I see many loan requests on the various P2P lending sites for upgrades to cloud mining contracts. Some of them quite large and many of them getting funded. In the short term these look like good opportunities for both parties but a look at the fundamentals of this strategy show how it falls apart relatively quickly.
1. It costs about 3 times as much per GH/s for sha 256 or MH/s for scrypt as it does to buy a physical machine to do the work. This effectively puts your break even (NOT RETURN ON INVESTMENT!) around 200 days or more for these cloud contracts.
2. Your breakeven point is around 200 days and not return on investment because you do not have any underlying value with the contract (unless it is a gawmining hashlet that you can resell). With a machine your return on investment is helped somewhat by owning the machine at the end of the mining period.
3. With every increase in difficulty your investment pays less and less. Sometimes as much as 20% less as is the case with bitcoin. This difficulty is reset often and at the present time only goes up. Altcoin is a little better with the difficulty moving sideways for awhile until the next wave of machines hits the market.
4. Price volatility also diminishes the value of what you are mining. Especially with the recent fall of bitcoin.
5. At first the cloud contracts pay enough to enable you to keep up with your loans and make you think you are doing well but inevitably as the days wear on your return will be less and
less, eventually going to near 0. Those new lifetime hashlets will not produce anything within a year and their value will be 0 as the hashrate they represent becomes more and more obsolete.
6. This scenario leads a borrower to always posting new loan requests and upgrading their cloud capacity to try to keep up with the diminishing returns but they will really never make any money. Only the cloud companies will.
7. Once they get to the point of not being able to get enough loans or provide their own capital, the whole house of cards will crumble.
8. This is why it is very important to lenders and borrowers to be sure of their strategy and hopefully move more to having physical miners that can pay for themselves before they are totally obsolete.
I think your right about everything but the biggest issue is the fees. Cloud mining has become the Ponzi scheme that bitcoin naysayers have dreamed of. This because virtual miners cost more/Gigahash than a physical miner plus service providers are taking between 50 and 90% of your earnings. Leaving you with noting at all. They are getting away with this because there is no regulation in the system.
Nobody has to invest with them. There is heavy regulation in the banking sector but they still rip everyone off.
If you do your own calculations and think you can profit you made your own choice, didn't you?
That's kind of a snappy comment for agreeing with you.
Now you should know that maintenance fees where pretty low when I got started in cloud mining. I didn't mind the high cost/GHS because I had to consider not just how much energy home miners where using but the energy used to keep them cool. The heat was filling my entire house. So the cost was still worth it. It didn't become a ponzi scheme until the maintenance fee went so high that people wasn't making any money.
You seem to be implying that because I had a choice that its my fault if I get scammed. That's not exactly true. Did everybody make a bad choice when bitcoin exchange sites claimed they lost millions in bitcoins due to a transaction bug But later we found out that the bug didn't cause that kind of problem? The exchanges just tried to take peoples money. Is it investors fault when Mt Gox tried to take millions of dollars worth of bitcoins when they went down? No. You simply just can say I had a choice like that means something. We all had a choice. I did the math. Many of us did the math. Still things don't go as planed.
Yes you can get ripped off anywhere but not by a ponzi scheme which is a specific type of scam and very illegal in the US. I'm not sure about anywhere else and I believe that CEX.io is either British or Canadian. Is it a persons fault for wanting to make a buck? No. advised or ill-advised, research or no research, its not an investors fault for getting scammed because the scammer is breaking laws. When a ponzi scheme arises we do need regulations to crack down. Nothing can stay unregulated forever.
A ponzi scheme is one which when you make an investment the returns form that investment doesn't really exist. The bitcoin isnt an ponzi scheme because it really exist. the argument is over weather or it its actually money. Cloud mining in it self isn't a ponzi scheme but when the purchased mining power produces bitcoins but it evaporates due to fees then it becomes a ponzi scheme. So the fault doesn't lye with an investor making the choice to invest. You don't see a ponzi scheme coming until its here.
It didn't intend to be snappy. Scams have to be fought and even if there were signs that it was a shady operation, people who get scammed didn't deserve it.