Interview with CEX.io's Jeffrey Smith on Why They Paused Mining and the Future of the Industry

In a less than graceful tweet, Jeffrey Smith, the CIO of CEX.io, announced that the company would be pausing mining for its users.

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Interview with CEX.io's Jeffrey Smith on Why They Paused Mining and the Future of the Industry

In a less than graceful tweet, Jeffrey Smith, the CIO of CEX.io, announced that the company would be  pausing mining for its users.

Instantly, the internet erupted. Accusations were thrown around, of course, and many wondered out loud if this was the beginning of the end for cloud mining companies like CEX. Their more thorough blog post—which included, among other things, that users are able to turn their hashes back on—received less attention.

Of course, accusations continue, and there really isn't anyone who can prove anything either way. Smith tells me that CEX has no hardware of their own, and everything traded on their exchange occurs through third-party hardware companies that have chosen to remain nameless. That isn't so much of a revelation as much as it is a fact that went unnoticed by many. The knowledge likely won’t quiet those who are complaining about a perceived lack of transparency. The website’s cloud mining page says nothing about hardware being held by third parties.

Really, nothing has changed for end users. If you own GHS, you can simply turn it back on and continue using the hashing power as you were before. People may feel as though CEX is looking to profit off those who don't bother to turn their GHS back on, but for the individual who is fearful that CEX is trying to get one up on them, the solution is to simply to turn it back on.

Sometimes the simplest solution is the correct one. If CEX is using third-party hardware on off-site facilities, then a low enough Bitcoin price would cause mining to be unprofitable for them without the user maintenance fee. Those fees turn off when the miners do.

We spoke to Smith about why they decided to pause mining and what the future of mining looks like. He, along with the CEX, team obviously have a lot of things on their plate, which may be the reason why our final interview question did not receive an answer. The conversation is still interesting, if incomplete—covering how this industry is going to evolve in the future, and whether it can survive the current price crash.

“We do not want the majority of users to have unprofitable mining, so we pause it for everyone, just to be safe.”

CoinTelegraph: Users can turn their GHS back on, so what would be the drawbacks from a consumer perspective in doing so?

Jeffrey Smith: Mining strongly depends on luck, so if a user decided to turn his miner back on, he may get negative profit, but there are also chances he will receive profit. But we do not want the majority of users to have unprofitable mining, so we pause it for everyone, just to be safe.

CEX.io's Jeffrey Smith

CT: How high do you think the Bitcoin price needs to get before it becomes profitable for miners (other than the lucky ones)?

JS: US$320

CT: We are already seeing mining companies moving to Iceland and other places where the cooling and energy costs are low. Do you expect that trend to continue? Will all major mining companies locate to similar areas soon?

JS: Yes, everybody is looking for cheap electricity and easier cooling. The company which has the best conditions will have a big advantage over other companies.

CT: Building on that, do you think the ultimate solution, five, ten years down the line, would be for mining companies to create their own power using solar, wind, tidal or other renewable and "free" resources? Or is the amount of required power just too much for an individual company to handle on their own like that?

JS: Building this type of energy source will reach a break-even point in 10 to 12 years. And Bitcoin is very volatile for this type of investment.

“I still believe that Bitcoin is the best investment for the long run. And we WILL see the price go back up and even higher. But we need time for people to grasp the concept of Bitcoin, understand how it works.”

CT: The Bitcoin price was obviously a bit of a disappointment for pretty much everyone in 2014. Miners are probably second on the list of those most affected (after speculative investors). Do you think this is a temporary problem and we'll see the price rebound and mining become profitable again, or do you think the problem will be a continual for miners and for Bitcoin in general?

JS: I think that Bitcoin is the best payment system, as long as it remains working and not broken by anyone. As of now, we as the Bitcoin community have already survived for four years, and we keep going. The price of Bitcoin was very high in the beginning of the year, but it was predictable that it will go down. But I still believe that Bitcoin is the best investment for the long run. And we WILL see the price go back up and even higher. But we need time for people to grasp the concept of Bitcoin, understand how it works. And eventually we will see more transactions, more usage, application, instruments, which will result in increased demand, hence the price will go up.

CT: I think the general consensus was that every time the reward was halved, the price would go up as the supply lowered. But this time we instead saw a decrease in hashing power. Ultimately, why do you think that is, and do you think this is the bottom of Bitcoin's price?

JS: When the bitcoin reward will be halved, we will see an adjustment in the price, hash-rate distribution and overall ecosystem. Unfortunately, I can't predict [bitcoin's lowest] price, since I have no idea what other circumstances we will face in 2015.

“I personally am a strong believer in Bitcoin and the blockchain. The technology we are building on is revolutionary, and we can't just stop. We will make it happen!”

CT: There have been a few “Bitcoiner's rules of thumb” that were never official, but seemed to hold true, until last year. We saw the difficulty decrease for the first time in Bitcoin's life (before rising again), and we saw the price go below the previous jump's high for the first time. These were never "official" rules, but they were things people listened to. Do you think that we will see more bucking of trends in the future as the economy gets more complex, or do you believe 2014 was an aberration? I understand it is impossible to predict the price accurately, but I am interested in your thoughts.

JS: I think that in 2015 we will see a lot of results of Bitcoin oriented companies' work in 2014. In order for Bitcoin to go mainstream, we need proper and secure instruments.  And these tools sometimes require more than one year of development. I personally am a strong believer in Bitcoin and the blockchain. The technology we are building on is revolutionary, and we can't just stop. We will make it happen!

CT: Could CEX.IO give users the possibility of mining other SHA-256 coins during this difficult time in mining? Is that possible with your current hardware and software capabilities?

JS: Yes, we do offer mining of other SHA-256 coins. But we offer it as a merged mining with bitcoin. [And] they are still indirectly connected to [the price of bitcoin], so it won’t do much.

“I don’t think there is a threat of mining centralization, since multiple parties are involved. There is no single entity which is able to hold the hashing power. So there always will be competition.”

CT: With you guys pausing mining, and with other cloud companies going down, is centralization of mining becoming a concern again, and if so, what can be done about it?

JS: I don’t think there is a threat of mining centralization, since multiple parties are involved. There is no single entity which is able to hold the hashing power. So there always will be competition.

CT: While understanding that you can't see into the minds of your competitors, do you think more cloud mining companies are going to follow suit and scale down mining operations?

JS: Well, I must say there is a limited number of possibilities:

  1. Scale down mining operations,
  2. Find cheaper electricity and continue mining,
  3. Find more efficient hardware and continue mining,
  4. Run a scam selling mining power which is not profitable.

“The maintenance cost which we charge users are direct costs. We do not make money off it. Hence, if the maintenance cost is too high for users, it is too high for us.”

CT: Some members on Reddit speculated that you are still running the mining hardware, just not passing it onto users. Do you care to comment on those accusations?

JS: Yes, users from Reddit tend to post messages like these. The fact is that the maintenance cost which we charge users are direct costs. We do not make money off it. Hence, if the maintenance cost is too high for users, it is too high for us, as well. So no, we will pause mining for everybody. And once again I must remind you that we are implementing a switch to turn the mining back on for each individual user. But the user has to have a positive balance, in the event that mining is not profitable, but maintenance has to be covered.

CT: Do you think the "never ending" arms race for hashing power is coming to an end, or will it ramp right back up as soon as the price increases? Are we finally seeing the ceiling of Bitcoin's difficulty?

JS: The never-ending arms race never ends. There are a lot of different scenarios which can happen. The price goes up, new technology is introduced with more efficiency, less power consumption, new coin, difficulty drop, etc

CT: Speaking of new technology, what do you think the future of ASICs looks like? Will we start seeing more ASICs developed by physicists, rather than "hardware" guys?

JS: It all depends on what kind of chips you can get your hands on. The rest is very simple to produce, if you know how to do it.

CT: Just to confirm: All of your own mining equipment has been turned off, correct?

JS: We do not have our own mining hardware. All hardware tradable on CEX.IO is provided by our hardware partners.

CEX.io

CT: Are your hardware partners publicly known?

JS: We had three hardware providers and all of them chose to remain anonymous.

CT: Do you think they have also scaled down mining?

JS: The pool hash-rate decreased by 1 to 2%, so my guess is that some did, some didn’t.

CT: If the price doesn't rise again, what is the future for CEX? How long can you survive with under-US$300 bitcoin?

Author’s note: We did not receive an answer from Smith on the last question. We will extend CEX the benefit of the doubt that this was due to being busy, rather than to a desire to avoid the question. Judging by Smith's answers, Bitcoin mining companies are heavily dependent on the price of bitcoin. That, of course, goes without saying on some level. But since this interview was conducted, the price has continued to drop, and the US$320 price point now seems quite a distance away.

The difficulty will adjust. It dropped for the first time a few months back and this looks to be in our future again, at least until the next generation of mining technology is revealed, or energy prices drop. But these are new markets, and tried and tested rules are going to be consistently broken. Normally, the market adjusts to whatever the issuing body of a currency does. If the fed lowers interests rates, for example, the market adjusts to that, for good or ill. If the supply is increased, it is increased on purpose, and the market adjusts. In Bitcoin, the closest thing to a governing body includes the algorithms and mathematical equations that were set in place in 2008. They rarely change, and the market has to revolve around the rules Satoshi Nakamoto invented while living in a precrypto world.

Everything in Bitcoin works in symbiosis together. An increase in price causes more people to mine, which causes a higher difficulty and increases the security of the network. But if the price doesn't match the difficulty, people will hop out and the security of the network will be, in theory, weakened. This has led to speculation that we’ll see a continuing vicious cycle, where decreased network security leads to decreased confidence, which leads to a lower price and even further decreased network security.

But the truth is that the network is still strong, 295 PH/s strong, roughly the same spot where it was in October, and no one was worried then about security concerns causing a chain reaction. As the price drops, the hashing power will drop, and eventually so will the difficulty. That should lead to miners hopping back on and things returning to normal, but that depends on whether the rules Satoshi set seven years ago are actually workable in the real world. We all know how it should work; now we will see whether it will work.


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