▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁

[Zeta0S]

We got this from Zeushash today.

Due to the surging of Litecoin minining difficulty, the daily payout of MHS
fails to cover the maintenance fee today. According to the term of MHS
contract, "the payout allocation will be terminated in case the daily mining
return is lower than the maintenance fee for 10 days in a row".

We are sorry to inform you when this continues for 10 consecutive days, we'll
have to terminate your MHS contracts. We are now on day four..
We didn't expect this happening so soon but we have no other choice.

I am happy i only have referrals there 

[Puppet]

One thing I missed in criteria in the OP (it might have been said already, didn't have the time yet to read the rest) is plausiblity check on the promised (and delivered) returns.

Ive deliberately ignored profitability for a few reasons already explained, but also because it doesnt really tell you much about if a service is a scam or not. A ponzi can arbitrarily set perceived profitability. Setting it for low profitability will make for a slow, longer lasting ponzi, setting it high will make it collapse faster, but its not even obvious to me which will earn the scammer most. So I dont want high prices to become a false indicator of legitimacy, nor penalize a legitimate service for having highly competitive price, nor give ammo to those that accuse legitimate mining services of being scams just because the contracts are no longer able to pay dividends.

That said, nice job on the website. I generally ignore all cloudmining "review" sites because they are simply a vehicle to push referrals. Its nice to see one that actually tries to tell the truth.

[Puppet]

We got this from Zeushash today.

Due to the surging of Litecoin minining difficulty, the daily payout of MHS
fails to cover the maintenance fee today. According to the term of MHS
contract, "the payout allocation will be terminated in case the daily mining
return is lower than the maintenance fee for 10 days in a row".

We are sorry to inform you when this continues for 10 consecutive days, we'll
have to terminate your MHS contracts. We are now on day four..
We didn't expect this happening so soon but we have no other choice.

A quick look at their fees and litecoin difficulty suggests what they say is entirely plausible.
Or I should say, was, because difficulty seems to been dropping again, so there might be some more weeks of payouts to come.

This however, is in no way evidence of a scam, but it does serve as an illustration of why mining in general is usually a bad idea: any apparent or excess profitability will quickly be gobbled up by extra deployments, causing difficulty to rise to the point where revenue and costs are in balance and cloud mining contracts become worthless. Unless you have a significant competitive edge (low costs), mining can appear to be profitable, but it will almost never end up being profitable. Its been like that since the very first asic, but people still get fooled by the short term %'s.

[Digiconomist]

One thing I missed in criteria in the OP (it might have been said already, didn't have the time yet to read the rest) is plausiblity check on the promised (and delivered) returns.

Ive deliberately ignored profitability for a few reasons already explained, but also because it doesnt really tell you much about if a service is a scam or not. A ponzi can arbitrarily set perceived profitability. Setting it for low profitability will make for a slow, longer lasting ponzi, setting it high will make it collapse faster, but its not even obvious to me which will earn the scammer most. So I dont want high prices to become a false indicator of legitimacy, nor penalize a legitimate service for having highly competitive price, nor give ammo to those that accuse legitimate mining services of being scams just because the contracts are no longer able to pay dividends.

That said, nice job on the website. I generally ignore all cloudmining "review" sites because they are simply a vehicle to push referrals. Its nice to see one that actually tries to tell the truth.

Well, it is one the main characteristics of Ponzi to offer high returns with little to no risk. The SEC lists the following items with regard to returns:

• High investment returns with little or no risk. Every investment carries some degree of risk, and investments yielding higher returns typically involve more risk. Be highly suspicious of any "guaranteed" investment opportunity.
• Overly consistent returns. Investment values tend to go up and down over time, especially those offering potentially high returns. Be suspect of an investment that continues to generate regular, positive returns regardless of overall market conditions.

And if you think about a Cloud Mining contract, then your only real risk is credit risk. Hence getting over 100%+ per annum makes zero sense. That´s because it is similar to a swap contract, which has zero NPV at inception, but with the credit risk being off balance due to the upfront payments. In other words, your primary source of income depends on the likeliness of default of the company involved.

But most genuine cloud mining companies cannot offer the required discount. That´s because they have the operational costs which are not relevant to the fair value of the contract. If you do include that, then the customer always has a superior investment strategy buying directly from an exchange and would never buy the contract. In other words, they would really need to stress their own position to offer any discount at all. Thus if it is genuine then you´ll typically pay too much.

From what I´ve seen so far, there is nothing in between a poor product and an unrealistic (Ponzi) product. I suppose that because most companies do not know how to accurately value their own product in the first place. I've contacted several of them, but not a single one includes expectations in the pricing of the product. You can fix the price, but not the hashrate, so how can you properly value your swap-like product if you do not have an opinion on expected future cash flows?? Fortunately for them, their customers cannot do this assessment either. But this is also what causes the huge gaps between a "normal" and a "ponzi" product. A genuine business intuitively sets the discount too low, while a ponzi schemer does not care and offers an arbitrarily large one.

Nevertheless, it is still only an indicator as scammers might choose to simply offer a competitive rate (meaning: still a rather poor product) in a market that is not properly understood. So overall, I can agree to leaving it out to a certain extend, although I do think that it is a pretty strong indicator in the current environment (perhaps just more difficult to understand).

Having written all this, I would like to end with a compliment for how this assessment has been set up. In the end, it's not like the final verdict for the concerned cloud mining companies is miles apart. So at the very least, the criteria already used seem quite good.

[Puppet]

And if you think about a Cloud Mining contract, then your only real risk is credit risk.

Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)

Hence getting over 100%+ per annum makes zero sense.

But you cant know what future profits will be like. You make assumptions on exchange rate and future difficulty and those assumptions tend to be overly optimistic. If they predict a significant profit, that very same prediction will lead to increased deployment of hashrate which will invalidate your prediction. In a sense, its a self defeating prophecy. To some extend the opposite is also true, if even the most efficient mining operation can no longer break even on its running costs, then difficulty will adjust until it does, because less efficient miners will unplug.

In short: long term profitability of mining is just marginally above zero for those with the most efficient hardware and the lowest operating costs. No need for math or estimates, its just how this market works. Its a zero sum game after all.

[Digiconomist]

Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)

What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity). That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).

Only cloud mining contracts demand upfront payments (that shifts the credit risk to the customer), so that justifies a discount (ROI greater than zero at inception). This is why cloud mining is a shady business in general, because a discount means that the company is getting a bad deal. So even legit cloud mining companies are either exploiting their customers, or running a very poor business..

[Digiconomist]

Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)

What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity). That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).

Only cloud mining contracts demand upfront payments (that shifts the credit risk to the customer), so that justifies a discount (ROI greater than zero at inception). This is why cloud mining is a shady business in general, because a discount means that the company is getting a bad deal. So even legit cloud mining companies are either exploiting their customers, or running a very poor business..

It's a very interesting comment but cloudmining companies get money upfront, they can use this money to buy new hardware. If they were not open to customers and were just mining for themselves they would not be able to grow as much.

Cloudmining companies can take a fee to conduct the business which means they have a very low risk and can earn a lot without cheating.

From a customer perspective any additional return beyond the credit risk compensation is risk free. That's where you head towards what the SEC advices to watch out for: High investment returns with little or no risk. If it's legit, credit risk would actually be expected to be negligible (they're just building their farm right, it's not risky business by nature) and it makes a high ROI (at inception) even more unlikely; it shouldn't last (it leaves an arbitrage opportunity).

Of course, I'm being very theoretical. I do not believe in market efficiency at that level (even more because the companies set the prices and not the market). Just trying to point out why at least 100%+ ROI p.a. at inception is a strong sign of trouble (and it's often not limited to that), while in theory it should be closer to zero than anything else. Important: this does not rule out a return over the lifetime of the contract; that can still be the case if prices go up and/or difficulty develops slower than anticipated (emphasis on the latter otherwise you are better off buying the currency), the main question is: are you paying a realistic price for a contract that allows you to speculate on that

[ShadeysLadyDrea]

Application of these criteria to some cloudmining companies

Feel free to post corrections or additions.

I was just noticing ZoomHash is not yet on this list. Haven't checked it out yet, so not sure if its legit or not....

[Puppet]

I was just noticing ZoomHash is not yet on this list. Haven't checked it out yet, so not sure if its legit or not....

AFAICT, they are no longer selling cloudmining.

[Puppet]

What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity).

Thats incorrect. You're ignoring maintenance fees which are function of exchange rate since electricity, hosting and usually hardware is still priced in fiat. Maintenance fees currently take up 50-90+% of the payouts on most legitimate contracts, so this is pretty darn crucial. If BTC falls below $200, all these contracts become worthless. If BTC goes ballistic, even cex.io contracts might make you a nice profit. AT least until difficulty catches up.

That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).

Again, you're assuming to know how much a contract will pay out. If you do not know what difficulty will be like 6 months from now and what the exchange rate will be, how do you know what the expected payout will be ?

You see cloudmining as a loan from the investor to the miner, I see it as the miner selling off a huge risk to the highest bidder.

[Digiconomist]

What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity).

Thats incorrect. You're ignoring maintenance fees which are function of exchange rate since electricity, hosting and usually hardware is still priced in fiat. Maintenance fees currently take up 50-90+% of the payouts on most legitimate contracts, so this is pretty darn crucial. If BTC falls below $200, all these contracts become worthless. If BTC goes ballistic, even cex.io contracts might make you a nice profit. AT least until difficulty catches up.

That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).

Again, you're assuming to know how much a contract will pay out. If you do not know what difficulty will be like 6 months from now and what the exchange rate will be, how do you know what the expected payout will be ?

You see cloudmining as a loan from the investor to the miner, I see it as the miner selling off a huge risk to the highest bidder.

I see a cloudmining contract as a financial swap contract, although with a small twist due to the mismatch in cash flows. If you're swapping flows then you're also swapping risks, so I don't think we see it very differently?

I do not intend to pretend that I can perfectly value these contracts. In my methodology I take a very pessimistic scenario so that I'm sure that my expection would be below the mean expectation if there was a free market. If I'm still left with a huge ROI at inception after that then I know something is wrong, because a swap traded at the mean expectation has zero NPV. In all other cases, I just want to inform people of the possible scenarios of the product they are buying, because cloud mining companies sadly do not provide this level of transparency.

[dicefun]

just want to subscribe to this topic
it seems very useful

[DiCE1904]

just want to subscribe to this topic
it seems very useful

Same. Thanks for this thread Puppet

[raskul]

found another one

https://www.bitcoinmaker.ch/

advertising on google, so you can bet your bottom dollar they already have victims.

but it's OK.. they have pix of their mining farm...



 

[Puppet]

found another one

They are hardly even pretending to do any mining, just using it as a  convenient excuse for a very transparent ponzi. I mean, guaranteed profit? Riiight. Interestingly, the company address and domain name registration at first glance appear plausible. No idea how easy or hard it is to set up a fake swiss company, but might be worth shooting an email to swiss authorities.

[chatoshi]

He is fully registered in the commercial register of canton Ticino, Switzerland.
Sole proprietorship Identification number CHE-282.741.339

www.zefix.ch

It's easy to be registered in Switzerland but very risky to startup this kind of business without limited liabilities. In the the other hand it would be a great advantage for potential creditors in case of bankruptcy.

[raskul]

He is fully registered in the commercial register of canton Ticino, Switzerland.
Sole proprietorship Identification number CHE-282.741.339

www.zefix.ch

and never seen on bitcointalk.

i wonder what he's afraid of 

[chatoshi]

He is fully registered in the commercial register of canton Ticino, Switzerland.
Sole proprietorship Identification number CHE-282.741.339

www.zefix.ch

and never seen on bitcointalk.

i wonder what he's afraid of  

of course it could be a scam, but in this case it will be harder for him to flee his commitments. It's the only thing I want to say.

Don't be paranoid please !  

[Pug]

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[Puppet]

Added bitcoinmaker.ch  and introduced  "guaranteed profit" bonus point that automatically leads to a ponzi classification.