Cloud mining describes the shared Bitcoin mining by many devices in the data center of a cloud mining provider. The advantage of this type of mining is that the customer does not have to deal with the hardware or software to mine Bitcoin, but only shares in the cost. The amount of hashpower that the customer can rent is variable. In this article, we will show you how to recognize a trustworthy cloud mining provider and what makes a dubious one.
The hard way of the Bitcoin miner
To be able to mine, you need hardware, software as well as the right infrastructure. Mining software, unlike hardware, is freely available. The mining hardware (i.e. ASIC or GPU miner) is usually in a price range of about 1000-3000 euros per device.
But this is not the end of the story. The miner needs a site with internet access and cheap electricity and cooling to make mining worthwhile.
These are not insignificant hurdles, especially for beginners, to participate in mining. If you want to learn how Bitcoin mining works exactly, read our knowledge article “Bitcoin Mining: How does it work and is it worth it?”.
Cloud mining as a business model and a fraud model
A company that has the infrastructure in place purchases miners and runs them on cheap electricity in its own data center. Customers can then rent the miners’ power for a certain period of time and get the revenue from this.
In itself, this is a promising business model, as customers can get started with small amounts and don’t have to buy an entire mining machine right away. Unfortunately, the cloud mining of many companies developed in a direction where the customer did not see a large part of his money again.
This included business models that sometimes used 40% of the invested capital for their own infrastructure and paid out high commissions to the people who were able to recruit new customers (pyramid scheme or Ponzi scheme). Those who only wanted to mine and not recruit further customers saw a maximum of a fraction of their invested capital again.
Other business models relied on the concealment of mining performance, so that it was not possible to calculate the expected revenue.
Bitcoin mining needs 100% transparency
A small example: an Antminer S9 has a computing power of about 13.5 TH/s and a power consumption of 1400 watts. From these values, one can calculate the revenue with a mining calculator (like whattomine.com) and thus know whether mining is worthwhile at the corresponding electricity price.
Now, many providers gave neither the used miners nor the miner power, which is existential for a calculation, with a starter package. However, very many customers were attracted by clever marketing and then bitterly disappointed.
In 2017, there was a boom in cloud mining. The promises of the dubious providers were so great that many people fell for them and in the following year almost all customers lost their invested capital when these companies simply made off or stopped the payouts. However, despite the many black sheep, there are cloud mining providers that clearly spell out their contracts, as well as state the cost of maintenance and miner performance.
You can learn how to separate the wheat from the chaff in the next paragraph.
How do I recognize a scam?
There are very clear signs that point to a scam. Extreme caution is advised with the following cloud mining conditions.
- Unrealistic profit promises. The break-even point of an investment is usually not reached after 6 months. It usually takes about 12 months, but with increasing Difficulty this period can be longer (e.g. 24 months).
- Free registration with the provider is not possible. An intermediary is needed to be able to invest yourself. This indicates a Multilevel Marketing system (MLM), where the recruiters earn extremely well. This has a negative impact on the company’s service performance in particular.
- It is not known which miner (type and company) is used and what computing power is the basis for your investment.
- Contracts that provide for arbitrary shutdowns when mining is no longer profitable.
High service fees in the form of “x dollars per giga or terahash”. Most of the time, the fees are so high that mining is not worth it from the start.
Overpriced or far too cheap miners. A twice as expensive purchase price compared to the manufacturer’s prices is not serious. Too cheap offers can also indicate a scam. The miner will always be slightly more expensive to buy than from the manufacturer due to import taxes and shipping costs.
5 points to watch out for when cloud mining:
When it comes to cloud mining contracts, and generally when it comes to investing with mining companies, it is recommended to pay attention to the following things:
- Location of the company: Is this known?
- Contractual transparency: How precisely is the contract drawn up? Does it comply with applicable law?
- Favorable electricity prices: How high is the electricity price? Is this stated and is mining worthwhile at all?
- Flexible service fees: Is the fee arrangement fair?
- Clear payout rules: When are payouts made? Are there minimum amounts? If so, how high are they?
Also, you should inquire on social media how long the provider has been around and if there have been any bad experiences. Most scam models do not last longer than 6-18 months on the market. However, you usually get the first negative feedback after 2-3 months. By the way, one of the biggest scams in cloud mining was the Bitclub scam.