Many people wished they had not missed the Bitcoin mining bus before the great Bitcoin boom started back in 2013. Back then you could mine Bitcoins pretty easily at home and make a very nice profit on the exchange rate. However since then, the mining difficulty has increased immensely and today it is almost impossible to mine Bitcoin profitably at home with your own hardware. The only exception is if you have very low electricity costs and manage to mine efficiently for at least 6 months without any major changes in this competitive landscape.
And that’s one of the reasons cloud mining was born
A seemingly sophisticated way to allow people to jump on the Bitcoin mining bus without the need of costly expenses. With cloud mining you can virtually rent mining equipment from a company that will give you back the profits from your rented mining rigs.You do not need to deal with the electricity costs, cooling down the miners or storing them, all you need to do is send out a periodical payment and you are all set. Of course this cloud mining idea quickly took off as people are always looking for new ways to make money online, however how legit and profitable are these cloud mining contracts? That’s exactly what I’m about to unveil in the following post.
99% of cloud mining companies are complete a Ponzi scheme
How do I know this? Well, I run a website dedicated to helping people get started with Bitcoin and every day I get another complaint about another cloud mining company that does not pay and the website seems to have gone away. Even Gavin Andresen, the previous chief scientist of the Bitcoin Foundation who has now been widely discredited because of his involvement with the charlatan Craig Wright, once said:
“I suspect many of them will turn out to be Ponzi schemes.”
Also just looking at our cloud mining reviews page you can see the amount of fraud and companies that fail to payout.
When consider a cloud mining company make sure to due your due diligence on every company you think of investing in. One the tools created for this task is the Bitcoin scam test. If it does not pass the test - do not invest.
But even if you do find a legit cloud mining company is it really worth your money? Let’s put one of the most profitable cloud mining companies to the test - Hashflare
Doing the math
If you go to the company’s pricing page and purchase 10Th/s of Bitcoin mining power (SHA-256) it will cost you $1,200 or the equivalent in Bitcoins around October 17, 2016. If I use a Bitcoin mining calculator and try to predict my profits with 10Th/s of mining power assuming I have no other expenses I get the following results:
So after one month I make around 0.34172190 Bitcoins (~$217), meaning after 1 year I will make around 4.1 Bitcoins. Seems pretty profitable, this means that I’ll break even after about six months and from there on it’s pure profit.
But here’s the kicker, something called MEF - Maintenance and Electricity Fees. For Hashflare they are as followed: The MEF is linear and equals 0.0045 USD per every 10 GH/s of SHA-256 and 0.01 USD per every 1 MH/s of Scrypt. Ethereum contracts are not subject to any fees.
So let’s go back to our investment and calculate in the fees. 0.0045USD per 10GH/s per 24 hours = $4.5/day (since I’m using 10Th/s).
So in one month this adds up to $135. So now we’re making only $82/m and are breaking even in about 15 months. If everything stayed constant in the Bitcoin universe I’d only get my money back after a year and 3 months. After that I’d be doing $82/m in revenue which is 6.8% monthly interest. However, if you take a look at Bitcoin’s historical price figuresyou see that nothing ever stays constant for such a long time. Exchange rates will fluctuate and mining difficulty will probably increase.
So in one month this adds up to $135. So now we’re making only $82/m and are breaking even in about 15 months. If everything stayed constant in the Bitcoin universe I’d only get my money back after a year and 3 months. After that I’d be doing $82/m in revenue which is 6.8% monthly interest. However, if you take a look at Bitcoin’s historical price figuresyou see that nothing ever stays constant for such a long time. Exchange rates will fluctuate and mining difficulty will probably increase.
Assuming the BTC exchange rate rises you’ll be making more money and so will the mining company. However, if that’s the case then perhaps you would have been better off just holding on to those $1200 in Bitcoin to begin with.
And if Bitcoin’s price drops? Well it’s going to take you a lot more time to break even. However since the cloud mining company already cashed out on you as a customer when you signed up they don’t really care. Also, if BTC’s price falls so low that it’s no longer profitable to mine you won’t be getting anything which can make your break even time become infinate.
However, the examples given above are actually the best case scenario where the company you invest in actually has mining equipment. Most of the cloud mining site today are unfortunately Ponzi schemes masquerading as legit investments. Usually they’ll just take money from newcomers and pay it out to senior members and themselves until this whole scheme finally falls apart and the site goes down.
Bottom line - Cloud mining companies are usually always like a casino - the house always wins. If you do start making profits with them it is after a very long and risky period in which Bitcoin’s price probably went up and you could have made more money by just HODLing.
Be careful with your bitcoins!