CRYPTOCURRENCY MINING CONSIDERATIONS
Updated April 30, 2018
The following is a list of matters one is advised to consider when undertaking mining of cryptocurrencies. The list does not purport to be a complete enumeration or explanation of the considerations involved and it is your responsibility to fully investigate the pros and cons of cryptocurrency mining.
There are substantial risks to be aware of when mining and holding cryptocurrencies, including:
A cryptocurrency wallet could be lost by locking yourself out by forgetting your password (e.g., your “private key”), accidentally or intentionally revealing your password to a bad actor who empties your wallet, or by physically losing the wallet via a broken hard drive or if your online wallet provider goes out of business.
It is possible that a talented hacker can break into any entry point into the cryptocurrency ecosystem and redirect or abscond with a party’s cryptocurrency. For instance, a hacker can break into a wallet or a mining pool and empty any of the users’ wallets or hack into the CryptoGulch website or other similar environment and change the wallet address listed for you such that existing or newly mined cryptocurrency is forwarded to the hackers wallet. In addition, it is possible for cryptocurrency-mining malware to infect mining machines. Such malware steals the resources of infected machines, significantly affecting their performance and increasing their wear and tear and could involve other costs, like increased power consumption.
Cryptocurrencies are subject to significant price fluctuation and may drop in value and any anticipated profits from mining such cryptocurrencies or the recovery of your initial investment could be lost. The price (cryptocurrency exchange rates) of any cryptocurrency may fall sharply and may even fall to zero.
Substantially because of cryptocurrencies being either unregulated, difficult to regulate or there being uncertainties as to how regulation will be applied to them, and because of their fully or partially decentralized nature, their value is not insured by any legal entities. The value of any amount of any cryptocurrency is subject to change due to many factors out of a miner’s control. These factors include but are not limited to changes of mining difficulty and/or other mining parameters/properties, fluctuating cryptocurrency exchange rates, obsolescence of hardware and amortization of hardware. The value of any amount of mined cryptocurrency may lose any amount, up to all its worth, at any moment of time due to the nature of cryptocurrencies.
It is possible that a competing cryptocurrency becomes more successful than the cryptocurrency that a miner chooses to mine or that somebody somehow finds a major flaw in the system or protocol that is the basis of the mined cryptocurrency. These would likely have a negative effect on the value of the affected mined cryptocurrency.
It is possible that a particular cryptocurrency will be forked which would require you to follow the appropriate procedure to maintain the full value of such cryptocurrency and its forked cryptocurrency.
Mining pools are commonly used to smooth out the acquisition rate of cryptocurrencies and improve mining efficiency. The operators of mining pools charge a fee for their use and it is difficult or impossible to verify that the actual fee charged is consistent with the amount of the fee that is disclosed. It is also difficult or impossible to determine the effect of using a pool will have on mining efficiency; for example mining efficiency can be affected by the miner’s physical proximity to the physical location of the pool.
It is also possible for mining pools to experience periods where they are not operational for example, due to DDoS attacks, or a pool’s decision to stop supporting a particular cryptocurrency or to go out of business for any period of time or entirely. During such period participants in the pool will not be able to mine cryptocurrency using that pool.
It is also possible that particular mining pool may be or become incompatible with CryptoGultch’s software. In this case a miner will be required to change the miner’s pool or mining choices in order to further mine cryptocurrency. These circumstances or any delay in adjusting to them would be materially adverse to a miner.
It is also possible for the operators of mining pools to refuse to distribute cryptocurrency in their possession to you in contravention of your agreement with them.
It is possible that the hardware or software used for mining may be or become defective or damaged, halting or limiting mining.
Cryptocurrencies are sometimes used or exploited in ways that are prohibited by the laws or regulations. Failure to comply with laws affecting cryptocurrencies may result in civil or criminal penalties, including large fines and monetary liability and jail time.
Transactions with cryptocurrencies may be unconfirmed for a period of time. Some cryptocurrency transactions may never be confirmed. Cryptocurrency transactions which are unconfirmed are not completed. In this case the party attempting to effect the transaction will not gain the intended benefit of that transaction.
Transactions with cryptocurrencies are generally irreversible – if you send any amount of any cryptocurrency to the wrong person, for example, you may be unable to recover those funds.
It is possible for bad actors to manipulate you using social engineering or otherwise into transferring cryptocurrency or information that could compromise your cryptocurrency.
Entering an erroneous wallet address can also result in the irreversible loss of cryptocurrency, which can occur from a mere typographical error up to a malicious interference, in which case any cryptocurrency mined during that period of time would be irreversibly lost.
Unknown technical defects inherent in cryptocurrencies may exist.
New regulation or unexpected and aggressive application of existing regulation have been and are likely to continue to be applied to cryptocurrencies which can negatively impact cryptocurrencies and their value.
The loss or destruction of a private key required to access a cryptocurrency may be irreversible. Any loss of access to your private keys or any data loss relating to your cryptocurrencies could have a material adverse effect on you. Cryptocurrencies are controllable only by the possessor of both the unique public key and private key relating to the local or online digital wallet in which the cryptocurrencies are held. Any loss of private keys relating to digital wallets used to store your cryptocurrencies could have a material adverse effect on you.
The further development and acceptance of the cryptocurrency network, which represent a new and rapidly changing industry, are subject to a variety of factors that are difficult to evaluate. The slowing or stopping of the development or acceptance of the cryptocurrency network would have an adverse material effect on our business.
Cryptocurrencies may be used, among other things, to buy and sell goods and services; they are a new and rapidly evolving industry of which the bitcoin network is a prominent, but not unique, part. The growth of the cryptocurrency industry in general, and the bitcoin network in particular, is subject to a high degree of uncertainty. The factors affecting the further development of the cryptocurrency industry, as well as the bitcoin network and other cryptocurrency networks, include, without limitation:
· continued worldwide growth in the adoption and use of cryptocurrencies;
· government and quasi-government regulation of cryptocurrencies and their use, or restrictions on or regulation of access to and operation of the bitcoin network or similar cryptocurrencies systems;
· the maintenance and development of the open-source software protocol of cryptocurrencies systems;
· changes in consumer demographics and public tastes and preferences;
· the availability and popularity of other forms or methods of buying and selling goods and services, including new means of using digital or fiat currencies; and
· general economic conditions and the regulatory environment relating to cryptocurrencies.
A decline in the popularity or acceptance of the bitcoin network or similar cryptocurrencies systems would adversely affect a cryptocurrency miner’s business.
The price of cryptocurrency is extremely volatile. Fluctuations in the price of cryptocurrencies could materially and adversely affect a miner’s business.
The price of cryptocurrency is a significant uncertainty for a miner’s business. The price of cryptocurrencies is subject to dramatic fluctuations. Using an exponential moving average and volume weighting of transaction data, the price of cryptocurrency is quoted by several publicly-available indexes, including the Coindesk price index, which derives from the transaction prices on electronic market places where exchange participants may use fiat currency to trade, buy and sell cryptocurrencies based on bid-ask trading (“Cryptocurrency Exchange”). Though the methodology may change in the future, these indexes use US Dollar-denominated trading data from qualified Cryptocurrency Exchanges with high trading volume in cryptocurrencies. The price of cryptocurrencies (the “Spot Price”) has fluctuated widely over the past several years. Several factors may affect index spot price, including, but not limited to:
· Global cryptocurrency supply;
· Global cryptocurrency demand, which is influenced by the growth of retail merchants’ and commercial businesses’ acceptance of cryptocurrencies as payment for goods and services;
· The ability to trade and convert cryptocurrency, which may require reliable online Cryptocurrency Exchanges, which are affected by their regulation, the willingness of governments to permit their ability to operate, their ability to connect to the global financial system and their security, among other things;
· The usefulness and security of holding cryptocurrency in digital wallets and through other means, the perception that the use and holding of cryptocurrencies is safe and secure, and the lack of regulatory restrictions on their use;
· Investors’ expectations with respect to the rate of inflation;
· Interest rates;
· Currency exchange rates, including the rates at which cryptocurrencies may be exchanged for fiat currencies;
· Fiat currency withdrawal and deposit policies of Cryptocurrency Exchanges and liquidity on such Cryptocurrency Exchanges;
· Interruptions in service from or failures of major Cryptocurrency Exchanges;
· Investment and trading activities of large investors, including private and registered funds, that may directly or indirectly invest in cryptocurrencies;
· Monetary policies of governments, trade restrictions, currency devaluations and revaluations;
· Regulatory measures, if any, that affect the use of cryptocurrencies as a form of payment or the purchase of cryptocurrencies on the Cryptocurrency Market;
· The maintenance and development of the open-source software protocol of the cryptocurrency network;
· Global or regional political, economic or financial events and situations; and
· Expectations among cryptocurrency economy participants that the value of cryptocurrencies will soon change.
Currently, it is believed there is a relatively limited use of cryptocurrencies in the retail and commercial marketplace in comparison to relatively extensive use by speculators, which contribute to price volatility that could adversely affect a miner’s business.
Cryptocurrencies and the cryptocurrency network have only recently begun to be accepted as a means of payment for goods and services by many major retail and commercial outlets, and use of cryptocurrencies by consumers to pay such retail and commercial outlets remains limited. Further, some of these retail and commercial outlets have ceased acceptance of cryptocurrencies. Conversely, a significant portion of cryptocurrency demand is generated by speculators and investors seeking to profit from the short-term or long-term holding of cryptocurrencies. A lack of expansion by cryptocurrencies into retail and commercial markets, or a contraction of such use, may result in increased volatility or a reduction in the Spot Price, either of which could adversely impact our business.
Many cryptocurrencies, such as bitcoin, have core developers (“Core Developers”), individuals willing to take on the responsibilities of the cryptocurrencies’ software updates and bug fixes, timely code releases, answering questions from users and developers, and generally setting a vision for the cryptocurrency. The Core Developers or other programmers could propose amendments to the cryptocurrency network’s protocols and software that, if accepted and authorized by the cryptocurrency network’s community, could adversely affect a miner’s business.
Cryptocurrency networks are based on math-based protocols that govern the peer-to-peer interactions between computers connected to the cryptocurrency network. The code that sets forth the protocol is often informally managed by a group of Core Developers. The members of the Core Developers may evolve over time, largely based on self-determined participation in the resource section dedicated to cryptocurrency on Github.com. In many cryptocurrency networks Core Developers can propose amendments to the network’s source code through one or more software upgrades that alter the protocols and software that govern the cryptocurrency network and the properties of cryptocurrencies, including the irreversibility of transactions and limitations on the mining of new cryptocurrencies. To the extent that a significant majority of the users and miners on the cryptocurrency network install such software upgrade(s), the cryptocurrency network would be subject to new protocols and software that may adversely affect a miner’s business.
The open-source structure of the many cryptocurrency network protocols means that their Core Developers and other contributors to the protocol are generally not directly compensated for their contributions in maintaining and developing the protocol. A failure to properly monitor and upgrade the protocol could damage the cryptocurrency network, which may harm a miner’s business.
Cryptocurrency network protocols that are open source are not licensed or sold and its use does not generate revenues for its development team, and, as such, the Core Developers are generally not compensated for maintaining and updating those cryptocurrency networks’ protocols. To the extent that material issues arise with the network protocol, and the Core Developers and open-source contributor community are unable to address the issues adequately or in a timely manner, the network and a miner’s business may be adversely affected.
If a malicious actor or botnet obtains control in excess of 50 percent of the processing power active on a distributed cryptocurrency network, it is possible that such actor or botnet could manipulate the distributed ledger (blockchain) and its protocol in a manner that adversely affects a miner’s business and its ability to operate our business as planned.
If a malicious actor, a volunteer or hacked collection of computers controlled by networked software coordinating the actions of the computers referred to as a botnet obtains a majority of the processing power dedicated to mining on a distributed cryptocurrency network, it may be able to alter the distributed ledger (blockchain) and its protocol on which the network and all the related cryptocurrency transactions rely by constructing alternate records (blocks). In such alternate blocks, the malicious actor or botnet could control, exclude or modify transaction information. Using alternate blocks, the malicious actor could “double-spend” its own cryptocurrencies (i.e., spend the same cryptocurrencies in more than one transaction) and prevent the confirmation of other users’ transactions for so long as it maintains control. To the extent that such malicious actor or botnet does not yield its majority control of the processing power on a distributed cryptocurrency network or the related community does not reject the fraudulent blocks as malicious, reversing any changes made to the blockchain may not be possible. Such changes could adversely affect a miner’s business or the ability of a miner’s business to operate.
The award of cryptocurrencies for maintaining the cryptocurrency’s distributed ledger (solving blocks) and transaction fees for recording transactions may diminish, thereby diminishing a miner’s profits. Further, if these amounts are not sufficiently high to incentivize other miners, miners may cease expending processing power to solve blocks and confirmations of transactions on the blockchain could be slowed. A reduction in the processing power expended by miners on a cryptocurrency network could increase the likelihood of a malicious actor or botnet obtaining control in excess of 50 percent of the processing power active on the cryptocurrency network or the blockchain, potentially permitting such actor or botnet to manipulate the blockchain in a manner that adversely affects a miner’s business or ability to operate.
If the award of new cryptocurrencies for solving blocks declines and transaction fees are not sufficiently high, the direct effect on a miner’s business may be material and adverse. Moreover, other miners may not have an adequate incentive to continue mining and may cease their mining operations. Miners ceasing operations would reduce the collective processing power on the cryptocurrency network, which would adversely affect the confirmation process for transactions (i.e., temporarily decreasing the speed at which blocks are added to the blockchain until the next scheduled adjustment in difficulty for block solutions) and make the network more vulnerable to a malicious actor or botnet obtaining control in excess of 50 percent of the processing power on the network. Significant reductions in processing power on the network could result in material delays in block solution confirmation time. Any reduction in confidence in the confirmation process or processing power of the network may adversely impact a miner’s business.
As equipment and software improves, as the number of miners increases, and as the difficulty involved in solving a block increases the number of cryptocurrencies awarded for solving a block in the blockchain decreases. As a result, existing technology could become obsolete and CryptoGulch could become obsolete.
As the number of cryptocurrencies awarded for solving a block in the blockchain decreases, the incentive for miners to continue to contribute processing power to the network will transition from a set reward to transaction fees. Either the requirement from miners of higher transaction fees in exchange for recording transactions in the blockchain or a software upgrade that automatically charges fees for all transactions may decrease demand for the related cryptocurrencies and prevent the expansion of its network to retail merchants and commercial businesses, resulting in a reduction in the price of cryptocurrencies that could adversely impact a miner’s business.
In order to incentivize miners to continue to contribute processing power to a distributed cryptocurrency network, the network may either formally or informally transition from a set reward to transaction fees earned upon processing transactions (or solving for a block). This transition could itself have a material and adverse effect on a miner’s business by lowering the total revenue derivable from mining activities. Whether this process is accomplished either by miners independently electing to record in the blocks they solve only those transactions that include payment of a transaction fee or by the network adopting software upgrades that require the payment of a minimum transaction fee for all transactions, if transaction fees paid for cryptocurrency transactions become too high, the marketplace may be reluctant to accept those cryptocurrencies as a means of payment and existing users may be motivated to switch from such cryptocurrencies to other cryptocurrencies or back to fiat currency. Decreased use and demand for cryptocurrencies may adversely affect their value and result in a reduction in their price and materially and adversely affect a miner’s business.
To the extent that any miners cease to record transactions in solved blocks, transactions that do not include the payment of a transaction fee will not be recorded on the blockchain until a block is solved by a miner who does not require the payment of transaction fees. Any widespread delays in the recording of transactions could result in a loss of confidence in the related cryptocurrency network, which could adversely impact a miner’s business.
To the extent that any miners cease to record transaction in solved blocks, such transactions will not be recorded on the blockchain. Currently, there are no known incentives for miners to elect to exclude the recording of transactions in solved blocks; however, to the extent that any such incentives arise (e.g., a collective movement among miners or one or more mining pools forcing cryptocurrency users to pay transaction fees as a substitute for or in addition to the award of new cryptocurrencies upon the solving of a block), actions of miners solving a significant number of blocks could delay the recording and confirmation of transactions on the blockchain. Any systemic delays in the recording and confirmation of transactions on the blockchain could result in greater exposure to double-spending transactions and a loss of confidence in the cryptocurrency network, which could adversely impact a miner’s business.
Third parties may assert intellectual property claims relating to the holding and transfer of cryptocurrencies and their source code. Regardless of the merit of any intellectual property or other legal action, any threatened action that reduces confidence in cryptocurrencies or their networks’ long-term viability or the ability of end-users to hold and transfer cryptocurrencies may adversely affect a miner’s business. Additionally, a meritorious intellectual property claim could prevent end-users from accessing the cryptocurrencies or their networks’ or holding or transferring their cryptocurrencies, which could force miners to cease operations.
Exchanges on which cryptocurrencies trade are relatively new and, in most cases, largely unregulated and may therefore be more exposed to fraud and failure than established, regulated exchanges for other products. To the extent that the Cryptocurrency Exchanges representing a substantial portion of the volume in cryptocurrency trading are involved in fraud or experience security failures or other operational issues, such Cryptocurrency Exchanges’ failures may result in a reduction in the Spot Price and can adversely affect a miner’s business.
Exchanges on which the cryptocurrencies trade are new and, in most cases, largely unregulated. Furthermore, many Cryptocurrency Exchanges (including several of the most prominent US Dollar denominated Cryptocurrency Exchanges) do not provide the public with significant information regarding their ownership structure, management teams, corporate practices or regulatory compliance. As a result, the marketplace may lose confidence in, or may experience problems relating to, Cryptocurrency Exchanges, including prominent exchanges handling a significant portion of the volume of cryptocurrency trading.
Over the past four years, many Cryptocurrency Exchanges have been closed due to fraud, failure or security breaches. In many of these instances, the customers of such Cryptocurrency Exchanges were not compensated or made whole for the partial or complete losses of their account balances in such Cryptocurrency Exchanges. While smaller Cryptocurrency Exchanges are less likely to have the infrastructure and capitalization that make larger Cryptocurrency Exchanges more stable, larger Cryptocurrency Exchanges are more likely to be appealing targets for hackers and “malware” (i.e., software used or programmed by attackers to disrupt computer operation, gather sensitive information or gain access to private computer systems). A lack of stability in the Cryptocurrency Exchange market and the closure or temporary shutdown of Cryptocurrency Exchanges due to fraud, business failure, hackers or malware, or government-mandated regulation may reduce confidence in cryptocurrencies or their networks’ and result in greater volatility in the Spot Price. These potential consequences of a Cryptocurrency Exchange’s failure could adversely affect a miner’s business.
Regulatory changes or actions may alter the nature of the cryptocurrency mining business or restrict the use of cryptocurrencies or the operation of the cryptocurrency networks in a manner that adversely affects a miner’s business.
Until recently, little or no regulatory attention has been directed toward cryptocurrencies or their networks’ by the U.S. federal and state governments, foreign governments and self-regulatory agencies. As cryptocurrencies have grown in popularity and in market size, the Federal Reserve Board, U.S. Congress and certain U.S. agencies, including the Securities and Exchange Commission (the “SEC”), the Commodities Futures Trading Commission (the “CFTC”), the Federal Trade Commission, the Financial Crimes Enforcement Network (“FinCEN”), the Internal Revenue Service (the “IRS”), among others, have begun to examine the operations of cryptocurrencies or their networks’, cryptocurrency users and the Cryptocurrency Exchange market. Local state regulators such as the Texas Securities Commission, the Massachusetts Securities Commission, the California Department of Financial Institutions and the New York State Department of Financial Services have also initiated examinations of cryptocurrencies, the cryptocurrency networks and the regulation thereof. Additionally, a U.S. federal magistrate judge in the U.S. District Court for the Eastern District of Texas has ruled that “Bitcoin is a currency or form of money,” two CFTC commissioners publicly expressed a belief that derivatives based on cryptocurrencies are subject to the same regulation as those based on commodities, the IRS released guidance treating cryptocurrencies as property that is not currency for US federal income tax purposes, and the SEC has issued several reports and statements questioning the legality of many uses of cryptocurrencies, Cryptocurrency Exchanges, wallets and cryptocurrency hedge funds for securities laws purposes, although there is no indication yet whether other courts or federal or state regulators will follow these asset classifications.
Cryptocurrencies currently face an uncertain regulatory landscape in not only the United States but also in many foreign jurisdictions such as the European Union, China and Russia. Various foreign jurisdictions have or may, in the near future, adopt laws, regulations or directives that affect the cryptocurrencies and their networks and users, particularly Cryptocurrency Exchanges and service providers that fall within such jurisdictions’ regulatory scope. Such laws, regulations or directives may conflict with those of the United States and may negatively impact the acceptance of cryptocurrencies by users, merchants and service providers outside of the United States and may therefore impede the growth of the cryptocurrency economy.
The effect of any future regulatory change or cryptocurrencies is impossible to predict, but such change could be substantial and adverse to our business.