What Is Cloud Mining and How Does it Work?

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Cloud mining operation is an alternative to conventional cryptocurrency mining. Cloud mining is usually regarded as being a more favorable method to generate digital coins for people who are not technically proficient, as well as for those who do not wish to run and maintain their own hardware and related software.

It is a method that definitely offers benefits to miners, but it is also a field that has become ripe with scams. In this article, we shall take a closer look at what cloud mining is and how it works, as well as what its advantages and disadvantages are.

What Is Cloud Mining?

Cloud mining is a process of generating cryptocurrencies by using rented computing power from a third party (cloud mining service provider). Every miner actually participates in a “mining farm” (remote data center dedicated to crypto mining) by purchasing a certain amount of “hash power” from the service provider. In exchange, the provider will grant them access to rewards that are proportional to the amount of hashing power miners have purchased. 

Since the mining operation is carried out via cloud, miners do not need to worry about computer equipment maintenance, noise, heat, or energy bills. After finding a reliable cloud mining service provider, miners only need to choose the type of contract to sign and the desired duration. They will have to make an upfront payment, either in fiat currencies or digital currencies, after which the provider will set them up with everything they need for the operation. 

Generally, miners can choose between contracts for 500 and 1,000 gigahashes per second, with a duration of up to one year. (One GH/s = 1 billion hashes per second.) Yet, some providers may offer short-term cloud mining contracts, 6-month or even 24-month contracts.

What Is Bitcoin Cloud Mining?

Bitcoin mining is painstaking and involves costly mining equipment for the scant rewards. The bitcoin cloud mining services act as an alternative for everyone to start mining bitcoin without the need for expensive equipment or technical knowledge. Just like any cloud mining, the concept is straightforward involving only the remote data center with a shared processing power — hashing power.

While the return of investment (ROI) from bitcoin cloud mining is arguably rewarding. But it all depends on the upfront costs and the valuation of the bitcoin’s price at that moment. Since you’re technically borrowing the computing power from a cloud mining service provider, the price per gh/s or th/s and the service fees could play a major factor in deciding your actual ROI.

Compared to owning a GPU mining that costs $2,000 to $8,000 for a high-end unit, cloud mining could actually save you a lot of troubles from the hefty electricity bills, the noise, and the heat. All it takes for you to sit back and watch the rewards roll in is to purchase your desired hash power and settle for a desired investment period. But, cloud mining is just like any other form of investment; it always involves uncertainties and risks. Always do your due diligence before investing. 

How Does Cloud Mining Work?

There are two types of cloud mining models: 

  • Host Mining: Miners buy or lease mining rigs on mining farms, and pay for their setup and maintenance. This model reduces costs associated with access to electricity. In addition, because miners have greater control over rigs, they can redirect the generated hashing power to mining pools. Additionally, miners have total control over rewards generated.
  • Leasing Hash Power: Miners lease a portion of the hashing power that a mining farm generates. They essentially subscribe to a plan offered by the cloud mining company to receive a share of the mining farm’s profit. Miners do not need to pay any setup or maintenance fees, and mining rewards are distributed depending on the share of the hashing power that every miner controls.

How do Mining Pools Work?

All participants in a mining pool share their computational resources to increase the probability of generating a block in a cryptocurrency’s blockchain — which requires solving complex cryptographic puzzles. If participants succeed, they receive a reward, usually in the form of the cryptocurrency they mined. The amount they receive depends on the proportion of their processing power or work relative to the entire pool.

Distribution of Mining Rewards

All mining pools have their own level of difficulty, usually falling between 1 and the level of difficulty of the cryptocurrency mined. If a miner generates a block with a level of difficulty between the mining pool’s difficulty and the cryptocurrency’s difficulty, that block will be considered as a “share.” The majority of mining pools usually distribute mining rewards among participants based on the Pay-per-Share (PPS) model. 

There are also pools that may impose restrictions on paid rates per share. These pools employ models such as the Equalized Shared Maximum Pay per Share, and Shared Maximum Pay per Share.

What Contributes to the Idea of Cloud Mining? 

The enthusiasm to mine cryptocurrencies remains strong, although the mining difficulty is on the rise. There may be miners who prefer a hosted mining equipment rather than own it. Still, there are plenty of reasons that give rise to the idea of cloud mining.

Here are some of the possible reasons:

Demands for Network Hashing Power

The difficulty of cryptocurrency algorithms had risen while rewards had gotten smaller (for example, 6.25 bitcoin per block mined nowadays, compared to 50 bitcoin per block when it began in 2009). Mining operation owners realized that more computing power was needed to remain competitive. This led to the idea of mining pools, which combine the hashing power of all participants engaged in a mining operation.

The Limited Supply of Mining Coins

Only a predetermined number of coins of a particular cryptocurrency will enter the market (in Bitcoin’s case, 21 million coins). Coupled with prospects of its exchange rate rising, this has led to a series of innovations within the crypto mining space. Cloud mining is actually the evolution of mining pools.

Attractive Mining Returns

Another reason for the rise of cloud mining is the possible opportunities for miners to earn attractive rewards by participating in the mining operation. Cloud mining companies tend to offer generous payouts in order to lure clients/investors into participating.

You can now buy hash power from Bybit Cloud Mining!

Mining rigs and equipment

The Revolution of Mining Rigs

In the early days of crypto mining, the entire process used to be carried out on an average home PC. Later, miners began establishing mining “rigs” by combining GPU cards, which proved much more efficient at resolving complex mathematical equations (such as Bitcoin’s Secure Hash Algorithm-256) than normal CPUs. GPUs bolstered the hashing power of the Bitcoin network but also made the SHA-256 algorithm much more difficult to solve.

A bit later, application-specific integrated circuit (ASIC) mining rigs were introduced in the market, quickly making GPUs obsolete. However, these high-powered, purpose-built chips came at a cost that the average miner could not afford. The hashing power of the Bitcoin network increased further — as did the difficulty of the SHA-256 algorithm. It became almost impossible for users to mine on a regular CPU while their electricity costs skyrocketed. 

The ASIC rigs turned the crypto mining sector into a place that was mostly for major players. And this is where mining pools stepped in: their purpose was to allow anyone to participate in the mining operation to the best of their abilities and exchange for regular rewards. Those rewards are usually proportional to the donated hash power of every participant in the pool. 

Soon, data center operators realized there were a large number of people not participating in mining pools because they did not own a mining rig. Thus, they started to rent out hashing power within the pool, which gave rise to the concept of cloud mining.

Cloud Mining vs. Hardware Mining

In cloud mining, miners are actually investors in a mining operation and the only thing they ensure is money. The cloud mining company operates a mining farm consisting of mining rigs and allows miners either to buy or rent a share of the farm’s hashing power.

In many cases, the provider has invested in top-tier hardware, building the mining farm in a location with cheaper electricity and cooler climate. This way, the overall costs of running the farm are kept in check. Miners do not need to take care of anything in the entire process, and they only expect a cut of the farm’s profit. 

In hardware mining, miners own a mining rig of their own and have to decide whether to mine solo, or to join a mining pool and contribute to its computing power in exchange for a share of proceeds. They need to take care of all costs related to maintaining and upgrading the hardware, and to have a reliable internet connection at all times.

How Do Miners Benefit from Cloud Mining?

Cost Efficiency

Cloud mining tends to be very cost-efficient for miners. They do not need to pay for mining equipment of their own, constantly upgrading it, and there are no installation or setup costs. The only hardware they need is a tablet or smartphone to check their rewards from the operation.

This eliminates worrying about whether they’ll be able to sell any physical equipment when mining is no longer profitable. 

Miners also don’t need to be concerned about electricity bills, noise, or heat generated by mining rigs.

Technological Support

Cloud mining doesn’t require any specific knowledge of protocols, cryptocurrency or mining rigs. Miners only need to open an account with a service provider and pay a fee that depends on the amount of hashing power they wish to purchase. All rewards will be transferred directly to that account.

No Maintenance

Another benefit is that miners don’t need to worry about equipment maintenance (ensuring the best environment for a rig to operate), because the cloud mining company takes care of that. Companies usually employ chilling towers and other equipment to ensure good aeration for their mining farms, thereby avoiding hardware meltdown.

However, miners may be charged an equipment maintenance fee by the cloud mining service provider.

Risks Associated With Cloud Mining

First, since miners do not own any computer equipment, they have no control over it. This means they cannot sell it. 

Second, the profitability of cloud mining contracts varies greatly and is not guaranteed. Even if miners locate a trustworthy provider and sign a contract with that company, it simply means the latter will provide the exact services and hash rates advertised for the agreed duration. It doesn’t guarantee it will generate a profit for miners. Additionally, any profits earned can be trimmed by fees that miners may pay the provider during the term of the contract — on top of the upfront amount. 

Third, cloud mining space is ripe with cases of fraudulent behavior. Miners may pay a provider upfront and receive no rewards in return, or the promised rewards may not be as expected. Also, providers may disclose details of their mining farm, but no actual photos or other verification of it, which could well indicate a scam. Reliable cloud mining companies will always disclose information and actual photos of their data centers and, in some cases, even provide proof of electric bills. 

If a provider appears to be offering an unlimited amount of hashing power for sale, it could also be a scam — because no cloud mining company actually has unlimited computing power. 

Finding a trustworthy provider can be challenging. Miners always need to attend to their own due diligence regarding a particular company before contacting it. 

Finally, there may be circumstances under which a provider may put a halt to their mining operation — for example, when the exchange rate of the cryptocurrency mined reaches a certain level. Thus, miners need to pay close attention to a provider’s terms and conditions regarding “contractual warnings.”

The Bottom Line

Many experts believe that cloud mining, with its advantages and opportunities, is the future of crypto mining. For the time being, however, it remains a challenging sector with the circulation of frauds and scams. That means miners must do extensive research before investing in a particular company’s technology.

Disclaimer

This article is intended for and only to be used for reference purposes only. No such information provided through Bybit constitutes advice or a recommendation that any investment or trading strategy is suitable for any specific person. These forecasts are based on industry trends, circumstances involving clients, and other factors, and they involve risks, variables, and uncertainties. There is no guarantee presented or implied as to the accuracy of specific forecasts, projections, or predictive statements contained herein. Users of this article agree that Bybit does not take responsibility for any of your investment decisions. Please seek professional advice before trading.

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