How to earn steady passive income from Bitcoin cloud mining
Be sure to read the updates at the end of this piece; things have changed dramatically since I wrote this in Oct. 2017.
A number of companies offer “cloud mining” for Bitcoin and other digital cryptocurrencies. Cloud mining is performed by a third party but you, the customer, buy some of their mining capacity and you receive the revenue from that mining. The mining is done “in the cloud,” which means that you buy into an existing or new mining project and you enjoy hassle-free revenue.
At least that’s the theory. Let’s see if it’s the reality. I’ll focus in this article on Genesis Mining, the most reputable of the cloud mining firms operating, and what makes or breaks a cloud mining contract with them.
Genesis Mining (GM) is based in Hong Kong but its mining centers are in Iceland where it’s easy to keep miners cool and geothermal power is cheap, reliable and clean. GM lists its agent and address right on its website, so it’s possible to find them and sue them if anything goes awry. They’re one of a very few cloud mining companies that do offer this information, and I’d suggest that no one invest in any company that doesn’t list this information. There are a lot of scams in this space, so caveat emptor.
GM offers various cloud mining contracts, including an open-ended (that is, it never expires as long as it’s profitable) Bitcoin mining contract, as well as 2-year ether and Monero mining contracts. Currently, the Bitcoin contract is sold out, but you can still buy ether or Monero contracts. I’m only going to cover the Bitcoin contract here and it should become available again soon as GM builds up their capacity and can accept new customers.
The mining contract price decreases a little as you buy larger contracts. The Bitcoin contract buying options start out at the lower end at $30 for 0.2 TH/s (terahash per second), equivalent to $150 per TH/s. The cost drops to $650 for 5 TH/s at the top end, equivalent to $130 per TH/s, but this requires a minimum purchase of $1,950 at current pricing.
The key for maximizing profits from cloud mining is being aware of the fees involved. The cloud mining contract offered by GM includes two fees: an upfront fee — the costs just described — plus a daily “maintenance fee” that is supposed to cover fuel costs and upkeep. For the contracts I’ve bought so far, the maintenance fee is $0.00028/GH/s/day. This amounts to about 1/3 of the value of the bitcoin mined each day. As such, you are paying GM 1/3 of your mined bitcoins to fuel and manage your very own mining operation that you’ve purchased from them.
My first contract with GM was an open-ended Bitcoin contract for 15 TH/s for $1,950. This means that in addition to my upfront fee, the daily maintenance fee is $0.00028 x 15,000 GH/s/day = $4.20.
Knowing your fees is important because the contract remains active only as long as it can at least pay the maintenance fee. The rationale is that once the daily payout can’t pay the maintenance fee then there’s nothing left over for the customer, so the contract is canceled once the fee can’t be covered for 60 consecutive days (this is described clearly in the short contract that GM offers you for perusal before you buy).
My first contract, commenced in June of 2017, returned about .0045 bitcoin (BTC) per day for the first week. The payout dropped fairly quickly, however, due to difficulty increases in mining. Difficulty is determined automatically by the Bitcoin algorithm and it adjusts as required to keep the mining schedule at 1 block worldwide every ten minutes. Each block currently contains 12.5 bitcoin, which means that the algorithm only allows 12.5 bitcoin to be mined every ten minutes worldwide. The difficulty changes every two weeks, adjusted automatically based on the level of mining activity in the prior period.
We know, from the fact that my daily payout dropped so fast, that mining interest worldwide increased rapidly in the same time period.
.0045 bitcoin was, in June 2017, worth about $9 (about $2,000 per bitcoin at that time). This was the mining payout less fees, which as mentioned above totaled $4.20 per day. So the total value mined each day before fees were assessed was about $13.20.
Due to difficulty increases during the summer of 2017, as Bitcoin mining became more and more profitable, and thus more people started mining, my daily payout dropped to about .003 bitcoin, 1/3 less than I had started with. That seemed like a raw deal or bad luck since I had not expected difficulty to drop so fast and it seemed like my contract might end long before I had hoped.
At 1/3 attrition in just three months (.0045 bitcoin to .003 bitcoin) it looked like my contract might end well before a year was up due to unprofitability. This would still have been a good deal and would probably have tripled my investment in just a year — a phenomenal return — but for this investment to make more sense than simply buying Bitcoin directly and profiting from its increase in price over time, the GM contract would have to stay operational for longer than a year. And that’s why it seemed like a raw deal that the daily payout was dropping so fast.
However, in digging a little deeper I discovered that difficulty and price are highly correlated. From Sept. 2015 to Sept. 2017 the Bitcoin price and difficulty were 94% correlated, as Figure 1 shows graphically. (I calculated the correlation using Excel’s correl function).
Figure 1. Bitcoin price (orange/right) and difficulty (blue/left) correlation (data source: blockchain.info; chart: Tam Hunt).
What this means is that the daily payout level stays approximately the same, in dollars, even as the amount of bitcoin returned each day drops due to higher difficulty in mining. Over time the daily mining payout, which began with my contract at about .0045 bitcoin, will continue to be worth around $9–15, and probably a bit more. The dollar value each day will fluctuate as the price of Bitcoin and the difficulty level both fluctuate. But because there is a 94% correlation between price and difficulty, over time the dollar value will be about the same — in the range just mentioned. Because the difficulty adjusts every two weeks and the bitcoin price adjusts in real-time there will be periods of deviation, but over time it will average out to be level.
For example, the payout of .003 bitcoin per day in September 2017 from this same contract is now worth, at the current price of $4,500 per bitcoin, $13.50. The drop in daily payout in bitcoin has been more than made up for with the increase in dollar value of each bitcoin.
Another key factor is that the daily maintenance fee is denominated in dollars ($0.00028 per GH/s/day). This means that as the price of Bitcoin and the difficulty level goes up over time, the daily maintenance fee remains approximately the same share of each daily payout.
So rather than my open-ended contract ending in just 9–12 months, as seemed likely when I examined the rapidly increasing difficulty level and declining bitcoin payouts, it now seems likely that my GM contracts that have daily maintenance fees denominated in dollars, may run in perpetuity (as long as GM stays in business and doesn’t change its contract structure). This means that my $9–15 per day from my 15 TH/s contract may continue in perpetuity at approximately the same payout per day (in dollars).
I currently have 30 TH/s in Bitcoin mining with GM. This will return approximately $20–30 a day, or up to $900 a month, in perpetuity, as long as the difficulty and price level continue to strongly correlate, as they should. And over time if I keep my bitcoin rather than converting them to dollars, the value of the bitcoin I receive will increase further, at the same pace as the Bitcoin price increases.
If I had bought a lower-priced contract, say, one that offered $150/TH/s rather than the $130 I did pay, we can see that it probably wouldn’t have impacted my revenue potential very much, or my chances of the contract expiring. If one is seeking to minimize the risk of your contract expiring, however, you should buy a contract at the higher level. I recommend buying at least $1,000.
If GM changes their daily maintenance fees in its new contracts, or denominates them in something other than dollars, this calculation may change. But as it stands now, as long as GM contracts denominate their maintenance fees in dollars, fears about the contracts ending due to rising maintenance fees as a share of the daily payout don’t hold water because of Bitcoin’s self-adjusting price/difficulty behavior.
I earned back my $1,950 principal from my first GM mining contract in about three months, with payouts totaling about 0.45 BTC in the first three months, but a large part of that speedy repayment was the fact that Bitcoin doubled in price in the same time period. I reinvested most of that payout into a new GM contract in September 2017. I will continue to reinvest my earnings as long as new contracts are offered, and collect the daily payouts in perpetuity.
If I can double my revenue stream approximately every three months or less (as payback times decrease because of multiple contracts working for me at the same time), based only on my initial $1,950 investment, it is clear that before very long the total daily payouts start to amount to a substantial passive income.
Here are the take-homes if you’re considering a Genesis Mining Bitcoin cloud mining contract:
· Predicting profitability of mining Bitcoin is made much easier when we acknowledge that there has been a 94% correlation between mining difficulty and the price of Bitcoin over the last two years. This means that even as your Bitcoin daily payouts decline, the dollar value of the daily payout should stay constant within a certain range.
· This means that your mining contract, as long as this difficulty to price correlation holds, may never expire because it will always be able to pay your maintenance fees.
· Knowing your fees is the key to knowing how long your mining contract may last. The current maintenance fee of $.00028/GH/s amounts to about 1/3 of daily bitcoins mined, in terms of dollar value.
· To ensure your chance of your contract lasting in perpetuity, buy at least $1,000 per contract.
I’m writing this piece in mid-October and what I’ve written here about trends has held true thus far. The difficulty to price correlation certainly could change, but there are good reasons why this correlation has held so far — specifically, the Bitcoin price goes up when interest in Bitcoin goes up, and the difficulty of mining goes up when interest in mining goes up. Interest in mining goes up when the Bitcoin price goes up. Hence, a close correlation between difficulty and price.
If you decide to dive in to the Genesis Mining business you can earn a 3% discount by using this promo code: oHpgVj.
Another cloud mining company I can cautiously recommend, based on my personal experience, is Hashflare. They only offer one-year Bitcoin mining contracts, but with the option to reinvest daily earnings and thus compound the mining power fairly rapidly. You can use this promo code to get 3% savings: FA5B8B58. It’s not as good a deal as the open-ended mining contracts that Genesis offers but Hashflare does have contracts available now.
Caveat: I learned after I wrote this story that before I first used Hashflare that in Sept. 2017 they uniterally broke existing open-ended mining contracts by converting them all to one-year contracts. That’s a basic violation of contract law and good business practices, so I would approach this company very carefully indeed and strongly advise you use Genesis Mining instead if they have available contracts.
June 2018 update: mining returns have plummeted over the last few months, so I don’t recommend being involved as a new participant in any mining activities, even though both Genesis and Hashflare have, in my experience over the last year and a half, both acted honorably and as they said they would. It’s just the case that difficulty of mining has gone way up as the price of cryptos has generally gone way down since their peak last December. So it’s been the worst of both worlds and the correlation I highlighted above, from the 2.5 years up until December, 2017, has essentially reversed. All of that said, with every shakeout there is opportunity so there may be some silver linings in all of the mayhem over the last six months.
August 2018 update: Hashflare profitability went to zero in June or July for Bitcoin contracts, and Genesis Mining followed soon after (their maintenance fees are lower than Hashflare’s, which is why their timing was different on this), so the worst case scenario has come to pass, unfortunately. I’m still very much a believer in the crypto future because blockchain and outside-of-regulation payments have so many benefits, not to mention all of the hundreds of other use cases for the various coins out there. We are, however, very much in a low part of the cycle so I do not recommend that anyone invest in cloud mining at this point. That said, amid every cloud is opportunity so it may be time before too long to start snapping up some deals in anticipation of the next wave upwards. But I don’t think that time is upon us just yet.
Tam Hunt is a lawyer and writer based in Hawaii.