Mining Bitcoin and other cryptocurrencies has a fairly high entry threshold, that is, it requires significant investments that will not pay off quickly. Nevertheless, many still believe that mining is easy, fast, and happens by itself with a constant success rate. The same picture is usually drawn by services that attract funds to Forex (palm trees, a lounge chair, a cigar between your teeth, and a laptop).
Today, the mining market gives a “new hope” to many of those who could not realize their Forex dreams. That’s why the huge number of services that actively exploit the idea of even easier money under the guise of mining or so-called cloud mining comes as no surprise.
It is not always possible to reliably determine which service is really engaged in mining, but you can always see the signs that the risks of some projects significantly exceed all reasonable limits.
Let's take a closer look at what cloud mining is, what pitfalls it has, and how to recognize a fake.
What is cloud mining?
Cloud mining is a financial service that allows you to earn money by investing in mining indirectly through a service that owns mining facilities or rents them.
Ideally, a company providing cloud mining services should really engage in mining in volumes that allow it to reduce costs to attain the delta required for a profitable retail offer. In reality, only large enough players with the appropriate infrastructure can afford such an approach.
In practice, anything can be hiding under the guise of cloud mining, starting with straightforward financial pyramids, with nothing behind the business itself, and the money of new depositors being used to pay the preceding ones, and ending with schemes of disorderly rental of mining facilities with variously successful attempts to create something of their own with tailoring “mining rewards” to current successes or failures.
Criteria for honest cloud mining
- A line of cloud mining contracts
The first thing you should pay attention to is the line of contracts. Cloud mining is almost always a contract that needs to be bought. The contract has a clear deadline - it can be a day, a week, a month, a year, etc. The longer the contract, the more expensive it is. The higher the expected yield, the higher the risk of such a contract.
In general, everything is like in an ordinary bank - you make a deposit for a certain period at the promised interest rate. However, while a bank deposit can usually be closed before its term expires, allowing you to withdraw money without profit, in cloud mining it’s most often impossible.
For instance, when buying a 1-year contract worth $1,000, you can reasonably expect that mining will bring this amount up to $1,200 or more. When it turns out that for various market (or non-market) reasons you have $500 or even less in your wallet mid-year, it is unpleasant to realize that you have to wait another six months just to break even or worse. This is a kind of cloud mining “roulette” you are forced to play even when you realize that there is no prize.
A high-quality financial service (e.g., a bank) may not engage in any real activity at all, except financial management, earning on the difference in interest rates between more and less risky assets, in which case the guise does not matter at all.
We can use the contract line of one of the popular cloud mining services as an example, where, in addition to BTC and ETH contracts , comparative “exotics” such as DOGE, DASH and even FILE have recently been offered. The rates on these contracts exceed 2% per day! The entry threshold is quite high ($3,000 for DOGE, $6,400 for DASH, $9,600 for FILE for 30, 60 and 90 days, respectively).
By specifying the SHA-256 Bitcoin mining algorithm in the search bar, we will get a sample of mining hardware indicating how much profit each ASIC can bring in per day in ideal conditions right now. As of May 26, 2023, even the “coolest device” gives $19.76 of revenue with $15.28 of electricity costs ($4.48 net per day), i.e., provides a yield of no more than 30%.
To evaluate the yield of Dogecoin and Litecoin mining, enter the Scrypt algorithm in the search bar. Or don’t specify the mining algorithm, and then you will see the situation as a whole. In any case, there is no place for any 700%.
It is curious that the emergence of these contracts is accompanied by a subsequent increase in pressure on the quotes of the respective assets. For instance, on May 24, 2023, Elon Musk said in an interview with the WSJ: “I’m not advising anyone to buy crypto or bet the farm on dogecoin”, and on May 16 , 2023 Grayscale received a comment letter from the SEC staff stating its view that Trust’s underlying asset, FIL, meets the definition of a security under the federal securities laws.
Anyway, such contracts are more like a casino bet, where the external attractiveness of the offer conceals the careful work of a team of analysts using the full power of probabilistic models, game theory, insider opportunities, marketing, etc.
In addition, the mining of any cryptocurrency requires a separate, very expensive infrastructure that cannot be created out of the blue overnight. Previously, only Bitcoin cloud mining was offered in some services, while today a dozen more cryptocurrencies are suddenly available, so it's worth asking a fair question - where did the required mining power come from?
So, buying a cloud mining contract implies a specific term and estimated yield. It is usually impossible to withdraw funds before the contract expires. If this option is available, it’s a very good sign.
- Transparency of mining rewards payments
The payment of mining rewards is always a set of absolutely transparent transactions, the information about which is present on the network. Whenever you send or receive cryptocurrency in your wallet, you and everyone else can see your transaction ID: this has never been a secret in decentralized networks. Mining rewards involve the payment made to the service by the mining pool to which this service is connected (the first transaction) and the payment made by the service to its customers (the second transaction).
It’s reasonable to assume that if a service works honestly, it does not need to hide these transactions, conceal the name of the mining pool or any other information related to the movement of funds. If you found such information on a cloud mining service website, it’s another good sign in its favor.
But the typical interface of a cloud mining project usually looks like this:
Here, even in your own personal account, you will not find a single reference to hashrate, transactions, or any other important information. It's just a black box, inside which anything can happen to your money.
- Withdrawal of funds from cloud mining services
Financial services usually have a KYC (know your customer) procedure. To register, you need to present your passport and sign a contract. This approach is widely used on centralized cryptocurrency exchanges and allows them to identify the account holder, transfer personal data to the competent authorities, etc. In general, this is a fairly common system.
Cloud mining services also sometimes implement KYC, or at least pretend that it is necessary. However, as is the case with some centralized exchanges, KYC may well be one of the reasons why you won't be able to get your money back.
The service can specify many reasons why this action is impossible, and each will be linked to KYC, e.g., something may be wrong with your jurisdiction or the origin of your funds. Also, the service can simply refer to problems with withdrawal and limit it for a certain period for a certain group of users - or for everyone at once.
As in the case of CEX, you do not control your assets when you buy a cloud mining contract, which means that you have no leverage in the situation, except for drawn-out correspondence with technical support (if there is one).
So, is the KYC in a cloud mining service a benefit or a problem?
There is nothing wrong with KYC, but generally speaking, a cloud mining service simply does not need it. Very often, KYC is used to make the refusal to withdraw funds look more solid and appeal to higher powers, rather than to the cloud mining platform itself.
Conclusions about cloud mining services
So, an ideal cloud mining service should offer reasonable contracts, the ability to control project hashrate and transactions, as well as allow for unhindered refunds both before and after the expiration of any contract. If you have found such a service, your money is most secure.
Unfortunately, life shows that there is often no mining at all going on cloud mining; instead, it’s mostly financial manipulations designed to ensure the viability of a service while it collects clients’ money.
It is important to understand that whatever a financial service is called, if it does not have the appropriate infrastructure, sooner or later it will still go down - even if at the initial stage it was not intended to mislead anyone in order to appropriate their funds. Market laws are quite cruel, and only the strongest survive - namely, those who are in it for the long-term and create all the conditions for this by investing in infrastructure and the future.
Tokenized hashrate
In addition to cloud mining, there is mining using hashrate tokens (or mining tokens), where instead of a contract (blocking funds at a specified interest rate for a certain period of time), users are offered a token pegged to a hashrate unit and freely traded on the market. By buying such a token, the user actually buys a share of the project's mining power and receives mining rewards in proportion to it.
This approach is much more advanced and flexible than cloud mining, and sometimes even called cloud mining 2.0, although by and large it is not. You buy tokens, get daily mining rewards, e.g., for a week, then, if necessary, sell them. You are not bound by a contract, you are not forced to wait for anything, your funds are in your wallet and you are the one managing them.Compared to cloud mining, buying a tokenized hashrate is a significant step forward in terms of security, flexibility and convenience.
In part, it resembles buying the shares of a mining company. The difference is that the pricing of shares and tokens differ greatly in favor of the latter, and “dividends" from tokens are paid out daily.
As the last year has shown, the shares of mining companies can fall 20-fold in bad times, whereas mining tokens behave in a much more restrained manner simply because they are not traditional financial assets that fall under the SEC rules, reporting, large investors’ expectations and their focus on reporting, etc. In addition, mining companies have NEVER paid dividends up until now and overwhelmingly do not plan to do so.
The token market is more democratic, because it has not yet managed to cover with hypertrophied fears of traditionalist investors and institutionalists who “dump risks” at the first signs of hypothetical danger, because otherwise their bonuses will suffer.
Hashrate tokens are typically liquid assets that you can sell and buy whenever you want and in any quantities. As in the case of cloud mining, the token issuer earns on the difference between “wholesale mining” and its retail sale, however, the carrier of value is a liquid hashrate token, and not an illiquid deposit under the guise of a contract.
However, as in the case of cloud mining, not every tokenized hashrate project is honest and viable, as we explained in detail in the article Why Is Minto Feeling Good When Mining Tokens Are Dead?
The criteria for evaluating such projects are generally the same for cloud mining projects:
- Make sure that there is a physical project hashrate connected to the mining pool, check out the mining pool’s transaction history.
- Read specifically about the value transfer unit - the hashrate token. Find the Whitepaper on the project's website and read it.
- Examine the information about the token on well-known aggregators like Coingecko, CoinMarketCap or Dappradar.
- Finally, carefully study the project site itself, its social media communities, the team and the convenience of the interface.
Tokenized Minto Hashrate
BTCMT token is a hashrate token pegged to mining power in the ratio of 100 BTCMT = 1 TH/s. The total project hashrate over the previous six months has been increased several times, and equals 73 PH/s as of June 2023. Minto users receive mining rewards in Bitcoins DAILY at the same time and can control payments in a smart contract.
The yield of hashrate token projects can only be estimated approximately, since mining rewards fluctuate from day to day. The reasons for these fluctuations are described in detail in the article Why Are Mining Rewards Always Different? Nevertheless, by analyzing the rewards for the last couple of weeks-months-years, it is possible to fully assess the general trend and get an objective idea of a service's capabilities.
Summarizing, the most important thing to understand is that no sky-high rates can indicate a real working business, but serve to attract unlucky investors. Every business has its price, and if everything were so simple, everyone would have been a millionaire long ago. In current conditions, an ~20% annual rate with low risks is a very good offer, so it is worth joining such projects, actively screening out those that do not meet the above-described criteria. As noted above, today, even with your own miners, you could earn no more than 30% with all the appropriate time and money, so the same 20% with an instant exit option is more than an excellent choice!
