What Is Cloud Mining?
Cloud mining is a mechanism to mine a cryptocurrency, such as bitcoin, using rented cloud computing power and without having to install and directly run the hardware and related software. Cloud mining firms allow people to open an account and remotely participate in the process of cryptocurrency mining for a basic cost, makes mining accessible to a wider number of people across the world. Since this form of mining is done via cloud, it reduces issues such as maintenance of equipment or direct energy costs.
Cloud miners become participants in a mining pool, where users purchase a certain amount of "hash power." Each participant earns a pro-rata share of the profits in proportion to the amount of hashing power rented.
- Cloud mining involves mining for cryptocurrencies by leasing or purchasing mining equipment from a third party cloud provider, who is responsible for maintaining the equipment.
- Popular models for cloud mining include hosted mining and leased hash power.
- The advantages of cloud mining are that they reduce overall costs associated with mining and allow everyday investors, who may lack sufficient technical knowledge, to mine cryptocurrencies.
- The disadvantages of cloud mining are that the practice centralizes mining to farms and profits are susceptible to demand.
Understanding Cloud Mining
Cloud mining leverages cloud computing for the purpose of producing blockchain-based cryptocurrencies. Cloud computing, more generally, is one of the fastest-growing technology trends wherein computing services such as processing, server capacity, database services, software, and file storage are accessed via the cloud, over the Internet. Such companies charge on a usage basis just like we pay for our water or electricity usage.
On the other hand, mining is the backbone of the cryptocurrency model such as bitcoin. It is the process by which transactions are verified and added to the public ledger, known as the blockchain. It is also the means through which new coins are released. A combination of the two opens the world of mining to people at distant locations with little or no technical knowledge and hardware infrastructure.
Cloud Mining Models
Hosted mining is the most popular form of cloud mining. In this model, the customer purchases or leases mining hardware located in a miner's facility. The miner is responsible for maintaining the equipment and ensuring that it functions as performed. Through this model, customers have direct control over their cryptocurrency. The economies of scale of a mining farm ensure that expensive costs associated with mining, such as electricity and storage, become manageable. But there is considerable upfront cost associated with this type of mining.
Leased hash power is another model that is used in cloud mining. In this model, hash power, or computing power associated with a cryptocurrency, is leased from a mining farm. Customers get a share of the farm's overall profits from mining cryptocurrencies. According to reports, leased hash power is a popular form of mining for altcoins, i.e. cryptocurrencies other than Bitcoin. The process requires a person to open an account with a cloud mining company via its website and select certain things like the contract period and hashing power.
While there are advantages to cloud mining, such as less investment in hardware and recurring costs, the process also has several disadvantages. For example, industry scams have proliferated rapidly with the popularity of cryptocurrencies. Then there is the prospect of diminishing profits. Altcoins especially are vulnerable to demand and a reduction in their hash power could lead to fewer profits for miners. Cloud mining models also promote the centralization of cryptocurrencies, otherwise a decentralized ecosystem.