What is "buying hash rate" and how could it be profitable?

Question

I'm sorry if this question may sounds like a newbie question (well, it is).

Introduction

I'm 23 years old and I would like to generate money with my money to eventually invest in stock market after some time. I was really interested in day trading, and I joined a discord server (Saphire) to gather some knowledge and experience from competent traders. After some time watching (I don't invest anything before I'm sure it's a good idea and before I know how to minimize risks), I discussed with someone who is a crypto trader. He talked to me about hash rate, and about how much it is profitable to buy hash rate (the platform used is xtradeclient). What I understood is the following: I don't have to buy gear such as graphic cards or similar to become part of the chain. I just put money in to contribute to things like fees, and then I get money back according to a fixed interest rate. The daily interest rate he told me about is 2%.

Question

After hours spent on the internet to know what "buying hash rate" is, I didn't find anything relevant. My first question is then what is hash rate, how to buy it, and what it means to buy it?

My second question is what interest rate can I expect from such an investment? And how risky is it? It seems like there is no risk, just getting back my money with interest. This sounds too beautiful to be so profitable.

Finally, are there any taxes I should be aware of about this? (I'm in Belgium.)

Answer 1

"Buying hash rate" is a synonym for a concept called cloud mining. In proof of work-based consensus systems, mining refers to a process of expending computational power to secure the network. As the integral computation is performing a cryptographic hash function, this is also referred to as hashing, and the amount of computation you can perform as your hashrate. To participate in mining, people acquire mining hardware, situate it in the vicinity of cheap power sources, and usually join mining pools to smooth out revenue. A large part of the global hashrate is contributed by specialized businesses that focus on exactly that.

Cloud mining promises to do all the heavy lifting for the miner: instead of acquiring hardware, setting it up, and sourcing power, you only provide investment capital but then get a steady stream of income.

The daily interest rate he told me about is 2%. […] This sounds too beautiful to be so profitable.

Your instinct is exactly right. If their business were that dead-sure, they would get an actual credit or investment at a much lower interest rate, take on the risk to build out a mining facility themselves, and make all that much more money.

So, why would they sell to retail investors instead? Great question. Because more often than not they're not actually running a mining business but a Ponzi scheme. And in the cases where they are legit, more often than not, it's still a terrible investment. Someone promising a 2% daily interest is definitely a huge red flag implying a Ponzi.

Answer 2

Although the particulars involve bitcoin, the central issue in this question is more of a Money SE question. You're being asked to invest in [industry], you just have to put up the capital, and [people] will buy [stuff] with your money which will create income because of [reason]. In this case, apparently industry=bitcoin mining, people=miners, stuff=mining rigs, reason=mining reward.

Two important concepts in investing are alpha and beta. Beta is a measure of risk. Higher beta will generally mean higher returns, as people will accept more risk if they're getting more of a reward. Alpha refers to when one is receiving returns above what the beta of your investment warrants.

Supposed alpha is a big red flag that something is a scam. There are cases where it's possible to get alpha, but it requires special skills or resources etc., and people don't just hand it out to anyone. If the person you're talking to has found a way to generate alpha, sharing it with you is just handing you free money. Why would they do that for someone they just met on a discord server?

2% daily interest compounded over a year is 1277%. That is, if you put in $1000 and let it compound over a year, you'll have $13,770. That's a massive rate of return. That's either a huge alpha, or a huge beta. Investment scams sometimes are beta fraud, where something is sold as being low risk, but in reality the person running the scam is putting your money in very risky investments, and then if the investment tanks they tell you that's just the risk of investment. Mostly, though, they'll just take your money and run.

If someone is offering 20% yearly interest, it's quite possibly beta fraud (the investment does legitimately generate 20% yield, but it's a very risky investment), but at 1277% it's almost certainly pure scam. If you invest your money, you'll probably get back statements showing your money steadily growing, and be pressured to put more in (after all, if you had more money invested, 2% of that would be a larger dollar amount), but if you ask to withdraw your money, there will be roadblock after roadblock until this person just disappears.

It's probably not even a Ponzi scheme; in a Ponzi scheme, early investors are allowed to withdraw their money to make the program look legitimate and entice more people to invest. But here, they're probably not planning on playing a long game. You're probably not able to bring in more investors, and 2%/day is a large interest rate to keep up for a significant amount of time; most Ponzi scheme run in around 20-40% (I think Madoff's was only 10%, but kept that up even in bear markets).

Answer 3

The only legit place which you describe is probably Nicehash.

This is a market place where you can directly buy hash power (hash-rate of somebody else). I'm a hobby miner and for some time i would resell my hashing power in exchange for bitcoin on Nicehash (Reason why somebody would do this is simply mining Bitcoin is only really profitable on ASICs which are a big expense up front and a lot of risk). You can look into that, but my understanding is that usually people buy hash power on Nicehash to strengthen a network and/or to get the coins they mine. The price is sometimes higher to buy the hashing power than you get in coin. So your profitability is not a fixed rate (in crypto no price or return on investment is fixed). And nobody will sell you their hash power if it is a lot below the value of direct mining.

I want to stress that what @Murch said is exactly right. If somebody needs to do this for you it's most likely a scam. There are a lot of scams in crypto be warned. Cloud mining is extremely risky because you trust somebody to run your money printing machine for you, often without being able to verify anything. Also beware crypto is an up and down, everybody who tells you otherwise is not to be trusted.