What’s mine is yours; what’s yours is mined

(I was going to turn this into a tweetstorm, but it’s a bit over the line for what would be a reasonable-length tweetstorm and also I am an old fart who thinks tweetstorming is unwieldy. Am I the only one who thinks tweetstorms are kind of annoying? Apparently I am.)

The big news in bitcoin-land today is the nine-figure-USD evaporation of the Mycoin exchange in Hong Kong (the SCMP article is paywalled but also worth a read) which turned out to have been a ponzi scheme. Mycoin ran a small BTC exchange, but their main business was selling bitcoin mining contracts: buy HKD 400,000 worth of mining capacity, the pitch ran, and you’d make HKD 1 million within a few months as the miners threw off bitcoin. When you pitch it like that, it’s pretty obviously a ponzi. 

But the idea of “mining contracts” is very well established in bitcoin-land. Googling “bitcoin mining contracts” gets you a lot of perfectly reputable-looking businesses offering “invest now; get a stream of cash later”. And the idea is somewhat sensible on the face of it: you pay $x upfront, in return for a stream of cash valued at $y (and hopefully y > x), and at the end of the contract you have a thing with residual value $z ≈ 0. 

That’s not the most insane thing in the world; it’s not a million miles from an industrial leasing business. But with an industrial leasing business, you have actual cars and heavy vehicles and machines and such, with actual measurable depreciation. With a Bitcoin mining contract, you just have a black box: BTC goes in, BTC comes out a few weeks later, and the stream of BTC tapers off as the difficulty increases. There are a lot of places an unscrupulous “mining contract” operator could either siphon cash out, or just fail to mine entirely and just pay users back out of their principal… until the principal runs out.

The question, then, is how (or even if) you can verify that there’s actual mining being done behind a given mining contract. Photos of rack-mount servers with an arrow pointing to them saying “this one is yours” are useless, obviously. A ticker on the company’s website saying “this many hashes per second!” doesn’t have to be real data. Even the bitcoin payouts don’t make it real. 

And really, if these bitcoin miners existed and were NPV-profitable, they wouldn’t be being leased out; they’d be kept by the owners and milked until it wasn’t economical to run them any more. You don’t see Hertz offering to sub-lease its rental-car fleet to people  and let them keep the profits.

Maybe it’s time for “bitcoin mining contract” to be filed next to “high-yield investment plan” in the “synonyms for ponzi scheme” file… along with a whole lot of other bitcoin lexicon.

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