Ninjastic
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Re: ▁ ▂ ▄ ▅ ▆ Cloudmining 101 (ponzi risk assessment) ▆ ▅ ▄ ▂ ▁
by
Digiconomist
on 20/12/2014, 17:04:46 UTC
Quote from: picolo on December 20, 2014, 02:27:32 PM
Quote from: Digiconomist on December 20, 2014, 01:41:18 PM
Quote from: Puppet on December 20, 2014, 12:07:55 PM
Nope. The real risk (assuming its not a scam) is future difficulty and btc exchange rate (operating costs are in still paid in fiat)
What I meant was that other risks do not justify a higher offered ROI. Exchange rate is a risk but not relevant to the pricing of the product due to the law of one price (spot-future parity). That leaves future difficulty (expected mining income) as the only factor that determines the price, which must result in zero expected ROI at inception for similar reasons. Buying 250 LTC (expected) for 300 LTC is obviously a bad deal, while the other way around is bad business (plus it would create an arbitrage opportunity). So the price must equal the expected coins mined with the contract, so that the NPV equals zero (or at least head in that direction).

Only cloud mining contracts demand upfront payments (that shifts the credit risk to the customer), so that justifies a discount (ROI greater than zero at inception). This is why cloud mining is a shady business in general, because a discount means that the company is getting a bad deal. So even legit cloud mining companies are either exploiting their customers, or running a very poor business.. Smiley

It's a very interesting comment but cloudmining companies get money upfront, they can use this money to buy new hardware. If they were not open to customers and were just mining for themselves they would not be able to grow as much.

Cloudmining companies can take a fee to conduct the business which means they have a very low risk and can earn a lot without cheating.
From a customer perspective any additional return beyond the credit risk compensation is risk free. That's where you head towards what the SEC advices to watch out for: High investment returns with little or no risk. If it's legit, credit risk would actually be expected to be negligible (they're just building their farm right, it's not risky business by nature) and it makes a high ROI (at inception) even more unlikely; it shouldn't last (it leaves an arbitrage opportunity).

Of course, I'm being very theoretical. I do not believe in market efficiency at that level (even more because the companies set the prices and not the market). Just trying to point out why at least 100%+ ROI p.a. at inception is a strong sign of trouble (and it's often not limited to that), while in theory it should be closer to zero than anything else. Important: this does not rule out a return over the lifetime of the contract; that can still be the case if prices go up and/or difficulty develops slower than anticipated (emphasis on the latter otherwise you are better off buying the currency), the main question is: are you paying a realistic price for a contract that allows you to speculate on that Smiley