What is cloud mining? A short guide


#1

Without revealing too much information about myself, I will just say that I’m a professional miner, that’s my day job.

With the influx of newcomers I want to set the record straight about what cloud mining is, and what it isn’t.

Question: Is cloud mining a scam?

Answer: That depends which provider you use!

There are many cloud mining providers. Some of them are scammy, and others are not. There are several questions you can ask to boost your confidence level, but in the end, it’s quite hard to KNOW if it is or not. Therefore, I would recommend diversifying if you do get into cloud mining. That means mining more than one coin, and using more than one provider.

Question: How do I spot the scams?

Answer: Here’s a checklist you can use.

Check if there are any videos of the mine in action. If you see only stock photos, no bio on the founders, only videos that do not have their branding on it, it’s more likely to be a scam.

Check their social media. Do they post on twitter and FB? Do people respond? What does the comment section look like?

How long have they been in business?

Are they offering free hash power? If they do, it’s a red flag. This is a common tactic used in pyramid schemes.

Don’t just see if people are making positive youtube videos, see if there are old videos that actually show payouts. Then read the comment section of those videos.

This list could go on forever, but just remember, do your own research! Asking if something is a scam on a forum is only going to get you so far.

Question: Some people say ALL cloud mining is a scam. Why would you sell contracts when it’s more profitable to mine yourself?

Answer: This comes down to how businesses work, and there’s a very good reason.
Think about this, what are the two main scenarios for a business? They are expansion and retraction. In good times, you grow, make more money, everything is great. But, are things always like this?

If I’m a large Bitcoin mining company, I am making money, great. However, what happens when there is a downturn? It takes time to make my money back mining, but what if there was a way to get my money back right away, and still make money even in a down market? What if there was a way to hedge my business?

Well, there is. It’s called a cloud contract. I sell 5%, 10%, some percent of my hash power to people on the internet, and this increases my free capital. Now I can buy more machines right away! Also, when the market tanks, I still get my daily fee, awesome!

Question: Is cloud mining a scam? By that I mean, shouldn’t you just buy Bitcoin instead of mining?

Answer: A bad investment and a scam are two different things.
We should expect profitability to vary, this is the nature of the market. Each provider has a different cost structure and expected reward. If a company sells one contract that will make you money, and another one that won’t, is that a scam?

Guys, read up no what a scam actually is. A scam is when someone takes your money and then just leaves. Or, like Madoff, takes your money to pay new people coming in, then eventually leaves (ponzi).

There is no substitute for doing your own homework. Once you have found a company you trust, figure out which contracts are profitable, use more than one calculator. Build your own spreadsheet, du werk!

Now, remember, some cloud contracts providers ARE a scam, and have exited with people’s money. But, buying a contract that’s never going to pay you back in the first place, is being lazy. Do the math guys.

Question: How do I determine profitability of a mining contract?

Answer: There are several ways, on the web and things you can do manually.

Start by using web resources, then if you want to get more advanced, make your own spreadsheet. It’s not hard guys. Here’s some resources for you.

coinwarz.com

whattomine.com

Question: Is there a list of cloud mining sites somewhere?

Answer: Yes.

Be aware that everyone wants to make money by spamming their affiliate links. If you see affiliate links, understand that it’s in people’s best interest to recommend something because they’re being paid.

I’m actually not going to post a list because I want you guys to do your own research.

Question: Isn’t it true that the YouTubers make their money from affiliate links?

Answer: Yep.

Question: Can you give an example of a profitable versus a not profitable contract?

Answer: Yes.

Without giving any names, let’s look at two cloud contracts (assume we find the provider reputable).

Contract A
Coin - Bitcoin
Cost per TH - $375
Term - Lifetime (until not profitable)
Fee - $0.00038 / GH/s / 24 hours

Contract B
Coin - Bitcoin
Cost per TH - $220
Term - 1 year
Fee - $0.00035 / GH/s / 24 hours

Basic Assumptions

  1. Bitcoin difficulty increases over time
  2. USD price does not change (yes I know what you’re thinking, bear with me)
  3. We are concerned with the total BTC returned, not USD returned.

Now, let’s do some math.

Contract A - Days to break even (without fees yet)

https://www.coinwarz.com/calculators/bitcoin-mining-calculator/?h=27000.00&p=0.00&pc=0.00&pf=0.00&d=1931136454487.72000000&r=12.50000000&er=15217.68000000&hc=10125

Contract B - Days so break even (no fees calculated yet)

https://www.coinwarz.com/calculators/bitcoin-mining-calculator/?h=27000&p=0&pc=0&pf=0&d=1931136454487.72000000&r=12.50000000&er=15217.68000000&hc=5940

So far so good. We’ve learned that Contract B returns our money quicker than contract A. However, we still need to look at fees, and if we will ever make our BTC back. Also, one contract can run until it’s not profitable, and the other ends after one year. So let’s keep going.

Contract A
Daily BTC return = 0.00351572
Daily Fee (USD) = $0.00038 * 27 * 1000 = $10.26
Daily Fee (BTC) = 0.00072418 ($10.26 converted to BTC)
Actual Daily Payout (week 1) = 0.00279154
Actual Daily Payout (week 2) = 0.00279154
Week 1&2 payout = 0.03908156 BTC (0.00279154 * 14)

But WAIT! We need to calculate difficulty. Difficulty increases by 5% every two weeks (let’s just say).

Daily BTC return = 0.00351572 * .95 = 0.003339934
Daily Fee (USD) = $0.00038 * 27 * 1000 = $10.26
Daily Fee (BTC) = 0.00072418 ($10.26 converted to BTC)
Actual Daily Payout (week 3) = 0.002615754
Actual Daily Payout (week 4) = 0.002615754
Week 3&4 Payout = 0.036620556 BTC (0.002615754 * 14)

As we can see, the returns will decrease over time, eventually reaching a point where they are not greater than the fee (or the contract ends).

Now, let’s do the same for contract B, throw this into Excel, and see what happens…

Contract A
BTC Invested = 0.71465 BTC
BTC Returned = 0.46323 BTC
ROI = -35.18%

Contract B
BTC Invested = 0.41926 BTC
BTC Returned = 0.47624 BTC
ROI = 13.59%

Hot Damn! We have a winner!

Question: Wait a minute, won’t these results change based on the market conditions?

Answer: Holy cow, you’re learning!

So, the contract that runs until it’s not able to pay its own maintenance fee COULD run for much longer if the price of Bitcoin goes up, and it could end much sooner if Bitcoin goes down. This is something to consider. If you want to get fancy, you can even model different scenarios.

Now, the other contract, limited to one year, can return more or less Bitcoin based on the BTC price (because you still have to pay the daily fee), but the term length cannot change. So, if the market price of BTC goes up or down, your income will vary, but not as much as with the other contract. This could be a good thing or a bad thing. If Bitcoin doubles in price again, it might be nice to have a contract that keeps going. But, if it tanks…

As you can see, these two contracts are very different in their mechanics and profitability under different scenarios.

Summary:

Guys, there’s no such thing as a free lunch. Mining Bitcoin (and cloud mining) is just like anything else. If you do it without any research, it’s just gambling. However, if you take your time, enter the market slowly, do your homework, you might just make some money.

Cheers!


Is hash flare a scam?
#2

Nice post.

I’m a miner too - I took out some cloud contracts to supplement my mining while I was building out my first rigs but there are none that I would take now as I love seeing my mining rigs producing crypto every day that I control and own.


#3

I hear you there. We do run actual hardware as well.

The issue we ran into was with hosting. We also use cloud mining to supplement.


#4

I guess you heard that Kodak is offering mining services - you pay them about $3500 and they buy a mining rig with it (which THEY own) and then pay you 1/2 of what it mines for 12 months.


#5

Yeah, can’t wait to be a part of that lol.


#6

#7

Great overview. I pinned this until June.


#8

Looks like some redditors have started a “real / scam” list on the /r/cloudmining sub. Use at your own caution, and if you do find a scam, please let the community know about it!