Decentralization Is the Way Forward for Cryptocurrency Mining – Here’s Why

Cryptocurrency mining – the power behind our decentralized currencies – has reached a fork in the road of its young life. Giga Watt filed for bankruptcy in late November this year, Genesis Mining is facing hard times, and Bitmain’s future is in limbo.

But despite massive depreciation, and miners leaving the cryptocurrency space en masse, it’s not all doom and gloom for cryptocurrency as a whole. Institutional investors are coming into the crypto space, and the recent decline in mining could be good for persistent miners, mining farms and pools worldwide.

 

How Centralized Mining Failed

If there’s one lesson for miners to learn from in this bear market, it is keeping down the cost of mining, with emphasis on efficiency over scaling up. Over the course of the year, mining has been increasingly unprofitable even for some enterprise miners. There are a number of compounding factors for the dry spell such as:

  • recent decline in the cryptocurrency market
  • strict regulations and increased power rates for cryptocurrency mining
  • rapid increase in mining difficulty – faster than market demand and cryptocurrency adoption
  • cost of outlays in running the business increase with size (e.g. bigger facilities, cooling systems, power consumption, hiring more employees for maintenance and upkeep)

Diminishing returns over a period of time (e.g., Bitcoin rewards halve every four years) coupled with volatility in the cryptocurrency markets makes it very risky for miners to scale up beyond a certain threshold. In many cases, mining profitability is only as good as the market conditions. The recent turn of events with the price of cryptocurrency, and the equivalent of approximately 1.3 million Antminer S9 units turning off as of late proves how large-scale miners have become so dependent on cryptocurrency markets in terms of mining profitability.

The arms race towards bigger mining facilities and acquiring more efficient but expensive mining hardware also tends to backfire for some mining businesses who are now struggling to pay off their debts. State regulations have also put a lot of strain to the mining industry by imposing higher rates for cryptocurrency mining. This, along with rapid increase in network hash rate/difficulty, and a long drawn-out bear market spells disaster for many businesses in the cryptocurrency mining industry, particularly those who have overspent with expectation of higher returns through market demand and cryptocurrency adoption.

Enterprise-level miners might have increased their mining power with a large share of the network hash rate which might have previously worked but because of the way proof-of-work cryptocurrencies such as Bitcoin are built large-scale miners are running into difficulties. Miners are finding with increased network hash rate there will come a point where mining and maintenance costs start to eat up their gains unless they find access to abundant or much cheaper energy source as soon as possible, or if cryptocurrency continues to gain widespread adoption. (Imagine if every miner in the world does the same thing and Bitcoin suddenly drops to $1,000. How long can these enterprise miners hold on until Bitcoin goes back up again to $20,000 or until mining difficulty drops significantly lower?)

Lastly, centralized mining puts a lot of strain to the power grid that governments won’t have much of a choice but impose exorbitant rates for mining operations in order to “force” miners to slow down, or run the risk of overloading the grid, severely affecting all other industries in the country. The only option for large-scale miners at this point is scaling down and help redistribute hash power to the cryptocurrency network, e.g. shipping their mining rigs to places with abundant and more affordable energy source. (In Venezuela, it only costs $531 to mine Bitcoin).

 

Why Decentralized Mining Is Crucial for the Cryptocurrency Space

More secure compared to centralized mining. Centralization of mining power misses the whole point of having a decentralized cryptocurrency such as Bitcoin. Cryptocurrency mining was never meant to be a centralized endeavor, but a shared obligation to secure the network where one’s willingness to share computing power to mine transactions and prevent double spend attacks is rewarded with cryptocurrency. Centralization creates weaknesses to an inherently secure decentralized network by establishing a single point of failure and opens up the possibility of double spends and censoring transactions. (This inevitably results in weaker adoption and/or the cryptocurrency’s demise.)

Distributes risks and rewards to miners. Higher hash rates do make a difference who gets the mining reward. But at the end of the day, it all boils down to probability. Suppose every miner in the world mines at exactly the same hash rate. The way Bitcoin’s algorithm was designed meant that there is no particular way to tell who will be the first to find the next hash since they would all be making random guesses at a given rate. Higher hash rates increases the likelihood of being the first to make the right guess, but so is the risk (power consumption = money lost). A better alternative to mining centralization is by using mining pools or by having small mining farms spread out to places where cost of running the mining the business is much cheaper.

 Distributes power consumption. With less centralization in mining power, miners will be able to utilize cheaper electricity instead of relying solely on the power grid. It would also encourage miners to be more creative and explore ways to make cryptocurrency mining a lot greener, or, as mentioned earlier, find places with abundant supply of energy source (e.g. hydroelectric, geothermal, solar, etc.)

 

Final Thoughts

The 2018 bear market has been an eye-opener for all of us, not only in terms of volatility and value of cryptocurrency, but also the dangers and consequences of going beyond what is intended for in cryptocurrency mining – decentralized and cost-effective. Bitcoin was just as secure back when people mined them in their PCs and laptops as it is today with more powerful ASIC miners and GPUs. It’s just a matter of perspective. Hopefully, this year has brought us some important lessons to help us with our journey in cryptocurrency for the year 2019.

Facebook’s Update on Crypto-related Ads – Why Should It Matter?

Facebook hit the news when it back peddled on its decision to ban cryptocurrency ads outright from the social media platform. This has now made technology companies, cryptocurrency and blockchain communities optimistic this move will set off a precedent for other advertisers to follow, particularly Google and Twitter, who earlier warned of a similar ban on cryptocurrency ads.

What are the implications of Facebook’s reversing its view on cryptocurrency, and what are we to expect about the future of blockchain technology?

 

What Changed After the Update?

Facebook now accepts cryptocurrency ads, but only from pre-approved advertisers who filed their cryptocurrency products and services onboarding request. ICOs and promotions associated with deceptive high-yield investment programs are still banned from advertising.

The update took effect after a six-month hiatus in cryptocurrency ads on Facebook. Apparently, the tech giant have found compelling reasons for reversing some of its decision after being dismissive on anything crypto-related. (uhhh… money of course!) There are also some rumblings Facebook plans on stepping into the cryptocurrency space with their own initial coin offering.

So far, legitimate cryptocurrency businesses like Cointelegraph.com have not been able to boost their posts a day after the ban was lifted. It’s very likely that Facebook is implementing more stringent rules and are, indeed, checking on the advertiser’s credentials with painstaking effort. We’ll learn more about the specific details of the screening process as they unfold.

 

Not a Complete Turnabout

Facebook didn’t go all the way, and instead chose to “loosen” some its policy on cryptocurrency advertising. A recent post from the product management director indicates an eligibility check, which takes into account licenses and pertinent documents submitted by each applicant. Facebook wants to avoid another Bitconnect incident or turn it a breeding ground for ICO scams (70% of advertised ICOs failed to materialize).

There’s no guarantee that every cryptocurrency and blockchain businesses would receive their stamp of approval. The least they can do for now is hope they don’t get screened out or send the wrong signal to the management and mistake them for ICOs or HYIPs. Facebook is open to the idea of revising this policy as they see fit and encourages everyone to give their feedback.

 

More KYCs and Background Checks on Advertisers

All advertisers in cryptocurrency must be “pre-approved” before posting ads on Facebook. To do so, they have to disclose information about their company such as:

 

  • purpose and nature of their business
  • Facebook ad account ID
  • website domain
  • licenses and credentials
  • company name
  • business address

You can apply for your pre-approval HERE

 

 

 

 

 

 

Facebook, basically, performs due diligence on advertisers on behalf of its users, which is a good thing for cryptocurrency. Done right, this might actually boost investor confidence. With stricter regulation in place, Facebook hopes to open more opportunities which could further mass adoption for cryptocurrency, and significantly increase ad revenue to the company.

Meanwhile, cryptocurrency and ICO scams might have a hard time after the update, but that doesn’t necessarily mean Facebook won’t have any of those. In fact several cryptocurrency and ICO scams were still able to get through, ironically, even after the ban on cryptocurrency ads.

 

What Changed Their Mind?

Facebook wasn’t so clear about the reason for partially lifting the ban on crypto-related ads. People have their own views and offer some explanation as to why this is the case.

Missing Out On Revenue. At times, Facebook is more worried about optics then revenue. This isn’t necessarily a bad thing but when it comes to crypto, Facebook has constantly missed the boat. This is evident when Facebook took a massive hit in market value recently. One of the main reasons for the price dip is the lack of awareness in its underlying technology; censoring out everything crypto-related from their platform could only serve to aggravate the situation. By encouraging users to learn more about the cryptocurrency through ads and meaningful social interaction, they might as well rack up huge profits along the way.

Facebook’s Launching Its Exploratory Blockchain Group. For a tech company this huge, it’s not difficult to imagine Facebook having its own native currency in the near future. Their announcement about the launching of an exploratory blockchain group has led to some rumours about their future involvement in the cryptocurrency space. If true, then this could mean adoption on a massive scale with its two billion plus users worldwide.

 

Conclusion

Facebook’s decision to lift the ban on crypto-related ads is a statement on cryptocurrency’s future utility as a store of value, or even as a medium of exchange. There’s no denying that cryptocurrency and blockchain technology has become a major force in shaping our current financial system. They might, as well, be a part of it instead of closing doors on an opportunity which could probably give them a decisive edge along the way.

If you’d like to know more about cryptocurrency, blockchain and minning, you can pick up the Living Book HERE

The Taxman Is Catching Up On Cryptocurrency

Revenue agencies around the world are scrambling to figure out a way to tax cryptocurrency as governments are beginning to realize they are losing out on a vast source of revenue.

We’re now seeing how cryptocurrency would fit into our economy, and more people from institutions and the mainstream society starting to acknowledge them as a store of value and as a medium of exchange. Consequently, this would also mean tax obligations for miners, buyers, traders, merchants, and everyday users.

Here are things we need to know to prepare ourselves for the tax season. We’ll cover some important issues, fundamentals of taxation and how they would apply to our cryptocurrencies. But before we start, here at CryptMin and CryptEdu, we encourage you to always pay your taxes and report your capital gains to the government. It’s never fun having the taxman after you.

 

Tax Laws Are after It

Despite what people tell us in social media and cryptocurrency websites about privacy and anonymity, dealing with cryptocurrencies can leave behind footprints for the CRA or the IRS. Blockchain transactions are public records – everybody sees it, including your taxman.

The truth is blockchain transactions are more transparent than our traditional banking system. The key difference is the use of public keys instead of real names, which makes every transaction pseudonymous. However, since no two public keys are alike, once it gets tied to a real person’s name or company, authorities can easily track every transaction that was ever made with that public key. (Note: some “underground” cryptocurrencies encrypt their true addresses on the blockchain ledgers like Monero and Zcash, and thus more difficult to track.)

Some places where the CRA or the IRS can get a hold of your identity are cryptocurrency exchanges, online wallets, cloud mining sites, mining pools, and the social media. Although gateways are largely unregulated these days, it’s only a matter of time before governments and regulators will require each one of them to disclose information they have about their customers upon request.

Coinbase, for instance, are required to conduct KYC on their customers before they can start buying, selling, or trading on GDAX. Same is true with cloud mining sites when accepting payments from customers using their credit card or bank account. Genesis Mining does so whenever customers buy their mining contracts. They’ll have their customers’ public keys as well for payouts.

From the governments’ perspective, these are all treasure troves when looking for information about people who owes them money. Depending on the exchange, cloud mining company or the country they’re in, government agencies can have access to these customer data.

They could also set their sights on social media, particularly content creators in YouTube, Facebook, or Twitter who display their public keys for accepting donations, or even online stores who take cryptocurrency as payment for goods and services. And while customers and everyday users might get away with it by putting them in cold storage (mobile, hardware, or paper wallet), sooner or later, regulators will find a way to catch up on them as well.

 

Conflicting Views on Cryptocurrency

The IRA and CRA treats cryptocurrencies just like any asset. Their value may fluctuate from time to time, but until they go out and are sold in exchanges for fiat, holding these currencies is not a taxable event. A Capital gain tax will apply when selling cryptocurrencies in exchanges. However, determining the exact price on the date of acquisition is necessary to properly assess how much capital gain the seller is obliged to pay taxes for during the re-sell.

As you might expect, getting the numbers right on a person’s capital gain is going to take a lot of work and making sure every transaction in cryptocurrency exchanges are properly documented. It’s possible, for instance, that Coinbase would be asked to disclose their records for taxing purposes on each buy and sell and the dollar valuation on each individual transaction to see how much capital gain a customer has.

When using it to buy goods and services, or trading them with other cryptocurrencies, bartering laws will apply. This is where it gets a little tricky when you consider capital gains on your cryptocurrency for every purchase. For instance, you bought a thousand dollars’ worth of Bitcoin and decided to buy furniture with it when the value goes up by 50%.  The next month, you buy your furniture with Bitcoin which is currently priced at 1,500 USD. According to law, you’ll also have to pay for the gain tax as it is with bartering goods. In essence, you’re paying tax twice for buying furniture with Bitcoin – gain tax on Bitcoin and GST/HST on the furniture. And since you’re exchanging your digital asset on a short-term gain, it will be taxed just like a regular income which is the highest for capital gain tax.

Businesses will have to deal with the same problem when accepting cryptocurrency payments. If clients chose to pay with Bitcoin, which by definition is property/digital asset, they’ll have to report it as income (see the confusion?). This carries a lot of risk for business owners due to the volatility of cryptocurrencies. They might end up paying taxes on the sale despite the fact that the value of cryptocurrencies have already gone down.

 

Tax Implications for Miners, Traders, and Buyers

Regulators are catching up on cryptocurrencies fast. There will probably come a time when every cloud mining company, exchange, and wallet service in every country will be required to keep records about their customers in order to run their business. In this case, we need to prepare ourselves to avoid getting burned when the tax bill arrives.

Cloud mining companies can take advantage of tax deductions by writing off electrical and maintenance expenses in running their cloud mining facilities. This is a lot better than dodging regulations and taking a lot of risk of being caught and paying huge penalties or even losing the whole business. Technically speaking, cloud mining companies don’t pay out their customers – it’s a rental service. Whatever payout their customer receives depends on the mining pools they choose to join in and the currencies they want to mine with the hash power they bought from the cloud mining service. They might also take a cut from the mining rewards as a service charge on top of the rental fee or contract price (all depends on the cloud mining company). This is considered a taxable event, and laws regarding cryptocurrency transactions will apply.

Mining pools also take their share of the mining rewards as their service fee, usually around 1-4%, and hence, it is a taxable event according to laws on bartering, i.e. cryptocurrency for mining service. Exchanges and traders will be hit the hardest, especially day traders and swing traders. Under existing tax laws, short-term capital gains (assets acquired below one year) will be taxed as regular income. This applies, not only when cashing out and locking in their profits with fiat, but when buying other cryptocurrencies with it, e.g. buying Bitcoin with Ethereum.

Everyday users might also have to deal with this when buying or using cryptocurrencies for everyday transactions. Some complications may arise for buyers and business owners as mentioned earlier in this article.

Tax laws regarding cryptocurrencies still needs a lot of refinement; implementing it at its current state can be problematic and cause a lot of confusion. Sooner or later, our governments might come up with better tax laws regarding cryptocurrencies and begin the process of pursuing anyone who gets their hands on them. When the time arrives, we would have already prepared for such eventuality.

Interested in mining? Learn the basics of cryptocurrency mining at CryptEdu.com or start  hassle-free cloud mining at Cryptmin.com today.

Should Governments Regulate Cryptocurrencies?

Cryptocurrencies exploded on the scene in 2010 and ever since then people haven’t known what quite to make of this new way of exchanging goods and services – one that, in the future, may take over fiat currency. Governments are having an even tougher time trying to regulate cryptocurrencies to ensure they don’t get abused by criminal organizations.

But probably more important to most central governments is their own financial interests in having a strong fiat currency. In fact, the greatest fear among regulators is not whether cryptocurrencies can be used for making secure transactions or if it has real value, but on people putting their wealth in places where governments have no access or control over. If this happens, fiat currencies will lose value or utility over time as more and more people trade cash for cryptocurrencies, thereby removing its grip on the economy and on people’s lives.

 

Gateways for Cryptocurrencies 

Cryptocurrencies and decentralized blockchain ledgers have very little need for regulations by themselves. Nor do they need any government regulation or human intervention to function properly and securely. Decentralized blockchain ledgers are, in fact, in many ways more secure than any centralized bank or financial institution.

The main purpose of regulations, as viewed by the governments, seems to gravitate on the government’s role as custodians of fiat currencies, making sure nothing gets past online wallets, brokers, and exchanges without proper authorization and identification, which is in keeping with statutory laws preventing unlawful use of fiat currency (FinCEN, AML, CFT, KYC etc.).

Some countries implement even more stringent rules against cryptocurrencies, from banning the creation of new currencies through ICOs, to the outright prohibition of cryptocurrency mining. However, many of these restrictions and prohibitions achieved nothing except encourage more people to dodge regulations by going deeper underground.

These factors make legislation for cryptocurrencies a tough balancing act, since it has to serve its purpose of protecting the people against the unlawful use of money without making it too prohibitive as to encourage clandestine exchanges, creation, and distribution of cryptocurrencies.

 

Gateway #1: Online Wallets and Exchanges

Governments, banks, and financial institutions came in to “regulate” this seemingly uncontrollable trading activity which involved using government-backed fiat currencies. In order for exchanges to operate unimpeded, they need to implement strict identification and verification procedures before granting certain privileges to subscribers such as increasing buying and trading limits and the ability to link their bank and/or credit card accounts to their wallet accounts.

Coinbase, Kraken, and Poloniex are well-known examples of online wallets and exchanges that implement KYC and other client verification procedures.

 

Gateway#2: Initial Coin Offerings (ICOs)

Investors and venture capitalists (VCs) saw the high stakes of creating tokens using blockchain technology. All that stands between them and making a fortune is finding and rallying the support from people and tech communities through the sale of equities in exchange for privileges as pioneers and early adopters of their newly created coin. In a span of nine years, there are over a thousand altcoins that have been created – and counting. Ethereum project is one of the few Initial Coin Offering (basically the same as a IPO) whose altcoin turned out to be a strong currency in the market.

ICOs has been a controversial topic in the cryptocurrency sphere. From the viewpoint of regulators, they saw the need to impose regulations for such investments because they place a lot of risk on people, especially with cryptocurrency’s volatility, unpredictability, and ICO’s susceptibility to scams. China and South Korea went as far as banning ICOs altogether, and other countries threatened to follow suit if the benefits fail to justify the risks, or if scams involving ICOs spins out of control. Of course, banning them outright is foolhardy, but these countries do need a better system of regulating them just like any other IPO.

 

Gateway #3: Cryptocurrency Mining

Miners are one of the strong pillars that upholds the integrity and security of cryptocurrency networks.

There are some mining regulations in most countries, while in a few places mining is explicitly prohibited. Regulations can be beneficial for several reasons. Some mining pools don’t generate enough profit to be considered sustainable for business while shady cloud mining services exist as actually Ponzi schemes. In some countries, the high cost of electricity is prohibitive enough to discourage people from mining.

For cloud mining companies, most of the burden comes from excessive regulations pertaining Money Service Business (MSB) or Money Transmitter Business (MTB) which must be complied with to legally receive payments via credit cards or bank transfers, and send payouts to their subscribers. Often the best recourse for these cloud mining companies is to move their businesses in countries which are more receptive to mining.

 

Limits of Government Regulations

There are plenty of ways violators can dodge restrictions, and fixing all the loopholes meant shutting down the entire network (or the Internet) or reverting to a centralized form of currency.

Whether or not these regulations could prevent unlawful use of cryptocurrencies is beside the point since many countries are still inconclusive about the effectiveness of anti-money laundering laws in preventing organized crimes, terrorism, and corruption.

Instead, governments should be focusing more on enforcing laws and tracking down wrongdoers without putting undue restrictions on every citizen whose lives depend on their ability to use fiat or cryptocurrencies.

People now have a choice. Whether or not cryptocurrencies will coexist as a better alternative to fiat currency or replace it altogether is something which people will have to decide for themselves.

 

Interested in mining? Learn the basics of cryptocurrency mining at CryptEdu.com or start  hassle-free cloud mining at Cryptmin.com today.