A group of Bitcoin miners that bought into the hype surrounding one particular manufacturer, HashFast, are reportedly examining legal options after the company repeatedly failed to deliver on its hardware and is only now beginning to ship products promised in October (and refusing to give full refunds). The problems illustrate many of the teething problems within the Bitcoin network, as well as the fundamental difficulty of making money by mining the cryptocurrency.

The Bitcoin mining network fundamentally transformed in two key ways in 2013. First, the difficulty of mining Bitcoins exploded in the back half of the year, driving profits through the floor in terms of earnings per megahash. Second, the value of a BTC has skyrocketed, crashed, and then continued towards recovery. These two events are logically connected — a huge jump in mining difficulty should increase the value of one BTC, if the currency is to hold any value whatsoever.

As we’ve previously stated, howver, the value of one BTC hasn’t grown nearly enough to balance the increase in mining difficulty. One BTC may currently sell for around $730, but the cryptocurrency would need to hit five-digit valuations to actually return to the profitability ratios of earlier this year. That means would-be miners have just one option — throw huge amounts of mining horsepower at the problem, and pay a premium for doing so.

Unfortunately, there’s a catch to this. The amount of time required to mine one BTC block scales upwards by a difficulty factor the more blocks are mined. The higher the difficulty, the more hashing power is required to catch up, which means the only people who truly benefit from the launch of a new ASIC are the first adopters who can seize on the increased hash rate to earn a positive ROI (return on investment). As each generation of hardware becomes available, a small group of people at the bleeding edge capture a greater percentage of the network hash rate. As more and more ASICs ship out, the value of each ASIC decreases until a new generation of hardware briefly kicks the gear into overdrive again.

The deflationary spiral and its impact on HashFasts’ unhappy customers

HashFast told its initial customers that their order was expected to ship between October 20 and October 30, 2013. The original terms of service (TOS) that the company offered stated the following: “HashFast guarantees that all “Baby Jet” units from our first production batch will be delivered by December 31, 2013. If Buyer ordered one or more Baby Jet units, and HashFast does not deliver such units by that date, then Buyer may at his or her discretion, cancel the undelivered portion and HashFast will issue a full refund the payment for the units that Buyer purchased but did not receive and cancelled.”

It’s now clear that the units will not be delivered by December 31 (HashFast was claiming as of December 31 that it would ship units, but updated its information late that night to claim sudden production problems. It’s now offering buyers a refund form if they fill out a document within the next ten days. There are two problems with this, in the eyes of the buyers. First, from October 30 to early January, the difficulty of mining BTC has increased enormously, while neither the performance of the HashFast miner or the value of BTC has grown commensurately. Second, customers that want refunds paid for their orders using BTC mined in July to September, when the value of a Bitcoin was generally between $75 and $150.

It’s easy to see why customers want BTC refunds rather than USD equivalents — 10 Bitcoins bought in July at $75 each are now worth 10x that amount. But the same deflationary trends that make BTC attractive as a long-term investment are part of why no company that trades in BTC can possibly afford to give refunds in BTC. In fact, this trend highlights the fundamental flaw in the currency’s price. The problem here is that HashFast took the cash paid by early adopters, used that money to fund its own development, and now likely couldn’t afford to refund everyone in BTC even if it felt like doing so. While it now accepts payments in USD, the dollar is much weaker against the Bitcoin than it was in August.

Some customers have suggested that HashFast set up its own mining pool to pay back the missing profits users ought to have earned or to refund the full cost of the spent Bitcoins. Based on a reading of the site’s original TOS (since changed), it’s not clear how much of a case they’ve got. The question hinges on how a court reads the phrase “full refund” and whether or not it’s legal to refund the dollar value of a BTC in USD based on the exchange rate at the time of purchase. Making the entire situation worse, HashFast’s entire database of customers was apparently leaked or stolen in the last few weeks, raising more questions about the company’s good faith and management and security practices.

After the last roller coaster year, the one consistent trend of Bitcoin is that its value has tended to increase — often at a rate that leaves people cursing for having spent it. At the same time, the chances of being an early adopter of new mining hardware and racing to earn back your investment has been shown to be poor. Thus we have a currency whose most reliable characteristic works against it being traded as a currency — and deflates at a rate that easily encourages fraud.

It’s clear from the timeline that the HashFast team overpromised and underdelivered. It’s less clear if this was due to deliberate fraud or bad business practices. If the case goes before a judge, it’ll set an interesting precedent for BTC’s status as legal tender. For now, we recommend all users stay away from new ASIC projects promising enormous performance advantages with unknown ship dates. Any slippage will erode the value of the project enormously, while the deflation of the currency may make it impossible to ever earn one’s money back compared to the value of those same BTC had they not been spent.