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Ethereum Cloud Mining on Hashflare.io is a losing investment. It is more profitable to simply buy Ether on an exchange.

I want to share my negative experience with Ethereum Cloud Mining on Hashflare.io so that you can learn from my mistakes when making your own investment decisions.

It’s very important to me that I am 100% honest.

I don’t want to just talk about my investment successes but also those times when I fall short of my goals.

I don’t like to dwell on times I lost money but if I’m not Learning from Mistakes then I’m not getting anything in exchange for the money I parted with.

I made the decision to invest in Ethereum Cloud Mining as a way to generate passive monthly income…and it didn’t work out at all!

If you’re already familiar with Ethereum, Ether and Mining you can skip down below.

What is the Ethereum Project?

Ethereum is a technology platform akin to Bitcoin. The project website defines Ethereum as follows:

Ethereum is a decentralized platform that runs smart contracts: applications that run exactly as programmed without any possibility of downtime, censorship, fraud or third party interference.

These apps run on a custom built blockchain, an enormously powerful shared global infrastructure that can move value around and represent the ownership of property. This enables developers to create markets, store registries of debts or promises, move funds in accordance with instructions given long in the past (like a will or a futures contract) and many other things that have not been invented yet, all without a middle man or counterparty risk.

Source: Ethereum.org

What is Ether?

Ether is a necessary element — a fuel — for operating the distributed application platform Ethereum. It is a form of payment made by the clients of the platform to the machines executing the requested operations. To put it another way, ether is the incentive ensuring that developers write quality applications (wasteful code costs more), and that the network remains healthy (people are compensated for their contributed resources).

Source: ethereum.org/ether

What is Ethereum Cloud Mining?

Mining Ether (Marketed as “Ethereum Mining”) is essentially renting processing power (hashing power) that is setup and maintained by a third party. This rented hashing power is then used to generate new Ether.

It allows someone like me who doesn’t have all the expertise in setting up or maintaining a mining rig to participate in mining.

What I Purchased from HashFlare.io

At the time I made my purchase, Ether was trading for around 9 USD, the Network HashRate was 945 GH/s, and the block time was around 17 seconds.

Using this handy Ethereum mining calculator I determined I would be making 108.91 USD per month provided Ether slowly grew in value and the hashing power of the network grew at roughly the same pace.

The 108.91 USD per month would be 1,306 USD at the end of the year. My cost was $561 so I had hoped to roughly double the invested capital in one year.

I also knew that this was a very risky investment and there was a good chance I could lose all my money.

Despite this I took the plunge and purchased 15 MH/s of processing power from Hashflare.io, good for one year, for 561 USD on 3 March of 2016.

On day 1 I was bringing in around .33 Ether per day, which would be around 120 ETH after a year.

The Investment Went Bad, Quickly

Since buying 15 MH/s of Ethereum Hashing power the overall Network HashRate of Ethereum has gone up.

A LOT.

As of writing the Ethereum Network HashRate is up to 3,356.29 GH/s from the 945 GH/s on 3 March 2017.

Ethereum Network HashRate

Ethereum Network HashRate Growth Since 30 July 2015

In other words the Network HashRate has gone up 255% since I started mining.

Relative to the new, higher Network HashRate my fixed hashing power is proportionally less and so I’m unable to mine as much Ether each day.

Meanwhile, the price of ETH has gone from $9 to $13, a more modest 44%. So the price increase in ETH is not keeping pace with the Network HashRate increase as I anticipated it would.

This is resulting in my profits being eroded away. On my first day of mining I mined about .33 ETH. Now I mine about .16 ETH. The amount I mine will continue to decline as long as the Network HashRate increases.

Even though ETH has gone UP in value 44%, the amount of ETH I’m getting each day has gone DOWN by 50%.

In order to simply break even ETH would need to trade up to around 18.7 USD.

I would also be better off if I had just bought ETH.

If I bought $561 of ETH for $9 (where it was trading when I started mining). I would have 62 ETH, and with ETH trading at $13, would be worth $806 for a $245 profit.

Ethereum Profitability Depends on Network HashRate

A Better Model

A better model for predicting mining profitability is to take into account the exponential growth of the Network HashRate.

Using the model I’ve developed, I predict that the total amount I will mine in one year will be just 30 ETH. Much less than the 120 ETH predicted by the static calculators that did not take into account the ever increasing Network HashRate.

The Red Dots show the ETH I mined each day, the blue line are projections of how much I will mine each day

The Red Dots show the ETH I mined each day, the blue line are projections of how much I will mine each day

How I Would Determine if Mining Ethereum is better than Buying ETH Directly?

I can’t do anything about the investment I’ve already made, but given what I know now, how would I determine if Ethereum Cloud Mining is both profitable and better than just buying ETH directly from an exchange?

I’d do it in two steps.

I’d like to take Hashflare.io as a real life example as I walk through the steps and Hashflare.io currently sells Ethereum Cloud Mining in 100 KH/s increments for $3.50 in other words, 1 MH/s for $35.

Step 1: Make an Accurate Prediction of how much you’ll be able to Mine

I would first make a conservative estimate of how much ETH I would be able to mine over a given timeframe. Using a static calculator is a start, but does not take into account the increase in Network HashRate, and as a result, will ALWAYS overestimate the amount of ETH mined.

Using my model, which takes into account the exponential growth of the Network HashRate, if I spent $35 for 1 MH/s of hashing power, I would be able to mine 1.289 ETH per year.

Step 2: Determine How Much You’re Paying per ETH Mined

The second step is determine how much is being paying per ETH mined, which is simply taking the cost ($35 in this case) divided by the ETH mined (1.289), or about 27 USD per ETH.

ETH is currently trading at $13, so $27 per ETH is very expensive.

Not only is it expensive but I’m paying more for ETH I won’t get until the FUTURE.

At this point I know that mining ETH will NOT be profitable unless ETH were to rise to 27 USD, at which case I’d just break even.

Further, I’d be better off just buying 2.69 ETH at $13 each, because if ETH were to go to 27, I’d make over $37 profit.

A $37 profit is better than breaking even in one year.

So anytime the price I get in step 2 is higher than what ETH is currently trading for, I know that is a LOSER and I’m better off just buying ETH directly.

What Ethereum Cloud Mining Would Cost if it was Profitable

As an example, if I can buy Hashing Power that would provide me 10 ETH in a year, and I could buy it for 90 USD today, I’m effectively buying ETH at a price of $9. I’m getting ETH at a $4 discount since it is currently trading at $13 today. I’m not aware of any Cloud Mining services that have pricing anywhere near this level.

Ethereum Cloud Mining is the Worst

Buying Ethereum Cloud Mining from Hashflare.io is the worst of all worlds because of the high price and delayed return.

I bought ETH at a premium today for ETH that will be delivered in the future when I want to be getting ETH at a discount today for ETH delivered in the future.

At current prices offered at Hashflare.io (because buyers aren’t getting a discount, they’re paying a premium) the only possible way it would be better to buy Ethereum Cloud Mining would be if the Network HashRate were to drop, and drop precipitously, while the price of ETH fell slowly, or better yet stayed the same or rose.

But as I mentioned before, the Ethereum Network HashRate has steadily gone up since the project’s inception on 30 July 2015.

Lessons Learned

It’s important that assumptions made when modeling future earnings are accurate. In my case I assumed a linear increase in Network HashRate when an exponential increase would have been more appropriate.

When making high risk, experimental investments, keep your investment size small. I invested $561 knowing I might lose all of it. If I had gotten greedy and invested more, that would only have compounded my losses.