Bitcoin's Dollar Value Wreaks Havoc within Cloud Mining Industry

cloud miningBitcoin has seen a prolonged fall in its US Dollar price. This has had a large affect on many sectors of the digital currency community and ecosystem. The value of less valuable altcoins has seen a corresponding tumble in value. The day-traders and short-term speculators are bailing out of the market en masse. And the cloud mining companies, who have tried to get in on Bitcoin over the last 18 months with "Cloud Mining,are feeling the pressure.

Plus, there are issues with paying off large loans for computer equipment, hosting services, rent and location leasing costs, all while keeping up with the latest in digital mining software and tech. These short-term costs can reach into the millions, and with Bitcoin's US Dollar prices dropping more than 80% since Thanksgiving of 2013, getting a ROI (Return on Investment) has been near impossible, and has had dire consequences for many companies that overextended themselves in 2013 when the Bitcoin Price was at its peak.

Also read: An Inside Look At Cloudhashing.com’s Bitcoin Mining Datacentre In Iceland

The Good, the Bad, and the Ugly in Cloud Mining

On Monday, C7 Data Centers filed suit against cloud mining company CoinTerra, claiming default on over $1.4 million in payments. Their lawsuit totals over $5 million in damages, citing C7’s costs for providing power and seeking to reconcile the balance of the CoinTerra contract terms. CoinTerra has filed a counterclaim, disputing all charges. CoinTerra CEO Ravi Iyengar says the company has gone into default due to C7 shutting down CoinTerra’s data center operations. Therefore, CoinTerra has stopped operations and halted payouts to its customers since December 19th.

As the price of Bitcoin has continued to drop, even the world's largest mining operations are unable to cover their costs at this time. Earlier this week, CEX.IO, the second-largest bitcoin mining pool extant, said it was temporarily suspending operations, due to an inability to run their operation profitably.

The popular cloud mining company CloudHashing, now owned by Peernova, has seen investors complain that the company is mining fewer coins than ever, and payouts are now erratic.

“CloudHashing is very much operational,” said Emmanuel Abiodun, president of Peernova. “We have simply pointed our mining machines to a larger mining pool to increase the block discovery frequency which is a good thing for all customers. The growth of the bitcoin network made that decision necessary. Customers will now be paid on a weekly schedule.”

Peernova has been forced to change its mining strategy going forward. Last month, the company said it had raised $8.6 million in new funding. They would use this new money to increase development of block chain-based software products for their future business efforts.

Another bitcoin mining firm that has had to change with the times is GAW Miners. They moved into cloud mining last summer, and the company recently launched its virtual currency called Paycoin. But some customers who continue to mine using GAW’s cloud-based “hashlets” say their operating fees are starting to exceed the returns from mining.

If the market is having this much of an effect on the major players, you can imagine what is happening to the small-timers. Many have had to halt operations and payouts, including ZeusHash and PB Mining. Cloud mining service Hashie not only suspended operations, but also temporarily replaced its website with an “alternate reality game.”

Mining infrastructure is divided into data centers and low-cost hashing centers that sports high-density hardware and power infrastructure, often kept in former warehouses. Advocates of hashing centers say the design of the low-cost infrastructure is critical to countering Bitcoin's price volatility.

“Most data center pricing models are not very applicable to the Bitcoin market, ”says Dave Carlson, the founder of MegaBigPower. “The people, who have signed up at data centers, are getting squeezed (on operating margins). I’ll still be running when those guys shut off.”

Some cloud miners using commercial data center space insist they can continue to compete.

“Bitcoin pricing does not affect us as much as other services, as we have relatively lower maintenance costs than the market,” said Abiodun of Peernova. “You will see other services affected by this price slip. It will ultimately lead to a slower growth of the mining network, which we predicted in 2014.”

Other mining industry executives say the relationship between price and competition has become unpredictable. Speaking with Data Center Knowledge, Iyengar explained further.

“Price is just one component of the puzzle,” said Iyengar, “The difficulty has gone up significantly while the price has gone down. Pretty much all the mining companies are struggling,” said Iyengar. “The mining industry is somewhere no one would have predicted six months ago. The model, we all relied upon, has collapsed.”

Iyengar speculated that the disconnect was due to “irrational mining” by some large players, who are either operating at a loss or obtaining power at below-market rates.

Personally, I predict that cloud mining operations are cyclical in nature, and many did not predict, or could not predict, the steep drop in price recently. Just as it would be unwise to invest million of dollars in BTC personally as an investment, it is not less wise for a business to do so, without taking massive risks and potentially facing massive losses. The mining industry is not known for it's massive profit margins to begin with.

Bitcoin's transition from a somewhat frivolous high-risk, high-yield investment to an actual global currency accepted by Microsoft and Dell with have some growing pains, especially in the market price. When, not if, Bitcoin rebounds, and starts to reclaim its lost value, cloud mining, and mining in general, will rebound with it.

Images from Shutterstock.

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Evander Smart

Evander Smart wants to get you talking, get you thinking, get you learning about Bitcoin, "The Future of Money". He has two Bitcoin video training courses on Udemy.com called "Bitcoin for Beginners". Go to EvanderSmart.com to get the latest on Evander and the latest Bitcoin news.