Monday, January 12, 2015

CEX.io "Suspends" Cloud Mining

It's been an interesting day to be sure, with PayBase announcing ways to improve their price and profitability long-term on the one hand while cloud mining services have been going belly up at a rapid pace. With the falling Bitcoin prices and continued high difficulty, it was inevitable that one of the biggest cloud mining services, CEX.io, would run into problems. Today in a blog post, CEX.io states that they are "temporarily" suspending their mining services. I put "temporarily" in quotes because there are really only a few scenarios that will lead to CEX.io resuming mining:
  1. The price of Bitcoin climbs to the point where it's profitable again.
  2. The difficulty of Bitcoin falls to the point where it's profitable to mine again.
  3. CEX.io gets more efficient hardware that makes it viable to mine even at the current price/difficulty ratio.
I actually noticed the problems with CEX.io over the past month, when I saw that my BTC balance would sometimes drop, and the past week in particular has been bad. Now, I have long since pulled out of CEX.io, so I only had 0.5GH left on the service, but over the past week my balance dropped about 5% (maybe more?) due to maintenance fees. Even worse, selling all hashing power still seems to have only partially stopped the hemorrhaging, as referrals can still result in fees. Nice, isn't it?

The real question is whether the maintenance fees are even reasonable, or if they're just high in order to secure a profit for CEX.io. I've looked at quite a few cloud mining options over the past couple of months, and without fail those focused on Bitcoin mining have looked like they would never come close to ROI. Even the best ASICs are looking rather questionable right now, as the initial cost is too high to justify.

My prediction this round is that we're due for the first real drop in difficulty in a long time for BTC. We finally reached the point where all that hashing power was using too much electricity to sustain, and with falling BTC prices suddenly everyone is in the red. Note that we did see a few small drops in December (-0.73% and then -1.37%), but these were followed by a 3% and 8% jump in difficulty on the next two cycles -- and that last one coupled with a falling price really pushed things over the edge. People who own their own ASICs can keep running them, effectively paying extra in fiat power bills to avoid the trouble of buying BTC directly, but for cloud mining this is a complete loss: you pay maintenance in BTC and you receive rewards in BTC, so effectively it's like paying 1 BTC per day to get 0.9 BTC back (whatever the exact amount is). There's no reason to continue, period.

This is also part of the bigger problem with Bitcoin: ever increasing hashing power is only possible with ever increasing price. If the latter falls, the former must eventually follow. Assuming things get bad enough, we could actually see difficulty and network hashing power drop so far that a 51% attack would be possible, though I think that's unlikely as anyone with any sort of interest in Bitcoin doesn't want that to happen. Not surprisingly, this flaw is what has driven so many alt-coins -- including Paycoin -- to adopt a Proof of Stake distribution mechanism, as there the total power requirements are relatively minuscule in comparison to Proof of Work.

Long block confirmation times and large amounts of "wasted" power are two real issues in Bitcoin. Could we actually see the cryptocurrency collapse? Well, I doubt it, but nothing is certain. If BTC does end up failing, something else will end up taking over, and more likely than not that something will not use a Proof of Work hashing algorithm. Far more likely is that we're at the point where difficulty is going to become a lot more stable. I don't think Bitcoin prices are likely to drop too much further, but if they do you can rest assured that some big ASIC farms will pull the plug while they wait for the next difficulty adjustment to see if it's worth mining again.

Worst-case, we could actually see a huge number of ASICs shut off in the near future, causing a large drop in difficulty that might take a month or more to happen. Then we'll see a huge jump in hashing power for the next cycle thanks to the difficulty drop, and suddenly all the problems alt-coins have experienced with too-long difficulty adjustment cycles will rear their ugly head in a big way with Bitcoin. There are probably enough "believers" that will keep mining come what may that Bitcoin won't have quite the roller coaster that we've seen with alt-coins, but this could definitely open the door for other cryptocurrencies to gain ground on what was once an unassailable position. It could prove to be a very interesting quarter or two....

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