The concept is very much real but the mining is not happening in real in most of them. They use the new users money to pay the old users and it runs like a ponzi in most cases. The only exception is when you personally, physically know the mining operation and you invest your money in them or buy their shares if they are a publicly traded company or you cut a deal with the owner to own some of the company's share.
Rest of the stuff we find on the internet, never spend money on them.
What you wrote sounds more like MLM, as this is how chain marketing works. Until they stop getting new bakra they keep on the money rotation and when new users do not come in they start winding up their business. In this scenario, the user has to onboard other users to make money but with cloud mining, it is not an option. Like any other business, a cloud mining company needs to invest funds in marketing and a lot of money is spent to get new users. These users will be asked to buy hash rate as I have explained earlier.
The price of the hash rate would cover marketing expenses and if a scammer is running it then nothing would be paid but if a genuine mining company is running it they would pay a small amount to the user and keep a large amount with themselves. In most scenarios, they would wind up the business citing that it is no longer profitable to mine the particular cryptocurrency. I agree it is not recommended to invest in cloud mining but what you have explained is not how it is done.
