In my never-ending quest for passive income I have repeatedly come across "cloud mining" being touted as a great method for getting your hands on more crypto without any work. At first cloud mining sounds amazing and companies like Genesis Mining, Nicehash, and Hashflare are all too happy to pull you in to their contracts. But are they really worth it? I'm taking a deep dive so you don't have to.

The idea behind cloud mining is that rather than yourself invest in purchasing expensive, loud, large and cumbersome hardware to mine yourself you rent someone else's. It makes sense right? The kind of specialized mining hardware required to be substantially profitable creates massive amounts of heat, takes up a lot of room, and also takes a lot of specialized knowledge to set up and monitor. Ain't nobody got time for that!

Enter Cloud Mining. Now you are able to become an active participant in your preferred crypto network while living in your small apartment with a dog, a wife, and a kid. Sounds like the best of both worlds huh?

So you go to a company like Genesis Mining with your genius passive income creation plan and they offer you a few options. You'll see something like:

This is the purchase page to buy some mining power from Genesis Mining. You pay them the dollar amount up front and receive the hash power for a 24 month period. It seems so simple!

But wait a minute. If it's so profitable, why would they sell their mining power to you? If your $225 dollar purchase makes you your money back and MORE. Why wouldn't they just use this mining power themselves and make the money? It doesn't make any sense! Businesses are here to make money and it sure sounds like they'll lose money with this business plan!

The answer is that the mining won't necessarily be profitable. They sell you this mining power with no guarantees of it's performance over the 24 month period. They walk away with their money upfront, and you assume all risk. Now don't get me wrong it's not a SCAM. They don't hide this fact in any way, all the information is available right their on the webpage. But what they're hoping is that you don't think about it and rush in all excited. And hey, there is the potential to make money! It's not impossible like a real scam. It is however unlikely, and we will talk about why.

You see mining cryptocurrency is inherently very competitive. Everyone is always upgrading their hardware, either the quality of it or the amount they have in an effort to one-up each other. When it comes to any proof-of-work cryptocurrency (Bitcoin, Litecoin, Dogecoin, etc.) their is a never ending arms race occuring. Here is a graph of Bitcoin hash power over time just to illustrate this.

Now this graph is a little outdated but you can clearly see a pattern. And if you zoom out over the entire history of Bitcoin the pattern holds true, hash rate is almost always increasing.

You've paid $200 upfront for 3 TH/s. And you represent a microscopic percentage of the network, awesome! But with hash rate always increasing, the power of your static 3 TH/s is always decreasing relative to the rest of the network. And while your earnings will feel reasonable during month 1, you calculate it out for 2 years and it looks like you will profit. What you'll find is month by month your earnings will steadily decline, and one day when you do the math you'll find you won't ever break even on your investment.

Genesis Mining is actually going to be making more money from their hash power by selling it to you at it's value today, and knowing that it's value is essentially ever-decreasing, than they were ever going to make mining themselves with it.

Now you may find yourself making money if you're lucky and catch yourself in a bull market. The upswing of the price will offset the losses of your hash power's ability to mine slowly declining. However in this situation you will always find you would have been better off merely buying the crypto in question rather than mining it.

Now you'll find Genesis Mining advertises many of their current contracts without maintenance fees but up until recently they did not. They had lifetime contracts available and in fact charged a fee every day for maintaining your contract, which they removed from your mining earnings. And this is a system many other cloud mining companies still employ. And if you sign up for these companies contracts you will likely be counting yourself among the majority who receive emails that look like this.

This is a real email from Genesis Mining circa 2019. Elliot had paid $7000 for a lifetime contract. But because of the market, and ever increasing hash power they found themselves net $-6500 with no contracts to show for it. Now I don't mean to pick on Genesis Mining as I don't have a fonder view of any cloud mining companies out there. I just found it simpler to write this from the perspective of making a purchase from one specific company.

Keep in mind I'm not a financial advisor. But I spend a lot of time looking into earning passive income. It's my #1 hobby! And after doing plenty of research over the years on Cloud Mining I have found that instances of profits and success are few, and when they do occur they are generally only because of a coinciding bull market. And the user would have made more via investing themselves.

Cloud Mining companies, like all companies, have their own best interests at heart. And no one is generously giving away profits to you. Think twice before purchasing these contracts if you're doing it to earn passive income. If you merely want to participate in the network and experiment for fun? That's a case where I recommend them, and I do think they have a place in the crypto space.

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