In the Wake of HashFlare’s Exit, Are Any Cloud Mining Operations Sustainable?

cloud mining

In modern times it seems that everything is heading into the cloud, is this a good thing? Everything is stored there, from our photos to our crucial documents, and some of us even have fridges and ovens that are connected to the cloud. But where do we draw the line with these cloud services? When it comes to mining cryptocurrencies new users are often drawn to fancy buzz words, and “cloud mining” reads as a care-free and easy way to secure some BTC. But as it always seems to be, when something is surrounded by too much hype it hardly ever lives up to the expectations. Cloud mining has been around for a few years now and is finally starting to show its true colors, and with all the risks and possible scams around could shifting into a new type of mining be the answer?

We would like to thank the team at Securix for their contributions to the design and implementation of the research and to the analysis of the result.

HashFlare Shows Its True Colors

One of the most prominent companies in traditional cloud mining, HashFlare, recently surprised users when they shut down their bitcoin mining. Having been in the industry since 2013, HashFlare is viewed as a trustworthy company, but with recent developments many users are starting to question cloud mining in general. After 28 consecutive days of daily fees exceeding customer returns, HashFlare terminated contracts and kept annual fees. This clause was in the user agreement that every customer signed when joining, along with other frightening and questionable clauses like:

  • Changing start date of contracts (by delaying them by weeks/months)
  • Change duration of mining contracts (such as from a 1 year contract down to a 6 month contract)
  • Alter daily fees at any time without prior notice
  • Maintain the ability to change available hashpower at any point in time

cloud mining

These type of terms are common across many cloud mining services, which begs the question of why users trust them.

Cloud Mining Logic – It’s a Business

Every cloud mining website is online to make money, users who forget this suffer. In short, imagine a cloud mining service as a sort of casino where the house always wins. On top of an annual fee there are typically daily fees as well, these correlate with the upkeep/electricity/etc needed to run the mining rigs. Once the company stops making money on customers (i.e. the daily cryptocurrency mined is less than fees) they cancel contracts, just as HashFlare did. Logically, why would these companies rent out equipment to a customer if they could make MORE money mining themselves?

Running the Numbers

At the time of writing this article, if you head over to Genesis Mining’s pricing page you can see that they offer 1 TH/s for an average of $280, depending on the plan you choose. This comes with maintenance costs of $0.14 per TH/s per day, and is guaranteed by a 5 year contract (which expires after 60 days of negative returns). According to CoinWarz.com, a mining calculator, average profits over 5 years (using 1 TH and today’s bitcoin prices) would be $103.25. That same profit could be achieved by spending the $280 directly on BTC (at ~$8300), and then selling when the price jumped to $11,800.

So an initial investment of $280 will earn you $103.25 in profits, or roughly an ROI of 36.88% – far better than any bank account, right? The problem with cloud mining, though, is that the difficulty of mining BTC (or any coin) increases with time, so that 1 TH you bought quickly becomes underpowered. Between July 2017 and July 2018, the mining difficulty increased roughly 592%. If this trend continues, even with a hyper conservative estimate of only a 50% increase over the next year, that $280 investment will cost you $115.75 – of course your contract would have long since been cancelled and you’d have forfeited your investment.

Just because traditional cloud mining may be a bad investment doesn’t necessarily make it a ponzi scheme or scam. Bitcointalk legendary forum member Puppet does a magnificent job breaking down various cloud mining operations, their motivations, and even rates them on a scale to determine credibility. Puppet goes on to say that “being legit does not equal being a good investment. By and large, cloud mining has not been profitable historically, and I don’t expect it will. I do not recommend you invest in (cloud) mining at all, but if you do, at least invest in a company that will actually contribute to securing the blockchain and is not extremely likely to just steal your money.”

Yet Cloud Mining Persists…

Even though customers can easily run the numbers to understand they are likely to lose their investment, traditional cloud mining has yet to perish. PhD Grad student Paul Ellenbogen writes an interesting paper investigating cloud mining, bringing up three key points concerning cloud mining services.

  • “Hired guns” – Ellenbogen proposes that many people hiring cloud mining services could possibly be doing so to perform 51% attacks on blockchains (like what has happened to Verge three times). However, he points out that many of the online services “do not have any sort of scriptable direct interface to the mining hardware. At the moment, cloud miners are probably not supporting themselves by executing attacks for others.”
  • “Regulatory loophole” – For individuals who wish to purchase bitcoin but don’t want their identity tracked (through the KYC protocols that most exchanges utilize), they could cloud mine coins to spend elsewhere. “Cloud mining operators and unscrupulous customers may try to skirt these regulations by claiming cloud mining operations are not exchanges or banks, rather they merely rent computer hardware like any cloud computing provider, meaning they do not need to comply with banking regulation. It is unlikely this would be viable long term…”
  • “Financial instrument” – Given that bitcoin miners play two roles, both managing their mining hardware as well as financial risk of mining, by switching to cloud mining they can focus primarily on managing the equipment. “Cloud mining is a means of hedging risk. If cloud miners can enter contracts to provide a certain hash rate to a customer for a length of time, the cloud miner does not need to concern themselves with the exchange rate nor hash rate once the contract begins. It then becomes the job of the customer contracting the cloud miner to manage the risk presented by volatility in the exchange rate.”

Mining Must Exist to Maintain the Blockchain

Blockchains are based on nodes, as we know, and those are typically maintained by miners (for now). Mining equipment is expensive for the average user to purchase and maintain, which is why cloud mining began in the first place. Even though single user mining isn’t viable anymore for bitcoin, cloud mining is still failing to successfully fill the void. There are alternatives, however, that aren’t being aggressively explored since cloud mining still holds the general communities interest. Many people in the cryptocurrency community are starting to see through the glitz and glamour of cloud mining. Gavin Andresen, former lead developer for bitcoin, said on reddit during a discussion about cloud mining contracts that he thinks “they make no sense. I suspect many of them will turn out to be Ponzi schemes.”

We’ve created an infographic to better explain this idea to you:

cloud mining

One viable alternative to traditional cloud mining (which focus on selling hashrates for fiat currencies), would be a token driven economy that rewards users for being part of, and supporting, said community.

Token Driven Mining Services

Allowing customers to ‘lease’ hashrates for an annual fee leads to far too many questions that companies don’t want to answer: what blocks are being mined, can you prove my hashrates, am I being given all the money I am earning, etc? If we take away the individualistic mindset of mining and instead apply a community mindset we can eliminate a lot of the common problems. Securix, a BTC/BCH mining operation, is a company that offers an alternative and even more to cloud mining.

Where traditional cloud mining forces customers to stay current by continually reinvesting to keep their hashrates competitive, Securix is instead based around a token system that rewards token holders monthly with payments. This type of token based economy helps alleviate a lot of the common cloud mining problems:

  • Users won’t forfeit their investment if the market dips and mining isn’t profitable. Instead, Securix will set a portion of their company profits aside as a reserve to keep the lights on while they wait for the market to recover. In addition, tokens will be secured using smart contracts so they can’t be cancelled or altered until they run their course.
  • Price volatility – If you invest in a cloud mining website and the price of BTC drops heavily, your potential earnings drop heavily with it. With a token based situation, however, your total mining power isn’t based on individual hashrates. Because of this, market fluctuation is far less impactful, and according to Securix’ whitepaper, users can expect an ROI in most cases: Bitcoin price moves up, you earn more; it moves down, you earn less.
  • It can be more tempting to hold BTC and wait for the price to increase, but holding Securix instead will still earn a profit even if BTC drops – you’ll just earn less. If BTC jumps “to the moon” the token revenue will go with it since gross revenues are shared between all holders. The important thing is that token holders continually earn unless BTC completely bottoms out, then the entire market will have a problem.
  • Operating a concrete (literally) facility with a reputable team who has proven business experience. Many cloud mining operations exist solely as websites, forcing users to trust that the mining equipment they are supposedly ‘leasing’ actually exists. Securix already has a facility in the Netherlands (coupled with EAN-2-EAN decentralized energy through EXE Energy) and plans to purchase mining rigs using 85% of the funds raised during their ICO ($0.85 from the every earned dollar).

Securix predicts that it will be mining about 24.5 BTC per day, and at current market prices (~$7,500 BTC) this is about $5,500,000 per month. Once they launch their mining operations, they’re planning to distribute 45% of total gross revenue from mining between all user held tokens equally. They are entirely transparent about the money being earned through mining and where it is all going. The rest of the money earned from selling BTC will be used to pay for electricity/overhead costs (37%), maintain/upgrade the property and equipment and buyback tokens (10%), and other similar tasks.

Because Securix token holders will earn money based on their tokens through gross revenue, they don’t have to worry about keeping up with hashrates, paying daily fees, or having their contracts cancelled (looking at you, HashFlare). Holding a Securix token has no hidden costs and allows for a high payout per token as we’ve mentioned above. No company is guaranteed to succeed, of course, but given that Securix has its token backed by their physical assets (the mining hardware), an established team, and an extensive white paper that analyzes their potential market, it could be far from a ponzi scheme.

The Future of Crypto Mining

There are a lot of theories on what will happen when all 21 million BTCs are mined, but experts speculate that it won’t happen until 2140, and until then we have to find safe and reliable ways to continue the mining process.

From global energy usage to untrustworthy cloud mining operations like HashFlare, the crypto mining environment is rife with problems. Token based mining operations that use renewable energy and don’t rely on user ignorance, like Securix, aren’t a fix all – but they are certainly a step in the right direction.

All materials on this site are for informational purposes only. None of the material should be interpreted as investment advice.

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