Loss of investment and reputational harm are high costs at stake when investments flow without due diligence into publicly traded cryptocurrency entities. The ecosystem has incubated a rash of innovative ideas, many of which have evolved into substantial revenue streams for their operators. However, the global impetus by governments and regulators to reign in harmful practices should draw our attention to the means by which some of those gains were procured; the industry has its fair share of unscrupulous actors – some amassing incredible wealth through unfair practices, deceit, or outright fraud. As massive amounts of funds migrate from crypto startups to the public sector for loftier projects, investors should be asking themselves – who am I investing my money with, and what are the implications of handing this custodian the key to more data, control, and power?
All rising stars in the crypto industry are not worthy of the awesome social responsibility bestowed upon the world’s most respected enterprises. Even those that may be, should be subject to critical review.
Money generated from private cryptocurrency operations is flowing into publicly traded companies through a variety of means: reverse IPOs, IPOs, and investments in or partnerships with publicly listed companies. It does not take much searching to find connections between publicly traded entities, and highly questionable private crypto operators. This commentary is a call for all potential investors to scrutinize crypto operators who move their operations into the public realm – whether directly or indirectly – and to demand high ethical standards.
CoinDesk has reported that Bitmain – a dominant manufacturer of bitcoin mining hardware, and leading cryptocurrency miner – has filed for an initial public offering (IPO). At an estimated $18 Billion, the IPO would eclipse that of Facebook, and without doubt attract speculators chasing riches in the next big IPO.
The remarks that follow will include public references which include Bitmain as source – not to draw any conclusions about the referenced entities, but simply to urge investors to do their homework and make informed decisions.
As a leading manufacturer of cryptocurrency mining equipment, and major mining operations – Bitmain was uniquely positioned to benefit handsomely from secretly using its latest equipment to mine cryptocurrency. In doing so, the wider mining community would be placed at a disadvantage, as the mining difficulty level increases along with the network hashrate boost provided by the robust new devices. Secret mining with new equipment that is not broadly available to the public – disadvantages miners who lack the computing power to win block rewards. In short the mathematical probability favours the new equipment; lining the pockets of their users with freshly minted bitcoin and other cryptocurrencies.
Bitmain was accused of participating in secret mining; a claim that the company stated – in a Transparency Policy– was unfairly leveled against it. Consider the unfolding of these events:
- Monero is a privacy-oriented cryptocurrency, designed to be mined with GPU machines which are much more accessible than application specific (ASIC) rigs – which were considered to be contributing to centralization in mining.
- The Monero mining community noticed unexplained difficulty in mining the cryptocurrency coupled with a decrease in mining rewards. This led some to speculate that somehow someone had found a way to manufacture ASIC rigs to mine the GPU minable cryptocurrency, and was mining with the more powerful ASIC machines.
- Monero.org announced that Bitmain had introduced a new ASIC Antminer capable of mining Monero.
- The Monero community rallied behind a proposal to modify the protocol and make it resistant to ASIC mining.
- Immediately following the code change, ASIC miners were rendered incapable of mining Monero. Something else miraculously followed; mining difficulty declined by 80% as captured below by Trustnodes.com.
- The developments get more interesting as one examines the impact on actors who were secretly mining with ASICs, and suddenly found themselves in possession of a worthless piece of metal, but we won’t venture there in this piece.
Source: Trustnodes
Bitmain subsequently published a Transparency Policy denouncing the practice stating: “Secret mining is a practice whereby an ASIC manufacturer may mine with newly developed equipment prior to selling or distributing such equipment to customers. This has been criticized as conferring an unfair market advantage to ASIC manufacturers over individual community member miners. Bitmain itself has been unfairly accused of this practice. In the end, Bitmain values transparency and fair competition. We therefore remain opposed to this practice and maintain our long-held zero-tolerance policy regarding same.“
While the Bitmain response may satisfy some that the company found the aforementioned practices objectionable, it remains important for investors to do their own due diligence and assess the intersection of their values with those of prospective partners in the crypto space.
Another major player that found itself embroiled in controversy was Coinbase, following the Bitcoin Cash fork. You can think of Bitcoin Cash as a Bitcoin dividend. Imagine a situation where a custodian held your shares in a company, was the only party in control of your dividends, but refused to grant you access to your dividends. I think this is a fair assessment of the position that many Coinbase customers found themselves in. The backlash resulted in the establishment of the dedicated internet presence CoinbaseBCH.com (now closed, and available via Web.Archive.org) with the stated mission:
“Our ultimate aim is to work with Coinbase, Inc to help them understand the user community’s concerns and take the correct and appropriate action of allowing users to trade or withdraw the Bitcoin Cash tokens (known as BCH or BCC) that rightfully belong to them following the 8/1/2017 Bitcoin hard fork.“
Coinbase subsequently reported that customers would be granted access to their Bitcoin Cash, and would be able to withdraw funds effective January 1, 2018.
As I experienced these events unfold, I was drawn back to the mission of Bitcoin – to improve upon trust and integrity. Both of these media events, brought trust into question, and impacted relationships in ways that some observers might consider unacceptable. Individuals and organizations will have differing tollerance to risk as they contemplate embarking on ventures in crypto. The market is maturing at an uneven pace. As you venture on, insist on integrity and transparency from partners at a level that meets your comfort. Alternately, wait for the entity to evolve to your standards, choose another partner, or better – innovate and serve the lacking need.