Remember the Old West, when naive speculators often bought maps to gold mines hoping for quick riches?
Today, the basic question cowboys used to ask themselves still makes sense: if the mine is full of gold, then why would they sell a map of it for a tiny or insignificant fraction of the wealth contained in it?
How many maps did they sell and how many people were already there, if the mine really existed, mining all the gold?
Intuitively, we could ask the same questions about cloud mining providers.
If mining were profitable for the mining infrastructure owners, why would they rent it out at a fraction of the price of the mined cryptocurrencies? Why wouldn’t they mine for themselves? These are valid questions and the answer isn’t always 100% convincing.
The explanation is that the mining infrastructure companies need some good old fashioned fiat money to honor their current expenses. In other words it’s a cash flow problem.
Taxes, light bills and so on need to be paid by certain dates in fiat money. So, instead of selling the cryptos they mine, they accumulate cryptos while selling customers some of their mining power in exchange for cash. The customers pay cash for future crypto amounts and this solves the mining company’s cash flow problem. This makes perfect financial sense.
Others have a less exciting story to tell. Quickly growing total network hashrate makes future contracts obsolete in a matter of months. So, even though you may purchase a “lifetime” hashrate service level, this hashrate will be quickly made obsolete by the natural network growth. There is nothing miners can do about this. As you can see on this chart provided by Blockchain.info, the hashrate has been growing approximately linearly in the past 3 months, with an increased slope in november 2017 when Bitcoin price exploded upwards. Naturally, with cryptocurrency valuation, the total network hashrate will increase, as more miners join the system.
If the current trend persists, the total Bitcoin mining hashrate will have doubled again by mid 2018. This means the network difficulty will also double. This automatically makes any cloud mining contracts half as profitable during the same period.
Therefore, we’re able to arrive at an early conclusion. Future mining contracts are only worth it as long as the the algorithm purchased is able to maintain value. Miners could switch to other hashing algorithms and attempt to mine more profitable coins that can later be traded for Bitcoin. This is an old strategy and some mining pools even do this automatically by dynamically switching mining algorithms to the most profitable one every X minutes – these are called multi mining pools and you can easily find them via web search. Sites like Coinwarz also provide real time mining profitability data gathered straight from hundreds of mining pools. By choosing the mining algorithm wisely, you may be able to achieve some ROI via cloud mining.
But cash payments may not be every cloud miner’s goal. Some consider cloud mining as an alternative way to purchase cryptocurrencies for the future, as a long term investment. As credit card purchases of cryptocurrencies isn’t always possible, especially in very controlled economies, buying cloud mining power could be a solution for those who wish to get into the world of cryptocurrency without getting in legal trouble.
For instance, several large US banks are blocking cryptocurrency purchases via their credit cards. So, if you are a customer of one of these banks, you could buy a crypto mining contract instead and fill your crypto bags without breaking any rules.
Although much has been discussed about cloud mining, including real scams, most of the time the ROI depends on you rather than on the cloud mining service offered. If you have trouble buying cryptos using your bank account or debit/credit cards in your region, mining could make sense even though it might not be immediately profitable. Some credit cards also offer generous points rewards and longer payment terms, which could indirectly add to the cloud mining profitability. In some countries credit cards allow customers to pay the bills in several installments, which could also work as a credit instrument to go from fiat money to cryptocurrency. Always make sure to check the interest rates, as they’re usually far above overdraft rates.
Choose the mining algorithm wisely, as mining Bitcoin directly may not be the best strategy. Altcoins may also gain value with time. Litecoin, for example, regained its old spot among the top 5 cryptocurrencies ($LTC used to be #2 back in early 2014!) and if you happened to have been mining LTC it would have been very profitable against Bitcoin.
As we can see, cloud mining does have its place in the cryptocurrency business. It is not a silver bullet that solves every case, but sometimes it’s the best option. Choose wisely and weigh your options, as always, perform due diligence and check the cloud mining company’s background and reputation before diving head first.
How do cloud mining companies profit from their services?
What Is Cloud Mining of Cryptocurrency, and How Does It Work?