First exposure of the "triple door" of crypto mining investment trap: cheat you without negotiation

"Low-key" may be the initial impression of the "crypto mining circle" in the eyes of many people. Cryptocurrency mining practitioners rarely appear in public. Compared with the topic-leading power of the blockchain "coin circle" and "chain circle", the real status and operation methods of the mining circle are particularly mysterious in the gray market.

"The industry chain and profit model of the mining industry are the clearest," said Wang Xiaoyi, CEO of Mining Ocean Academy, to Liandede. "It is simple and clear, and you can tell how to make a profit with a calculator."

It is April now, and another flood season is approaching. Electricity, which is the main cost of mining, will drop, and the mining circle is stepping up preparations to capture this "spring".

"Annualized 30%. Payback in half a year during the flood season." is a slogan used by many people to promote mining investment. According to the law, a large number of new mining investors will enter the market during the flood season. At the same time, scams and traps will also appear in large numbers. According to the experience of senior miners, it is not easy to really make money in the "spring".

First: Mining machine purchase fraud, a pitfall for retail miners

"I heard that mining Bitcoin is still quite profitable." Zhang Tao, a sales manager of a blockchain company, talked about his concerns with Liande.com, mentioning that the price of new mining machines is still relatively high, second-hand mining machines are hard to come by, and there are even many malicious scammers waiting to be exploited.

According to Liande, new investors in the mining industry are generally divided into two categories. One is to choose large-scale investment, purchase hundreds or thousands of mining machines, and reach a cooperation agreement with the mining farm. Many large mining farms also provide mining machine sales services. The number of mining machines accepted by a general mining farm is at least 100 or more. Even second-hand mining machines cost about 100,000 yuan, and the electricity fee (hosting fee) is even higher. Take the Ant S9-13.5T mining machine as an example: it consumes about 32.4 kWh of electricity a day. Assuming the electricity fee is 0.4 yuan per kWh, it is 13 yuan a day. 100 mining machines need to consume about 460,000 yuan a year, and the total cost for a year is about 560,000 yuan. For ordinary people, it is not a small investment.

The second is to try the waters first. Compared with the above investors, more investors who want to enter the mining business but have limited funds may choose to buy a few mining machines to test the waters first. After trying, they will find that the "water" of buying mining machines is too deep.

Retail investors mainly purchase mining machines online. In addition to the official websites of various brands, many retail investors see sales advertisements for mining machines on various forums and forums, add their WeChat or QQ, and directly purchase mining machines through transfers on these social platforms. This method is obviously difficult to obtain transaction guarantees. Problems such as "blacklisting investors after receiving money, second-hand mining machines being inferior, mining machines being replaced with fake ones, counterfeit OEMs, and no after-sales service" are common in the process of purchasing mining machines.

"Many mining machines look similar and can only be distinguished by disassembling them. Some second-hand dealers sell mining machines that are 60% new as 90% new to confuse novice users. Currently, there is a lack of mining machine dealers that are recognized by the entire industry and officially approved." Wang Xiaoyi told ChainDD, "The focus of strong supervision in the blockchain industry is on coin issuance, but the supervision of the ecological chain (including mining) is very weak."

On February 24, retail investor Zhai Zhongzhuan ordered an A9 mining machine through WeChat and bank card payment, but only received an E9i. The price difference between the two mining machines was 7,000 yuan. Zhai Zhong negotiated a refund with the seller Lu Yang to no avail, so he had to expose the other party's company and personal information on the Internet.

When the bull market was booming in 2017 and 2018, "scammers" in the mining machine purchase process became more rampant. According to the general recollection of people in the industry, at that time, the supply of mining machines from Bitmain, Ant, etc. was in short supply, and the market was frantically buying them, which gave rise to many "scalpers" who bought mining machines on behalf of others. These mining machine purchasing intermediaries not only increased the price of mining machines, but also speculated that the mining machines that were sold on the official website for more than 30,000 yuan were once sold for more than 130,000 yuan. Even many scalpers did not have enough inventory, so they sold a batch of mining machines to several groups of people at the same time. The "Huainan Fraud Case" in 2017 was based on this plot, and the amount involved was over 100 million yuan.

"The market is not good now, and people's demand for mining machines has also decreased. They can just buy them directly on the official website. Some people claim that they have "coupons" issued by the official. In order to buy mining machines at more favorable prices, many people will still go to these intermediaries and face the risk of being deceived." Wang Xiaoyi told Liandede.

The second problem: illegal mining sites. “It’s hard to find a mining site that complies with the law.”

After mining investors purchase mining machines, the next step is to consider where to start them. Because mining machines require a lot of electricity to operate and electricity prices vary greatly from place to place, mining investors need to choose a place with relatively low electricity prices to build a mining farm to ensure profitability. Not all investors have the funds and energy to build their own mining farms, and most customers choose to cooperate with mining farms by signing a custody agreement.

Building a mining farm requires consideration of multiple dimensions such as electricity consumption, infrastructure, and operation and maintenance, so many investors host their mining machines in cooperative mining farms and pay certain electricity and hosting fees on schedule. If the mining farm is found through an intermediary, agency fees must be paid regularly.

"There are many pitfalls here." Wang Xiaoyi sighed.

"When choosing a mine, you should not only look at the electricity price, but also check whether the mine has signed a legally protected electricity contract with the government and whether it has the qualifications to use electricity. If the electricity is not compliant, the mine is always in danger of being shut down. Once it is shut down, the interests of investors will inevitably be harmed."

It’s not just electricity, the greater potential risk is that many mines themselves are “non-compliant.” According to Liande, areas where many mines were once concentrated, including Xinjiang, Ordos, Wuhai, Baotou in Inner Mongolia, have issued relevant notices to clear out virtual currency mines.

Take Xinjiang as an example. Due to the low electricity and land prices, many people choose to buy or build mines here. As early as July 2017, the Xinjiang Uygur Autonomous Region Economic and Information Commission issued the "Notice on Prudent Support for Bitcoin "Mining" Enterprises". The "Notice" pointed out that in addition to consuming a lot of electricity, Bitcoin mining companies have basically made no contribution to local social and economic development (including taxes). A year later, in July 2018, the Xinjiang Economic and Information Commission issued the "Notice on Clearing Out Illegal Electricity "Mining" Enterprises".

Tian Yu, a mining investor, once bought a mine in Yili, Xinjiang. The original owner of the mine had signed an electricity agreement and registered a company. Among the materials provided by Tian Yu, there is a closure notice issued by the Xinjiang Production and Construction Corps National Horgos Economic Development Zone Corps Division Management Committee. The notice states, "According to the spirit of the National Financial Work Conference, the virtual currency "mining" industry is a pseudo-financial innovation that has nothing to do with the real economy. The project is illegally produced and operated in the name of the "cloud computing" industry, and is actually a "mining" enterprise."

Tianyu said that the contract he signed with the original mine owner stipulated that if the electricity price rose or the mine was closed, the original mine owner needed to return the purchase money. The other party failed to fulfill the contract, causing a dispute . As with many emerging fields with strong supervision, the attitudes and relevant policies of various regions towards "mining" companies directly determine the survival of the mine.

"The current law does not have specific regulations on the operation of virtual currency mines, but some regions have introduced policies." Guo Yatao, a lawyer at Chain Law, told Liande. "Pseudo-financial innovation is just an official term. The policies in different regions are different, which are all uncertain factors."

Nowadays, in order to survive in the grayscale, many mining companies hang up signs in the name of "cloud computing".

"Mining and cloud computing do not conflict. With the advent of 5G, I am optimistic about the computing power industry." When asked how investors in mining farms can avoid such risks, Wang Xiaoyi said, "There is no other way. Try to choose compliant routes and choose some mining farms that really have computing power industries."

The third door: the custody agent's quibbling, "Your business has nothing to do with me"

Mining machine hosting is a huge industry in the mining circle. Most people will choose to host mining machines to save time and worry.

How to find a mine for new miners is also a big problem. Many people only see the good returns of mining, but they have no idea where to start when they first come to the industry, so they can only "seek medical advice from all sources". This situation of extremely asymmetric information often makes it easier for them to first encounter "agents" rather than mine owners.

"Intermediaries" exist in all walks of life, mainly relying on information and personal connections to provide related services and connect resources for profit. In the virtual currency mining industry chain, intermediaries are sometimes only responsible for helping mine owners find customers, helping investors in need find mine hosting, and charging intermediary fees; sometimes intermediaries directly sign hosting contracts with customers, earning the difference in electricity prices, and asking customers for intermediary fees on schedule. In this case, since neither electricity nor mines are in the hands of intermediaries, the risk is extremely high.

If the mine stops operating due to electricity costs and other issues, and the investor has not signed any contract with the mine, and only relies on the bilateral contract signed with the intermediary, it will be extremely difficult for the client to protect its rights against the mine. Such a tragedy happened to the company "Jiuren Technology" whose mining machines were illegally occupied by the mine. The mining machines entrusted by "Jiuren Technology" to the mine stopped operating because the company signed a trusteeship contract with the intermediary instead of the mine owner. When the company asked the mine owner for the machine after the incident, the mine in question (Zhengzhongbang) claimed that it had no cooperative relationship with the investment client (Jiuren Technology).

"In this situation, investors can sue the intermediary, but the difficulties involved are unknown." Chain Law attorney Guo Yatao analyzed that the mine owner may lie that he does not know the intermediary, and the intermediary may shirk responsibility. If reconciliation is impossible, all of these will need to be discussed in court.

“The existence of various unreliable intermediaries and the various disputes caused by the existence of intermediaries are ultimately due to the lack of transparency in information in the mining circle and the relatively closed resources.” Wang Xiaoyi expressed the helplessness of practitioners to Liandede.

Crypto mining, the most basic contributor and implementer of cutting-edge blockchain applications such as credit enhancement, property rights confirmation, traceability, distributed accounting, and encryption algorithms, is embarrassingly lacking the primary principle it should be pursuing - the credibility of information and data.

In an emerging space that advocates decentralization, distribution, and community self-discipline, speculation and profit-seeking are intermittently out of control. The primary factor affecting business efficiency is never centralization, but the lack of rules and aphasia. Taking the mining industry as an example, the value premise of commercial and physical applications is still calling for the establishment of a scientific regulatory framework and the construction of a public goodwill credit database.

“The entire ecosystem will be better only when information is transparent.” is the most realistic lament in the mining circle.