Initial Miner Offerings — Same Tune, Different Name?
An IMO (Initial Miner Offering) is a relatively new market offering, and is both very similar to ICOs, and yet has different possibilities and opportunities. Before we discuss the pros and cons of investing in an IMO, we need to revisit some recent history.
On September 4, 2017, China imposed a ban on cryptocurrency exchanges, concerned by the increasing number of ICO scams catching out Chinese citizens. Naturally, this had a dampening effect on the cryptocurrency market, although, in hindsight, it seems to just have been a blip on the radar, especially when there was a bull run in mid-December that took the price close to $20,000. The price has since corrected to the $7000-$8000 band, starting with the major slump on Feb 4th that took the price down to below $7000 and wiping $67 billion off the board. There were a number of reasons for the fall, including:-
- continuing pressure by Asian authorities, including Korea and India to limit trading and investing in cryptocurrencies.
- An announcement by China against IMOs as well, classifying them as barely disguised ICOs.
- Further moves by China to block any websites offering cryptocurrencies
- Major banks planning to block credit card clients from using their plastic to buy cryptocurrencies.
Bitcoin price March 30 2017-2018, courtesy Coindesk — https://www.coindesk.com/price/
Although the market seems to have stabilized since then, it currently is a bit muted.
The Evolution of Mining Cryptocurrencies
In the early days of cryptocurrencies, data mining was something anyone with a reasonably powerful computer could get involved in. Your earnings were small portions of the currency you were mining, and covered the cost of your electricity with a small profit. Gradually, as the algorithms used in mining got more and more complex and consumed astonishing amounts of electricity, the amateur miner got excluded from the market, and the professionals took over.
The currencies to be mined use an algorithm called “Proof of Work”, which generates a really complex algorithm that the miner has to solve, and the fastest solution wins. Proof of Work is an electricity-guzzler, and there are other algorithms out there (such as Proof of Stake) that do not require this computing power, but as Bitcoin and Ethereum use Proof of Work, as well as most of the lesser currencies, there is a lot of power being consumed in this never-ending race. There are very differing estimates out there, some running as high as 30 terabytes by Digiconomist, but no-one really knows, although most experts question Digiconomist’s figures. The predictions of ever-rising consumption should be taken with a pinch of salt, for instance Bitcoin is trying hard to become more energy-efficient, so possibly energy use will decline over the long term.
So What is an IMO?
Professional mining operations generally require data centers to house the mining hardware needed, although there are cloud computing options as well. This requires serious capital investment, which is where IMOs come into play.
IMOs focus on the extraction of cryptos by miners, rather than the currencies themselves.
When data mining started, it was something that could be done on your home computer, One of the key characteristics of this market is the tremendous utilization of energy by very powerful computers to mine the currencies. So there are needs arising from the activity of miners, namely:-
- high-spec computers at reasonable prices
- Borrowed and rented storage capacity for performing calculations
- Ever-increasing provision of electricity to run these computers
- Cheap sources of power — the biggest cost in mining
- Renewable energy sources, both for environmental and pricing considerations
- Suitable sites for large data centers for commercial virtual mining.
None of the factors mentioned above are particularly new, but the combination of them into a product bundle is what differentiates IMOs and makes them an interesting proposition. Basically, they are looking for funding for their mining operations, which are generally to be located in out-of-the way destinations.
The preliminary requirement for a mining data center is cheap power, ideally in a cold climate. The energy used in these centers generates tremendous heat, so more electricity needs to be generated to cool the site. Miners therefore look for unlikely places such as abandoned mines in Kazakhstan or the Chilean desert to set up their infrastructure. This has some interesting consequences; the village of Gondo in Switzerland used to be a gold mining center a century ago; it is now becoming a mining centre of another kind, which is reviving the town. Cheap electricity from hydropowr was a decisive factor in Gondo being chosen.
How Viable are IMOs?
As with all ICOs, the investor needs to do their homework. Apart from all the normal checks, such as scrutinizing the white paper, and avoiding companies where the majority of the stake is being held by the ICO rather than investors, you need to look at the mining competence and the viability of their proposed site.
- Are these experienced miners?
- Do they know how to run a data center (if it is not a cloud-based offering)?
- What is the quality of supply? While renewable energy such as solar and wind is great, it is not guaranteed 24/7, which is essential. This does not mean that all renewable energy is unreliable, geothermal electricity is reliable, but it is not cheap and is available only in areas which are prone to earthquakes and volcanic eruptions.
- Are they claiming exaggerated profits?
The return on investment from IMOs, which is generally paid in tokens, is not as likely to reach such crazy heights (and lows) as the coin market. However, if the miner is solid and know what they are doing, the income stream should be positive and profitable. The two main factors that will affect it adversely are the price of the underlying currency or currencies, and the threat of future electricity price increases. However, there is another benefit to be considered.
Data is the New Gold.
The growth of data and the need to analyze it is exponential. Let us imagine the unlikely demise or decline of cryptocurrencies: the data center can become a processing hub for data scientists running algorithms and applying AI on data ranging from healthcare to the cosmos, via the Square Kilometer Array (SKA). This makes the data center an attractive proposition. What is more, over 70% of data miners are currently based in China, and the clampdown there will increase demand elsewhere.
Still a Bumpy Ride
There is still uncertainty in the market in general. What is certain is that blockchain is here to stay, and this will change and disrupt every industry with respect to their business processes. The cryptocurrency market is under pressure from companies that see it as a threat to their traditional way of doing business. Authorities are clamping down and trying to enforce regulation on a very free market. However, they also see the potential of digital currencies. While China is being overprotective of its financial markets, it is engaged in building its own digital currency, which will overhaul the current tired renminbi currency. Perhaps once that is achieved, the doors of the Middle Kingdom will open again. Other countries that are also reacting against the surge of interest by their citizens in cryptocurrencies, need to put some “light” regulations in place and relax. One can isolate oneself from a global phenomenon, but it disadvantages everyone who is excluded from participating, and they will find loopholes to bypass any restrictions. IMOs such as Miner One and Genesis Mining are an interesting alternative to investing in cryptos directly, and there will probably be more as investors understand the potential benefits.