Cloud Mining is Not Profitable

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.

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