (at least with the most popular cryptocurrencies) a full âloss.â Sure, there are those who purchased Bitcoin at $19,500 and watched as a week later it sat around $14,800, but it was still just a 25 percent drop and they still owned a bitcoin.Enter mining, the process that generates new units of cryptocurrencies. I donât really understand the actual technicalities of it, but mining requires super-fast computers that do one thing: mine Bitcoin. A roughly $7,000 Antminer S9 can put out around 13.5 TH/s of hashrate (a term for how fast it mines). Depending on the mining difficulty of the blockchain and the price of Bitcoin, this can make you around $654.01 per month in profit. (Note: all calculations are based on a $15,000 Bitcoin price.)Bitcoin mining made more sense to me than buying and selling it, in terms of playing the odds. It was the grind of a Craps tableâa layout that pays more (statistically) while also hedging your bets against a seven, the Bitcoin equivalent being a price crash. Itâs hard to find an exact analogy, but mining is like the reverse-style of craps that bets money on sevens rolling early and often.A couple hard realities put a wrench in my plan, though. Mining machines sound like miniature jet-engines and can rack up a significant electricity bill, meaning that you canât just stick them in your home computer room (unless you are very tolerant of sound). You could build your own, or maybe even sell your house to cover your costs, but to me they seemed like complex, power-hungry, and potentially explosive devices.So, I decided to take my betting money and put it in the cloud.*The cloud mining space is a worrying, potentially scam-filled Hell.Cloud mining works similarly to other cloud-based services like data storage: Someone else owns the computers, and youâre just paying to use them for a while. The two most popular companies offering the serviceâHashflare and Genesis Miningâstood out only because I found some evidence of payouts online. Both have gaudy marketing. Genesis Mining declares that you can âSTART BITCOIN MINING TODAY!â despite not currently selling Bitcoin mining contracts (only, as of this writing, Monero, and Bitcoin contracts are marked as being âout of stockâ). Hashflare offers âunbeatableâ features like 24-hour payouts, instant withdrawal and âdetailed statistics.âIn both cases there are minimums you have to accrue before you can withdraw your profitsâHashflareâs currently sits at 0.05BTC. Genesis Mining has a number of different payout minimums, depending on the currency youâre mining. Thereâs also withdrawal fees, required because of the transaction fees associated with moving cryptocurrency. Individual withdrawals generate a new transaction, meaning more fees, hence the minimum withdrawal amount. Finally, thereâs a small daily fee based on how much mining you do. By my math, a 10 terahertz per second Hashflare account will produce around $19 per day, but you lose roughly $3.50 in fees.The thorny math and small print made it all seem a little shady, but on December 11th, I bought my first mining contract with Hashflare. I spent the next day reading numerous âSCAM! SCAM!!!!â tweets and watching a sea of stock-photo-avatared YouTube videos that donât exactly help the case for cloud mining being legitimate, nor did the stream of people suggesting you sign up immediately using their 10 percent-return referral code.I was kind of freaked out.*I initially bought two separate year-long 15 TH/s contract for $2,250 each with a credit card. I told a friend at the time that Iâd either been scammed and the money was gone anyway, or Iâd not been scammed and Iâd have better returns later if I bought more hash power. So, in the time before my first withdrawal I decided to put my bitcoin into buying a further 100 TH/s, which translated, at the time, to roughly $15,000. Remember, Iâd purchased my bitcoin for a lot cheaper than that.On December 17th 2017, Hashflare (briefly) suspended withdrawals. For a few days, I kept reinvesting simply because it felt like a video game that had cost me five figures than gambling with real money. When Hashflare re-opened withdrawals, I stopped reinvesting and waited for the day when the withdrawal button would turn blueâwhich ended up being Christmas Day.Before that, though, my best friend, health physicist and coffee-maker Phil Broughton, told me that this was all a decent betting strategy, but reminded me that it was gambling and to treat it as such. My father told me it sounded âreasonable,â which is British for ânot completely stupid.â Everything up until now seemed to check out, but I was still scared. Who wouldnât be?It paid. When I was able to finally withdraw, my mining payout was 0.09587047 BTC. The withdrawal button worked, and the BTC arrived in my Coinbase account. I moved it over to GDAX (Coinbaseâs platform for professional investors, which for some reason doesnât have Coinbaseâs normal fees), sold it all as BTCâs price briefly hit around $16,000, and pocketed $1,540.32, about a 6.6 percent return on the total I invested.Even though I got my first payout, the constant increase in the blockchainâs mining difficulty and fluctuation in Bitcoin price makes it hard to say whether reinvesting was the best idea. According to the most conservative estimate I can makeâlow mining amount per day, harder blockchainâit will take me at most three months to recoup my entire investment, dollar-for-dollar. From then until the end of my contract in December of this year, I will, in theory, be making pure profit.This assumes a few things, though. Bitcoin is volatile enough that it could shoot up to $19,000 per bitcoin again, or down to $10,000. Or worse. Hashflare could halt withdrawals, or the blockchain could become incredibly difficult, to the point where Iâm not making nearly as much. Iâve got a year to at least break even before my mining contracts are up, though.*So, itâs still early but it looks like my gamble is going to pay off. But something troubles me about it. Throughout this process it seemed like miningâboth in the cloud and on-premisesâwas yet another way in which cryptocurrency would enrich those wealthy enough in real dollars to invest five (or six) figures.While everybody on the blockchain is subject to the same math, someone with $220,000 to put into a 1,000 TH/s worth of hashrate could make about $1,650 per day after $350 in fees. That same person, if Bitcoin then rose from $15,000 to $17,000, would have exponentially more liquidity than anyone who canât put down at least four figures. Sure, everyoneâs bitcoin goes up in price the same, but itâs still a perfect âthe rich get richerâ scenario.Weâve gone from the Craps table and into the depths of Galtâs Gulch.Although Bitcoin mining can technically be done by anybody, in reality a handful of large companies dominate the space with gigantic server farms located everywhere from Canada to Inner Mongolia. Succeeding in mining is a game of scale, and the company with the most, and fastest, computers will win more often and mint more digital coins.In the future, one can imagine a Goldman Sachs or Kleiner Perkins (or even just a rich person) spending many millions of dollars on tons of Bitcoin rigs and running them out of warehouses. Not only would this enrich established players many fold, but it would give them a degree of power in deciding the rules of the Bitcoin blockchain, or to bootstrap a new blockchain with new rules that favour them.While there are people out there who may see purity in this future, excited at the idea of Bitcoinâs infrastructure being decided by Wild West free market dynamics, I see Bitcoinâs current mining system as a way for the blockchain rich to get richer. The irony of me even saying this is that I had the money to invest in the first place. Am I part of the problem? When do I become part of the problem?Maybe Bitcoinâs future is in highly centralized, ultra-powerful mines. When the 2020 halving comes (when the reward for mining blocks of Bitcoin data is halved) and the last of the small outfits drop out of mining due to a sheer lack of profitability, the blockchain will end up stacked heavily in favor those who have acquired vast resources of cloud or on-premise computing.There will be a new class of crypto-capitalists; they own the sole means of Bitcoinâs production. âGold rushâ is a wonderful clichĂ© to apply, if only because I think weâre in the middle of oneâregular people can ostensibly still mine for now, if theyâve got the cash and the gumption, but weâre going to get to a time when only lumbering corporate giants can get anything of worth at all. The fact that a single companyâBitmain in Chinaâsells the majority of everyone elseâs mining equipment and mines Bitcoin itself could be an early sign of this trend.In any case, there is no turning back from this point. Iâll probably turn around a healthy profit and be happy with that. Others will too. But in two years, where will we be? In two years, where will cryptocurrency itself be? Will it even be worth calling it crypto currency? Some people already say no. Or will they simply be crypto-entities, traded for money, enriching those that can afford to invest ridiculous sums? We may even really be at a point where people who couldnât invest and enrich themselves before are finally having a chance, but the sun is setting.And with it, a beautiful future.Ed Zitron is the founder and CEO of EZPR. Some of his clients include companies working in the cryptocurrency industryâbut none of them mine cryptocurrency, in the cloud or otherwise.
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One worrying thing about this scenario (from a gamblerâs perspective, anyway) is that ultimately you are beholden to the mining difficulty of the blockchainâwhich tends to go up over time, meaning that you will mine less Bitcoin eventuallyâand how much you can withdraw at a given time. There may come a point when your year-long cloud mining contract ends, and you donât meet the minimum to withdraw your profits.Many Twitter users have voiced their concern about this. In Hashflareâs defense, itâs been incredibly expensive to do a Bitcoin transaction for months, and in December, one transaction cost an average of $28 to push through the network. The company is also investigating ways to bundle withdrawals to lower fees.I’d oscillate between “I’m the brain genius for having my monster cash-engine building” to “I could have magically had $17,000 and not spent any of my actual money if I just cashed out my bitcoin.”
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Within the time that I bought my first contract and built up my hashrateâabout a weekâHashflare stopped withdrawals entirely, the blockchain became way, way more difficult to mine, and Bitcoin dropped in price. But the grind continued.During this period, I obsessively checked my inaccessible payouts every day, reinvesting them and reassuring myself. Iâd oscillate between âIâm the brain genius for having my monster cash-engine buildingâ to âI could have magically had $17,000 and not spent any of my actual money if I just cashed out my bitcoin.â I pumped in another $4,530 worth of Bitcoin that Iâd just bought, like an excitable gambler throwing more chips on the felt.I pumped in another $4,530 worth of Bitcoin that I’d just bought, like an excitable gambler throwing more chips on the felt.
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