A Beginner’s Guide to Bitcoin Cloud Mining

By: Ofir Beigel | Last updated: 8/19/20

Cloud mining is a general term given for sites that charge a monthly fee in exchange for mining cryptocurrency for you. In this post I’ll cover what cloud mining is in detail and expose the truth about its profitability.

Cloud Mining Summary

Cloud mining is a term describing companies that allow you to rent mining hardware they operate and maintain in exchange for a fixed fee and a share of the revenue you’ll make. It basically means that you can mine remotely without the need for buying expensive mining hardware.

Most, if not all, cloud mining companies today are either plain scams or work through an ineffective business model. By ineffective I mean that you will either lose money or earn less than you would have by just buying and holding Bitcoins.

That’s cloud mining in a nutshell. If you want a more detailed review about cloud mining and a specific profitability analysis, keep on reading. Here’s what I’ll cover:

1. How Does Cloud Mining Work?

Since mining Bitcoins at home is so incredibly expensive many people are looking for cheaper solutions that don’t involve buying hardware that eats up electricity and will quickly become outdated.

In light of this, cloud mining seems like the perfect solution: You “rent” hash power from miners that are located in a remote, cool location. The cloud mining company takes care of maintaining the miners and you share the revenues of the operation.

If you google the term “cloud mining” you’ll find endless possibilities to jump on board. Most of these websites will show you tons of confusing numbers (especially if you’re a newbie) and promise that cloud mining is “the easiest and most efficient way to earn Bitcoins”.

So everything looks OK, except you can’t always rely on these companies to deliver on their promise.

2. Best Cloud Mining Services

It’s hard to recommend a specific cloud mining company since these companies are more often than not complete scams. However, there are some legit options out there.

Legit cloud mining companies

When I say legit, I don’t mean profitable or reputable, I’m only referring to the fact that they actually own hardware and mine Bitcoins.

Three known examples are Genesis Mining, Bitclub Network and Hashflare. However, I’ve taken a deeper look at all of these companies and in each one there are huge red flags that come up.

Lose Lose Situation

The main model of legit cloud mining companies use is a “lose lose” paradigm. If Bitcoin goes up in price you’ll earn less than if you just bought it. If it goes down – you won’t earn anything and you’ll probably lose the money you’ve invested.

I’ve written about it extensively here in the past but here’s how it works in a nutshell:

Aside from the cloud mining contract payment which is usually a fixed sum, companies charge a maintenance fee. The maintenance fee is the cost of running the mining hardware, cooling it, storing it, etc. The maintenance fee is usually calculated in USD per mining power unit (e.g. $0.14/TH).

Since mining revenue is accumulated in Bitcoin and maintenance fees are paid in fiat, if Bitcoin’s price falls the revenue might not be enough to cover the ongoing maintenance. In that case, the company will just terminate your mining contract without any refund.

Here’s an exact quote from Genesis mining:

In the event of a contract becoming unprofitable (i.e. the payout can’t cover the maintenance fee), the resulting daily payout will be zero. After that, the contract will continue to mine for 60 days….If the contract does not return to profitability in this period it will be terminated….

On the other hand, if Bitcoin’s price shoots to the moon, the mining difficulty usually goes up as well, making your miners less profitable. To sum it up, in both cases you’re probably better off just buying and holding Bitcoins. You’ll either lose less or earn more.

If you do a quick search online or even read my own reviews about these companies, you’ll find a large amount of testimonials from people who got their contracts terminated during the long crypto winter that started in 2018.

Scam cloud mining companies

Aside from legit cloud mining companies, we also have complete scams. When Bitcoin started to gain momentum, a lot of ponzi schemes came to play, with the most famous ones being Bitcoin Savings and Trust, Bitconnect and OneCoin.

Another name for Ponzi is “Pyramid Scheme”. It’s a type of investment scheme where you need to invest money in order to participate. The people who came in first get paid by the ones that came after. Eventually the payouts stop for some reason and the people at the bottom of the pyramid are left with nothing.

In my opinion (and in the opinion of respected others as well) most of the cloud mining companies are plain Ponzi schemes. Meaning these companies don’t actually have any mining rigs set out in a remote location and the money that you pay is used for paying out older customers and the company itself.

Most people won’t press charges when a few hundred dollars are stolen from them, so when the company goes bankrupt or just plain vanishes, all that is left are a bunch of angry people. Hey, it happened to me as well…

4. Do Your Own Research

If you’re still not convinced and want to go down the road of cloud mining, make sure to conduct ample research before pulling out your wallet. Here’s what I suggest:

Look for References

For almost every fraudulent website on the web there’s someone who already posted about it. Either search BitcoinTalk for information about that company or go to BadBitcoin for a list of the well known scams.

If you’ve already been scammed and couldn’t find any reference, I advise posting on one of these sites to help other users out.

Don’t Invest More Than You Can Afford to Lose

Probably the most important tip – if you’re going to get into cloud mining, do it little by little, and NEVER (and I mean NEVER) invest more than you can afford to lose. The way most of these companies work is that they lure you in, little by little, and once you get the big money in they close down without any notice.

The Bitcoin Scam Test

I’ve developed our own methodology for inspecting different Bitcoin related sites. It’s a series of questions that will eventually give you a pretty good idea if the site you’re looking at is a scam or not. You can take the test here.

5. Conclusion – Is Cloud Mining Profitable?

If you want my advice – stay away from cloud mining. There are too many question marks around this area to make it legit.

I think that if you’re serious about investing in Bitcoin then you’re better off buying Bitcoin and holding rather than mining it.

If you’ve had your own experience with cloud mining I’d love to hear about it in the comments section below.