coindesk.com
In its quest to make industry-grade crypto mining accessible to retail investors, Compass Mining may have overreached. After a couple of years of growing exponentially, the firm is slowing down and focusing on its core business.
On June 28, the CEO and chief financial officer of Compass resigned amid a series of “setbacks and disappointments,” including delays in deploying machines and several thousand rigs being stranded in Russia following sanctions on its hosting partner in that country. The new management then cut 15% of staff, mainly in marketing and business development, and is now trying to move away from a growth mindset to focus on the core parts of Compass’ business.
“In hindsight, you wish we had done certain things differently. But in the moment, you gotta be realistic about what information is available to you and make decisions accordingly,” said Thomas Heller, who will be leading the company.
The two new interim CEOs and co-founders are indicative of Compass’s new direction. Paul Gosker, formerly the chief technology officer, and Heller, who as head of mining spent more time in the nitty-gritty business of building mines, are more the back-office types than Whit Gibbs, the CEO and third co-founder who resigned and who was more of a charismatic executive.
Heller told CoinDesk that he is "supportive" of recruiting a more seasoned CEO to lead Compass and to “bring a new perspective” and experience, but the new leading duo is also open to staying on.
Compass is one of a handful of companies trying to bring bitcoin mining to the masses – despite the industry’s gravitational pull toward bigger firms, investors and mining sites. The company “does its part” to support the network’s decentralization by enabling individuals to mine, its website says.
It’s an ambitious, if not noble, goal. The company’s recent “setbacks” pose a serious question: Is the model, “everyone can mine bitcoin,” untenable or is it an indication of misfortunes and mishandlings particular to this one firm – and can Compass Mining set sail on a new course?
The model
Compass is essentially a middleman. It enables retail customers to buy machines and hosting services. For the mining rigs, it divides bulk orders to manufacturers into smaller pieces. Under the terms of service, retail customers will own the mining rigs without taking on the responsibility of plugging in or maintaining the computers.
For the most part, Compass doesn’t operate its own crypto mines. Instead, it works with hosting companies that take care of setting up and managing the infrastructure that the rigs operate in. It lists 39 such hosting facilities across the world on its website, mainly in the U.S. and Canada.
Hosting is a service that data centers provide to crypto miners so that customers can store their mining rigs and mine their preferred digital assets for a fee, without having to build the accompanying infrastructure themselves.
Compass also operates a platform where suppliers and hosting firms can buy and sell machines and rack space. Heller wants the company to focus more attention on developing this platform, and on improving transparency through technology and real-time data.
The company was founded in 2020 and grew to serve 11,000 customers, according to Gibbs, thenow-former CEO. Heller said later that Compass counted 7,000 customers and that this past spring before the layoffs, it employed 100 people, up from 12 in April 2021.
Two services companies that worked with Compass, one of them Sabre56, told CoinDesk that Compass was professional and that they had no issue working with them.
But the publicly facing image wasn’t the whole story. One former employee told CoinDesk that “lots of things are very poorly managed and executed on, which gives people the perception that they’re shady.” The employee didn’t want to be named because of nondisclosure agreements.
Heller said that internally, the company is fast paced and operates like a startup. It isn’t like a big, established corporation with standard practices and flowcharts. Heller said the company is now taking more time to make strategic decisions than it did before.
Compass’ operations have been plagued by delays in delivering its promises and by what many customers see as a lack of transparency and communication. At least four of Compass’ sites have suffered from downtime or delays in deployment, leading to losses for customers.
Those hiccups angered lots of customers. More than 500 customers have taken to a new Discord server to voice their woes and organize so that they can better deal with difficulties. Customers who CoinDesk spoke to requested anonymity because some are contractually obligated not to talk about their dealings with Compass.
Growing too fast
Three industry insiders that CoinDesk spoke to said that the company grew too quickly for its own good and Compass’s new management agreed with that assessment in its blog post while announcing the layoffs.
Heller said the reason the company grew so quickly is that it was “filling a niche market that people had tried to fill before but have never evolved from a small-time brokerage into a platform where customers buy and sell [machines and rack space] on the website.”
“Along the way, there's definitely things that we could have done differently,” like focus more on “the real core of the business,” which is selling machines and keeping customers satisfied, Heller said.
Phil Harvey of Sabre56, a company that builds mines around the world, including about five for Compass, said that typically a hosting firm will deal only with Compass but that Compass as a middleman could be confronted with as many as 1,000 angry customers with 1,000 different machines.
Choosing partners
The promise back in 2020 was to allow the retail client to host at the “most respected facilities in the world.”
It turned out to be a tall order to find rack space for 30,000 machines. By contrast, a similar company, Mining Syndicate, which started selling mining rigs and hosting last October, has fewer than 600 clients, Chris Koerner, founder and CEO of the company, told CoinDesk.
Heller admitted that Compass worked with some “new-ish” hosting providers that had built out only a few megawatts of mining sites.
“If not for the explosive growth, and if not for the rack space constraints, we would have most likely just stuck with more seasoned operators,” he said.
Harvey said that common problems such as machines overheating can spiral out of control very quickly when the parties involved aren’t experienced enough to solve them quickly.
Compass has sued at least two of its hosting providers for failing to deliver what they promised. The first lawsuit is against Xenon Management in Texas courts. The suit was filed last December. Details are scant in a court document that CoinDesk reviewed, and Xenon didn’t respond to a request for comment.
Heller said that Compass found some “red flags” while doing due diligence and stopped working with Xenon, but he refused to comment on the specifics of ongoing litigation.
The second lawsuit is against Dynamics Mining, a company that was building a bitcoin mine for Compass in Maine. In the lawsuit, which attracted a lot of eyeballs on Twitter, Compass claims that Dynamics has failed to deliver on its contractual obligations and is holding its mining rigs hostage.
Compass gave Dynamics $1 million in loans to build out two facilities on top of hosting fees and deposits totaling $650,000, according to court documents seen by coindesk. Making such a loan to a hosting provider was very “uncommon” for Compass, Heller said.
On the other side, Dynamics claims that Compass hasn’t paid it $861,000 in hosting fees and electricity charges and accused Compass of trying to break into Dynamics' mining facilities, in order to steal the mining rigs.
A court partly granted Compass’ request for a restraining order on Dynamics. That allowed Compass to retrieve all the machines as of July 29, Heller said. Customers could choose to have their machines shipped directly to them for a fee or hosted on a new site, after the rigs are serviced at a Colorado facility, according to an email seen by CoinDesk.
Despite the turn of events, Dynamics Mining gave a free bitcoin mining rig and hosted one of a handful of parties at the Mining Disrupt conference in Miami in late July.
Mining consultant Harvey also thinks that Compass gets a bad rep because it has so many retail customers and is outward facing. Delays in sites or unexpected downtime are common issues in the industry – even for giants like Marathon Digital – but “Compass has such a large and prominent PR presence” that such issues are “more widely publicized,” he said.
Koerner said that he has a lot of empathy for Compass, because mining is a very difficult business.
“It is really, really hard to run both a miner sales business and a hosting business” at the same time, he said. “It's especially difficult, and then you do it to retail clients that are brand new to this [industry]. It's just logistically challenging.”
For retail investors, the situation was stressful to say the least.
“People have their savings in there, and they are uncertain what will happen with the miners,” one customer said, adding that the more recent news about miners offloading their bitcoin and potentially having undercollateralized loans only heightened their concerns.
All that glitters
Compass has in the past flip-flopped on its statements.
When CoinDesk spoke to Gibbs, the former CEO, on June 24, he said that Compass had never had layoffs and that Compass was “in a good position” to continue to serve its customers and to focus on growth. That was before new management decided to lay off 15% of the workforce on July 7.
Serial numbers of the machines it sells is another issue. The terms of service from last September that CoinDesk reviewed said that Compass had to provide customers with the serial numbers of their machines within three days of their requests. But a newer version from March has scrapped the time limit for Compass to satisfy the request.
Several people on the Compass Discord channel complained that they were ignored when they asked for serial numbers. One said that he was waiting for around two weeks for the serial numbers, which would enable him to track the machine. Otherwise, Compass would send it after it was deployed, the customer said.
Asked about the change in the terms of service, Heller said; “Truthfully speaking, having a three-day window on providing serial numbers is just unrealistic.”
Given that there are limited resources when setting up the mines and that in some cases deployment has already been delayed by the time the machines have arrived at the site, the priority is to get the rigs running and then send the serial numbers to customers, he added.
The company mainly cut down on marketing and business development staff, which Heller said wasn’t exactly essential to deliver machines and hosting. Compass had poured resources into creating educational and marketing materials for its retail clients, publishing insights that CoinDesk frequently references.
Heller and Gosker promised to “spend more time diligencing content providers, and partner with those with high integrity,” in their July 7 blog post. Heller noted that the comment wasn’t directed at any one particular partner.
One customer, who chose to remain anonymous, said that he first heard of Compass through influencers like Peter McCormack and Anthony Pompliano. None of the influencers responded to CoinDesk’s request for comment.
Some content creators have broken off with the company prior to this summer’s revelations. On June 27, before the announcement of the management changes, influencer Dennis Porter, who had signed on as executive producer with Compass on March 22, said the two ended their collaboration on Twitter Spaces. Mitch Klee, who was a mining analyst with Compass, also appears to have left the company based on his Twitter bio, as of July 7.
The Russia affair
But perhaps the biggest difference on what was advertised versus what happened had some element of force majeure; sanctions on Russia.
Compass had a big operation in Russia with $40 million worth of equipment, or 10% of the company’s total hashrate at the time, Gibbs told CoinDesk in an interview prior to his resignation. Soon after the war in Ukraine broke out, then-CEO Gibbs assured customers on the Compass Discord channel that it was “business as usual” and there was no reason for concern.
Gibbs gave customers the opportunity to move their rigs out of Russia at an additional cost. But Compass wouldn’t be able to host them at different facilities, meaning customers would be losing money on downtime.
On April 20, the U.S. Office for Foreign Assets Control added Compass’ hosting provider BitRiver to its list of specially designated nationals, barring U.S. companies from doing business with BitRiver. That development came as a surprise to many because it was the first time a bitcoin mining company had been sanctioned by the U.S. government.
Compass had been unable to access the machines and couldn’t communicate with BitRiver, Gibbs and Heller said.
A BitRiver representative, however, told CoinDesk that it was Compass that was refusing to communicate.
“Despite our numerous calls to resolve issues that Compass Mining customers have regarding equipment, we have found this company reluctant to deal with and solve this problem.” a BitRiver spokesman told CoinDesk. “Compass Mining refused to communicate with us and, unfortunately, refused to deal with the return of the equipment,” the spokesperson added.
According to messages on the Discord channel, BitRiver told customers that Compass Mining didn’t give BitRiver a master list of which machines belong to whom, prior to the sanctions, and so the Russian firm couldn’t coordinate with individual customers to send back the machines. When asked by CoinDesk, BitRiver didn’t comment on the existence of such a list.
Later, Omar Todd, a customer who is organizing the response to the Russia debacle, told CoinDesk that Compass did send BitRiver a master list but that the Russian firm either never received it or didn’t act on it.
Dissatisfied by Compass’ handling of the Russia situation and seeing no light at the end of the tunnel, a group of customers have banded together to hire lawyers to get their machines back, at the cost of $100 per machine.
“We are hopeful that both sides are well intentioned, but soon actions will speak louder than words,” Todd told CoinDesk. “Being an unsanctioned party representing many Compass customers with miners stuck in Russia, we should be able to find the right solution without breaking any sanctions,” he said.
Veribi, a firm that bought $1.5 million worth of mining equipment to be hosted in Russia, has filed a lawsuit against Compass, claiming Compass failed to secure the miners when the war broke out.
According to lawsuit documents, BitRiver has refused to work directly with Compass customers because in its view, the equipment belongs to Compass. In its lawsuit, Veribi claims that the true relationship between Compass and BitRiver has been concealed: “In fact, it is far more plausible that Compass’ relationship with BitRiver is other than the simple agent-provider relationship represented to Compass’ customers,” the complaint filed in a California court reads.
The sanctions on Russia “do not prohibit the recapture or demand for return of property under the temporary control of a sanctioned entity,” as Veribi’s lawsuit writes, said Justin Newton, co-founder and CEO of Netki, a company that is working on digital identity products for anti-money laundering and sanctions enforcement.
“If Compass was obligated to compensate BitRiver for the return of the mining rigs, that may be a different story, since sanctions prohibit U.S. companies from transferring value to sanctioned foreign entities,” but other than that, Newton said he couldn’t see “a good reason for Compass not to repossess their equipment, unless they are financially unable.”
On the other hand, Ari Redbord, head of legal and government affairs at crypto compliance and risk management firm TRM Labs, said that “dealing with a sanctioned entity is complicated” and that Compass likely “would be looking for a license or at least a thumbs up from OFAC before engaging.”
The bundlesLast summer, after China banned crypto mining, Compass started selling bundles of mining rigs to customers, promising them future hashrate. The firm then used those deposits to buy the rigs and build the hosting sites.
Under this model, customers had to foot the bill for the sites’ buildouts, while Compass was managing the process.
One way that Compass did that was to sell bundles of rigs, averaging a predetermined amount of hashing power, which would be gradually going online over several months. The bundles cost anywhere from around $48,000 to $65,000 just for the machines, including $26,000 to $34,000 in upfront costs, according to marketing materials seen by CoinDesk.
“That was my biggest mistake,” one Compass customer told CoinDesk about buying a bundle, because the opportunity cost turned out to be much bigger than he initially thought it was. Most bundles promised that the machines would start going online as early as February of this year, when mining profits were almost double what they are now.
Heller said that Compass tried to procure backup rack space for the bundles, and even had backup on backup, but hosting providers didn’t deliver.
Customers said the first three machines out of six they were expecting were more than one month late each. Three customers told CoinDesk that they were told they would get refunds for their bundles.
In July, Compass offered miners who bought a hosting plan for a Texas site to opt to move their machines to a facility in Georgia due to low uptime, according to messages on the unofficial Discord channel. Later Compass said it wouldn't proceed with moving the miners that because "a recent rise in the cost of energy in Georgia" would increase hosting rates and because they want "to honor Compass Miners who deployed in Texas for tax purposes," according to messages on the channel.
To Sabre56’s Harvey much of this is expected. “Like any company, they're gonna pass the risk on to their client base,” he said.
“Unfortunately, that's the story of the retail investor,” he said. They are “always the last ones to benefit.”