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Every time I have asked Bitcoin experts about buying a "cloud mining" account, that is, paying fiat money to a company for them to mine Bitcoin for me, I get the response that it's a scam. "Why would they want to give you any Bitcoin when they can just mine for themselves?" is the reasoning given.

But then doesn't the same logic apply to actually buying a miner and "mining at home yourself"? Why would anyone sell such a machine when they can just hook up another one to their massive warehouse of miners and get more Bitcoin for themselves? Why bother dealing with charging fiat (or Bitcoin!) from annoying customers, having to deal with shipping and all that stuff? Why not just... mine themselves?

It seems like the very same thing to me. I just don't see any way for me to mine Bitcoin which would actually be profitable or make sense.

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  • 4
    Why would anyone sell a house when they could just live in it themselves?
    – WillO
    Jun 27 at 15:05
  • 59
    "In a gold rush, the only people getting rich are those selling shovels." Jun 27 at 17:28
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    I think you might be missing the possibility that these companies don't have any interest in bitcoin. They are just making things that people want to buy. Kind of like how heroin manufacturers aren't really into shooting heroin. They just want money.
    – JimmyJames
    Jun 28 at 16:02
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    'Why would anyone sell hammers when they can use them to drive nails themselves?"
    – MonkeyZeus
    Jun 29 at 17:51
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    The main capital cost of mining is hardware. The main operating cost of mining is electricity. The best place to mine is somewhere with very cheap electricity. The best place to make mining hardware is a company full of ASIC experts. Almost certainly the ASIC manufacturers could not mine competitively on the land they own because they did not select that land to be in a place with particularly cheap electricity. To start mining, the ASIC manufacturer would need to invest in land somewhere where mining was profitable. This is now a business venture and a risk.
    – J...
    Jun 30 at 15:44

12 Answers 12

27

Every time I have asked Bitcoin experts about buying a "cloud mining" account, that is, paying fiat money to a company for them to mine Bitcoin for me, I get the response that it's a scam.

Most of them are scams because it's almost impossible to verify that your money is used for mining. You need to trust a company that can do anything with the money (trade, lend, run away after few months etc.)

Why would anyone sell such a machine when they can just hook up another one to their massive warehouse of miners and get more Bitcoin for themselves?

Mining is a business which requires:

  1. Space
  2. Electricity
  3. Hardware
  4. Cooling
  5. People to manage

Manufacturing ASICs is a business in which you create hardware used in mining, ship it and provide support.

A company which creates ASICs can do both (manufacturing and mining) or just manufacturing. This is similar to lot of other hardware companies that could use the product themselves for business but it has different risk/reward compared to just manufacturing.

I just don't see any way for me to mine Bitcoin which would actually be profitable or make sense.

Mining profitability calculator: https://insights.braiins.com/profitability-calculator

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    Funny how the calculater you linked only accepts values for the price of electricity which are - at least for European standards - ridiculously low. Any in my experience realistic value cannot even be entered. If your energy costs are actually that low, why convert electricity to bitcoin, instead of something useful, and make a profit with that, instead? Jun 28 at 15:07
  • Electricity price in my country is 0.08 USD/kWh (Household) and 0.12 USD/kWh (Business). Calculator accepts those values. Not sure what are electricity prices in other countries. Also I consider mining bitcoin as useful.
    – Prayank
    Jun 28 at 15:30
  • From an economic perspective this doesn't matter: if electricity is cheaper, it's cheaper for everything. Jun 28 at 15:44
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    @I'mwithMonica why convert electricity to bitcoin, instead of something useful - it's a gamble. Historically bitcoin has increased in value far higher than anything you can make. 99% of things you can make actually decrease in value over time. Among the only thing you can make that actually increase in value are buildings. However historically bitcoin has seen increases in value at much higher rates than buildings or land. But it's a gamble since bitcoin has also seen drops in value much steeper than anything you can make
    – slebetman
    Jun 28 at 19:18
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    @I'mwithMonica I'm in the US and my rate is higher than that, and that doesn't include delivery fees. I don't know why the site even has a limitation on the rate.
    – rtaft
    Jun 28 at 19:30
19

The difference is that with cloud mining, all you are doing is lending the company money. And you are expecting them, for no rational reason, to pay you back an interest rate higher than they would have to pay if they took out the worst loans in existence.

In the case of cloud mining, literally everything is done by the company. All they are doing is borrowing money from you and you are somehow expecting that the will pay you more than the normal amount of interest borrowers pay to lenders. That's obviously ridiculous.

In the case of buying a miner, the company just provides you a physical product that they manufacture. It is then up to you to maintain it, to provide it power and cooling, to maintain its internet connection, and to take on risk over months that the value of the cryptocurrency it produces will drop. That is nothing like just lending money to a supposed turn-key profit generator that requires you to do nothing but kick back and collect profit.

Why would companies that make miners have access to cheap power and cooling? Why would companies that make miners have facilities that can house them?

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  • "Why would companies that make miners have access to cheap power and cooling?" Corruption?
    – VargaD
    Jun 28 at 16:12
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    @VargaD They could have that access. I think the point being made in the final paragraph here, though, is that they don't automatically have that access purely by virtue of manufacturing miners.
    – Arthur
    Jun 28 at 21:29
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    In the case of cloud mining, wouldn't they pay you back based on the Bitcoin price? So if it goes down, you lose money. That's not necessarily a scam. Normal lenders aren't going to lend money for such a thing where they might never be paid back. Bitcoin speculators will.
    – user253751
    Jun 29 at 9:17
  • The comparison to commercial lending is way oversimplified. The reality is that your average low-interest commercial lender (a) may not lend money at all on such a business, (b) if it lends, will either lend a very small amount or will impose other onerous conditions such as security, and/or (c) will in any event be unlikely to lend 100% of the borrower's capital needs. The forces of supply and demand mean that such a borrower will have to pay higher rates if they want more favourable borrowing conditions. There's nothing "obviously ridiculous" about this.
    – JBentley
    Jun 29 at 11:13
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    @DavidSchwartz I'm sure the legitimate but pointless offers are good business for the companies providing them.
    – user253751
    Jun 30 at 14:07
9

There's a couple of reasons I can think of:

  • They might not think mining is profitable and are simply looking to sell hardware and treat BTC miners as a good target market, media attention probably means there's a lot of naive users that believe they can make huge profits by mining themselves.

  • Once you scale up mining beyond a certain limit there can be significant capital costs. For example if you live in an apartment they'll be limits on the total power consumption the utility can provide and space constraints. Overcoming those by say setting up something in a larger / more industrial area will have a large up-front cost and the inconvenience of moving.

Also on a global scale whatever mining hardware a single individual / company might sell is pretty much a drop in the bucket, so some probably use their expertise to sell some mining hardware to make some additional profit regardless of how BTC travels. Selling the hardware involves minimal risk and can be done with minimal infrastructure.

4

Selling hardware is a less risky enterprise than mining bitcoin. The manufacturer knows exactly what their profit margins and unit costs etc are and has a more or less guaranteed result.

People running miners do not.

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    Come to think of it, I bet it's substantially more profitable these days to sell mining hardware, than to be the owner of said hardware. Especially today with prices hiked because of the chip shortage. It could easily be a better business to sell hardware to people who think it prints money, than to actually believe in it and run up your power bill in blind hopes that you'll win the lottery. And BTC is very much a virtual lottery, but compare it to a physical one... Who gets more rich? The average lottery player? Or the guy that sells the paper stock used for lottery tickets?
    – Billy C.
    Jun 30 at 3:50
3

There are quite a few oportunities (or, at least, an impression of oportunities) to be more efficient miner than the mining hardware business themselves.

  • You may have an access to cheaper (or free, or even stolen) electricity
  • You may live in favorably cooler climate
  • You may be one of those gambling types that just want to bet
  • You may have enough (spare?) manpower to run the mining setup
  • You may have less pressure from the shareholders for reliable and/or immediate profits etc, etc...

That's why both you and the manufacturer may be better off in your particular roles. This makes selling/buying a mining hardware profitable for both sides.

3

There is great difference for large companies between earning X money now or earning X + 20% in two years' time: The former lets them invest for the next miner without waiting years, because waiting a few years to continue innovating. Waiting a few years can cause them to lag behind their competitors for many more years to come. Besides, selling miners has very low variation depending on Bitcoin's price, so they reduce the risk for themselves. Also, mining is a low-effort investment, while as a large BTC company they might have advance knowledge about many price changes, which could allow them to earn more money holding than mining.

1

tl;dr If you wanted to invest cash in gold-mining, would you buy a pickaxe for yourself or pay someone else to mine for you? Or, would you buy stock in a gold-mining company?


This is why investors buy stakes in companies.

Consider three scenarios for using your cash to mine cryptocurrency:

  1. Do all the mining yourself.
    Buy your own hardware, use your own space and electricity, do all the work yourself.

  2. Hire a service to do the mining for you.
    Instead of doing it all yourself, outsource it to professionals. You should enjoy huge economics-of-scale, while you pay them their cut.

  3. Buy a stake in a mining company.
    Someone creates a mining-company, using their cash to buy/operate miners. You give them 10% more cash to do the same, they give you a 10% cut. Same economics-of-scale, while employees draw salary for working the whole thing.

Problems:

  1. Individual miners are horribly inefficient.
    Everyone learning and doing small amounts of labor themselves is highly inefficient. There's too much duplicated effort and too little expertise.

  2. Hiring a service can have trust problems.
    If you're a customer, then they're trying to sell you something you want – not necessarily something that's best for you.

  3. Owning a stake in a component mining-company would seem best.
    This is what companies are for: they do some work using their assets, paying laborers for their labor, while capital-owners (people who give them money) can buy/sell stock-shares, collect cash-dispersals from dividends, etc..

    Ultimately should work out a lot like the prior case, except instead of being a customer that they're trying to get money from, you'd be a part-owner who the company would have fiduciary obligations to. "Fiduciary Duties: Minority Shareholder Rights" (2015) looks helpful. Also, the principal–agent problem.

Note: This isn't financial advice nor legal advice. And I'm definitely not suggesting anyone invest in Bitcoin.

That said, if someone did want to invest money in mining cryptocurrency, investing in a good, reputable mining-company would seem like the way to do it. Alternatively, someone could mine for themself, though that'd seem to be mixing in a hobbyist-project rather than a strictly investment-focused strategy.

1

This is an excellent question, and in fact there have been schemes around companies that did both - they used the mining hardware and sold it.

I don't recall the name of any company that used this scheme; it must have been around 2015 or so.

  • Advertise the sale of bitcoin mining rigs. Prepayment required.
  • Build the mining rigs.
  • Run the mining rigs themselves for testing purposes. A couple months, up to a year or so of "testing".
  • Ship the mining rigs after the complaints got too loud.

Customers lost out twice. First, missed a year or so of bitcoin mining opportunities.

And second, by the time they finally received the mining rigs, that was outdated technology and could no longer compete with more up-to-date miners.

1

Cloud mining introduces a lower entry fee into mining as you do not need to purchase the hardware. That said, many cloud companies are considered 'scams' because contracts can end abruptly without compensation. This usually happens when the BTC price increases or decreases considerably. Although there are some reputable companies around.

Cloud contract prices are variable and follow the BTC price. And, the longer the cloud contract period, the higher the profit margin. But in order to turn a profit, a cloud miner is making a bet that the BTC price will remain stable or increase.

Cloud mining, selling hardware, and mining yourself comes with risks because the profitability of all of these businesses follows the BTC price which is volatile. Professional miners use the bull and bear cycles to their advantage, and can also move rigs to where electricity is cheaper.

0

That's a great question; here is the thing about cloud mining and ASICS.

1. CLOUD MINING

cloud mining is an act where a company pays users to use their mining software so that customers may use their machines as a proxy. Here is what doesn't make sense about the economics, who gets the money?

1.1. customers make profit 1.2. company makes profit 1.3. miners make profit

You cannot have all 3 of these groups make money, that's just not how economics works. The companies when recruiting others to cloud mine suggest that they (the miners) will earn a higher profit than mining if they mine for the cloud mining company. How can one earn more money with a company than mining the coin directly?

How can the company make a profit as well as the customer? You can't. We did an audit of NiceHash for example, and we found if you order a hashrate that was 10% of the hash unit advertised, then your order of miners will appear for a few minutes and then approximately 25% would disappear, and then reappear again 8 minutes later. This was a repeating cycle.

scammers will use fake user accounts that: a) try to gas light you (telling you that you either made it up or that you're confused on how it works) b) try to discredit you so that people looking up reviews to test the service will trust the users who are doing the gas lighting and discrediting. c) defend the company to their last breath. Hint: actual people won't die hard defend a company, especially a crypto business.

2. ASIC MANUFACTURERS

this boils down to liquidity. If you engineer an ASIC and no one else on the market has one, then do you keep them for yourself or do you sell them? You sell them. Because if you were able to make an ASIC, then you can be sure that someone else is also doing the same thing and will bring theirs to market if you don't. Now you don't have the edge on mining, and you lost out on ASIC revenue.

the second part comes to availability. What would you rather have? 1 bitcoin every day, or 40,000 units of sales within a year? ASICS are very, very cheap to manufacture, especially with the hack jobs that bitmain cranks out. Old recycled hardware or unused from Chinese manufacturers, and a design that isn't compact in the slightest. It's truly built as if someone threw scrap parts together. Nonetheless, it does what it was designed to do. At 40k units, the company manufacturing these units are most likely looking at a profit of $100+ million.

There is likely around 160k ASIC units mining Bitcoin. Most of which Bitmain is responsible for. They would not be able to get to that point if they had not sold their ASIC units. It costs a lot of money to start manufacturing, but if you're pumping out thousands, then the costs get relatively cheaper by scale.

Another point to look at is that Bitmain also owns Antpool where they can get up to 4% of all bitcoins mined. They have 0% for paid per last N shares, or 4% full paid per share, of which the latter is more desirable as it takes nearly a full day to start earning revenue with PPLNS.

Ant Pool finds approximately 14% of all Bitcoin blocks.

506.3 Bitcoins Per Day * 13.8% Block Claim = 69.86 BTC per day

let's assume 30% of the miners choose the 4% option.

69.86BTC * 30% (0.30) * 4% (0.04) = 0.8384328 BTC per day.

This means that Bitmain is also earning approximately 306.02 BTC ($10,557,965) per year, all without deploying 5000 ASIC machines, and having to pay for mass cooling, mass storage, and mass electricity.

1
  • all 3 of those groups could make money, if the mining activity was profitable. Maybe not compared to the opportunity cost (of buying miners and running them yourself)
    – user253751
    Jun 30 at 14:08
0

One possible explanation as to why companies sell their mining hardware instead of using it themselves is given by the paper "Correct Cryptocurrency ASIC Pricing: Are Miners Overpaying?" (links to a short talk about the paper, a long talk, a medium post, and the paper itself).

The authors of the paper argue that mining hardware is overpriced, meaning that manufacturers charge a price that is higher than the correct price for their hardware. They reach this conclusion by modeling the hardware as a bundle of financial options, and then applying option-pricing theory to evaluate its correct price.

For example, when looking at the Bitmain Antminer S9, the authors concluded that Bitmain's official price was higher than the correct price for most of 2016-2019: A comparison of the official and correct prices for the Bitmain Antminer S9

-1

The most obvious reason I am aware of comes to mind. If you have a cloud server farm for other standard types of cloud services that isn't being utilized heavily, renting off capacity to a new market helps keep you from being under utilized and keeps you in your line of business.

It's the most basic move all businesses make, extend your product into as many markets as possible so shifts in one market don't sink your entire business.

And before anyone brings up the wear and tear aspect of taxing server resources with crypto mining and shortening their life, in a large server operation, you already have to upgrade hardware on a schedule just to keep up with improvements in technology. Having to replace a server you've otherwise never used, is a capital loss. There are only certain circumstances where that loss is useful for tax purposes and even then you don't save it's cost in tax savings, just a small percentage. You'd only choose to keep it idle if it would lower the overall rate you are taxed on everything else.

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    Bitcoin mining is performed with ASICs that are custom processing units that can not perform general computing tasks.
    – Murch
    Jul 2 at 18:45

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