Bizznerd Investigates: The Truth About Cloud Mining, Worthy Investment, or Scam?

With the advent of cloud mining, the debate has generally centered around whether or not the alternative to buying and maintain one’s own hardware is a good investment or scam. The Bizznerd team did a deep dive into the hashing power rental industry to dig up the truth.

The process of validating digital asset transactions in a distributed ledger powered by Proof of Work (PoW) consensus algorithms involves a great deal of computing power. The hardware involved solves complex mathematical equations in order to validate transactions and commit them to the ledger. The process – also known as mining – is insentivized by a reward in digital assets.

The process is quite demanding however, in terms of electricity costs, as well as hardware maintainance and upgrades. Add the fact that digital asset prices tend to fluctuate wildly, and setting up your own mining operation could prove rather difficult.

“The logic behind mining is very complicated. You need to calculate what machine to dig, how much it will cost, how much the electricity will cost, etc. In all costs, the price of electricity accounts for more than 80%.” – Lei Geng, of digital asset mining firm, RawPool.

Cloud mining however, promises to offer the average Joe an opportunity to get in on the digital currency mining action.

Without having to purchase an array of hardware and manage complicated software, non technically astute individuals can take out a contract offered by a mining service and rent some hashing power to reap a portion of the profits. At least that’s how it works in theory. There have been several boat loads of firms springing up on the net, purporting to offer such services, only to vanish into the night almost as quickly as they came.

The Cryptocurrency Mining Industry

Despite the post-2017 price doldrums that digital asset markets have been stuck in, the mining sector has seen a great deal of growth. China still dominates the Bitcoin hashing power market, but data from the Cambridge Centre for Alternative Finance, or CCAF, suggests that other territories have begun to take mining seriously.

The industry has seen a lot of public, and private sector support in recent years, with some territories recognizing it as a legitimate industry. Firms like digital asset liquidity provider, GSR, are beginning to develop risk management structures and financial support facilities for the digital currency mining industry. Suggesting friendlier sentiments toward digital asset miners.

By the numbers, Bitcoin mining – alone – generated over 112 Terahashes in May 2020, down significantly from the previous month (possibly as a result of the post-halving difficulty bomb), but still in the All Time Highs territory it has been logging in recent years.

Over all, the – increasingly transparent – Bitcoin mining industry has registered a 10× growth rate since 2017, to be valued at over $5 billion in May of 2020. According to Finanso.se, $4.9 billion of the revenue generated by mining firms in 2019 was from block rewards. Due to lack of clarity from industry players it is hard to estimate what percentage of mining revenue came from cloud mining contracts. However, the sector’s growth is not insignificant.

The Problem With Cloud Mining

The issue with cloud mining is that there are many who doubt the legitimacy of the model, as an investment. Cryptocurrency forums are full of posts from people claiming to have been scammed by a cloud mining firm, and subsequently losing their investment.

With the current frenzied adoption of digital assets, the market is packed with poorly informed individuals looking to make triple digit gains off their investment, opportunists recognized this and can easily set up websites promising a slice of the cryptocurrency mining pie. Without any regulatory oversight, many a new investor is left vulnerable to being scammed.

Well known Bitcoin developer, Gavin Andresen, in 2014, posted a comment on a post asking about the legitimacy of cloud mining services, likening them to pyramid schemes; “I suspect many of them (Bitcoin cloud mining firms) will turn out to be Ponzi schemes.”

The other aspect that draws scepticism from the cryptocurrency community is the rate of return on one’s investment in cloud mining contracts. Mining firms who are known to lease hashing power out to the public usually have such a low return and charge such hefty fees that one is left wondering if they would be better off simply purchasing the asset. Taking market fluctuation into consideration, cloud mining contracts could possibly yield a negative return.

The Rawpool team begs to differ however, and estimate that cloud mining contracts will still be profitable in a market downtrend. Only, it may take longer to realize those profits. This may be the case, as cloud mining contracts appear to be so popular that contract options on ViaBTC.com and Bitcoin.com’s cloud mining service are, at the time of writing, sold out.

Our Investigation

The Bizznerd team selected a handful of websites claiming to offer hashing power leasing services and put down a total of $1,000 on mining contracts on all of them. Of the firms we tried out, none gave a satisfactory return.

Genesis Mining

We put 0.02 BTC into an ETH mining contract, which was worth $ 85.50 at the time (currently worth around $195). The returns, after two years of holding the contract, were 0.13 ETH, valued at $31.6.

Hashing 24

This contract had us pulling our hair out. We took out a 100 GHs mining contract, then worth 0.00709543 BTC  ($64). The contract never broke even, but it did earn 0.00030587 BTC, about 26 bucks. We couldn’t withdraw the funds however, as the balance was too low. The contract also auto-cancelled, because Hashing 24 cancels contracts that go negative for 3 days in a row.

Eobot

The two contracts we took out on Eobot, account for our biggest cloud mining contract related spend. The results however, leave a lot to be desired. We took out aCloud SHA-256 5.0 – 221.6744 GHS contract (10 years), as well as a Cloud SHA-256 6.0 -1352.9354 GHS (10 years) both failed to yeild profits.

Following the Bitcoin Halving, both contracts stopped. The second it now active again, but with smaller GHS numbers and it doesn’t appear that we’ll receive 30% of the initial investment. There’s much doubt whether, or not, the contract will be active for the remainder of the decade.

Others

Other contracts we took out with other clound mining operators stopped working after a single year. Some took longer, but eventually also stopped operating. Some contracts we took out with other big firms are still active but they only make up about 5% of the mining firms we took contracts with. No profits to report on those contracts either yet though, just a miniscule yield that might never realize a profitable position, similar to the others.

Most cloud mining operators seem to follow a similar operational vein; open a UK based company, protect the site with Cloudflare (possibly, to their leads), operate for a year, shut down, rinse & repeat. They don’t offer any substantial proof that they even own mining hardware, or investors, or contact numbers.

We reached out to a number of cloud mining operators to get comments – and, possibly, some answers – however, none had gottent back to us by the  time of publication. ViaBTC and Genesis Mining were the only firms to return a response, saying that they would get back to us but that – to date – has not happened yet.

Conclusion

Our first hand experience with cloud mining leads us to conclude that cloud mining contracts don’t seem to offer a convenient (or profitable) alternative to actually spending on mining equipment, or buying and holding the actual digital asset. The notoriously opaque operational nature of the digital asset mining industry is another stumbling block that makes mining contracts unattractive.

With that in mind, along with the fact that a lack of regulatory oversight leaves the segment open to scammers, cloud mining appears more like a white elephant than an actual investment. Perhaps firms seeking to rent out their hashing power would benefit from being more open, amending their offerings to drive contract, or simply going public (listing on a stock market, or tokenizing shares) to fund operations. Current cloud mining offering don’t appear to be all that the firms offering them promise to be, which is probably why we hear words like ‘scam’ and ‘ponzi scheme’ bandied about whenever they are mentioned.