Cloud Mining is Not Profitable

in mining •  2 years ago  (edited)

A long-winded foray into the Bitcoin global hashrate, its effect if any on the price of BTC, and the profitability, if any, of cloud mining. Calculations are shown specifically for Bitcoin, but the math is similar for other cryptocurrencies.

( tl;dr summary = hashrate rapidly increasing, cloud mining almost certainly a good way to lose money)

In a comment a while back to a bitcoinmeister YouTube video, I mentioned that there was some evidence the the Bitcoin global hashrate seems to be increasing rapidly above and beyond what it had been doing in the past and wondered what effect that might have for future trends in the price of Bitcoin. I've since done some research and pondering and have come to realize that I'd made an amateurish mistake — seeing causation where there was only correlation.

Looking at an historical chart of the hashrate ( such as at https://blockchain.info/charts/hash-rate?timespan=all ), you can see that the hashrate has not only increased over the last few years, but the RATE OF INCREASE has also been accelerating. It seems to be entering a "hockey stick" phase of exponential parabolic growth. It roughly tripled in 2016 and, if early in the year trends continue, appears to be headed for significantly more than tripling over the course of 2017.

While the strong price surge of BTC over the course of 2016 likely encouraged miners to add capacity to earn more coins, it comes at the cost of a vicious cycle. Every TH/s added to the network slightly reduces the amount of Bitcoin that each TH/s can earn. From mid-2016 until the next halving in mid-2020, each block yields a reward of 12.5 Bitcoin. Roughly 1800 bitcoin are mined in any given 24-hour period. All things being equal, any mining rig has a chance to earn the 12.5 bitcoin reward equal to its hashrate as a percentage of the total hashrate of the Bitcoin network.

So miners keep adding more computing power to the network chasing a fixed number of 1800 Bitcoin per day (which will drop to 900 a day in mid-2020). And the rigs they're adding are new, more powerful ones such as the S9 which dwarf in power the ASIC rigs from just a few years ago.

The increasing price of Bitcoin in 2016 helped fuel this hashrate increase, but the opposite is NOT the case. The hashrate increase does not in and of itself presage an increase in the price of Bitcoin. All of this makes mining remarkably cutthroat competitively and miners in jurisdictions with low electricity prices have a huge advantage over miners in jurisdictions with higher electricity prices.

Cutthroat for miners. As I will explain, almost certainly not profitable for those who purchase cloud mining contracts. ( Guesstimates similar to what I show can be done with a hashrate calculator such as the one at https://alloscomp.com/bitcoin/calculator ).

As of today, 1 TH/s will earn for a miner on average 0.00044461 btc per day, $0.51 at the current $1150 price (1800 BTC mined per day, divided by 4048436, the total number of TH/s on the Bitcoin network). The numerator (1800) will not change over the next three and a half years, but the denominator will change, significantly. This has HUGE implications for people buying cloud mining contracts.

It's widely understood that most cloud mining companies are fly-by-night scams, Ponzi schemes designed to separate fools from their money. It's also widely perceived that Genesis Mining actually does have mining rigs so is at least not a true Ponzi scheme. All over the web and on YouTube and steemit, you can find testimonials from people who have crunched the numbers to "prove" that they can get a good Return On Investment. But I think they all have a fatal flaw in their analysis.

Let's go back to the 1 TH/s example above. As of today, a 1 TH/s "lifetime" cloud mining contract is available from Genesis for $150 or 0.131 btc. In addition to that upfront charge, Genesis charges $0.28 per day as a "maintenance" fee. Call it a charge for electricity if you will, but that $0.28 per day never changes. They take that 28 off the top, every day, before your payout. And here's where people make a big mistake when calculating their ROI. That TH/s generates 0.00044461 btc per day, $0.51 as of today. So your daily return as a cloud miner on today's $150 contract will be that $0.51 minus the $0.28 maintenance fee or $0.23 for the day (paid out in Bitcoin, that's 0.0002 btc for the first day).

People do some quick math ( 150/0.23 = 652 ) and determine that they will get their investment back after 652 days, and that from then on, it's gravy, free money from their lifetime contract.

But that completely ignores the fact that the 1800 numerator is static but the denominator keeps going up, and dramatically so. The TH/s that produced about 0.00044 btc on the day that you bought it will produce progressively less Bitcoin per day over time (with fluctuations based on the dollar price of Bitcoin, but a steady downward trend). The denominator that's on the order of 4 million today will almost certainly be north of 12 million a year from now. And Genesis keeps taking $0.28 a day. Assuming that the global hashrate ONLY triples over the next year, your 1 TH/s that earned 0.00044461 btc per day, $0.51, will earn a third of that per day a year from now. But you'd never get that far. That's only $0.17 per day and your "lifetime" contract would have blown though the $0.28 barrier and become null and void at roughly the 300 day mark, well short of earning your money back. Granted, that assumes no change in the BTC/USD ratio between now and then. In theory, you could keep earning enough to pay the maintenance fee and generate a profit for yourself if the price of Bitcoin were to rise dramatically. BUT the rise in the price of Bitcoin would be an incentive for miners to add even more rigs, boosting the denominator even higher, reducing the amount of Bitcoin produced by your hash power.

I have rambled on too much. Long story short — cloud mining is almost certainly not profitable for anyone but the cloud mining company.



ETC = 1P535cxV1SXkPWj1GAqxv6PqHuaCBnsqJ2
LTC = LSQNA1bCUDXKBfN5bewzBngTczxDBxCQkL
ETH = 0xB86A902A1bedF3b47b20edB5f352187d191aA66F

Authors get paid when people like you upvote their post.
If you enjoyed what you read here, create your account today and start earning FREE STEEM!
Sort Order:  

Great post! In a video of mine I mentioned how Genesis said that they were for people who wanted to be miners but did not want to take the risk. Notice how they did not talk about profit. Most of the newbs out there that fall for this don't give a darn about that though, they do want profit. They don't understand that even the "good company" admits that they provide a service (becoming a "miner" w/o the risk) that most of their customers probably don't even think about. People need to stop falling for this impulsive stuff. Don't be emotional with your Bitcoin. Be a machine and Buy and hold. Simple is better than fancy here.
Welcome to Steemit.

  ·  2 years ago (edited)

the only good thing about cloudmining is your ability to change what crypto you are mining after you buy the contract.

lets say I buy a contract for ZEC. What if ZEC crashes? If I bought it, I wouldnt really have anything to sell(very little). but with the cloud mining i could just switch over to another currency with that algorithm. other than that it increases risk and is not the best investment.

I have bought a $150 contract and am seeing the exact returns i calculated.

if we could get some kind of guarantee of proof of work being profitable for the period of the contract, this business model is not too shabby for someone who has no option to mine at home. but we cant get that.

with all that said i think cloud mining will find some very business savvy entrepreneurs that will arise with some new processing tech and make a better business model for cloud mining that is profitable and protects the users in some way

Are you sure you actually switch which currency you mine? I mine through Genesis and have a lifetime BTC contract, changed to DASH and the payouts change based on the price of DASH. I emailed Genesis and they told me I'm still mining BTC, just getting paid in DASH.

so the overall value of what they give you has changed to AS IF dash was being mined, yet you are still mining bitcoin. OR is it the same exact value overall but just paid in dash...?

but now as im looking it over it seems that bitcoin is used more universally as far as payouts go and maybe i dont know what im talking about. yet my original point still stands to some degree.

Hey, sorry it took so long for a reply, but here's what Genesis said:

Yes - you are mining BTC and getting a payout in DASH. Of course, DASH price has an impact on your payout, but much grater effect is on the mining difficulty and BTC price on the market.

Let me share some info about what events had impact on the decrease of your payouts:

These events all had an impact on your maintenance fee and on your earnings. Your fee is fixed in USD, but it changes daily according to the BTC price value. The lower the Bitcoin value, the higher the impact of that fee on your mining returns.

Bitcoin price is very volatile and there can be huge differences between days. Sometimes even between hours.
Difficulty depends on the total amount of hashrate which is hashing Bitcoin. A bitcoin block is released every 10 minutes, but the more computing power there is, the more likely it is that blocks are found by those computers quicker then 10 minutes. To counter that effect, the blockchain raises difficulty to make it harder to find blocks. For Bitcoin difficulty adjusts, very roughly, two or three times a month.

We are very sorry but unfortunately, we do not control these parameters - they are variable, as so it is the sheer nature of the cryptocurrencies. As any investment, it contents inevitable risks as well as possibilities of making a profit. We hope this explains it.

Thanks for your understanding.

I've been using this cloud mining platform for a while and can say that its payout rate is much higher than genesis and withdraw limits are minimum. I can advise who want to make an investment. https://goo.gl/opXo8j

Very informative. I wished I had seen this some time ago lol

Good post. I have been suckered by the allure of cloud mining. Fortunately for a small amount. When i saw the return and read about the fees I realised I should have known it's too good to be true

I bought a small contract with Genesis, and I made a profit. It's possible, but I only profited because the price of DASH went up and my small payouts were suddenly worth way more. In my experience, though, I agree that it's not worth the investment.

Cloud mining all the way for me. These are the sites I use!
all free!!!
Eobot - https://goo.gl/FVAp7L - Daily free faucet!! Number One & Most Trusted
Fleex - https://goo.gl/hyff4J - 100Gh/s
Rapid - https://goo.gl/W1CzRr - 100 Gh/s
CryptoS - https://goo.gl/LtaaTU - 20Gh/s
MinerClub - https://goo.gl/Lfok5X - 15 Kh/s
Nano - https://goo.gl/ZgcrQe - 15 Khs
Elite - https://goo.gl/72rxWA - 5000 DogeCoin to start investing.
Demix - https://goo.gl/pcpMve - 5 Gh/s
DogeMine - https://goo.gl/syBPcZ - 20 Kh/s
I do not recommend you invest $$$ except in Eobot, more your time,
in and internally generated Gigahashes
Then cash out when you like the day returns!
Then send it over to Eobot to boost my account their.
Please use the links so i can gain a small amount of Gh/s for your referral.
Happy Mining.

... it's kinda a Gamble I believe, Crypto's are really Risky! Really Good Post

There's not much incentive for purchasing Sha at this time UNLESS you have A LOT of money for the initial hashrate. However, in my experience, X11 has been profitable....too bad it isnt offered at this time :(

I have been finding this kind of analysis.

I looked into the profitability of a contract of Genesis Mining: How profitable is Bitcoin mining? (Part 2) Analysis of Genesis Mining using an idealized model. I did not say Genesis Mining is a scam. Just, their contracts have been not being profitable.

Great post! There are indeed a lot ponzi's out there. I have been been victim of one. also it is true that most people don't take into account all the right criteria. Therefore I wrote an article about it describing all the points you mention and giving a shot at CALCULATING the estimated payout taking into consideration the increase in difficulty. I test and compare the 3 biggest cloudmining companies and try to calculate the estimated ROI and total returns in a google sheet. you can find it on:
https://steemit.com/cloudmining/@circularitylabs/everything-you-need-to-know-about-bitcoin-cloud-mining-comparing-genesis-mining-vs-bitcoin-pool-vs-hashflare-vs-minergate

I've been using this cloud mining platform for a while and can say that its payout rate is much higher than genesis and withdraw limits are minimum. I can advise who want to make an investment. https://goo.gl/opXo8j