Why cloud mining is a zero sum game

[mojosavage]

I see many loan requests on the various P2P lending sites for upgrades to cloud mining contracts.  Some of them quite large and many of them getting funded.  In the short term these look like good opportunities for both parties but a look at the fundamentals of this strategy show how it falls apart relatively quickly.

1. It costs about 3 times as much per GH/s for sha 256 or MH/s for scrypt  as it does to buy a physical machine to do the work.  This effectively puts your break even (NOT RETURN ON INVESTMENT!) around 200 days or more for these cloud contracts.

2. Your breakeven point is around 200 days and not return on investment because you do not have any underlying value with the contract (unless it is a gawmining hashlet that you can resell).  With a machine your return on investment is helped somewhat by owning the machine at the end of the mining period.

3.  With every increase in difficulty your investment pays less and less.  Sometimes as much as 20% less as is the case with bitcoin.  This difficulty is reset often and at the present time only goes up.  Altcoin is a little better with the difficulty moving sideways for awhile until the next wave of machines hits the market.

4. Price volatility also diminishes the value of what you are mining.  Especially with the recent fall of bitcoin.

5. At first the cloud contracts pay enough to enable you to keep up with your loans and make you think you are doing well but inevitably as the days wear on your return will be less and

less, eventually going to near 0.  Those new lifetime hashlets will not produce anything within a year and their value will be 0 as the hashrate they represent becomes more and more obsolete.

6. This scenario leads a borrower to always posting new loan requests and upgrading their cloud capacity to try to keep up with the diminishing returns but they will really never make any money.  Only the cloud companies will.

7. Once they get to the point of not being able to get enough loans or provide their own capital, the whole house of cards will crumble. 

8. This is why it is very important to lenders and borrowers to be sure of their strategy and hopefully move more to having physical miners that can pay for themselves before they are totally obsolete.

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[Snorek]

Starflyer, where did you buy your cloud mining contract? It is very important to use only good and reputable cloud mining providers. With some random and unknown company you can be in wrong hands. Not to mention they can scam you.

[puwaha]

3.  With every increase in difficulty your investment pays less and less.  Sometimes as much as 20% less as is the case with bitcoin.  This difficulty is reset often and at the present time only goes up.  Altcoin is a little better with the difficulty moving sideways for awhile until the next wave of machines hits the market.

This is probably the biggest concern, but most cloud mining companies have plans to combat this in various ways.  LTCGear will "multiply" your shares to combat difficulty.  GAW/Zen has just recently increased their SHA-256 hashlets output by 50% (10GH/s to 15GH/s).  So the threat of difficulty eating into ROI is there, but some of the cloud mining companies are doing right by their customers.  Lots of cloud hashers reinvest to increase their position and to offset perceived difficulty changes.

There are strategies to combat difficulty, but no one really knows if they will pan out.  There are plenty of stories on both sides of the clould mining game, and I don't think we've had enough time to say for certain whether it's good or bad overall.

[mojosavage]

Point taken.  I guess I just wanted to point out some underlying mechanics of cloud mining to give food for thought.  In the long run I guess we will see how it all shakes out.  It just perturbs me when one particular company states that their miners "never become obsolete" or "always are up to date" when the only thing that really matters is hash rate.

[puwaha]

Point taken.  I guess I just wanted to point out some underlying mechanics of cloud mining to give food for thought.  In the long run I guess we will see how it all shakes out.  It just perturbs me when one particular company states that their miners "never become obsolete" or "always are up to date" when the only thing that really matters is hash rate.

If this is in reference to GAW/ZenCloud Hashlets, those phrases only really apply to one type... the Prime.  The claim that it "never becomes obsolete", or is "always up to date" refers to several aspects.  The Prime can switch between SHA-256 or Scrypt mining.  You can choose your pool from the small selection.  And they have all these weird add-ons like "double dipping" or "rocket boost", which allow you to mine two pools at once or increase hash rate temporarily, respectively.  I personally don't think the price of the Prime (currently at around $50) is worth those add-ons... but at least GAW/Zen are helping the Prime owners recoup some of their investment.

Those folks who got in early with ZenCloud when the Primes were around $16 are really making their ROI pretty soon with all the add-ons.  Plus, as you acknowledged, they get to sell them back for 80% of their current value... so they've already made their ROI if they want to cash out.

I've got a few MH/s scrypt mining hashlets on GAW/ZenCloud for full disclosure.  I like the service, and I'm keeping a close eye on everything.  I had to underclock the Antminer S1 I have at home this week because it was no longer paying for the electricity it was consuming.  I never made enough with the S1 to trade up to something better for the house.

[kuusj98]

But services like LTCGear bring you ROI in under 40 day's if you invest wisely and you can sell the shares whenever you want effectivly giving you ROI after like 2 or 3 weeks.
Insane..

[ErikvanBreen]

But services like LTCGear bring you ROI in under 40 day's if you invest wisely and you can sell the shares whenever you want effectivly giving you ROI after like 2 or 3 weeks.
Insane..

And they have shares multplication to give you extra shares based on the difficulty increase every 45 days 

[kuusj98]

But services like LTCGear bring you ROI in under 40 day's if you invest wisely and you can sell the shares whenever you want effectivly giving you ROI after like 2 or 3 weeks.
Insane..

And they have shares multplication to give you extra shares based on the difficulty increase every 45 days 

Very true, sir. I currently have around 14Mh/s on there, and it fetches a cool 2.85LTC a week, not bad considering I payed 0.16 BTC for them and have ROI at the end of this week.

I can't even beleve it, and what makes it even better, is that the LTC/BTC ratio is something like 0.012 BTC/LTC and normally is around 0.022 so almost doubling the BTC also
Dark time's are over, this is a true goldmine and I am wondering how this guy makes money of it.

[starflyer]

Starflyer, where did you buy your cloud mining contract? It is very important to use only good and reputable cloud mining providers. With some random and unknown company you can be in wrong hands. Not to mention they can scam you.

I got the vouchers off ebay for CEX.IO -- I know maybe it was a silly thing to do.  The way I learn is I jump right into things. But I only invested $10 so there's no big loss if it doesn't work out. I figured I might as well just keep them in there and let it do it's thing for awhile.

[TheGull]

2. Your breakeven point is around 200 days and not return on investment because you do not have any underlying value with the contract (unless it is a gawmining hashlet that you can resell).  With a machine your return on investment is helped somewhat by owning the machine at the end of the mining period.

8. This is why it is very important to lenders and borrowers to be sure of their strategy and hopefully move more to having physical miners that can pay for themselves before they are totally obsolete.

I agree with some of your points, but I think others are less valid. In particular 2 - owning the machine is of virtually zero benefit in my view. The rate of improvement in technology means that your machine is so quickly redundant that it has no salvage value by the time you have been using it for a short period. This is supported by your point 3 too.

Also, this is definitely not a zero sum game. Cloud mining service providers AND investors can win if the bitcoin price is high enough relative to input costs. A zero sum game is one where the net effect is that no none wins, certainty not true here.

The truth with mining at current prices and with the massive investment from so many is that the little guy will struggle from here. You need massive scale to make this work so that your costs relative to mining power are as small as humanly possible. The investors who put $20m into BitFury know this.

[elgimpo]

My 4 week ROI disagrees

[l3sny]

buying contracts that you cannot sell is the worst choice in my opinion.

If you look at CEX you will se however that the market price of the shares is way aboven ROI. There are a few reasons for it. One is the hope for BTC price movements making minig more profitable. Another one is the price fluctuation (read speculation). You can buy shares and re-sell them with profit and keep the mined coins.

[smolen]

If you look at CEX you will se however that the market price of the shares is way aboven ROI. There are a few reasons for it. One is the hope for BTC price movements making minig more profitable. Another one is the price fluctuation (read speculation). You can buy shares and re-sell them with profit and keep the mined coins.

Pfft! Their customers just want to re-mint old dirty bitcoin scrap into shiny new blocks without any history!

[Morguk]

I'm rapidly heading towards ROI so I have to disagree.

I've also mined at home and I don't miss the heat, noise, random issues and the high electricity bill.

[wunkbone]

My 4 week ROI disagrees

Really? which cloud mining did you purchase?

[Collider]

The future of mining lies much more in the "cloud" than in home mining.

In theory, a well designed cloud mining system can provide both hardware and power at lower than residential rates.

This pooling of buy power should be enought to give both you and the managing company a profit from mining - if anyone makes profit from mining that is -


The current state of affairs seems to suggest that cloud mining is more expensive than home mining, as some people are willing to pay a premium for the conveniance of the service.
Many cloudmining providers take advantage of this and turn around HUGE profits.

[transient858]

My 4 week ROI disagrees

Really? which cloud mining did you purchase?

Like to know also.

[cryptomad]

Thanks.

[MelodyRowell]

I'm rapidly heading towards ROI so I have to disagree.

I've also mined at home and I don't miss the heat, noise, random issues and the high electricity bill.

Which cloud mining did you bought that is heading towards ROI?

[thirdprize]

I'm with PBMining and several months ago when i signed up it looked like i would ROI in two months.  Payments have taken a dive and get smaller each week.  I mentioned this on their thread and people said you just had to buy more Hashes to make up for the increase in difficulty!!!!

Since when has increasing your investment while returns get smaller been a good idea?