Rarestone Capital is pleased to announce its recent investment in Compass. Compass founder and CEO Whit Gibbs also joins Rarestone Capital’s advisory board to help with our mission to support and incubate purpose-driven founders in web3.
The bitcoin mining value chain is incredibly complex and inefficient. It is still heavily dependent on insider knowledge, who you know and who you trust. Being able to source and screen ASICs, mining facilities, low-energy sources is problematic for most and results in high barriers to entry for institutional and retail players. Resultantly, retail struggle to mine bitcoin profitably due to economies of scale and institutions are limited by counterparty risk and a poor understanding of the economics of bitcoin mining.
Compass is Rarestone’s best bet at solving these inefficiencies by enabling retail and institutional miners to easily purchase hardware and secure space in the world’s best bitcoin mining facilities at competitive rates with the trust assurances the industry desperately needs.
Read on to learn more about what Compass, why it exists and how it works.
Compass owns and hosts the #1 Mining Podcast (HASHR8 Podcast) and the #1 Bitcoin Mining Newsletter (Difficulty Adjustment). Both will be utilized by Compass for networking and customer acquisition.
Seed investors include Rarestone Capital, Coinshares, Galaxy Digital, CoinFund, Kenetic Capital and CMT Digital.
Compass offers a two-sided marketplace. It connects mining facilities (supply-siders) with investors (demand-siders) to ease an investor’s access to mining operations and allow hosting facilities access underserved portions of the market.
Using Compass, investors can easily purchase mining hardware and host it at a hosting facility of their choice, through the App. Compass’ diligent onboarding steps for hardware providers and hosting facilities accommodate investors with the trust assurances necessary for them to feel comfortable with the counterparty risks. All vendors must abide by certain standards before being verified and being made available to investors via Compass.
For investors that do not have a sufficient level of financial capital, Compass allows the ability to tap into the same economies of scale offered to large mining companies via a service called Powerblocks. Powerblocks is similar to a GoFundMe campaign. Compass acts as the intermediary between the hosting facility and many small clients, which enables retail customers to only buy a portion of a “Powerblock”. This effectively breaks up the minimum order quantity into smaller, more accessible orders, with each customer owning their own hardware.
As Compass scales its full-stack solution, new services will be offered through the natural sales funnel created by the platform. Direct hardware distribution and credit underwriting products for retail clients are the two most immediate products planned.
- Retail Investors (Demand-Side)
- The profitability of cryptocurrency mining is dependent on multiple factors: The cost of equipment and the facility, overhead, electricity costs and the price of the mined asset. For retail investors, the barriers to entry are too high. This is due to considerable initial costs, lack of knowledge about mining, local regulatory challenges or they are simply based in a country with too high electricity prices.
- Hosting your hardware in a facility often requires $100,000+ in upfront capital. This puts the opportunity to mine cryptocurrencies beyond the reach of most enthusiasts and hobbyists.
- More accessible services like cloud mining are rarely profitable, as investors do not actually own the hardware and pay a high premium for mined coins.
- Institutional Investors (Demand-Side)
- Many institutional investors have mandates to grow the amount of BTC in their portfolio. Instead of going for riskier trades on altcoins, they can start a mining operation to accumulate Bitcoin at a discount to the spot price.
- Limited by regulatory uncertainty and counterparty risks.
- Trading Venues (Demand-Side)
- Commoditization of hash-rate is limited by how much access an exchange can get to genuine hash-rate. Trading facilities that offer hash-rate derivatives are limited by this and compete amongst each other.
- They also need to deal with a lot of parties at once as there’s no single place for getting access to hash-rate.
- Hosting Facilities (Supply-Side)
- Struggle with customer acquisition and retention.
- The current process is heavily trust-based and comparable to direct OTC deals without a trusted third party. If a customer wants to make use of a hosting facility they first need to find a seller for the hardware. Then they need to check the hardware to see if it works as intended. Afterwards, you will have to find a place to put all your hardware, with cheap power, decent security and trustworthy support service (including replacements and maintenance). The customer then sends the hardware to the facility and hopefully has an agreement with a guarantee of uptime, or they risk that their hardware is not actually being used.
- The whole process requires a great deal of trust and is further hampered by scam offers and bots.
- Significantly reduces counterparty risk — Compass conducts thorough checks before on-boarding new facilities and requires all facilities to pass due diligence before generating a profile on the Compass website.
- Profitable mining operation — For the first time, retail markets will be able to profitably mine cryptocurrencies at top-tier facilities with significantly smaller ticket sizes than what the current minimum order requirements are. All without any untrusted middlemen being involved and while completely owning the purchased hardware.
- Attractive yield-generating investment opportunity — Investing in cryptocurrency mining is comparable to a longer-term dollar-cost-averaging strategy. On top of this, the hardware price shows a strong correlation with the Bitcoin price and can be sold by customers for a premium as Bitcoin’s price increases.
- Commoditization of hash-rate — As hash-rate markets mature it will be possible for Compass to offer exchanges access to hash-rate without them having to deal with multiple parties.
Cryptocurrency customer base breakdown, source
A comprehensive screening of every facility is done by Compass before the onboarding, including a check of corporate documents, an interview process, and reference checks. Customers on Compass and Powerblocks will then be presented with all relevant information about the respective facilities, including but not limited to information about the electricity costs, security measures and a geopolitical index assessing the regulatory risk of the facility’s location.
After a customer purchased hardware and chose a hosting facility the distributor will ship the hardware and the facility will plug it in. This process is protected by contracts and fully mediated by Compass. In case a facility has available hardware for purchase the distributor is simply not involved. The amount of middlemen involved is reduced drastically as Compass will always act as the sole customer to a hosting facility. The same is true for exchanges looking for access to hash-rate as Compass will be able to act as the sole access point. Compass owns the customer relationship at all times.
Furthermore, to reduce the financial barriers of entry, Compass will offer credit underwriting options for customers, allowing them to participate in cryptocurrency mining more easily. Compass aims to earn interest on these financial products.
Compass itself will never have any hardware on its balance sheet.
Regulatory and Counterparty Risks
In general, counterparty risks and regulatory uncertainties are significantly reduced. The thorough due diligence process of facilities by an experienced team, paired with necessary protections and transparency are key for building up trust. In addition, earning newly minted coins reduces the regulatory risk to a minimum, as the risk of them being linked to fraudulent activities in the past is non-existent. Lower risks make cryptocurrency mining an increasingly attractive business for institutions.
Following close engagements with Compass’ target user groups a variety of revenue streams have been employed:
- 5% service fee from supply-siders, taken from their gross revenue generated from each client per month
- % markup on direct hardware sales
- % interest in financing sales (credit underwriting)
- Referral payments as a media partner with their mining podcast and newsletter.
Compass will leverage its proprietary media outlets (podcast and newsletter) to drive awareness and customer traction.
Both the newsletter and the podcast will act as important funnels for supply-siders and demand-siders. This will especially be important during the early stages of the product, during which Compass can acquire early customers through existing means and better understand their needs and responsiveness to marketing.
Stage of Maturity
- Compass owns and hosts the #1 Mining Podcast (HASHR8 Podcast) and #1 Bitcoin Mining Newsletter (Difficulty Adjustment). Both will be utilized for networking and marketing.
- 5900+ weekly readers of the mining newsletter (wider audience, including retail).
- 7000+ monthly downloads of the mining podcast (listeners include large mining operators, thought leaders and journalists).
- CEO, Whit Gibbs
- Grew HASHR8’s mining podcast and mining newsletter into the #1.
- 15+ years of executive and project management experience.
- Involved in the mining community for 3 years.
- COO, Thomas Heller
- Responsible for growing F2Pool to become the #1 bitcoin mining pool.
- Extensive management experience.
- Lead Developer, Paul Gosker
- 20+ years of design and software development experience.
- Leo Zhang – Leo produces industry-leading content on the developing hash rate markets and advises Compass on data aggregation and content strategy.
- Harry Sudock – Harry is scaling one of North America’s largest mining facilities and advises Compass on business strategy and product monetization.
- Nathan Nichols – Nathan is a partner at Imperium Investments, a North American mining firm with $100m+ in AUM. He advises Compass on strategic partnerships and will later assist with growth capital for future projects.
This overview has been prepared solely for informational purposes and is not to be considered as investment advice. It does not purport to contain all of the information that may be required or desirable to evaluate all of the factors that might be relevant to a potential investor, and any recipient hereof should conduct its own due diligence investigation and analysis to make an independent determination of the suitability and consequences of any action.