Scam projects or bad business model: can cloud mining be fair?


  • Scammers use cloud mining to trick victims

  • Why you shouldn’t pay for hosting in advance

  • The promise of high returns is a sign of a scam

International consortium of news organizations developing transparency standards.

Cryptocurrencies are attracted by the opportunity to make quick money, but not everyone is ready to devote themselves to trading, to spend hours and days on crypto exchanges. One of the ways to get passive profitability in the crypto world is cloud mining. But it was chosen not only by investors, but also by numerous scammers, which is why cloud mining has become synonymous with scam and is associated with news about millions stolen from investors. However, the very idea of ​​cloud mining – buying computing power in a data center to mine cryptocurrency – is not fraudulent in nature. Do cloud mining projects have a chance to survive after another bitcoin halving and can investors see signs of fraud before signing a contract??

CLOUD MINING in 2020! – REVIEWED – Is Cloud Mining Legit or a Scam?

Lost millions


In August 2014, the American company Gaw Miners, registered in the state of Connecticut and initially engaged in the sale of mining equipment, announced the start of sales of virtual contracts for mining (hashlets). According to Gaw Miners, the contract was definitely profitable, the owners of the hashlet received a share of the profits from the mining of bitcoin and other cryptocurrencies in the Gaw Miners data centers. An interview with the founder of the company – Gomero Joshua Garza – and articles about his projects appeared in leading publications devoted to new technologies (Techcrunch, Yahoo Finance, Blogs Wall Street Journal, Market Wired, Finance Magnates, etc.).

But by the end of 2014, rumors began to appear on the market that GAW Miners was selling more contracts for computing power than it had in its data centers. In December 2015, a lawsuit was filed against the company by the American regulator – the Securities and Exchange Commission (SEC). The trial lasted almost two years. In the summer of 2017, Garza confessed to fraud and was sentenced to imprisonment and a fine of $ 11 million, of which almost $ 10 million is damage to investors..

Bitcoin mining is a computational process, as a result of which transactions in the bitcoin network are confirmed, information about them is recorded in a distributed ledger (blockchain), and the miner for this work receives a reward in bitcoins, some of which are user fees for the transaction, and part – new bitcoins produced by the system.

Every year the complexity of computing on the bitcoin network is growing, and the days of home mining, when every owner of a more or less powerful video card could mine bitcoins at home, are long gone. In addition to purchasing special equipment – ASIC computers – the miner needs to pay for electricity, amortization, configure and monitor. Such not only financial, but also temporary investments are not affordable for everyone. Thus, the average retail investor has almost no chance of making a profit from Bitcoin mining. In response to the interest and demand for passive income from mining, so-called cloud mining projects began to appear on the cryptocurrency market, when investors are invited to invest not in the purchase of the computing machine itself, but in rent or purchase of power units. In this case, the seller is a remote data processing center (DPC), in which mining machines are located. Or aggregators and resellers.

Is Cloud Mining a SCAM?!?!

Cloud mining often attracts newbies who are aware of their capabilities and understand that they cannot run even a small mining farm on their own. It is these investors in cloud mining projects that find themselves in the highest risk zone: the format of remote communication with the seller allows you to manipulate data, “draw” fictitious profits and disappear from the market with impunity.

Even those cloud mining projects that have been trying to work honestly with investors for several years – and this is a lifetime for a fast-moving and young cryptoindustry – stop working. This is due to the increase in the computational complexity of the bitcoin network and the reduction in the reward for miners (halving bitcoin halving halving the number of new coins created and earned by miners in half. This happens approximately every four years and … More), which occurs every four years. which is superimposed on periods of sharp decline in the bitcoin rate. The cloud mining service Genesis Mining failed to survive the 2018 crypto winter without losses. In August 2018, the company announced that mining is becoming more difficult and energy intensive, and the terms of some contracts are no longer enough to cover the service fee. Buyers of HashFlare mining contracts faced the inability to withdraw their funds from their accounts in the same summer of 2018. “Payments for 28 consecutive days were lower than the cost of servicing contracts,” the company wrote, announcing the suspension of servicing contracts due to unprofitability.

Image is everything


Many companies operating in the cloud mining market are often scammers or projects with an ill-conceived business model, believes Philip Modnov, CEO of the LAZM project, which manages data centers in the Lipetsk region. Although cloud mining seems to be an easy way of passive earnings, in fact, an investor needs to spend more than one day studying the terms of the contract and finding out the history of a project that offers hosting or renting computers in a remote data center..

Nevertheless, cloud mining projects continue to work on the market, which manage to function successfully in conditions of sufficiently high volatility of cryptocurrencies. Thus, the Japanese company GMO Internet, which launched contracts for cloud mining in August 2018, despite millions in losses incurred during the crypto winter, announced plans to launch additional data centers in the United States in 2020. Do newbie investors have the opportunity at the market research stage to determine how good the company is and whether it is a fraudulent scheme?

First of all, market experts advise paying attention to the transparency of information provided by a cloud mining project. The names of the organizers, registration data are what the investor should pay attention to first of all.

“You need to pay attention to the image of managers, their previous projects, accessibility to communication with clients,” advises Sharif Allayarov from the Matrixport crypto-exchange platform, who previously worked at the Chinese manufacturer of mining equipment Bitmain. He also notes that the jurisdiction in which the company is registered does not always speak about the stability of the service. “We have seen projects in the USA, Canada, Switzerland, Malta and Singapore that have had a very bad end. Project managers are still hiding ”.

The investor should also pay attention to how thorough the verification process of the company is before registering in a particular jurisdiction and who is the partner of the project. So, in the US state of Delaware, which has a reputation for being an American offshore and corporate capital, it allows registering a company without personal presence and with a minimum package of documents. In some jurisdictions, the verification process when registering a company involves a more thorough verification. “Our company – LLC“ Digital Technologies ”(brand LAZM) – to obtain the status of a resident of the special economic zone“ Lipetsk ”went through the approval procedure in several stages. The business plan was considered at a meeting of the Expert Council, which was chaired by the head of the regional administration, says Modnov. – To go through all these stages, it was necessary to really carefully think over the business model of the data center. With the prospect of working for a maximum of six months, it is simply unprofitable to invest so much in all these checks “.

Scam contracts

Scam projects or bad business model: can cloud mining be fair?


One of the clearest signs of fraud and a pyramid scheme is the promise of high returns, world regulators warn. But it is the words about profitability that investors are looking for in advertising brochures trying to get passive income in the cryptocurrency market. Therefore, one way or another, the profitability of the cloud mining contract can be said in the contract. Another thing is how much such profitability reflects the real state of affairs in the bitcoin network..

Before investing in a supposedly highly profitable mining business, the user should study the current profitability of various computers, clarify what kind of machines the cloud mining project works with, what profitability is given by renting a certain computing power, if the project sells contracts not for renting the machines themselves, but for a certain computing power. The contract must contain all the fees charged by the data center, the cost of access to computing power in terahesh per second (the cost of renting equipment or part of it), the cost of TX / day (the cost of operating the equipment in the words of the data center)

Taking into account the current complexity of the bitcoin network, a capacity of 1 terahesh per day gives about $ 0.076. The latest generation of Bitmain mining machines – S19 – has a capacity of 110 Th per day. Thus, excluding payments for electricity and depreciation, revenue is $ 8.3 per day. “Hosting costs in regions with favorable electricity rates fluctuate around $ 1.5- $ 2 per day. Thus, if a cloud mining project predicts a daily profitability of $ 7- $ 8, then this indirectly means that there is no deception at this level, Allayarov explains. – If it is less, then the company, possibly, imposes hidden commissions on what customers have mined. If this is more than a level, then it is worth considering. This is a sign of a scam ”. 

I do not quite agree with the calculations of Modnov. According to him, “fair” hosting costs in regions with favorable electricity rates are slightly higher – around $ 2-3.3. “1.5-2 $ per day – when using a server that consumes 80 kW / h per day, the cost of hosting: payment for electricity, operation and service, depreciation of the Data Center equipment, payment of taxes, and so on – and the share of electricity in it is $ 0.008 … 0.013 (0.55 … 0.90 rubles) with VAT per kW / h – which is actually an extreme rarity, especially with a legitimate connection. “.

One can also suspect fraud under other terms of the cloud mining contract, Allayarov said. “If a project requires an advance payment for hosting for 1-3 months in advance, then you can think about the fact that the company wants to collect money from customers, and then hide.” However, the requirement of prepayment for hosting services for a long time may speak not only of the organizers’ initial fraudulent intentions, but also of the problems of the company, which tried to work honestly. “For example, if a company has difficulties with a construction project, which they are unable to complete on their own, since there is not enough funding,” explains Allayarov. Too low an advance payment for rent of capacity may also indirectly indicate the company’s dishonesty. Thus, in order to determine whether a cloud mining contract is “in the market”, an investor will need to study the conditions of not one data center, but ten or more, while it should be compared with those projects that have been on the market for more than a year, having established themselves as reliable suppliers cloud mining services. So he will be able to understand how the terms of the contract proposed by this project differ from the promises of other companies..

Drawn profit


Even after carefully studying the terms of the contract and the history of the project, the investor should not forget about the control over the work of the rented computing power. The sooner he realizes that he has invested in a fraudulent project, the less painful the exit will be for him. The fact that the cloud mining company in fact does not carry out any calculations in the interests of the investor can be guessed by the indicators that are disclosed to the investor.

“One of the easiest ways to cheat is with drawn mining metrics. The investor gets access to his personal account, which displays the performance indicators of his computer, power, the number of coins mined, and so on. Scam projects simply draw this data, and for several months the investor is fully confident that he is receiving income, – says Modnov. “Doubts about the integrity of the project usually arise after a couple of months, when the investor tries to withdraw the mined to a third-party account.” He advises paying attention to the details and dynamics of the operation of computers: for example, if an investor’s personal account displays a hashrate that is absolutely even without a single fluctuation, then this may indicate that this and other indicators have nothing to do with reality.

Cloud mining mistakenly seems to investors to be an easy way to generate passive income that does not require special knowledge and skills. A user who does not want to become a victim of another crypto fraud will have to spend a lot of time and effort studying the details of the cloud mining contract. And even this does not guarantee success and easy income, because in many ways the success of cloud mining depends on the situation in the cryptocurrency market, the rate of bitcoin or altcoins. “People want to make a profit without straining. This is an understandable desire, but it is precisely what gives rise to numerous frauds, concludes Modnov. – The very idea of ​​cloud mining in its foundation is quite viable. But you shouldn’t expect mad xes there “.


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Scam projects or bad business model: can cloud mining be fair?
Scam projects or bad business model: can cloud mining be fair?

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Scam projects or bad business model: can cloud mining be fair?

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