The rapid obsolescence of mining equipment and its high price made professional mining not profitable for most users. And this forced both mining service providers and those left behind as a result of this “arms race” to look for alternative solutions. The exit was found quickly enough. Cloud mining.

It seemed to be the revolutionary step in the world of cryptocurrencies. The company buys high-quality and modern equipment for mining, makes it set up and sells to its customers (rents out). Such kind of service made possible for people to join crypto rush without buying and maintaining expensive mining equipment.

However, in the current state, cloud mining business is not profitable. With a growing network’s complexity and “bearish” market it was more or less viable while Bitcoin’s exchange rate stayed high. But after it’s price fall more than in twice — mining rewards are barely enough to cover maintenance fees, not to mention any valuable profit.

As an example of cloud mining industry development, we have collected and analyzed the open-source information about major players of the market and market itself.

Two business models

Generally, there are two main models of the cloud mining business. First, when the company buys equipment itself and provides its customers with cloud mining contracts directly. At first glance, it’s very simple, yet quite complicated for the business, because the company needs to combine both hardware and customers management.

The second one makes the chain longer, replacing one providing company with two different subjects: reselling business and hardware facility. In this model, the quality of service of the reseller directly depends on the endpoint — hardware provider. However, it’s the most popular scheme, due to lower business founding expanses.

Nevertheless, both these models won’t work if the hardware maintenance and service fees are higher than the final profit. And in a case when the final profitability depends on several values, even a small change in one of them may cause the overall business unprofitable. And that was a case of Bitcoin cloud mining. In middle 2018 the network difficulty of the Bitcoin blockchain raised significantly (from 2.6031T in January 2018 to 7.455T in October 2018 and finally to 5.814T in January 2019), while the exchange rate of the cryptocurrency went 70% down.

(*Results for Antminer T9+ ASIC in China. Antminer T9 + was chosen as the optimal device due to its value for money and good computing power with relatively low power consumption.)

Consider the example of large market players, how this idea developed and what it turned into in the end.

Cloud mining pioneers

Genesis Mining was founded at the end of 2013 by a group of cryptocurrency enthusiasts. Started at the very beginning of the blockchain and cryptocurrency era, it became an enterprise-level solution for cloud mining, with 6 cryptocurrencies listed and 1000 GH hashrate. For each of the listed currencies, Genesis Mining proposed several plans, including 3 preset options and 1 custom solution, where user decide himself how much power he needs.

All things went well until the start of 2016. The issue is that during the 2016 network difficulty of Bitcoin and other cryptocurrencies raised significantly (in Bitcoin’s case — almost tripled). Yet contracts remained on the same level of proposed hashrate, so the final income of all Genesis users decreased respectively.

Genesis Mining team has foreseen the chance, that someday contracts may become unprofitable, so according to the project’s Terms of Service, if cloud mining contract becomes unprofitable — company stops charging the maintenance fees for next 60 days, hoping that contract will come profitable again.

In order to provide its users with higher quality service and higher chance to get rewarded within their cloud mining contracts, Genesis Mining made several software and hardware updates (last one in early 2018), which but they didn’t help. The last step from the company’s side was making possible to pay maintenance fees in advance to extend the 60-day-holding period, so contractors could prolong their period of waiting for contracts get back profitable. The first complaints in social networks about closed contacts appeared in August 2018.

Genesis’ cloud mining contracts gone sold out/out of stock in mid-2018 (late July — early August)

Start date — March 2, 2014

Contracts sell stop (web status changed on “Out of stock”):

BTC — 28.11.2018

DASH — 11.12.2018

ETH — 11.12.2018

LTC — 10.12.2017

XMR — 10.12.2017

ZEC — 10.12.2017

Limited stocks and sold out contracts

Hashflare was another one major player on the market of cloud mining services since late 2015. With headquarters based in the UK, Hashflare got a number of offices and data centers all around the globe. Main mining facilities, as it is in most of the cases, were placed in Georgia and Iceland due to low electricity cost and legislation loyalty.

Just as Genesis Mining, Hashflare has been proposing various plans for mining various cryptocurrencies (Bitcoin, Ethereum, Litecoin, ZCash, Dash), however, it was not the only same thing. The payback period of any of these contracts was way too long (around 350–370 days) to be profitable for clients in short and mid-term. And continuously growing network difficulty made them unprofitable for long-term too.

Hashflare strived to make changes in their software and hardware, however, it leads them to nothing. Hashflare’s cloud mining plans are out of stock since July 2018. Also from June 2018 users started talking about closed contracts. There’s still Ethereum plan marked as “Limited stock”, yet nothing happens when you try to buy it.

Start date — April 18, 2015

Contracts sell stop (web status changed on “Out of stock”):

BTC — 14.06.2018

ETH — Limited

ZEC — 04.05.2018

LTC — 09.06.2018

DASH — 07.01.2018

Awesome partners

Hashing24 was founded in 2015, however, the team behind it was working since early 2012, so it’s legit to say, that the project was made by a group of blockchain and cryptocurrency pioneers. One more fact, staying for Hashing24 is that this cloud mining service used to be an official partner of the blockchain giant — BitFury.

Unlike Genesis Mining and Hashflare, Hashing24 have had no pre-set plans for cloud mining, yet users were free to choose the amount of money they’d want to spend or hashrate volume they’d like to buy. And, as many other services, their contract used to be lifetime-until-profitable.

But after networks’ difficulty rapid rise period, the average contracts payback time got close to 380 days after which contractor meant to start earning his profit. In fact, during this “payback year” network’s difficulty obviously, rise and alleged profit got leveled.

Cloud mining contracts of Hashing 24 got “out of stock” in the middle of 2017.

Since September 2018, the network also has feedback on closed contracts due to negative returns.

Start date — November 18, 2016

Contracts sell stop (web status changed on “Out of stock”):

BTC — 04.09.2017

Contracts terminated (~24.08.2018)

Closing the gate

The ease of use of the service is a distinctive feature of MinerGate since 2014. Thanks to this, the pool has gained such popularity among beginners. The launch of cloud contracts on a pool that often experiments with new services was a matter of time.

The sale of cloud contracts started on MinerGate at the end of 2016. All contracts were for life, that is, they were considered active as long as they generate revenue. Despite the growing complexity of Bitcoin, MinerGate continued to keep contract yields at an acceptable level. How exactly is not clear, but since the profitability equation is made up of the cost of electricity, which remained almost unchanged over the period of popularity of cloud contracts, the efficiency of the miner and the need for its maintenance, which was charged regularly, it is most likely a matter of partner diversification.

It is highly likely that MinerGate was a common intermediary involving various providers in the execution of cloud contracts. But such a scheme could not exist in the market for a long time.

Cloud contracts cannot be bought from late September 2018. In January 2019, many contracts began to show sharply reduced returns In February, feedback about the closure of cloud contracts began to appear on the network. The main question is why so long?

Start of sales — December 2016 (presumably).

The end of sales — 2018 late September

Irrelevance of strategic partnership

In 2014, Hashnest was acquired by Bitmain, which became a supplier and service company for cloud mining. For Bitmain, this was the first experience of buying a startup in the field of cloud mining. At that time, the company was actively expanding its competencies, trying to become a leader in everything related to mining.

A distinctive feature of Hashnest was also the marketplace, where users could buy power from each other.

The user could buy as power for 1 day or buy ASIC in permanent possession. However, with a negative yield of more than 5 days, the contract ceased to be executed and was considered terminated.

Now it is impossible to buy new contracts, the marketplace is not displayed, and the support of the service claims that the work will be resumed from day to day. Without naming time. In social networks, you can find a lot of feedback from people whose contracts were closed at the end of 2018.

The solution to technology and geography?

These cases demonstrate how strongly Bitcoin price and network complexity affect profitability and the ability to continue mining. But is it possible to improve the quality of equipment and lower electricity prices will be able to return services to the game?

Traditionally, mining was concentrated in countries that provided minimal electricity tariffs.

Pay attention to Georgia, Viniswell, Russia, and China. Reducing the cost of electricity allowed to multiply increase profits.

At the same time, the development of ASICs production technologies created improved versions and new models. New machines surpassed the old by half while consuming as much energy.

In addition to the price of electricity, it is important to take into account the overall level of infrastructure and political stability in the country. For this reason, Venezuela, with its low electricity prices, is not the first choice. At the same time, relocation often involves such expenses that the transportation of equipment may make this operation unprofitable.

But everything again broke about the increase in the complexity and cost of the ASICs themselves. The growth of complexity depreciated the new devices in 2 months, transforming the payback process from monthly to annual. At the same time, the devices are not going to become cheaper, since the part of research and development behind them must also be paid off.

The situation with ASICs looks really bad. Even those devices that show profits simply do not have time to work out their own value before obsolescence. Difficulty grows faster, and the Bitcoin continues to fall.

So, this is it?

From the examples above, it becomes obvious that even large players cannot support the infrastructure of cloud mining against the background of the growing complexity of the network and “bearish” market trends. The solution that would allow realizing the entire idea of cloud mining is currently not profitable.

Most of these businesses were founded with a view to the exact network difficulty and the specific exchange rate of the Bitcoin. As soon as both these criteria have changed in the worst possible way (difficulty went higher when the price went lower), such kind of industry doesn’t work.

For those who do not have their own computing power or coins based on the Proof of Stake algorithm, but would like to mine cryptocurrency — rental of hashrate directly from other users and connecting leased power to mining pools is a more preferable option.