The Rise and Fall of a Bitcoin Mining Sensation

Compass Mining expanded swiftly in the golden age of cryptocurrency. Now its clients and the thousands who own its mining equipment, are trapped.

At the BitRiver Rus LLC bitcoin exchange, an armed guard patrols in front of lit mining equipment housed inside racks.

On June 13, around 8:45am, Bill Stewart, the CEO of Dynamics Mining, a bitcoin mining company based in Maine, got a call from one of his staff members. Stewart added that the man declared, "Every machine inside our facility in Brunswick [in Cumberland County, Maine] has been removed."That's absurd. I found it hard to believe".

In nearby Lewiston [in Androscoggin County, Maine], he warned workers at another mining operation to "be on their toes." He believed a burglar was on the loose. Stewart had a notion as to who might have taken the machines. At the time, he was in a legal battle with a client named Compass Mining, a Delaware firm that allowed customers to purchase mining equipment and host it at third-party facilities like Stewart's, over an energy bill issue.

Compass claimed their contract stated differently. However, Stewart believed Compass was required to pay for them.

Dynamics had shut off Compass' equipment shortly after sending a letter of termination and demanded payment a few days earlier. Then, Compass Mining employees had removed their equipment from Brunswick and were getting ready to enter the Lewiston factory to get additional equipment. They're attempting to enter the building, adds Stewart. And I'm requesting that our security chief, my brother, not permit them entry. No miners are being torn from the wall by us. Please don't let them in.

On June 21, Compass Mining filed a complaint against Dynamics in the Delaware Court of Chancery, alleging that Stewart had been "keeping this important equipment hostage to gain leverage in discussions" by refusing to pay the energy bill he was obliged to. According to Stewart, he merely wanted the removal to occur on time rather than covertly and at night. Additionally, he claims that he had thought about continuing to host the machines for Compass' clients to eliminate the middleman for a while."Their clients were contacting them and asking, 'Hey, can we just mine with you?'" said by Stewart.

Compass' bid to have its equipment back was allowed by the court on July 5, but it was emphasised that this should only happen after a formal request to unmount and transfer the machines. Stewart claims that Compass' crew also took one of Dynamics' own servers during the removal, and this is supported by an email sent to Stewart by one of Compass' lawyers describing how the server had been "inadvertently scooped up" and requesting instructions on how to return it.

Compass interim co-CEO Thomas Heller stated in an email interview that his team is "laser-focused on serving our clients, and will do so by the contracts we have in place with our service providers, and by resolving any disputes arising from a fundamental misunderstanding of these contracts in a court of law."

Even if Compass had won, the argument had poor optics. Stewart had tweeted about the conflict as it was happening, accusing Compass of owing him hundreds of thousands of dollars in energy bills and accusing them of breaking into Dynamics' facility. Stewart also railed at Compass in Twitter Spaces for a long time. After a dizzying rise, Compass had spent the previous three months in continual crisis mode until it chose to fire its CEO just hours after Stewart had begun tweeting about his early-morning battle with the corporation.

Russia's conflict with Ukraine and an eccentric cybersecurity entrepreneur named Omar Todd were at the epicenter of that problem.

Todd, based in Australia, cofounded the Julian Assange-supporting WikiLeaks Party in 2013; the party later ran in the Australian national election and received 0.6 percent of the vote. In 2016, Todd became the director of the combative marine conservation organisation Sea Shepherd. His job description has expanded once more in recent months: In his personal time, Todd is organising a global legal campaign to free thousands of bitcoin mining equipment from Compass in Siberia.

Approximately 4,000 mining machines, valued at $30 million by Bloomberg, are stuck in Russia due to Western sanctions after Moscow invaded Ukraine.

As part of a joint venture between Compass and the Russian company BitRiver, the devices had previously been used in a Russian mining farm. Ordinary customers purchased machines from Compass, who then installed them in a BitRiver facility for the cost of the equipment plus a monthly hosting fee.

Compass cut ties with BitRiver in April 2022 when the US Office of Foreign Assets Control (OFAC) listed the company as a sanctioned organisation to abide by the restrictions.

According to information provided in a California complaint Veribi LLC, a Nevada-based customer, filed on July 1 against Compass, BitRiver switched the machines off and informed individual Compass customers who wished to reclaim their costly equipment, that all the machines legally belonged to Compass.

Customers who knew their serial numbers and those who did not, learnt that in the eyes of BitRiver, they did not own the gadgets they had bought; instead, the devices would remain in Irkutsk, Siberia, absent intervention from Compass. In a WhatsApp message, Andrei Loboda, a spokesman for BitRiver, claims that "Compass Mining refused to engage with us and, sadly, refused to deal with the return of the equipment." In an email interview, Compass' Heller labels the categorisation as "wrong." According to Heller, Compass's management team will keep trying to help its clients while following OFAC rules.

Customers turned to Todd because they had nowhere else to turn and millions of dollars in sunk costs. He claims I rose to the top because I was the most well-known person. Through a Discord server for Compass users, Todd's business SkyWiFi Pty raised tens of thousands of cash. (Todd won't reveal precisely how much, but discussions on the public Discord server indicate that it is more than $60,000) He claims that these funds will be employed to hire attorneys and other professionals in the US, Russia, Australia, and the UK and mediate a resolution on the client's behalf.

Erich Ferrari and Vasily Kuznetsov, two attorneys listed on the list of advisers Todd gave the crowd funders, claim they were not hired and had no plans to work on the case. On August 1, Todd removed some names from the list and sent an email notifying WIRED of the change.

Transferring the machines to a Russian facility controlled by an unrestricted group would be a Compass Mining is waiting for my assistance—they have no answers.

Customers who support SkyWiFi have accused Compass Mining of making mistakes that led to this predicament. Many clients were concerned that their mining equipment might be involved in the escalating geopolitical situation following Russia's invasion of Ukraine on February 24. Some requested that the equipment be withdrawn. "Listen, let's get the miners out of Russia, I said to them. One client, who wanted not to be identified because they still do business with Compass, recalled, "It doesn't make sense to continue to deploy there. Many other people followed suit".

Customers now refer to Compass' remark from a Discord message from March 4 as a meme. Whit Gibbs, the company's then-CEO, stated in a letter that everything was "business as usual" and that there was no need to be concerned. According to Gibbs, the Russian government connections that BitRiver has will make the operation safer. (BitRiver made no comments with these alleged linkages.) Gibbs continued, "Compass will move quickly to get all equipment out of Russia immediately if the situation changes.

Although Todd claims that Compass did provide clients the choice to break the contract and transfer their equipment elsewhere, it was unclear how that would work out.

He claims there aren't any transportation or logistics options, adding that some individuals who wanted their miners returned were informed of this. Really, there wasn't anything else that anyone could have done but wait for Compass.

When the customer's business partner approached Compass to ask about getting the machinery out of Russia, the customer claimed that Compass informed him that "they could not guarantee they could securely remove the equipments." According to emails provided to WIRED, Compass rejected the customer's request to deploy some of the equipment they had ordered to a US location rather than Russia. The client claims that they have already lost over $70,000 between the price of the machines stranded in Russia and the lost revenue due to their idleness.

The client claims that despite numerous queries, they still do not know the serial numbers of their equipment. According to Heller, clients can easily get their serial numbers by getting in touch with our Support team. Veribi, a Nevada-based business, claims a loss of over $1.5 million in its lawsuit against Compass in California. Veribi accuses Compass of breach of contract, negligence, conversion, and fraud. However, based on its proof, it does seem to have acquired the serial numbers for its 20 devices.

Compass released a formal email to its customers on April 21 announcing the termination of all ties with BitRiver after the OFAC ultimately decided to penalise BitRiver for "help[ing] Russia monetize its natural resources" on April 20, 2022. In what Todd refers to as "a fire sale," Compass asked customers for permission to sell their machines to recoup at least some of the money they had spent on them. However, most customers—some of whom had paid up to $13,500 per mining machine—could not bear the idea. Gibbs made an odd remark as Compass' Discord grew increasingly crowded with upset consumers.

"You might have chosen another nation to host, but you went with Russia. Take some personal accountability, he urged. Gibbs declined to respond to questions for this article. The business eventually permanently terminated its Discord service. It was because "using Discord to service thousands of clients was unstructured and prolonged our reaction times," according to Heller.

Then, according to Todd, Gibbs had to "fall on his sword." The guy was just given much too much publicity. He spoke out too much, most of which were, at best, dishonest. On June 28, Heller and Compass' chief technology officer Paul Gosker took over as co-CEOs in place of Gibbs and Compass' chief finance officer Jodie Fisher. Not just Compass customers, who by this time had gathered on another unofficial Discord channel, expressed relief over Gibbs's departure; some Compass staff members did as well.

Compass sales manager Andrew Nagel wrote in a Discord chat the day after the resignation was announced that the two days after it had been "the finest days I've had in a long time." He stated that Compass' customer service had historically been "bad." Before the Russia incident, 2022's US operations had been beset by delays, culminating on June 27 in the public rupture with Dynamics.

The expectation was that things would be different under the new administration. However, many Compass employees would leave the organisation before it could occur. The corporation declared on July 7 that 15% of its workers would be let go, along with general spending and compensation cuts. According to the letter, the compass had "developed too swiftly," which had led to its dysfunction.

The compass is, in many respects, a symbol of a very particular period in the history of cryptography. The price of bitcoin had risen rapidly since late 2020, finally reaching an all-time high of $67,000 in November 2021, fuelled by a pandemic-induced need for new risky assets. Compass Mining was founded in August 2020 to enable common people to mine cryptocurrencies. In the company's now-defunct Discord channel, this concept was humorously referred to as "pleb mining."

According to CoinDesk, Compass sold its customers' mining rigs worth $11.4 million in its first two months of business. By March 2021, it had raised $1.7 million from well-known cryptocurrency companies like Mike Novogratz's Galaxy Digital. Even before it celebrated its first anniversary, the compass hosted a yacht party in Miami. But in 2022, when rising inflation, Russia's escalating hostilities, and high-profile industry scandals drove down cryptocurrency values, causing a $2 trillion loss throughout the industry. Compass, like many others, began to run into issues one after another. Even still, the reputational harm done to Compass by this dispute with its clients pales in comparison to the more severe financial problems that many other bitcoin mining companies, including several publicly traded ones, are experiencing.

According to Ethan Vera, co-founder, and chief operations officer of crypto-mining infrastructure business Luxor Mining, "In Compass' approach they deal with retail, which has a tremendously powerful voice online, so their troubles are blasted to the world with a speakerphone." But the mining cycle in 2021 has put a lot of businesses in a difficult situation. The common denominator that will cause some businesses to file for bankruptcy or sell their assets at fire sales is over-leverage, too quick growth, and buying machines at the cycle's peak.