Falling bitcoin prices land rent-a-miner scheme in hot water
A lot of people made big investments in bitcoin mining, with plans dependent on constant price growth.
Effective bitcoin mining is all about location. The number one priority is access to electricity as cheaply as possible, and numbers two and three are finding enough space somewhere, ideally somewhere with cold weather.
One Norwegian company, Selksapet Digital Gruveindustri, or Digital Mine Industry reckoned it found a symbiotic solution. Customers buy powerful ASIC bitcoin miners outright with Norwegian krone, and receive 70% of the bitcoin mined by the rigs. The customers own the machines, while the company runs them on their behalf and keeps 30% of the bitcoin mined by them. Customers can get their own miners, while the company uses a handy location and economy of scale to operate them more efficiently and without the outright cost of actually buying the machines.
Customers could get a single Antminer S9 for 29,999 kroner (about US$3,600), a 5 pack, or a complete 10 pack of ASIC miners for 259,990 kroner (about US$31,100).
It all went as planned until bitcoin prices dropped, E24 news reports. Even with its arrangements, the company was losing money hand over first by simply switching the machines on. Its customers, some of whom had forked out hundreds of thousands of kroner for a big stake, weren't particularly interested in the company's shrinking margins and simply wanted to get the bitcoin they were promised.
As bitcoin prices dropped, and then stubbornly refused to recover, the company has been taking increasingly desperate steps to stay above water.
The first, before Easter, was to abruptly amend its customer contracts and tack on a fiat currency operating fee of 1,000 to 1,800 kroner (up to about US$215) per month, depending on the package they've purchased and doubling the amount of bitcoin they retain, to keep 60% of the mined coins. E24 spoke to one customer who refused to agree to the new terms and said the company simply shut off their machine.
But this still wasn't enough, and the next customer payment never arrived. In its place, the company simply sent a letter saying that their operating costs exceeded the amount of bitcoin recovered, so they would be keeping it all.
Even keeping the full profits, the company is probably still losing money by switching on the machines. A bitcoin price of about $8,000 will see most miners barely break even, so at the time of writing, prices under the $7,000 range are unsustainable unless you have a huge set-up and access to some of the cheapest electricity in the world. The original contract terms, by which the company would only keep 30% of the coins being mined, are outright impossible.
The company says there's no chance of customers getting their money back, but mentions that the customers still own their own machines and can request it shipped to them. However, there will be a 5,000 kroner shipping fee. That's about US$600.
It takes time to set up a mining operation, so even as bitcoin prices dropped from their December highs, people were still joining the mining race, and raising the difficulty level and bringing more competition in the process. At current prices, most of these miners are probably getting burned simply by switching on their machines. Their options now are to either switch them off and wait for better days, keep mining and hope bitcoin prices rise enough in the future to make it retroactively worthwhile, or try to sell off their machines.
None are much good to the disgruntled customers in Norway, who at this stage, failing intervention from authorities, might at best swallow the shipping fee and then try selling off the mining rig. If they do, it will be the first time they've ever laid eyes on the machine itself.
Disclosure: At the time of writing the author holds ETH, IOTA, ICX, VEN, XLM, BTC, NANO