What is Cloud Mining and Is It a Good Business?

What is Cloud Mining

Disclosure: Nothing in this blog should be taken as investment advice. Do your own research. This blog is supported by advertising and affiliate links... Links to products and/or services on this blog may include links to affiliate programs that provide commissions to this blog. All of the content in this blog is 100% my own opinion.


With the price of a single Bitcoin recently spiking near $20,000, cryptocurrency miners are facing even more intense competition to mine coins. Investors wanting in on the mining game are getting creative with ideas both malicious and benign.

Honorable, would-be miners who are new to the game are considering cloud mining services, which eliminate the need to own expensive mining hardware.

But is cloud mining for Bitcoin and other cryptocurrencies a safe or good business?

What Is Bitcoin Mining?

Traditional Bitcoin mining is a competition between powerful computers on a peer to peer network on the Internet. The computers on the network are called “nodes”. Some of the nodes are called “miners”.

Anyone can create a node (while not also being a miner).

You can create a node if you want to start mining Bitcoin. To do so, you can download the Bitcoin Core software (which is free) from Bitcoin.org, and leave a specific port open on your computer.1

Anyone can become a miner (while also being a node).

In the late 2000s and early 2010s, it was relatively easy be a Bitcoin miner from the comfort of your own home. You could use a powerful computer, or daisy chain together several computers, incrementally increasing your processing power. You then use your powerful computer to solve the mathematical puzzles on the blockchain network.

Miners use computing rigs to solve complex mathematical puzzles on a blockchain. The mathematical puzzles are called proofs. The first miner to solve the proof is awarded with some Bitcoin.

The sooner the miners are successful, the better. This is because the reward of Bitcoin to the winning miner is cut in half about every four years.

There can only be one Bitcoin winner

As Bitcoin continued rising in value, mining became more competitive. The race for mining power intensified. Because solving a puzzle involves both guessing at random and complex math, the greater your computing power, the greater your chances of solving the puzzle.

If your computer can process calculations faster than anyone else, you have a better chance of finding the solution than your competitors.

The winners were those who built the most powerful rigs.

But the rigs can cost tens of thousands of dollars. Mining Bitcoin also uses a considerable amount of energy. Energy is needed to run the rigs, but also to cool them down when they get hot. The entire Bitcoin network uses more energy than many small countries.

Eventually miners may become disincentivized to mine Bitcoin.

As an alternative, instead of incurring the up front hardware and ongoing operations costs to mine Bitcoin, you can mine Bitcoin as part of a pool, or through a 3rd party cloud mining service.

What is Cloud Mining?

Cloud mining is Bitcoin mining without the up front investment. Unlike conventional Bitcoin mining, cloud mining does not require any hardware.

With cloud mining you are renting software and processing power that lives on a network of remote computers. The “cloud” is another word for the Internet.

By connecting to the Internet from wherever you are, you can access your mining software and check its progress.

Cloud mining is akin to having an account with Dropbox or Box or Google Drive… You are essentially renting software from these companies. In return, they store and provide access to your data.

In the case of cloud mining for Bitcoin, you are renting the processing power in the cloud from a 3rd party that will charge you a fee to mine Bitcoin for you.

The processing power is measured in “hashes per second” or H/s. This represents the number of Bitcoin mining computations (aka “hashes”) performed in one second. This is also referred to as the “hash rate”. The hash rate is a measure of Bitcoin mining performance.

Cloud mining companies will charge you based on the hash rate you want. The following are rates of hashing performance.

  • 1 MH/s is 1,000,000 hashes per second.
  • 1 GH/s is 1,000,000,000 hashes per second.
  • 1 TH/s is 1,000,000,000,000 hashes per second.
  • 1 PH/s is 1,000,000,000,000,000 hashes per second.

Companies like Genesis Mining and HashFlare will charge you based on the hash rate. The greater your hash rate, the more it will cost and the more Bitcoin you should expect to receive.

However, cloud mining companies will also charge you for all the costs they incur in providing the service, including electricity. These may be in the form of maintenance fees, or an additional monthly subscription fee.

Some cloud mining companies may require a contractual time commitment, such as 1 year.

Bitcoin’s price fluctuates wildly. As such, it is possible that the mining return on investment (ROI) may be non-existent if the price of Bitcoin falls below a certain level. This can make the investment in your cloud mining contract worthless.

Note, bitcoin, Ether and other approaches to cloud crypto mining are highly speculative. I don’t endorse either of the companies mentioned above.

Be sure to do your own research before deciding to work with a cloud mining company.

Is Cloud Mining Too Risky?

The consensus among experts is often split. Some people believe Bitcoin is the new gold, whereas others pundits believe gold is the new gold.

Cryptocurrencies are in their infancy. If you believe that Bitcoin will be around 20 years from now, it is possible that Bitcoin may behave like a digital version of gold and rise in value over time. Bitcoin seems to behave more like an asset than a currency.

As such, you may decide the least risky path is to avoid the mining altogether.

You can simply to invest in Bitcoin on your own, through a service such as Coinbase, and simply HODL.


Image by Martin Sichert via Flickr

Footnotes

  1. The minimum recommended settings to run Bitcoin Core is 145 GB of disk space, and 1 GB of RAM. Bitcoin Core can run on Windows, Mac or Linux.