Some cryptocurrenciesVirtual currency, used to exchange goods or services on a peer-to-peer basis, usually independently of the banking system or any monetary policy, whose issuance and transactions are based on blockchain technology., including Bitcoin, are issued based on a consensus mechanism called proof of workTransaction validation mechanism based on solving a complex cryptographic problem., where people called minersPerson who validates and secures, for a block, the transactions on a cryptocurrency network using a consensus mechanism. For each block validated, the miner gets a block reward. perform an activity called miningOperation, based on a consensus mechanism, that enables blocks to be added to a cryptocurrency network in exchange for a block reward., which involves using computers to validate the blocks added to a blockchainA secure, distributed database that stores transactions between users, from the date of its creation, in a chronologically ordered sequence of blocks that are linked together. and all the transactions they contain.
For each new block that’s created, miners receive a block rewardAmount of a cryptocurrency awarded to a miner or a group of miners as compensation for creating a block and as an incentive to participate in the network. A block reward can consist of tokens or coins generated when the block is created or associated transaction fees.. For some cryptocurrencies, block rewards are the means by which new tokens or coinsA cryptocurrency’s basic unit of value, usually used for payments or to access services through decentralized applications. The value of a cryptocurrency token or coin goes up and down based on supply and demand. are issued.
What is a mining farm?
A mining farm is a location, usually a large space, housing several computers dedicated to mining one or more cryptocurrencies.
The computers consume a lot of energy, and air conditioning is needed to prevent them from overheating. Québec is an attractive location for this type of activity because of its cold winters and cheap electricity.
Even so, mining is expensive. In addition to using large amounts of electricity, the computers need to be replaced frequently. Mining farm promoters therefore need capital to start up, expand and maintain their farms. The type of investment proposed can vary from one mining farm to the next. For example, a promoter may:
- launch an initial cryptocurrency offering (ICO)
- ask investors to buy the computer equipment that will be housed and used for mining at the farm
- issue debt (e.g., bonds) or equity securities (e.g., shares)
Who is this type of investment for?
When cryptocurrencies rise in value, investors sense an opportunity and think about investing in cryptocurrencies and related activities such as mining.
This type of very risky speculative investment is not for everyone. Even if you consider yourself to be a knowledgeable investor, make sure you have the technical knowledge needed to fully understand the project, the underlying technology and the related risks.
The return on mining depends on electricity costs, the computing capacity and efficiency of the computers used and cryptocurrency market prices. When cryptocurrencies decrease in value, so do mining revenues, making mining a very volatile and risky activity.
Are you being asked to invest in a mining farm?
Sandra is approached by a mining farm promoter. The promoter paints a glowing picture of the high returns she stands to earn in exchange for a cash contribution. Sandra won’t be involved in day-to-day management of the mining farm.
Be careful: A promoter or company that asks you for a cash contribution in exchange for potential returns, where you won’t be involved in managing the business, is soliciting you as an investor. The solicitation of investors is regulated in Québec. If the company is not in compliance with regulations (if it has not filed a prospectus or obtained a prospectus exemption, for example), this activity could constitute an illegal distribution of securities. You may have difficulty obtaining proper disclosure about the investment and lose your money.End of the warning
Before investing in a cryptocurrency mining farm
As an investor:
- Do you have a good knowledge of cryptocurrencies, blockchain and mining?
- What is your risk tolerance? These projects are often start-ups, so the risk of losing all the invested capital is very high.
Do your homework and ask questions:
- The solicitation of investors is regulated in Québec. Did the promoters prepare and distribute a prospectus describing the investment in detail, or did they obtain an exemption? If they obtained an exemption, what are the exemption conditions?
- Who are the promoters? Are they experienced? Be skeptical of company documents claiming that the promoters have held positions at other companies, if no details are provided. Do a background check to see if they have ever been disciplined for improper business practices (refer to Office de la protection du consommateur This link will open in a new window and SOQUIJ This link will open in a new window).
- How often will you receive information regarding your investment? Will investor meetings be held?
- Is the mining farm already in operation?
- Is there a business plan? How long will it be before the farm turns a profit? Watch out for unfounded claims concerning the future success of the farm.
- Can you obtain the company’s financial statements? If so, are they audited?
- How will the return on your investment be calculated? How will it be paid to you?
- Do the promoters have a clear plan to deal with equipment obsolescence and replacement?