A Beginners Guide to Bitcoin Cloud Mining
By: Ofir Beigel | Last updated: 2/22/21
Cloud mining is a general term given for sites that charge a monthly fee in exchange for mining cryptocurrency for you. In this post Ill cover what cloud mining is in detail and expose the truth about its profitability.
Cloud Mining Summary
Cloud mining is a term describing companies that allow you to rent mining hardware they operate and maintain in exchange for a fixed fee and a share of the revenue youll make. It basically means that you can mine remotely without the need for buying expensive mining hardware.
Most, if not all, cloud mining companies today are either plain scams or work through an ineffective business model. By ineffective I mean that you will either lose money or earn less than you would have by just buying and holding Bitcoins.
Thats cloud mining in a nutshell. If you want a more detailed review about cloud mining and a specific profitability analysis, keep on reading. Heres what Ill cover:
1. How Does Cloud Mining Work?
Since mining Bitcoins at home is so incredibly expensive many people are looking for cheaper solutions that dont involve buying hardware that eats up electricity and will quickly become outdated.
In light of this, cloud mining seems like the perfect solution: You rent hash power from miners that are located in a remote, cool location. The cloud mining company takes care of maintaining the miners and you share the revenues of the operation.
So everything looks OK, except you cant always rely on these companies to deliver on their promise.
2. Best Cloud Mining Services
Its hard to recommend a specific cloud mining company since these companies are more often than not complete scams. However, there are some legit options out there.
Legit cloud mining companies
When I say legit, I dont mean profitable or reputable, Im only referring to the fact that they actually own hardware and mine Bitcoins.
Three known examples are Genesis Mining, Bitclub Network and Hashflare. However, Ive taken a deeper look at all of these companies and in each one there are huge red flags that come up.
Lose Lose Situation
The main model of legit cloud mining companies use is a lose lose paradigm. If Bitcoin goes up in price youll earn less than if you just bought it. If it goes down you wont earn anything and youll probably lose the money youve invested.
Ive written about it extensively here in the past but heres how it works in a nutshell:
Aside from the cloud mining contract payment which is usually a fixed sum, companies charge a maintenance fee. The maintenance fee is the cost of running the mining hardware, cooling it, storing it, etc. The maintenance fee is usually calculated in USD per mining power unit (e.g. $0.14/TH).
Since mining revenue is accumulated in Bitcoin and maintenance fees are paid in fiat, if Bitcoins price falls the revenue might not be enough to cover the ongoing maintenance. In that case, the company will just terminate your mining contract without any refund.
Heres an exact quote from Genesis mining:
In the event of a contract becoming unprofitable (i.e. the payout cant cover the maintenance fee), the resulting daily payout will be zero. After that, the contract will continue to mine for 60 days.If the contract does not return to profitability in this period it will be terminated.
On the other hand, if Bitcoins price shoots to the moon, the mining difficulty usually goes up as well, making your miners less profitable. To sum it up, in both cases youre probably better off just buying and holding Bitcoins. Youll either lose less or earn more.
If you do a quick search online or even read my own reviews about these companies, youll find a large amount of testimonials from people who got their contracts terminated during the long crypto winter that started in 2018.
Scam cloud mining companies
Aside from legit cloud mining companies, we also have complete scams. When Bitcoin started to gain momentum, a lot of ponzi schemes came to play, with the most famous ones being Bitcoin Savings and Trust, Bitconnect and OneCoin.
Another name for Ponzi is Pyramid Scheme. Its a type of investment scheme where you need to invest money in order to participate. The people who came in first get paid by the ones that came after. Eventually the payouts stop for some reason and the people at the bottom of the pyramid are left with nothing.
In my opinion (and in the opinion of respected others as well) most of the cloud mining companies are plain Ponzi schemes. Meaning these companies dont actually have any mining rigs set out in a remote location and the money that you pay is used for paying out older customers and the company itself.
Most people wont press charges when a few hundred dollars are stolen from them, so when the company goes bankrupt or just plain vanishes, all that is left are a bunch of angry people. Hey, it happened to me as well
4. Do Your Own Research
If youre still not convinced and want to go down the road of cloud mining, make sure to conduct ample research before pulling out your wallet. Heres what I suggest:
Look for References
For almost every fraudulent website on the web theres someone who already posted about it. Either search BitcoinTalk for information about that company or go to BadBitcoin for a list of the well known scams.
If youve already been scammed and couldnt find any reference, I advise posting on one of these sites to help other users out.
Dont Invest More Than You Can Afford to Lose
Probably the most important tip if youre going to get into cloud mining, do it little by little, and NEVER (and I mean NEVER) invest more than you can afford to lose. The way most of these companies work is that they lure you in, little by little, and once you get the big money in they close down without any notice.
The Bitcoin Scam Test
Ive developed our own methodology for inspecting different Bitcoin related sites. Its a series of questions that will eventually give you a pretty good idea if the site youre looking at is a scam or not. You can take the test here.
5. Conclusion Is Cloud Mining Profitable?
If you want my advice stay away from cloud mining. There are too many question marks around this area to make it legit.
I think that if youre serious about investing in Bitcoin then youre better off buying Bitcoin and holding rather than mining it.
If youve had your own experience with cloud mining Id love to hear about it in the comments section below.