Nearly every emerging technology follows the same pattern of enthusiasm and abandonment and then sometimes graduates into wide scale adoption–often referred to as the Gartner Hype Cycle and the same is true for cryptocurrencies and cryptocurrency mining. At first, technology trends such as inexpensive storage and processing power, and the ubiquitousness and accessibility of high-performance servers, made coin possible. Early experiments validated the distributed model, followed by growing buzz around Bitcoin and other digital currencies in social media and blogging communities until, in mid-2013, it became front page news in mainstream press.
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The first generation of mining ASIC startups including BitFury, KnC, Hashfast, and BFL, thrived at the end of 2013 by tapping into the Bitcoin ‘gold-rush’ to sell millions of dollars of mining hardware on pre-order to eager and willing prospectors. In the frantic race to be the first to market and capture maximum profits, many startups were created ad-hoc without much attention given to planning or even best practices. Large amounts of money were thrown at ASIC design firms to compress schedules and shortcut steps in the production cycle in order to meet overly aggressive delivery dates promised to customers, as a way to attract more orders. This vicious cycle led to startups foolishly taking on more and more operational risk, for many teams that were already inexperienced or overrun by greed. Soon enough, one startup after another began missing delivery dates, delaying shipments, or failing to deliver altogether, triggering widespread market panic, customer outrage, and consumer lawsuits. When it was all said and done, many consumers had been taken to the cleaners and left many distrustful if not hostile towards vendors in this space. That is when we hit the trough of disillusionment, where we are today.
While there is a tremendous amount of negativity and pessimism about the space in general, the next generation of mining ASIC startups targeted other Scrypt-based currencies which include Litecoin, the main contender to Bitcoin. Instead of following the foolhardy path that the first generation of mining companies took, this second generation are designing highly efficient, flexible chips that deliver a lower total cost of ownership. That said, chip design takes deep expertise while production requires money. And, that’s where these companies are caught. They find themselves at the crossroads between traditional funding, through Venture Capitalists or Angels who have been scared off by the first generation of mining hardware companies, and the nascent crowdfunding platforms that are not mature or popular enough to raise enough capital to fund full scale production.
More specifically, for the small number of VC firms that are bullish on the cryptocurrency market, the mining business represents a short-lived revenue opportunity where the profitability of hardware is a race to the bottom and will quickly become commoditized, although this is slowly changing with the recent $20M venture round for BitFury. (This is the only deal of this size to date and it is an anomaly.)
A new interesting crowdfunding model–in the spirit of Kickstarter and Bitcoin–is equity crowdfunding. In the way that Bitcoin has decentralized currency, new services such as Swarm and Counterpaty seek to decentralize startup investing through crowdselling equity. While retail investors may express interest in decentralized crowdfunding, in practice, these services provide no investor protection and are subject to potential fraud and mismanagement. Centralized Bitcoin exchanges such as Havelock Investments and CryptoMex seek to provide some level of investor confidence through a vetting process that requires identity authentication and legal business checks. These platforms allow companies to offer a virtual IPO of their equity as well as provide open trading liquidity for early shareholders, which is a huge win for investors by giving them the option to cash out earlier. For startups, this offers an excellent option to quickly raise capital and allows retail investors to participate in early-stage investments which were previously only available to accredited investors.
However, there are two important roadblocks that make this route a non-starter. First, the SEC has lagged on approving the regulation crowdfunding exemption under JOBS Act Title III; the selling of securities to non-accredited US investors is still not permitted. Second, the average consumer is not a good target for mining gear, although given the right product and price point, there could be some success in getting people to donate and experiment. Given the cost-benefit tradeoffs, time is better spent going after larger investors with deep pockets.
So, ASIC startups are literally caught between a rock and a hard place that could result in reduced competition, slower innovation, and potentially spell the collapse of coin.
Let’s all remember why we fell in love with coin. It’s about the democratization of currency, the ability to send and receive money immediately anywhere in the world, to not pay expensive banking fees, and to transact in an environment that is secure and anonymous. The survival of the cryptocurrency market depends on the future generations of mining ASICs; look beyond the trough of disillusionment, invest in the cause, and help us ascend the slopes of enlightenment.