What is Cloud Mining?

By Mohammad Musharraf

Cryptocurrency mining is a process Proof-of-Work blockchains, like Bitcoin, employ to operate the network securely in a decentralized setup and add new blocks of transactions. 

As part of the process, miners use powerful computers to find solutions to cryptographic puzzles. The miner that successfully solves a puzzle creates the block and earns a reward in return. As such, mining crypto is very popular. After all, who wouldn’t want to earn cryptocurrency?

But mining cryptocurrencies on your own, i.e. solo mining, can be a lot like gold mining: technically difficult, expensive, and high-risk-low-reward. To explain, you need expensive computers, high bandwidth internet connection, and a lot of electricity; not to mention some technical know-how.

Even after all that, a proof-of-work system favors miners with greater computational capacity,  meaning it can be extremely difficult to compete with large companies with extortionately expensive mining rigs.

Luckily, there’s a much less complicated alternative: cloud mining. But what is cloud mining exactly?

Let’s explore:

What is Cloud Mining?

Cloud mining is a method to mine cryptocurrencies by leasing equipment or renting computing power from data centers. It negates the process of individually setting up physical mining hardware, getting a high-speed internet connection, sourcing electricity, and maintaining the hardware.

These data centers take care of everything on the backend, and merely ask for user’s money either to rent an entire mining rig, or lease some of the power the farm uses. 

Instead of setting up your own hardware and servers that run 24-7, you choose a subscription plan and pay the fees to the respective company and rent either an entire rig, or just some of the farm’s “hash power”. 

But before we get into the specifics of what that means exactly, let’s explore why cloud mining in the first place.

What Is Cloud Mining For?

Put simply, cloud mining allows anyone to start earning crypto rewards via mining. But there’s a bit more to it than that.

You see, mining crypto means setting up and running costly machines. Computers capable of mining also use a lot of energy and generate tremendous heat and noise. Having them at your home can be bothersome to say the least. With cloud mining, you skip dealing with this heat, noise and high energy consumption. You don’t have to buy or set up any specialized equipment. You just pay the company a certain fee and get a share of the crypto they mine. It’s as simple as that…mainly. 

But in all truthfulness, cloud mining can be more complex than that, depending on which method you choose. So let’s explore the main types.

Types of Cloud Mining

There are two primary approaches to cloud mining: Hosted mining and Leased hash power. So what’s the difference between them?

Hosted Mining

Hosted mining refers to cryptocurrency mining where you rent an entire mining rig situated in a mining farm. With this method, the rig itself stays where it is—all you have to do is fund it virtually. From there, the company owns and operates the mining setup, and you don’t have to worry about the heat or noise that comes with it.

Since you rent the entire piece of equipment, you can also define your mining preferences, uptime, and strategy too. Then when you receive the mining rewards, you’re obliged to pay a small commission to the company running the rig.

Leased Hash Power

Leashed Hash power works a little differently. With this method, you still need to employ the services of a mining farm, however, instead of renting an entire mining unit, you rent a portion of computing power over a fixed period. This is called “hash power” and instead of tying cloud miners to a specific piece of equipment, it allows them to earn mining rewards determined by the power they are willing to pay for.

This means no hardware, no upkeep time, and no maintenance on the individual’s side. Then the rewards are determined based on the amount of hash power you lease. The more power you lease, the more of the mining rewards you make. 

With this method, the company has the ultimate control over your mining efforts; from running the rigs to distributing the rewards. As a result, they usually charge a more significant fee.

How Does Cloud Mining Work?

At their base, all cloud mining involves mining farms. These companies may own multiple mining rigs, enough that they can rent full pieces of equipment or just portions of their computing power to individuals hoping to make some passive income. So how does that work exactly?

Mining Farms

Large-scale companies set up vast mining operations, referred to as ‘mining farms’. These farms, equipped with multiple high-powered computers, are capable of mining cryptocurrency far more efficiently than any single individual.

Renting Equipment or Hash Power

From here, the mining farms offer up either entire mining rigs or just some hash power for rent. This is how individuals like you and me can participate in the mining process remotely.

Earnings Distribution

After choosing a method of cloud mining, the renter earns rewards in return for their investment. So, for those who rent just the computing power, they earn a proportion of the rewards. Then for those that rent an entire rig, they pay a portion of their rewards to the mining farm. 

This is how cloud mining makes it simpler and more accessible for everyone to participate in the mining process.

Risks When Cloud Mining Crypto

Of course, cloud mining isn’t risk-free by any means. Here are 4 key risks to be aware of:

Scammy Projects

Many cloud mining platforms have proven fraudulent, disappearing with users’ investments. Always research extensively to ensure the legitimacy of the platform and avoid potential scams.

Fees

Service fees and operational costs associated with cloud mining can eat into profits more than you think. At times, just purchasing the cryptocurrency and HODLing it can prove more profitable than mining.

Market Volatility

Cryptocurrencies are known for their price volatility. A sudden drop in the value of a mined cryptocurrency can instantly turn a seemingly profitable venture into a loss-making journey.

Regulatory Hurdles

The legal landscape for cryptocurrency and mining is evolving and varies globally. 

Miners must be aware of regulations in both their own country and the mining company’s jurisdiction to avoid potential legal repercussions.

Now that you know the risks of cloud mining, let’s look at some of the other things you should be aware of.

Important Terms to Know Before Cloud Mining

Before you start cloud mining, it’s important to become familiar with some of the terms which may affect your choices. Let’s take a look at some of the most important aspects of cloud mining:

Hash rate

It is the mining power you possess. A higher hash rate increases the chances of solving cryptographic puzzles, leading to more mined blocks and rewards.

Energy consumption

Mining requires significant computational power, consuming a lot of electricity. Lower energy consumption per hash translates to more profitability.

Cost per hash

This reflects how efficiently your mining operation runs. The lower the cost per hash, the more you earn for each unit of mining power.

Mining difficulty:

As more miners join the network, the difficulty to mine a block increases. Higher difficulty means you’ll need more power and time to mine the same amount of crypto.

Block rewards

After mining a block successfully, the reward you receive is termed the ‘block reward’.

Price of the asset

The value of the cryptocurrency you’re mining directly affects profits. If its price rises, your mined cryptocurrencies become more valuable, and vice versa.

Platform fees

Cloud mining platforms charge fees for their services. These fees, often percentages of your earnings, will reduce the net profit you pocket.

How to Start Cloud Mining

Now you know all about the terms involved, you’re ready to start cloud mining yourself. Here’s a step-by-step guide on how to begin:

Select a Mining Service

Before you dive into the world of cloud mining, it’s essential to be diligent. As mentioned earlier, the industry has witnessed several cloud mining scams. It’s crucial to ensure that the company you choose has a genuine reputation and is not out to defraud investors. 

Delve into online forums, look for certifications, and maybe even reach out to past customers. The company should have a history of reliability and transparency in its operations.

Beyond that, you must also find and select a mining service that works for you.  Not all mining farms offer the option to lease hash power. So, you’ll have to choose wisely depending on the type of cloud mining you want to participate in.

Finalize Contract Agreement 

Finalize the contract details, such as the duration, hash power, and fees. Once settled, pay for the service as per the company’s guidelines.

Start Mining

With the payment processed, your cloud mining starts. Monitor your account to keep track of mined rewards. Most platforms provide dashboards to check earnings in real time.

Track Your Rewards

Of course, the investment you make should ideally see a return. If not, why are you here? Make sure you calculate expected rewards against your expenses to ensure that the venture will be profitable for you. Then, make sure you’re tracking those rewards to guarantee you are making a profit. 

If you want to make the most of cloud mining, you’ll want to be open to adapting your mining strategies and preferences if needed based on market dynamics.

Final Thoughts on Cloud Mining

Cloud mining is a quality step-up for anyone willing to have more skin in the game in the cryptocurrency industry. Plus it enables you to personally contribute to the security of Proof-of-Work networks.

Similarly, it also parallels pooled crypto staking in many aspects. Both provide an avenue for individuals to partake in the cryptocurrency ecosystem without directly engaging in complex operations. 

However, in both aspects, due diligence is paramount. Selecting reputable platforms is non-negotiable and so is storing your cryptocurrencies safely. To facilitate this, Ledger hardware wallets are primed with security and convenience features. 

This ensures a safe and smooth experience whether you just want to HODL or gravitate toward cloud mining or staking. Irrespective, you can never be ‘too safe’.  So remember to do your own research (DYOR) before you begin, and as ever keep the private keys for your rewards offline, to stay safe as you explore cloud mining.