What are the pitfalls of buying Bitcoin mining machines (Part I)

Most of the first Bitcoin miners have captured the mining opportunity and achieved financial freedom.

In front of the huge mining profits, some projects in the name of blockchain, Bitcoin, mining successfully catch many people’s attention. New miners feel regrets for missing golden opportunities of bitcoin mining, so they jumped into the wave of mining without second thoughts, and then fell into one trap after another.

We believe that enumerating all the pitfalls in the mining industry may be one of the most effective ways to prevent miners from getting fooled again. We would like to start from the pitfalls in the purchase of mining machine.

Pitfalls

#1 The distributors of mining machines run off with money

In 2016, mining-related services were not as convenient as today. The baddies and good people in the seller’s market mixed together. You could conscientious sellers who wanted to build a good reputation, as well as distributors who wanted to do one-time deal. There was a great uncertainty with regards to seller’s credibility. Under this circumstance of asymmetric information, they buyers must bet on the sellers that they were not a liar.

Sky Mining organized several events to attract investors. Screenshot taken from Sky Mining’s video on Youtube

According to Newsweek’s report, on July 2018, the CEO of Vietnamese cryptocurrency mining firm Sky Mining, has disappeared with investors and company funds worth $35 million. The company lured the investors to invest in cryptocurrency mining machines with a promised 300% annual return, plus extra interest. When the clients went to the company to withdraw the mining machines, they found that the mining farms and offices were empty.

At that time, there were about 30% of trusted sellers and 70% of frauds on the machines trading market. However, with the development of mining, the market is getting more and more transparent and regulated and it is easier for miners to find legitime channel to buy mining machines.

#2 Advance payment trick

The buyers would also encounter various pitfalls when trading mining machine future. We will publish an article about the mining machine futures trading pitfalls in the next article. Stay tuned.

Many miners have been cheated by the distributors in the advance payment. Mining machines trading has been a seller’s market for a long time, the original rule was: mining machine distributors requested once-off lump to order future machines. Along with the development of the industry and the rise of many mining machine manufacturers, that rule has gradually evolved to that mining machine manufactures accept a portion of the advance payment and the settle the final payment upon shipment. Today, all the major mining machine manufacturers follow this rule.

While some distributors still require clients to pay in full at once. That was a new form to charge more advance payment. Clients may encounter the distributor’s “Schrodinger” operating upon the shipment of the mining machines, for example, the distributors would not order mining machines from the manufacturers if they predicted the machine’s price would decrease, even though the clients have already paid. If the price of the mining machine did drop as they predicted, the distributors will order the mining machines, and tell the clients that the machines were purchased at the agreed price so the distributors made the difference. If the machine price increases, the distributors would tell the clients that they failed to order the mining machines, they would proceed a refund, or asking the clients to add money for buy the machines at the current price. In this case, the clients’ funds have been used by the distributors, clients would benefit nothing from the price increase, moreover, they would become scapegoat when machine prices fall.

It’s difficulty to avoid this pitfall because clients seldom know the proportion of the advance payment between the mining machine manufacturers and distributors. It’s worth noting that clients must find a trusted distributor to sign a formal contract where the rights and responsibilities of both parties must be stated clearly, it is better to sign with the company instead of an individual, furthermore, the contract can also serve as an evidence when protecting your rights afterwards.

#3 Selling seconds at best quality prices

It is difficult for new miners to buy mining machines through the official channels. In general, they will buy the mining machines through the distributors. Unfortunately,Some dishonest distributors often use defective mining machines to substitute the qualified ones when they find clients are lack of experience. They tore up the original label from the cheap mining machines, and replaced by the labels of expensive mining machines, then sold them to rookie miners at a high price.

How did they do that? It is because that some different models sharing a similar appearance, while their hashrate and EER (energy efficiency ratio) are very different. These machines are indistinguishable with naked eye when their labels were torn up. In this case, a rookie miner might spend the money of a 60Th/s mining machine to buy only 40Th/s product.

How to avoid this pitfall? It requires the buyers to have the concept of hashrate. The price of mining machine, the hashrate and EER are generally strongly correlated. You need to make a cross comparison of price per hashrate among different machines before making the payment. Indeed, all the deals must ultimately bound by official agreement, which should be signed by both distributors and buyers, and should include important factors such as hashrate guarantee and warranty period.

#4 Second-hand mining machine plot

With the development of the industry, the proportion of second-hand mining machine transactions has gradually increased. To pursue cost-effectiveness, some miners choose to buy second-hand mining machines. Compared to new machines, the asymmetry of information between buyers and sellers is even greater in used machines trade, it requires more experience in the industry as most of the second-hand mining machines are out of warranty period. There is no guarantee for the condition of machines, failures such as dropping boards, dropping chips and insufficient computing power happens all the time.

Some inexperienced miners may buy the mining machines without considering those circumstances. It was not easy to blame distributors when you find the machines were broken down and their hashrate were insufficient. The experienced senior miners usually sign an agreement to guarantee the running time which also limits the responsibilities and obligations of the sellers, avoiding dispute afterwards. You can ask for a refund or other means to compensate you for the insufficient hashrate.

To stay out of the seller’s trap, it’s important that the buyer knows this industry, knows exactly where the seller might take advantage of asymmetric information, and then binds that part up by agreement. Signing an agreement aims to provide strong legal protection for post-sale rights, more importantly, it is a screening, identifying the good seller’s process, some bad sellers finds that you are familiar with this business they may withdraw from the deal.

#5 Power supply honeypot

In all the above-mentioned cases, most of the victims are rookie miners, while senior miners are not naturally immune to these traps. A senior miner Lao Luo (a pseudonym) who started crypto mining since 2015, has fallen into a trap in 2017.

He has bought 1000+ new model L3+ mining machines from Bitmain. The L3+ model is not an all-in-one machine, which means the machine and the power supply are separate, clients must buy machine or power supply separately. At that time, the official power supply was priced at 680 RMB, and it was one-to-one model, in other words, one power supply matched one mining machine.

Lao Luo also inquired that someone was selling unofficial power supply, it costed 380 RMB and it was an one-to-two model, one power supply matched two machines. Assuming there are 1000 machines, Lao Luo would save 400 thousand RMB if he chose the unofficial one, therefore, Lao Luo purchased the unofficial power supply. Lao Luo felt lucky to meet the right person in right time, saving him 400 thousand Yuan.

Lao Luo’s happiness did not last for long, the unofficial power supply had a problem. The failure rate of these power supplies was extremely high, and machines cannot generate revenue without power supply. The inferior power supply not only kept him from making money, but also posed a great hidden risks for security. Some power supplies will suddenly explode during operation, which may cause a fire in the mining farm.

And this batch of inferior power supplies were not refundable. Lao Luo couldn’t bear to scrap these supplies, after all they were costs. In the end, Lao Luo had to use them with caution and bought other official power supply for backup. He has spent far more than 400 thousand Yuan in repurchasing official power supply and time waste. This batch of power supplies did not cause other accidents, which was a blessing.

Lao Luo remarked that as a senior miner, he could not skip the traps in the process that he was not familiar with. The unofficial power supply seemed to be a bait to tempt him to the pitfall.

To avoid similar pitfalls, you must bear in mind one thing:

It never will rain roses.

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