The Risks of Reinvesting Bitcoin on HashFlare
HashFlare cloud mining is becoming very popular in 2018, and one particular aspect of it has us a bit worried; reinvesting. In this guide we go through some risks of reinvesting your mined coins on HashFlare.
YouTuber Income is Exaggerated
A lot of YouTubers have been posting videos on HashFlare reinvestment strategies in January 2018, and many of them show their HashFlare 'Dashboard' where at the top there's a chart displaying 'BTC Balance'.
If a reinvestment strategy was working you might expect to see this BTC balance increase by more each day, so tomorrow it would go up by 0.01 BTC, the day after by 0.012 BTC, etc. A big problem is that a YouTuber using HashFlare's affiliate program would see a similar pattern, where as their content becomes more popular and more people click on their affiliate link they'd see their balance increase by more each day.
There's nothing wrong with this, it's just a side effect of them becoming more popular and getting lots of affiliate income; but viewers of these videos should be aware of this, that they'll likely see a less dramatic increase than the YouTuber is getting even with a successful reinvestment strategy.
Reinvestment Calculators getting Difficulty Wrong
Lots of reinvestment calculators are popping up, often in the form of spreadsheets or websites. A problem here is with the values used for Bitcoin's difficulty, where often it's underestimated in two ways:
- Many calculators get Bitcoin's difficulty from BitcoinWisdom, which has an outdated value. As of writing this on 4th February 2018, BitcoinWisdom states that Bitcoin's difficulty is 1.33T, but it's currently 2.6T; so any calculator using BitcoinWisdom's value will significantly overestimate profitability.
- A second issue with BitcoinWisdom is that many calculators are using it to estimate future difficulty changes. On 4th February 2018 it states the next difficulty change will be -16.49%, but since 6th December 2017 Bitcoin's difficulty has increased every 2 weeks, again causing these calculators to overestimate profitability.
We wrote a separate guide discussing this in more detail here.
Bitcoin's Difficulty Changes Every 2 Weeks
This is a strange issue to have, but we've seen it happen on several reinvestment calculators. Generally speaking Bitcoin's difficulty changes every 2 weeks (it would be slightly faster if lots of new people are mining, and slightly slower if fewer are). This means when predicting profitability in the future, you need to update Bitcoin's difficulty every 2 weeks, let's say you go with a 15% increase every 2 weeks.
Some calculators don't do this, instead they say Bitcoin's difficulty will increase by say 200% over a year, or maybe 500%. In theory this is fine, given the correct maths you can average this value and give the total profit over a year. The problem is that this value needs to be signficiantly higher. If you take say a difficulty of 1T, and increase it by 15% every 2 weeks for 52 weeks, you wouldn't get this 200-500% increase that a lot of people think. You'd get an increase of more like 3800%. The percentage increase compounds the same way profit does, causing it to get exponentially larger over time.
HashFlare Pricing & Minimum Withdrawals
Two HashFlare-specific problems are:
- They may change their pricing within the next year. Recently they changed Bitcoin contracts from $1.50 per 10 GH/s to $2.20 per 10 GH/s, an increase of 47%. Any increase in this pricing would effect reinvesting profitability.
- Minimum withdrawals are very high at the moment, varying between 0.02 BTC and 0.05 BTC. Some reinvestment strategies suggest withdrawing every few days to minimise risk, but unless you invest a significant amount initially you wouldn't be able to do this due to the minimum withdrawal limits being so high.
Bitcoin's Price Effects Buying Power
This concept can be tricky to visualise if you're new to Bitcoin. So Bitcoin's price varies by a lot, it dropped by around 55% between 17th December 2017 and 2nd February 2018. This means that the Bitcoin you're mining has become less valuable over that time. On the 1th December 2017 you would have gotten 55% more for your money than on the 2nd February 2018. A daily reinvestment strategy would average out this buying power, where if Bitcoin went from $20k down to $10k say, your average price would have been around $15k.
If you'd taken a different approach, where you assume Bitcoin's price will go up again at some point (so there is the risk here that it could keep going down). If you'd stopped reinvesting when Bitcoin's price dropped, then started reinvesting when it went back up to say $20k, you'd have gotten more hashpower for the same amount of money.
A counter argument is that you might have to wait several months for Bitcoin's price to go back up, and so there's no benefit to waiting. You need to research this area yourself and compare the pros/cons of each scenario.
We've gone through lots of risks in this guide which effect reinvesting on HashFlare. Now that you're aware of them you should be able to make more informed decisions on whether reinvesting would work for you or not.
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