- Editor Rating
- Rated 1 stars
- Really Bad
- Cointellect Cloud Mining
- Reviewed by:
- Published on:
- Last modified:
- Potential ReturnsEditor: 20%
- TransparencyEditor: 20%
- OriginalityEditor: 20%
- Follow-upEditor: 20%
Update: Cointellect’s service legitimacy has been more closely examined in a fraud risk assessment found here.
Cloud Mining simply allows users to mine cryptocurrencies without having to own any mining equipment. The datacenter with the processing power is managed by the Cloud Mining company, which is Cointellect is in this case.
Cointellect offers various contracts for different time periods and (Scrypt) processing power. Users pay a fixed rate for the full rental period upfront, and receive variable payouts based on the amount and price of the mined cryptocurrency.
Due to the previous, this product can best be compared to a common financial swap in which a fixed amount is exchanged for a variable performance. The buyer of a Cloud Mining contract hopes for prices to rise or network hashrate to drop in order to generate a profit. Proof of Work (PoW) mining algorithms, however, has led to a mining arms race to its nature. Hence, the total network hashrate will always have an upward trend for coins with a PoW algorithm. This will only be broken temporarily by sudden decreases in rewards per mined block for most coins, which is typically a rare (and predefined) event.
On the other hand, this product requires an upfront payment from the customer, which deviates from the payments in a common swap where fixed and variable payments change hands at the same time. If the customer is expecting an increase in price it would therefore be a superior strategy to simply buy the cryptocurrency, rather than receiving fewer coins (due to the increasing hashrate) at a later time as these will have less upward potential.
It imposes an additional condition on the product, as it should be profitable even if price of the mined currency remains equal. If this is not the case, then there is a superior strategy available leaving no reason to buy this product. In short, the product is meant for users who expect to receive a discount compared to simply buying a cryptocurrency.
A quick evaluation of one of the contracts providing 100 MH/s for 18 months priced at €3,000 ($3,750), however, reveals that the product is, in fact, overpriced.
An example is provided below for a miner that uses a 100 MH/s miner to mine (Scrypt coins) Litecoin and Dogecoin. Dogecoin is included because it allows for merged mining with Litecoin.
In this example it has been assumed that both of the network hashrates and currency prices remain equal for the entire period. But even with these favorable conditions the contract would result in a loss. It is impossible to generate any more coins through mining as the number of coins to be released over the entire period is known, and a miner will only get as many coins as the proportional contribution to the total network processing power (on average).
In reality, the final return would be even worse due to the ongoing mining arms race. By extrapolating the recent growth in the network hashrate the final return would be more likely to look as follows:
The expected discount is thus nowhere to be found. Not even if potential changes in hashrate are ignored, but somehow Cointellect claims the 100 MH/s contract will return €50 ($62.50) per day. The contract would earn itself back in just 60 days and return more than $33,000 if held for the entire 18 month period.
So what is going on? Amounts such as these are literally impossible to deliver, as shown in the examples, yet, some claim that Cointellect does indeed deliver amazing returns. The Cloud Company is therefore either making ridiculous promises and guilty of false advertising, or it is paying out more than just mining revenue making it a Ponzi scheme. The former situation is not a lot better, because the upfront payment for a mining contract would cause the customer to have a lot of counterparty risk on a company that cannot be trusted, only to receive a return that is below the initial investment. In both cases, Cointellect’s Cloud Mining contracts are best left avoided.