Cloud Mining: A Year in Review

At the height of the late 2017 crypto bull run, I began researching ways of growing my stack of crypto. After losing almost a whole ETH due to exchange fees and realizing I wasn’t going to become the next WolfOfPoloniex anytime soon, I opted to looking into mining as a viable alternative.

Because of my limited capital, however, I soon turned to cloud mining, and even though I found an overwhelming amount of people saying all cloud mining providers were most definitely scams, I decided to take the plunge and find a yearly subscription to mine any one of the coins I saw a strong future for.

After doing a lot of research, I paid Hashflare $220 for a yearly ETH cloud mining contract with 10 MH/s of hashrate on January 4, 2018.¹ For the last year I have tracked its daily performance to see if I had truly been duped (as everyone claimed I would), or if cloud mining could be a viable source of crypto income. The entire year’s worth of payments (copied straight from my Hashflare dashboard) can be found here: Hashflare Mining Profits

This writeup is just a review of those last 365 days, including a brief analysis of payout trends and other stray statistics I calculated while trying to figure out how my investment had done. I hope it provides an unbiased firsthand experience so that others can make an informed decision if they believe cloud mining is right for them. Without further ado, here is what I found:

  1. Q: First of all, is cloud mining a scam? A: No, it is not, at least in my experience.

I “received” my daily ETH payout every day without fail. I even went as far as as sending the first 0.1 ETH mined to my Ledger to make sure it was indeed real ETH and I would at least have some of it in my possession if they decided to run, but I continued to receive payments for the entire term of the contract with no problem.

That being said, Hashflare still has ~0.16 of my mined ETH in their possession and I’m currently waiting for KYC verification so I can withdraw it in one transaction because I’m not sure if they still have a 0.1006 ETH withdrawal minimum and I am currently capped at withdrawing 0.1 ETH daily. As long as the verification goes through and I can get all the mined ETH into my wallet I can wholeheartedly say it wasn’t a scam, but I won’t count my chickens before they hatch.

However, Hashflare did stop mining bitcoin in mid-2018 and it revoked all BTC mining contracts due to “decreasing profitability” because of last year’s price crash. Even though the terms of the contract 100% gave them that option, I guess some people could argue that this is “scam-y”, and the fact that they implemented stricter withdrawal restrictions afterwards does leave a bad taste in my mouth. I’m willing to give them the benefit of the doubt because I can’t prove this move was purely malicious or if they faced regulator pressure to do so, but it does seem fairly unlikely that KYC would kick in coincidentally at around that time… However, because this article is about my personal experience, I’m staying in the not-a-scam side unless I positively cannot withdraw my ETH from their site.

UPDATE 1/23: After waiting almost 3 weeks and emailing support once, my KYC verification was finally accepted by Hashflare. I successfully withdrew the remaining ~0.16 ETH to my Ledger as of this morning (etherscan) so I can finally say with 100% confidence that cloud mining through Hashflare was not a scam.

2. Q: Second of all, is it profitable? A: Yes and no, it depends.

I hate giving such a “traditional” finance answer, but it really is true in this case. My investment was NOT profitable in USD terms due to the massive ETH price crash of last year. I mined a total of 0.26880820 ETH for $220, meaning I basically “bought” my ETH at a price of $818.43. With Ethereum’s current price hovering at around $150, that 0.26880820 ETH is only worth ~$40 today, meaning I lost 81.27% of my $220. As a simple comparison, if I had bought $220 worth of ETH on January 4 (which I will call “Equivalent ETH”) instead of paying Hashflare for my contract, my USD loss would have actually been slightly higher than that: around 83% or ~$185.²

However, using this idea of Equivalent ETH to calculate my total Ethereum profit, my investment actually returned 13% ETH, which is pretty decent for an asset you can just buy and forget for a year.³ Because my goal in crypto since day one has always been to grow my stack of coins regardless of my performance in fiat terms, I’m happy with this outcome… but if you are betting strictly on growing your dollar amount as quickly as possible you probably want to look far far away from cloud mining.

For a little bit of perspective, since I was looking for a brainless way to make a steady return year-round, I could have looked to invest in a traditional index fund. Crypto falls broadly into the technology space, so buying $220 worth of $QQQ (an ETF that tracks the NASDAQ 100) could have been a somewhat similar move. This $QQQ investment would currently be worth basically the same $220 meaning I would have avoided had a huge USD loss, but if that had been the case I would not have grown my ETH stack past what it was before.

3. Q: Ok, so it’s not a scam and it is actually profitable but you could have made WAY more doing X/Y/Z. A: Sure! However that wasn’t my goal.

That’s not really a question but it is still a valid point. Could I have turned the equivalent ETH into a whole lot more by aggressively trading it around the clock or by picking some cheap microcap crypto and riding it to the moon? Maybe. Could I have turned those $220 into way more USD by trading penny stocks all year or buying the Powerball or putting it all on black at a nearby casino? Potentially. However that wasn’t my goal.

I ventured into cloud mining because I wanted a steady source of crypto that wouldn’t cost an arm and a leg (I’m looking at you antminer and other hardware miners) and I actually got just that. I didn’t want to be glued to my computer 24/7 to see how my investment was doing, and I’m not the best or smartest trader out there so I guarantee you I would not have made 13% in last year’s crypto markets and still be here to talk about it. Instead, by opting for cloud mining I slowly but steadily earned ETH year-round, and my contract actually helped me survive last year’s massive bear market with a little bit more crypto than I started with.

4. Q: So, are you going to buy another Hashflare contract now? A: Ehh…

There seems to have been a whole lot of luck involved in how things panned out for the duration of my contract. From the simple fact that I decided to buy an ETH contract instead of putting my money into a BTC one that would have been revoked, things lined up in a weird way for my benefit and I’m not sure if things are going to be the same this year.

For example, just a few days after I bought the contract I learned about Ethereum Casper, the hybrid PoW/PoS consensus protocol that was supposed to be launched sometime in 2018. If it had been implemented on time, I’m almost certain it would have made cloud mining obsolete and Hashflare would have cancelled my contract, but delays in its launch made sure traditional PoW mining continued into this year and my contract was able to finish unharmed. I’m not sure if Casper will ever be released or if other major changes to the Ethereum network are going to affect the viability of cloud mining, but I wouldn’t want to be on the receiving end of that fallout, and since the ETH platform is trying to revitalize itself after losing a lot of steam last year I’m unsure of what to expect.

Furthermore, in a weird way I got “lucky” with last year’s bear market. If we had seen a bull market, my contract would have been wildly successful in USD terms but pretty disappointing in ETH terms.⁴ Because it is fairly easy for even the most brainless trader to make money in bull markets, I could have probably made more than a 13% return on $220 worth of ETH just trading on momentum, and because I will ALWAYS want to maximize my amount of crypto, being stuck in a year-long contract with $220 less to invest in that kind of market would not have been ideal. While I’m the last person that can tell you if we’re going to see a 2017 level bull run anytime soon, a period of accumulation due to dirt cheap crypto is the first step towards positive price movements and with most major projects being down 80% or more last year I believe it’s just a matter of when more than why.

With all of that being said, while I may not be interested in commiting to a yearly cloud mining contract with Hashflare, I’m definitely looking into Nicehash or other short-term providers to mine ETH or XMR this year, but I still have to do a lot of research before figuring out if I’m going to go down that road or if I’m just going to take advantage of the low prices and buy crypto directly.

Some stray observations I made in the past year

  1. Although I won’t lie and say I didn’t think that Hashflare was running an ETH Ponzi Scheme more than once, it was somewhat reassuring to see how the higher the network hashrate the lower the daily payout.
  2. The daily change in payouts was pretty standardly distributed, and I saw only 7 more days of payout increases than I saw of payout decreases. The highest decrease came in early January and I can find no real reason for it, but the biggest increase came in November when ETH lost almost 8% of its value in 24 hours.
  3. It took me almost 100 more days to break even (in terms of ETH) than the original projection. After the year was over, my actual earnings were 30% less than what I had originally projected.
  4. The biggest one for me: In terms of ETH, I was never in the hole during the whole year. Even with my daily reward decreasing by 50% from what it started at, the lowest my ETH ROI went down to was 8.74%.

Footnotes

  1. I chose ETH mostly because of the lack of a maintenance fee that would eat into my profits, but also because I believed it could see a similar meteoric rise in 2018 as it had seen in the summer of 2017.
  2. This analysis can be found in the “Equivalent Assets” sheet of the Google Sheets I linked above.
  3. Although I guess it is somewhat debatable that 13% return is acceptable due of the risk profile of this investment, I’m too lazy to actually come up with a comparable asset class to have a more accurate comparison. 13% is almost twice the average S&P 500 annual return.
  4. For example, if ETH had closed the year at $2000 my USD ROI would have been 144% while my ETH ROI would still only be 13%. However, this hypothetical scenario ignores the fact that the return of trading ETH for other crypto would probably net more than 13% ETH, and I would still be able to sell the bigger ETH stack at $2000 too.