Is Bitcoin Cloud Mining Profitable? (HashFlare)

Opinions

Date: 22.02.2018

Bitcoin has had quite a year this 2017, up to more than 1700% increase year to date (checked on Dec 17, 2017). With this exponential increase, comes an equivalent interest in mining them. Some think it’s a scam, while others think it’s a great investment. Given what I’ve seen online, and the many variables involved, I haven’t really encountered a thorough article that allows me to draw an unbiased conclusion by myself. This article is my attempt to gather my thoughts and hopefully provide that.

BEFORE EVERYTHING ELSE

Feel free to point out mistakes in this article if you see any. If you don’t know Bitcoin or blockchain technology you can check this article by Mohit Mamoria. If you want something more technical you can check out Mastering Bitcoin: Programming the Open Blockchain by Andreas M. Antonopoulos , I have only started reading the book myself, but I’ve heard a lot of good things about it. Shoutout to Michael Galero for painstakingly helping me learn and appreciate this technology throughout the years.

This article was originally written as an interactive Jupyter Notebook a few days ago. The notebook mentioned is slightly more in depth, this is a condensed version. More importantly, it was written when HashFlare offered their cloud mining contracts with an upfront free of $1.50 per 10 GH/s , because of the demand it seems like they increased it to $2.20. All the default values for the variables here including are taken from a few days back. Update as you see fit.

Scam or Legit?

FORMULATING A PROBLEM

Let’s make the problem more specific.

Given:

1. There is a service called HashFlare that lets you rent a SHA-256 algorithm miner for a year (assume 52 weeks or 364 days), you can choose how much share of hashrate you get. ($1.50 per 10 GH/s a few days back, now $2.20 per 10 GH/s)

2. Every day for the whole year you get an automatic payout in BTC but a maintenance fee will be automatically deducted from this given current the exchange rate between BTC and USD. The maintenance fee is 0.0035 USD /(10 GH/s) / 24 hrs .

Important Assumption:

Bitcoins mined by the network comes from the block reward only and not from transaction fees.

Find:

- Will I make money? If so how much?

As with all investments, we are never 100% certain, we can only make estimates based on what we currently know and assumption that are hopefully sound. Needless to say, how much money we will gain or lose depends on how much we put in.

First Things First

  1. How much hash rate will I get if I make an initial investment of x USD?
  2. How much in USD should I initially invest if I want to have y amount of hash rate?

How much will I mine every 10 minutes?

Theoretically and on average, it is targeted that every 10 minutes, a block is solved by the network of miners. Each time a block is solved, a number of bitcoins is added to the network by being awarded to the miner (or mining pool) which solved it. This number of bitcoins is the block reward which is currently 12.5. This value will halve every 210,000 blocks, with the next halving still more than 2 years away (See: Bitcoin Block Half). Estimating your piece of the pie or the fraction you will get is simple; it's your hash rate divided by the total hash rate of all the computers participating in the network. The current network hash rate can be seen here.

THE NETWORK HASH RATE VARIES OVER TIME

The network hash rate Hn and difficulty D is related by this equation:

Hn = D * 2**32  / 600

The complicated thing is that the difficulty is adjusted every 2016 blocks (2weeks) based on the time it takes to find the previous 2016 blocks.

Learn more here:

Also, looking at its history, the difficulty and consequently network hash rate tends to increase exponentially over time.

Let’s use this information!

Great! Did I actually make a profit?

The thing is, the USD per BTC exchange rate is very volatile and daily maintenance fee is subtracted from your bitcoin mined that day given the exchange rate at that time. So we have to make a few more assumptions about the exchange rate which is difficult to predict.

Assumption A: Constant Exchange Rate Scenario — The USD per BTC doesn’t change the whole year (You wish!)

The simplest case for the lazy! If you think the rate will go up and down but will average out through the year then it’s not a very bad assumption.

Assumption B: Bitcoin Crash Scenario — Right after you bought the contract, the USD per BTC exchange rate drops to X fraction of what it was and stays flat for the whole year.

You might think this would be a ridiculous assumption, but consider these:

November 30, 2013: 1 BTC = 1,149.14 USD

May 5, 2014: 1 BTC = 428.98 USD (dropped to a third in about six months!)

May 7, 2015: 1 BTC = 232 USD (almost halved in about a year!)

If bitcoin’s value halves, then HashFlare will get twice as much of your BTC given its maintenance fees are pegged in USD!

https://medium.com/@mithi/is-bitcoin-cloud-mining-profitable-712eb0396b60

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