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What is Cloud Mining?

Cloud mining is a mechanism for mining a cryptocurrency, such as bitcoin, using rented cloud computing power and without the need to install and directly run hardware and related software. Cloud mining firms allow people to open accounts and remotely participate in the cryptocurrency mining process for a basic fee, making mining accessible to a wider range of people around the world. Because this form of mining is done through the cloud, it reduces issues such as hardware maintenance or direct electricity costs.

Cloud miners become members of a mining pool where users buy a certain amount of "hash power". Each participant receives a proportional share of the profit in proportion to the amount of leased computing power.

Key Takeaways:

• Cloud mining involves the mining of cryptocurrencies by renting or purchasing mining equipment from a third-party cloud service provider who is responsible for maintaining the equipment.
• Popular cloud mining models include hosted mining and rented hash power.
• The benefits of cloud mining are that it reduces the overall costs associated with mining and allows ordinary investors who may lack technical knowledge to mine cryptocurrencies.
• The downsides of cloud mining are that the practice centralizes mining on farms and profits are driven by demand.

Understanding Cloud Mining

Cloud mining uses cloud computing to produce blockchain-based cryptocurrencies. Cloud computing, more generally, is one of the fastest growing technology trends, whereby computing services such as processing, server power, database services, software, and file storage are accessed through the cloud over the Internet. These companies charge for use, just like we pay for the use of water or electricity.

On the other hand, mining is the backbone of a cryptocurrency model like bitcoin. This is the process by which transactions are verified and added to a public ledger known as a blockchain. It is also the medium by which new coins are issued. The combination of these two methods opens the world of mining to people in remote places with little to no technical knowledge and hardware infrastructure.

Cloud Mining Models

Hosted mining is the most popular form of cloud mining. In this model, the client buys or rents mining equipment located at the miner's facility. The miner is responsible for maintaining the equipment and ensuring its proper functioning. Through this model, clients have direct control over their cryptocurrency. The economy of scale of the mining farm ensures that the expensive costs associated with mining, such as electricity and storage, become manageable. But there are significant upfront costs associated with this type of mining.

Renting hash power is another model used in cloud mining. In this model, the hash power or computing power associated with the cryptocurrency is rented from the mining farm. Clients receive a share of the total profit of the farm from mining cryptocurrencies. Leased hash power is reportedly a popular form of altcoin (i.e., cryptocurrencies other than bitcoin) mining. This process requires a person to open an account with a cloud mining company through their website and select certain options such as contract duration and hash power.

While there are benefits to cloud mining such as lower hardware investment and running costs, the process also comes with several disadvantages. For example, fraud in the industry has spread rapidly with the rise in popularity of cryptocurrencies. Then there is the possibility of a decrease in profits. Altcoins are particularly vulnerable to demand, and a decrease in their hash power could lead to lower profits for miners. Cloud mining models also promote the centralization of cryptocurrencies, otherwise a decentralized ecosystem.

How Cryptocurrency Mining Works

Mining cryptocurrencies such as bitcoin, whether through the cloud or locally, does not really involve any kind of mining. While this process generates new cryptocurrency tokens that are awarded to miners, the mining operation serves a much more important purpose for securing a distributed ledger such as a blockchain. Bitcoin mining is carried out by powerful computers that solve complex computational mathematical problems; these problems are so complex that they cannot be solved by hand, and they are complex enough to burden even incredibly powerful computers.

When cryptocurrency miners add a new block of transactions to the blockchain, part of their job is to verify the accuracy of those transactions. In particular, bitcoin miners make sure that bitcoin is not duplicated, which is a unique feature of digital currencies called “double spending”. With printed currencies, counterfeiting is always a problem. But usually when you spend $20 in a store, that bill ends up in the hands of the seller. However, the situation is different with digital currency. Miners use their computing power to solve cryptographic puzzles that prevent double spending in a decentralized manner.