The cloud mining platform has discovered a market with a simple user experience and which retail investors like to participate in. However, the target customers of cloud mining are not retail customers, and a model with market pricing capabilities is more suitable for this ecosystem.
Original title: “Opinions | Is Cloud Mining Compliance or a Scam?” “
Author: Luxor Tech
compiler: Liam
Cloud mining is often described as a scam by insiders, while outsiders describe it as a way to get rich quickly. Despite countless unethical or illegal participants, the field of cloud mining is still booming. Today, there are several platforms that play an important role in the ecosystem, so we think it’s time to take a closer look.
The history of cloud mining
Cloud mining platforms are almost as old as mining pools. It was first launched by the CEX.IO exchange in 2013. Since then, the development of cloud mining has been accompanied by a large number of scams, but has also produced some giants in the mining field. Cloud mining is a term used to describe companies that provide computing power through contracts to mine Bitcoin and other proof-of-work (PoW) tokens. Buyers can directly sign cloud mining contracts to rent the computing power provided from the company’s machines without having to directly invest in the hardware used for mining. The buyer pays for some form of currency (usually bitcoin) to obtain a certain amount of computing power (such as 20 TH/s) within a set period of time (such as 30 months). Buyers will initially pay a fixed fee, expecting that their contract will bring higher returns than their initial investment (IRR). For example, here are three contracts offered by Genesis Mining. In the platinum contract, users will spend $999/day and pay a maintenance fee of $0.03 per TH/s in exchange for 20 TH/s of computing power in 30 months.
Genesis Mining Hashrate Contracts (June-2020)
The big difference between cloud mining and regular mining is who owns the hardware. In cloud mining, the company that provides the contract owns the actual hardware, while the buyer only has the computing power it provides for a period of time. Cloud mining is very attractive to people who do not have the technical or economic ability to purchase their own equipment, and then send it to a server or host it in their own home. The real reason for cloud mining to be so successful is the simple user operation experience, without the cumbersome operations and capital investment required by traditional mining. According to TokenInsight, most buyers of cloud mining volume come from Russia, China and Ukraine.
Annual Mining Research Report (TokenInsight 2019)
Concerns about cloud mining
There are some major problems with cloud mining: (1) Such platforms may be scams or Ponzi schemes (2) The platform may target retail investors who are uneducated and do not understand the relevant risks (3) There is no market-based Pricing.
Fraud platform
In the past 7 years, dozens of “cloud mining” platforms have proved to be scams. In most cases, these platforms do not actually deliver the promised computing power to buyers. As a result, the buyer invested money and found nothing.
Such relatively open companies include: HashOcean, Bitcoin Cloud Services, GAW, BitClub, etc.
Therefore, it is very important for the buyer to conduct a detailed investigation before putting the money in the cloud mining contract, and only invest the amount that they can afford to lose.
Deceptive marketing
Part of the reason cloud mining is so successful is because of the marketing strategy they use. It is common (even legal) that cloud mining platforms promise large percentages of high ROI. They usually say that their contract will bring more than 50% return.
The following is an unsolicited email I received from Hotbit a few months ago. In the email, it mentions 100% of theoretical gains.
Hotbit: Cloud Mining Deceptive Advertisement
This is a dangerous warning for any investment. No one can predict the future (especially a cloud mining company), so it is unethical to publish such a radical high return report. This is just like the CEO should not raise stock price targets, nor should cloud mining companies raise the expected internal rate of return.
Mining is a huge investment, but it is also difficult to carry out correctly. Those insiders who understand the market dynamics are the ones who can get huge returns in the mining field. And retail investors who are just beginning to learn about mining cannot make any good investment decisions. But these retail investors are the clear target market for most cloud mining platforms, so it is very unethical to focus marketing on retail customers.
Annual Mining Research Report (TokenInsight 2019)
Opaque pricing
Cloud mining platforms set prices for their own contracts rather than open markets. This usually results in the buyer at a disadvantage. It’s a bit like playing card games in a casino. Although casinos also offer odds, you usually don’t have any advantage.
HoneyLemon is a very interesting project, it aggregates various types of mining contracts, so people can carefully compare the contract details. It is hoped that this platform will bring more competition and transparency to the pricing of cloud mining contracts.
Famous cloud mining platform
Although people have different opinions about the popular cloud mining companies, there is no doubt that these companies play an important role in the mining ecosystem.
Genesis Mining is one of the earliest and largest cloud mining companies. They provide contracts for SHA-256 (Bitcoin) and some other algorithms. The company’s base is in Europe and has all of its own mining equipment. This company is a good example of a traditional legal cloud mining company.
Bitdeer is one of the most interesting companies in the mining field. As a subsidiary of Bitmain, it is at the core of many mining products, including Bitmain (manufacturers and mines), Antpool, BTC.com, Via.BTC, Matrixport, etc. It is also interesting that it allows us to reimagine the way in which computing power is traded between mines, mining pools, cloud mining platforms, and buyers. In theory, computing power can go through many changes before actually being used on the Internet. The following is a potential ecosystem that may exist today.
Potential Bitmain Mining Ecosystem
I hope these platforms, especially Bitdeer, can continue to move forward.
How to estimate the internal rate of return (IRR) of cloud mining
You can use any calculator like MinerStat or Whattomine to calculate the current mining profitability.
A key point is to ensure that you take into account the network difficulty factor during the contract. Historically, increasing the difficulty of the network will result in a decrease in revenue.
Another aspect that I will talk about often is to be able to clarify your personal opportunity cost (or capital cost). Mining is risky and the returns can be very unstable. Therefore, in view of the risk situation and other investment opportunities, it is necessary to ensure that their expected returns are reasonable.
It is also recommended that when making investment decisions, you should consider the use of internal rate of return (IRR) rather than return on investment (ROI) .
Differences from Hashrate Marketplaces
The hashing market Nicehash is usually classified as a cloud mining company. But there are some very obvious differences between cloud mining and the computing power market.
Hardware Equipment Owner-Cloud mining company owns the hardware used to generate the computing power sold on the platform. This is different from the computing power market where independent miners can connect their hardware to the market.
Market pricing-In cloud mining, the platform determines the price, and buyers can only choose to accept or reject. But in the computing power market, the price is determined by the supply and demand of computing power.
Buyer Freedom-On cloud mining platforms, buyers usually do not have the ability or restrictions to choose the currency they want to mine, or which mining pool to use. On the contrary, the computing power market has complete flexibility, and buyers can freely use the computing power they obtain.
The difference from Hashrate Futures & Forwards
In April 2020, Greenidge sold 30% of its computing power to buyers, which was a contract for physical delivery. On the surface, this looks like a cloud mining contract. However, there are some obvious differences here.
Types of buyers-Most buyers on cloud mining platforms are retail customers. This is different from the forward contracts of computing power for institutional investors such as hedge funds or family businesses. Such investors can usually invest more resources in making investment decisions.
Over-the-counter pricing -Even if the contract is an over-the-counter transaction, there is still a better pricing mechanism than the hash power seller sets the price, as it exists in cloud mining. There is a middleman (BitOoda) between the two parties.
The legality of cloud mining
In the United States, the test used to determine whether the transaction between the platform and the user complies with the investment contract (“securities”) is the Howey test.
In the Howey test, a transaction can be considered a security if it satisfies:
- Have funds invested
- Funds are invested in a common enterprise
- The reasonable expectation of profit comes from the efforts of others
The future of cloud mining
I personally think that cloud mining target customers are not retail customers, and models with market pricing capabilities are more suitable for this ecosystem. But it is clear that cloud mining platforms have discovered a market with a simple user experience and which retail investors like (at the beginning?) to participate.
We can expect these platforms to continue to develop in China, Russia and Ukraine. I also hope that other platforms (such as the computing power market) can grow in North America.