The words Cloud Mining have become synonymous with scam. Is there value to be found in this industry or should the market simply be avoided?
Cloud Mining refers to a contractual agreement specifying the terms by which a mining company will mine bitcoin for a customer. The customer pays an upfront fee, which is generally expressed by the amount of Gh/s purchased, as well as a maintenance fee which is meant to cover electricity costs and other management requirements. Usually, these contracts are "lifetime", meaning that mining will continue until the maintenance costs exceed the bitcoin earned from the rigs over a prespecified period.
Theoretically, Cloud Mining makes a lot of sense. For customers, mining manufacturers can deliver massive economies of scale, minimizing per unit mining costs and strategically locating mining locations to take advantage of low energy costs and ideal environmental climate. Furthermore, cloud mining eliminates mining maintenance headaches, as well as the headaches that might result from running loud mining rigs. For the manufacturer, cloud mining contracts not only provides a hedge against unfavorable future movements of bitcoin price or mining difficulty, but reduces the logistical headaches involved with shipping mining equipment all over the world.
However, in the bitcoin marketplace, the term Cloud Mining has become synonymous with ponzi scheme. Cloud mining is an extremely exploitable model, and has given rise to numerous scammers. A contributer on bitcoin talk named Puppet has established himself as something of a guru on the topic, and developed an extremely thorough listing of these different operations, along with a criteria to determine the scam-likelihood of any operation. We highly recommend using this as reference.
Why is Cloud Mining so Scam-Susceptible?
Perhaps the best explanation is offered by poster Spinoza at Reddit, which we summarize below. Cloud mining contracts might be considered a bet on future mining difficulty levels and bitcoin prices. For whatever reason, cloud mining contracts have been extremely overpriced, basically offering ROI if difficulty rates buck the consistent historical upwards trend and remain stagnant, while at the same time bitcoin maintains or increases in price. It would be a relatively simple task for a charismatic individual or falsely-trusted group to sell these contracts while banking that upward mining difficulty trends would continue, and that there would be no massive increase in bitcoin price. No actual mining, then, would have to take place. Rather, customers would simply be paid back with their own money until the "maintenance fee" exceeded the value of the "coins mined".
Provided the contracts are priced correctly (from the cloud mining company's perspective) the only risk is that a large drop in difficulty - or increase in bitcoin price - will actually lead to customer profit. In such a situation, the customer would be dependent on the overall reserve strategy of the cloud miner - do they have enough money to pay out the profit, and for how long? If they do not, then one of two things could happen. The first is that the operator moves into Ponzi territory, and starts paying out customers not from reserves but with funds that should be allocated to other customers. Of course, if the difficulty remains low these companies will eventually be exposed. The second is the company simply disappears with customer money never to be heard from again. Actually, the first option would most likely simply turn into the second.
That is not to say that any operator selling contracts not backed by actual mining is necessarily a scam. Cloud mining is basically a method of shorting a highly overpriced mining market. Provided that the short position - i.e. the cloud mining operation - has the money to cover the position should the market move against them, it is only the misrepresentation that is unethical.
Legitimate Cloud Mining Operations
And there are some legitimate cloud mining operations. In our opinion, the two worth noting are Hashnest - which is connected to BitMain and uses Antminer equipment - and Genesis-Mining, which has joint ventured with Spondoolies and utilizes their fantastic equipment behind mining contracts. Indeed, Marco Streng, CEO of Genesis Mining, has adressed the negative image of his industry, maintaining that it is incumbent on the mining operator to provide proof that the mining is taking place. If the mining is not taking place, he goes on to say, it is "at best a bet against your client and at worst, a Ponzi scheme if you never intend to pay. In any way such an operation is a scam, because it does not hold its promise that mining really takes place. If such a company bets against its client it can (i) win the bet and earn a higher profit than an honest business (ii) lose the bet (and probably get insolvent). If you are anonymous then there is only an upside (and no downside)." Transparency, he continues, is a necessary condition of a reputable cloud mining company. Genesis publishes information on its executives, who are active in the bitcoin community, it is a registered company and they are open about where the mining operation is, and provides proof of hardware ownership.
We find it somewhat amusing that Mr. Streng emphasizes transparency, but will not expose the mining address of his units mining on a customer's behalf, nor will he allow a customer to choose the pool at which the mining takes place. However, we include Genesis Mining as one of our two legit cloud mining sources due to their partnership with Spondoolies, a business we feel has integrity. Users can be assured that their contracts are backed with Spondoolies mining equipment.
Is the Genesis-Mining - Spondoolies Contract Profitable?
The current contract is offered at $449 for 1 Th/s, and an additional 0.0019 per gigahash per day maintenance - or $57 per month. Perhaps readers will have read our mining analysis of Spondoolies SP20 mining rig, a 1.7 Th/s beast offered in October of 2014 with a price tag of $470. At 1.1 kWh energy consumption, we calculated a $99 energy fee per month at average US energy prices. So basically, compared to the SP20, the contract offers 58% of the mining power at 57% of the energy price. A bit disappointing that the savings achieved from their Icelandic mining operation is not, in actual fact, passed on to customers. To be fair, we did not take into account shipping costs or mining pool fees - which generally are about 2% - into our calculations of retail hardware profitability. All things considered, perhaps their is a marginal advantage in purchasing a contract, but we do feel the company could offer more competitive pricing.
Bitcoin Price (USD): 853.48