What Is Cloud Mining of Cryptocurrency, and How Does It Work?

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.

Key Takeaways

  • 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 a 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.

How Cryptocurrency Mining Works

Mining for cryptocurrencies such as bitcoin, whether via the cloud or locally, does not actually involve any mining. And while this process does generate new cryptocurrency tokens that are awarded to miners, the mining operation serves a much more crucial purpose for maintaining the security of a distributed ledger such as a blockchain. Bitcoin mining is performed by high-powered computers that solve complex computational math problems; these problems are so complex that they cannot be solved by hand and are complicated enough to tax even incredibly powerful computers.

When cryptocurrency miners add a new block of transactions to the blockchain, part of their job is to verify that those transactions are accurate. In particular, bitcoin miners make sure that bitcoin is not being duplicated, a unique quirk of digital currencies called “double spend.” With printed currencies, counterfeiting is always an issue. But generally, once you spend $20 at the store, that bill is in the clerk’s hands. With digital currency, however, it's a different story. The miners use their computational power to solve cryptographic puzzles that prevent double spend in a decentralized manner.

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