This guide will explain, in the simplest terms, what cloud mining is, how it works, as well as the main advantages and disadvantages of the process.
There are also several methods and types of cloud mining, which we’ll discuss in more detail. Read on to learn all about it!
What Is Cloud Mining?
Mining is an integral part of blockchains that use proof-of-work consensus, such as Bitcoin. It enables miners to gain rewards for transaction validations.
That said, cloud mining is the process of mining cryptocurrencies. However, it differs from traditional mining as it uses cloud computing power. In other words, mining occurs in the cloud, not on computers. This means miners won’t have to install expensive hardware to mine crypto coins. Instead, they’ll rent mining rigs from cloud mining companies. After processing a block, they’ll receive rewards that they’ll share with the renting company.
Cryptocurrencies can be mined via the cloud in different ways, from solo mining and mining pools to CPU/CPU mining. Each method has its advantages and disadvantages. Furthermore, there are two main types of cloud mining — leased hash power and hosted mining.
Cloud mining is a new technology that makes mining accessible to a larger number of people. Why? Because it doesn’t require technical knowledge and the use of mining rigs. This makes it very popular among crypto beginners.
Methods of Cloud Mining
As mentioned above, cloud mining includes three methods:
- Solo mining
- Mining pools
- GPU/CPU mining
Solo mining refers to mining cryptocurrencies independently. This means that the miners have to install hardware suitable for the cryptocurrency they want to mine. For each successfully mined block, the miner will receive a reward.
The main advantage of solo mining is that the miner will be the sole owner of the rewards. For example, the miner will receive around 6.25 BTC for each discovered block. Moreover, with solo mining, the chances of getting interference due to outages are minimal.
On the other hand, the main disadvantage of solo mining is the need for large starting capital. In addition to that, solo miners may lose their rewards if another miner participates in solving the same block.
Another method of mining cryptocurrencies involves mining pools. Mining pools refer to a group of miners who connect their rigs via a network. The goal of mining pools is to increase miners’ chances of getting rewards.
Due to the shared hash power, pool miners will mine blocks much faster. However, this also means they’ll have to share their rewards. The amount of the reward will depend on their contributed hash power. Moreover, to get a reward, they’ll also have to present proof of their transactions.
The biggest benefit of mining pools is the possibility of generating higher incomes. Pool miners will also be able to mine multiple crypto coins. However, mining pools also come with certain risks. On that note, they are vulnerable to DOS attacks and security flaws.
This mining method refers to crypto mining via the Graphics Processing Unit (GPU) or Central Processing Unit (CPU). What distinguishes a GPU from a CPU is the way they mine cryptocurrencies.
The GPU uses the computer’s graphic processing unit to verify transactions and solve hash blocks. On the other hand, the CPU uses the primary processor of the computer.
CPUs are generally weaker and much slower than GPUs, and they often have problems with overheating. This is why they’re not so popular among miners. Inversely, GPUs can handle heavier workloads because they have better memory bandwidth and greater processing power.
That said CPU mining is more suitable for beginners, while experienced miners will have more benefits from GPU mining.
How Cryptocurrency Cloud Mining Works
The main difference between cloud mining vs hardware mining is that the former doesn’t require mining rigs. Why? Because the mining process takes place on the cloud. Instead of investing in mining rigs, cloud miners have to buy cloud mining contracts.
These contracts will enable them to rent specialized mining equipment or hash power from cloud mining platforms.
The higher the hash power they have, the higher their chance of winning rewards will be. Cloud mining platforms will also be responsible for electricity costs and hardware maintenance. Some platforms will offer mobile applications that will allow miners to monitor their hash rate in real time.
Crypto miners will be able to rent mining equipment for a certain period and a specific fee, depending on the platform they use.
Types of Cloud Mining
There are two types of cloud mining — leased hash power and host mining. Here’s how they function:
Leased Hash Power
Leashed hash power refers to borrowing hash power from a mining farm for a specific period. The higher the amount of hash power, the higher the mining reward will be. Moreover, miners won’t have to pay a maintenance fee. Instead, they’ll have to subscribe to a specific plan.
After the mining farm discovers a new block, miners will receive a reward depending on the amount of hash power.
The main advantages of leased hash power include lower investment, participation in speculative mining, and the potential for a stable income. This option is suitable for people who don’t want to invest in mining rigs and those who don’t understand the technical aspects of mining.
Host mining involves buying or renting an entire mining rig from a cloud mining platform. It allows miners to have more control since they’re able to specify the performances of their rigs.
However, since the rigs are physically located in their homes, miners also need to have a good internet connection and adequate cooling. The main advantage of this model is that it comes with zero maintenance fees. Moreover, most cloud mining platforms will replace the old parts for free for their customers.
What’s more, some platforms offer discounts on electricity costs if miners buy longer contracts. This approach is suitable for more experienced miners who want to have more control over their mining rigs.
Advantages and Disadvantages of Cloud Mining
Cloud mining comes with the following benefits and risks:
No Need for Technical Knowledge
The main benefit of cloud mining is that it requires no technical knowledge. Namely, anyone can become a miner since the cloud mining platform will take care of the technicalities.
Setting up a mining rig can be very expensive. On that note, most mining rigs cost between $1,000 and $4,000. Cloud mining reduces this cost since miners will be renting instead of buying their rigs.
Is cloud mining profitable? Yes, since it enables miners to generate passive income. This income will depend on the hash power and the coin that is minted.
To rent a hash power, miners will have to pay specific fees that include service fees, maintenance fees, and pool fees. Moreover, cloud mining won’t give users complete control over mining. This means that rig providers will make all decisions, which may not be in accordance with everyone’s mining strategy.
Cloud mining platforms will have full control over mining. This means that if they go out of business, miners will lose all their profits. This is why it is essential to check the legitimacy of each platform before creating an account.
Mining and cryptocurrency laws may vary from state to state. They are also subject to change. This means that cloud mining platforms must comply with the laws and regulations of the state in which they operate.
How to Start Cloud Mining
You can start cloud mining by following these five steps:
1. Select a Mining Service
When choosing cloud mining providers, pay attention to their reputation, fees, and mining models. This will help you choose the one that best suits your mining strategy.
Likewise, give preference to platforms that offer features like real-time monitoring and automatic cloud bitcoin mining. Keep in mind that most providers will require a minimum investment.
2. Finalize Contract Agreement
After choosing a cloud mining provider, you’ll have to create an account and choose the contract agreement that suits you best. These agreements will specify the amount of hash power that you can rent, as well as the duration of the contract.
As mentioned before, higher hash power means higher rewards, but also higher fees. Make sure you choose a contract agreement that will include the altcoin you prefer to mine.
3. Begin Mining
Before starting the mining process, you’ll have to fund your account. As mentioned before, some providers will require a minimum investment that can go up to $100.
After completing this step, you’ll be able to set the parameters of your mining rigs, from mining pools to allocating your hash power. For example, you can select the ETH pool and allocate your hash power to ETH mining.
4. Collect the Rewards
Most cloud mining platforms will allow you to keep track of your rewards through their dashboards. You should track your rewards to ensure that you’re making a profit. Mining rewards will depend on your hash rate, and they’ll be shared between you and the cloud mining provider.
To cash out your rewards, you’ll have to set up a crypto wallet that’s compatible with the coins you’re mining.
Now that we understand what cloud mining is — is it worth it? Yes, however, its profitability will depend on the fluctuations in the prices of crypto coins and the efficiency of the cloud mining provider. This is why it’s essential to find reputable providers that will be transparent about their fees and contract agreement terms.
Although cloud mining is a good low-cost alternative to traditional mining, this strategy also comes with certain drawbacks, such as high fees and regulatory issues.