When the Bitcoin protocol was first introduced, the first and only method to get some bitcoins was to mine them, using your own computer, as the mining difficulty was very low. Then, Bitcoin mining difficulty grew, and people started using GPUs, and then FPGAs & ASICs to mine.
People started to gather into mining pools, to have more chance together to mine some bitcoins. However, and while mining pools still exists and are going strong, it’s not the ideal situation. You still need to own your own hardware, pay the electricity bill and try to sell the hardware again when your mining efficiency starts to go down.
Cloud mining proposes to solve all these problems, by allowing people to buy Bitcoin mining power from some piece of dedicated hardware that is hosted remotely. Is it a good investment vector? That’s what we are going to see in this article.
What is Cloud Mining?
The idea behind cloud mining is simple: a company buys a significant piece of Bitcoin mining hardware (usually ASICs, which are dedicated chips for Bitcoin mining), host this hardware somewhere, pays the electricity and maintenance bills, starts mining with it, and then rent out a piece of this power to you.
There are many websites out there that propose such a service. We are not going to go into the details of each of them now, but here are three that I used successfully myself:
These websites all work around the same principle: you buy a piece of their Bitcoin hashing power (in GHS or THS) in exchange of a given amount of money. Then, they pay you a given sum of bitcoins (or other coins like litecoins) every day or every week, which corresponds to what the piece of computing power you bought produced (sometimes minus charges).
This creates a cashflow from your investment, that is then deposited on a local Bitcoin wallet of the company you chose for the mining. Some of them even propose to automatically reinvest your gains into more computing power, therefore creating a nice compounding effect.
WHAT YOU CAN EXPECT
So what returns can you really expect from cloud mining? Well, you need to be very careful. Indeed, unlike a more typical financial placement for example, you are pretty sure that your monthly returns will go down over time. Why? Simply because with a constant computing power, and with an increasing Bitcoin mining difficulty, your gains will slowly go down over time.
So don’t be lured by the nice payouts advertised by some websites: they are only valid for a short period of time, basically until the Bitcoin difficulty increases. Because your returns are going down with time, it is absolutely necessary to get till the point where you at least break even, so when you get your invested money back.
This is why I really recommend using a calculator to know when (and if) you will break even, before doing any investment. I searched a lot for the best calculator out there, and for Bitcoin I found the following one simply called Mining Profit:
And what you really need to be careful about is the price of the computing power you are buying. Let’s take an example. At the date this article was written, I used a simple scenario of cloud mining, for a 12 months period, without any fees or Bitcoin price change. It’s a bit idealistic, but it’s for the sake of the example.
Let’s assume you buy 1 THS of hashing power on a cloud mining site. On a given site, it costs 1.5 BTC, and on another website the same power costs 2.2 BTC. Both websites advertises similar payouts. Well, in the first case you will realise a nice APR (Annual Percentage Rate) of 30%, whereas in the second case you will actually loose 9%, as you will never reach the break even point.
You also need to be careful with fees on these websites. Anything that lowers your payouts will compromise your chances to break even, and therefore you will just be throwing your bitcoins away(or more precisely, you will be throwing them into the cloud mining company pockets).
Finally, you have to be very careful about scams around cloud mining. Even more than other Bitcoin websites, cloud mining is well known for Ponzi schemes. Basically, you will get your money, see some regular payouts (given not by mining, but with your own money or money invested by others!) and then after some months the website will just disappear. Make sure to always consult forums (like https://bitcointalk.org/) to get some information about the cloud mining company you plan to use.
SO SHOULD YOU INVEST IN CLOUD MINING?
We can now back to the essential question of this article: should you have cloud mining as a part of your Bitcoin investment portfolio? Despite all the concerns I raised in the previous section, my personal opinion is still yes, and I’ll tell you why.
First, it’s nice diversification option for your portfolio. I like peer-to-peer Bitcoin lending, but I also don’t like the idea to have all my eggs in the lending basket. Having some of my bitcoins invested in cloud mining is a good option for me in that sense. You can usually start with quite low sums of money (starting from $10) and still make a good return on investment.
Then, if you make things right, you will also get a nice return on it, similar to Bitcoin lending. With the example I took in the previous section, you can easily get to 30% of annual returns, if you carefully use a Bitcoin returns calculator. Be sure to get the lowest price possible on the Bitcoin mining power, choose a website without fees, and you should get at least a 20% return on your investment.
I known that cloud mining is a controversial topic in the Bitcoin community, so I would really like to have your opinion on the topic! What do you actually prefer, cloud mining or owning your hardware & mining in a pool? Or other kind of investments? Share in the comments!…