Last week, cryptocurrency miner manufacturer KnCMiner launched a new service called Cloud Mining. Through this service, clients are offered the ability to rent a Bitcoin miner for a certain period of time from its new arctic datacenter. Mining contracts last for a period of six months, and are priced at $2,000, $5,500 or $9,000 for 1 TH/s, 3 TH/s or 5 TH/s of computational power respectively. More than ever, this service reveals how miner manufacturers shamelessly earn money over the backs over their clients.
The previous can easily be shown with some calculations. For a start, it can be established that 3 TH/s would be able to mine Bitcoins at a rate of 0.055814 coins per day. To get to this number, the proportion of total hashrate owned must be multiplied with the total number of coins released through mining per day. Currently the Bitcoin network hashrate is at 215,000 TH/s, while 4,000 coins are released per day. The latter assumes a block time of 9 minutes on average. Bitcoin actually has a block target time of 10 minutes, but with slow difficulty adjustments and the total hashrate quickly increasing blocks are found at a faster pace.
If the total network hashrate remains equal throughout the entire period, then the miner can mine 10.21 coins over six months (0.055814 * 183 days). With the current price of Bitcoin at $480 per single coin, 10.21 coins would be worth $4,900. This is only the first indicator that the service is overpriced, given that a $600 loss is realized if the price does not change. As the contracts ends after six months, the client will not get more than 10.21 coins from this miner while the client could also use the $5,500 to buy 11.46 coins.
But it gets worse, as the network total hashrate typically does not remain stable. In fact, so far it has been increasing with an exponential trend line. The reason for this is that mining profitability is driven by efficiency, and by the laws of economies of scale a larger scale means more efficiency. Large scale also means more hashrate. These miners push aside less efficient small scale miners, causing the hashrate to spiral upward.
By applying a linear extrapolation using increments of 1,833,333 GH/s per day in the total network hashrate, to approximate the exponential trend, it can be calculated that 3 TH/s would only mine 6.19 coins in six months. At the current Bitcoin price, this is just $3,000 or $2,500 below the price of renting a miner for six months. Not a very attractive deal. Note that if Cloud Mining is successful it will itself contribute to an increasing network hashrate.
It does not stop there, as the rent of a mining contract must be paid in advance. To KnCMiner, this transforms the rental contract in a short forward/swap hybrid instrument without any counterparty risk. The client receives an expensive long position with full counterparty risk. If polar bears ravage KnCMiner’s arctic Cloud, the company might fail to deliver the agreed coins. Rather than receiving a discount for this risk, clients actually get to pay more for an overpriced product.
Overall, KnCMiner is not exactly acting in its client’s best interests. The new service primarily benefits the company itself, and does not seem to hold any benefits to its clients at all. These would be better off using the money to buy actual coins.