What is cloud mining?

• Cloud mining provides a way for people to participate in crypto mining without needing to set up and run complex equipment.

• You can think of cloud mining as a subscription-based service where buyers can lease equipment or computing power from a third-party provider.

• While cloud mining presents several advantages over direct crypto mining, it’s not without its own risks and vulnerabilities.

Mining is a core part of the proof-of-work blockchain consensus mechanism. A handful of cryptocurrency projects use this system to help secure their blockchains, issue new units of cryptocurrency into circulation and verify transaction data.

If you’re unfamiliar with this process, we have a dedicated article on, What is Bitcoin mining? to help guide you through it. 

Mining cryptocurrencies such as Bitcoin (BTC) or Dogecoin (DOGE) is a popular way for people to participate in running proof-of-work blockchain networks.

In exchange for contributing to a blockchain network, miners have the opportunity to win block rewards. Block rewards contain an amount of newly-minted cryptocurrency — typically the native token of the underlying blockchain network. For example, successful bitcoin miners receive newly-minted bitcoin (BTC), and Litecoin miners receive newly-minted Litecoin (LTC) as a block reward.

Competition for block rewards has intensified over the years as larger and more sophisticated mining operations have joined the market. There are now several publicly-traded companies, including Marathon Digital Holdings and Riot Blockchain, whose sole focus is to profitably mine BTC.

This competition makes mining bitcoin incredibly difficult for individuals and has ultimately resulted in two primary divergences from traditional BTC mining. 

1. Some individuals and smaller businesses who are priced out of BTC mining have chosen to mine smaller cryptocurrencies instead or join mining pools.

2. Cloud mining services have emerged that allow participants to rent computing power directly from large data centers, removing the need for miners to purchase, set up and run their own equipment.

Cloud mining offers an alternative solution for casual or entry-level crypto miners looking to participate in blockchain networks. 

Unlike traditional crypto mining, cloud mining doesn’t require a deep technical knowledge of crypto mining or the ability to set up and run potentially large-scale computer hardware.

Instead, cloud mining enables anyone to participate in crypto mining by leasing mining resources over the internet. There are two primary ways that crypto mining operations facilitate cloud mining services:

• Renting a certain amount of hashpower (for example, a customer buys the rights to BTC mined by 1% of the hash rate of a BTC mining operation). Nicehash is an example of a well-known service offering hashpower-based cloud mining.

• Leasing physical crypto hardware (for example, a customer buys the rights to BTC mined by 1 Antminer ASIC). One example of a cloud mining service that offers hardware for lease is ECOS.

Overall, cloud mining turns a resource-intensive venture like crypto mining into an activity that feels more like subscribing to an online service. People can purchase contracts representing a portion of mining revenue generated at a specific crypto mining location. 

For example, a service like ECOS owns a large data center that houses multiple crypto mining rigs. Through their cloud mining service, customers can rent out a portion of this equipment in exchange for a portion of any daily mining proceeds the facility generates. 

Essentially, this is a way to subscribe to an amount of computing power (sometimes at a fixed rate), to generate block rewards in the form of BTC or another cryptocurrency.

While cloud mining and traditional crypto mining both aim to achieve the same end goal – to earn block rewards from mining cryptocurrency – there are several key advantages and disadvantages associated with cloud mining that all prospective investors should be aware of.

Advantages of cloud mining

• Low barrier to entry: Traditional crypto mining requires procuring, installing, running and maintaining potentially expensive computer hardware. Cloud mining, on the other hand, typically involves purchasing contracts and paying toward maintenance fees.

• No technical knowledge needed: Traditional crypto mining requires deep technical knowledge of blockchains and hardware. Cloud mining does not. With that said, you will still need to understand basic mining terminology, such as hash rate (a blockchain’s hash rate is essentially the measure of all computing power used to mine a particular cryptocurrency) and mining difficulty (the dynamically-adjusted difficulty of the mining process that aims to ensure new blocks are discovered at a consistent rate). 

• Geographic opportunities: Certain countries, such as Italy and Austria, have relatively high electricity costs that can make it difficult to directly mine crypto profitably. Cloud mining allows people in these locations to participate in mining operations based in other geographic locations where rates may be cheaper.

Additionally, some regions have issued restrictions or bans on cryptocurrency mining over concerns of excessive power consumption and the potential stress on national power grids. To ensure compliance, be sure to check the regulatory guidelines in your region before investing in cloud mining services. 

Disadvantages of cloud mining

• Hash rate centralization: When one or a few parties control a sizable portion of a blockchain’s hash rate, it can create weaknesses in the network. If they were to suffer an attack or go offline, it could seriously impact the wider network.
  The most secure blockchain networks are highly decentralized, such that no single entity can significantly affect the integrity or operation of the network.

• Profits are not guaranteed: Whether participating in cloud mining or building your own mining setup, profits from mining are never guaranteed. Cloud mining sites often tout the profits that a person could make by using their services as if it were a “sure thing.” However, this is not always the case and does not take into account hidden fees and other associated costs. It’s important to do your own research into the true potential profitability of cloud mining before using any given network or provider.

• Fraud and scams: Traditional mining involves no intermediaries. A person can run their own equipment from home without relying on any other third party. Cloud mining, however, directly involves third parties and the need to trust them to hold up their side of the contract. Due diligence is crucially important when choosing a cloud mining service. Before committing to any provider, ensure that they have legitimate operations and provide fair compensation to their customers by searching for trusted online and video reviews. Be mindful that bots can sometimes leave written reviews, so be wary of any online feedback that seems unusually uniformal.

• Hidden fees: Cloud mining providers can be purposefully unclear about the fees they charge, such as withdrawal fees, miscellaneous expenses, maintenance and repair costs. This makes it important to consider the reliability and transparency of the collective mining pool by assessing audits, reports and any available user testimonies.

There are a range of cryptocurrencies available today that a person can cloud mine, though profitability can vary considerably between different projects.

A number of factors, including market value, mining difficulty and the cryptocurrency’s algorithm, can impact how easy or difficult it might be to cloud mine a cryptocurrency and make a profit.

Here are some notable cryptocurrencies that you can cloud mine:

Bitcoin (BTC)

• Due to its popularity, BTC has a very high mining difficulty, which necessitates sophisticated equipment and often very high costs to stand a chance of winning block rewards.

• This makes cloud mining a potentially attractive alternative to traditional mining methods, but still involves considerable costs and no guarantee of profits.

Ethereum Classic (ETC): 

• ETC is a fork of Ethereum that runs the original version of the Ethereum blockchain

• ETC’s lower mining difficulty compared to BTC means it can be easier for miners to compete for block rewards.

• Ether (ETH) was one of the most popular PoW cryptocurrencies until it changed its infrastructure to Proof of Stake (PoS) in September 2022. Since ETH is no longer an option for mining, many ETH miners switched over to ETC.

Litecoin (LTC): 

• LTC’s mining algorithm requires less computational power than BTC, making it a more accessible choice for cloud miners.

Monero (XMR): 

• While larger cryptos like BTC require specialized hardware, XMR’s RandomX algorithm is designed to level the playing field for anyone with access to a computer’s graphics processing unit (GPU) or central processing unit (CPU) mining power.

• By enabling participants to mine using hardware like CPUs and GPUs, which are relatively lower-cost options, XMR may be an appealing low-fee option for cloud miners.

ZCash (ZEC): 

• ZEC, like XMR, is a privacy-centric cryptocurrency that can be cloud mined.

• ZEC employs the Equihash algorithm, which is memory-oriented, making it more accessible for general-purpose hardware.

• Since ZEC can be mined with traditional hardware such as GPUs, it could be another low-cost alternative for cloud miners.

Dogecoin (DOGE): 

• Despite initially started as a meme, DOGE has garnered a significant following and market capitalization, making it a popular choice among cloud miners.

• Doge uses a Scrypt algorithm like Litecoin, and has a similarly lower barrier to entry in terms of hardware requirements.

Ravencoin (RVN): 

• Ravencoin is based on a fork of the Bitcoin code.

• RVN uses the KAWPOW mining algorithm, which requires more memory and processor registers. This feature makes mining with GPUs more favorable than using application-specific integrated circuit miners (ASICs).

• GPUs are far less costly and more widely available than ASICs, making Ravencoin a low-cost alternative to larger cryptocurrencies such as BTC. 

To start your cloud mining journey today, you’ll need to first find a reputable service. There are several options available, however, doing your own due diligence is paramount. An extra layer of precaution may entail contacting the cloud service and asking for as much information as they’re willing to share regarding audits, their mining operation, fees, etc. 

Once you’ve decided on a service, the signup process is relatively straightforward. 

1. First, you’ll remotely rent, lease, or purchase machinery being used in their existing crypto mining operation. 

2. Once you’ve paid, you’ll immediately have the opportunity to receive a pro-rata portion of any profits the provider generates. For example, if you buy 1% of the operation’s total capacity, you’ll be entitled to receive 1% of any block rewards that they might generate (note that profits are not guaranteed). 

3. Many cloud mining services pay out any profits they generate to their cloud mining customers on a daily basis. Though there are some providers that pay on an intraday basis; for example, Binance pays out every 8 hours.

Several factors can influence the viability of cloud mining a given cryptocurrency, including

Contract prices

When renting mining services, contract prices naturally impact any potential rewards earned from cloud mining. Although higher priced contracts may offer greater hash power, there are no assurances of breaking above even.

Equipment quality

When it comes to cloud mining, it can be advantageous to use a service with higher-tier equipment. The level of sophistication and efficiency at which mining equipment operates can influence the chances of earning block rewards. If a mining rig is capable of processing more hashes per second, the likelihood of earning mining rewards over time can increase. Providers that use the latest mining equipment can gain a competitive edge against those using outdated rigs. 

Hashrate dynamics

When the hashrate of a network falls, cloud mining may be advantageous—the probability of solving blocks tends to increase when mining amid dips in competition. Tracking hashrate is a key characteristic of a successful miner so that mining efforts may be timed against conditions that coincide with periods of less intense competition. For cloud miners, renting more hashpower when total network hashpower is relatively low may be advantageous.

Network difficulty

Network difficulty determines the ease with which miners may discover new blocks and earn rewards. When a network’s hash rate falls, mining difficulty typically drops in tandem. Networks with lower difficulty may provide greater profitability for cloud miners to generate rewards, as the protocol dynamically adjusts to make mining new blocks easier.

Electricity costs

Running any type of crypto mining machinery requires electricity, and that cost is passed on to miners. Lower energy costs can improve a cloud miner’s break-even level.

Market volatility

Cryptocurrencies are highly volatile assets. This volatility can significantly affect the viability of any mining operation. A surge in prices can spur new mining competition, which increases overall difficulty. In addition, market downturns can reduce the value of block rewards, making cloud mining above break-even levels more difficult. To combat these conditions, some cloud miners may seek to keep associated costs as low as possible while sourcing the most computing power they can reasonably afford to purchase to stand the best chance of receiving rewards.

Regulatory compliance

Adhering to the legal standards of the jurisdiction of the mining operation is vital, and non-compliance may lead to unwanted legal complications as well as financial losses. 

Staying informed on the regulatory guidelines in the regions where one intends to use cloud mining services should be a part of any prospective crypto miner’s due diligence process.

Profit calculators

Various online tools exist to help cloud miners roughly gauge whether certain cloud mining options are financially feasible or not.

These calculators take into consideration contract costs, overall duration, maintenance fees, electricity prices, and the expected hash rate of a given network to determine the potential profitability of a cloud mining venture. Some websites provide free cloud mining profitability calculators, such as Hashmart and Bitdeer. Hashmart also provides a comprehensive guide on how to use their calculator.

Note that these calculators provide approximate figures based on a limited range of factors and should not be relied upon wholly when assessing the potential profitability of any cloud mining service.

For many crypto enthusiasts, cloud mining provides an easier way to participate in a blockchain network without needing to directly purchase and run specialized hardware.

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