I think I'm missing something. There are a bunch of cloud hashing companies that lease hashing power. Let's take cointellect for example. They have contracts from 10 days to 24 months. If I buy a 10 mH/s of hashing power from this company for 99 euros, they guarantee a minimum of 2.2 euro daily return which makes 180 euros in return for my initial investment of 99 euros in the 3 month contract. How is this profitable for both me and the company? What's the math behind this?
When you're calculating the profit from Bitcoin mining, you take into account the current bitcoin price, how much hashpower you have, and the current difficulty.
Difficulty rises over time. (Generally speaking.) Between Jan '12 and Jan '13, difficulty rose by a factor of 2.9x.
Between Jan '13 and Jan '14, difficulty rose by 407.2x.
Between Jan '14 and now, difficulty has risen by 33.3x.
Unless they're guaranteeing 2.2 euros per day over the course of the contract, in which case they're either morons or liars. (If you really could guarantee that kind of return, investors would be all over you.)
Of course, as David Schwartz notes, it could also be a scam. They could give you good returns, then vanish after lots of people invest.
99.9% of such companies are frauds.. they simply gather money from new users and payoff the old users. They repeat this to get enough trust among users. To make it more lucrative they throw in affiliate or referral schemes. That ensures people refer friends and family or simply go social in promoting these sites with a story that they have earned (which they really did). People trust people when they see success stories. And have a tendency to go with the flow. Even if I knew its a scam, I would take a chance since the company initially pays off. To top this, these companies provide a lot of revenue to other review sites. These reviewers not only get money from ref links they post on their reviews but a direct income straight from the company for advertising their website.
At the end, eventually when this is all over.. The ones losing money are the ones who invested at the end. Many who invested first keep rolling the same money and if they did not exit in time, they lose all that was invested. REST EVERYONE makes money from this. From the founder of the firm to the initial investors & investors who were smart to remove profits to the advertisers all make money. Ones who joined the party late lose out.
I mine myself, and have been doing so for some time now. You can make the kind of money they promise in mining indeed. However there are ups and downs and you cannot keep getting the same income over and over. There are huge fluctuations in the coin prices that sometimes work for you and sometimes are a huge setback. If you can afford to sit tight on your investments, go mine or even better trade with the money you would otherwise invest in mining. Trade alt coins and bitcoins. There is much more money to be made there. Its relatively easier and make more with trading alone compared to first mining and then trading what you have mined. Plus it saves a lot of time for you and you can operate on the go with nothing to strap you down to one place. Also, you then have nothing to do with the power costs or equipment upkeep or upgrades.
I started off with cloudmining. then moved to physically mine coins. Then realized trading gives you a head start over physically mining coins. Now I do 90% trading and 10% mining - mining only unknown coins nothing specific. Keeps shifting depending on some factors.
In all, the returns from cloud mining companies are for a limited time. If they are operating for a long time, its only about time they shut and run away with the money. They are not here to stay. Make most while they are here. Stick to a strict ROI and take your initial investment out. Leave the rest in and let it build. You keep removing lets say 50% profits from there each month or whatever the timeframe is. Protect yourself from these cheaters.
My guess is like any business it's an interest loan that they take out. It's a bit of a risk if the difficulty of mining does not rise, but maybe that's a win win for both of you. Businesses sell bonds to people at interests rates where the people or the banks are guaranteed to make money. They can invest in newer equipment today while you have to wait 6-9 months for your year contract to make a profit. I'm currently mining through bitcoin cloud mining service and at the rate they are paying me I will get a return on investment for my two year contract in 6 - 9 months.
I find a summary the best way to explain this:
Company: +£99 from you. The company do not pay out anything but costs for power. Bitcoin 'creates' the money. You: +£All your earnings. 10Mh/s will not generate anything, 10Gh/s maybe...