With the rise of the cryptocurrency industry, new income-generating opportunities have emerged that are unique to it.. One of these is crypto mining. This propels participants to the status of stakeholders on various blockchains as they invest their time, computing power and money in securing and validating their chosen crypto network.
There are different ways of participating in the crypto mining sector. You can opt for a hands-on approach or choose to steer clear of the technical undertakings required for successful crypto mining. In this guide, we will be focusing on the latter. Here, you will find everything you need to know about choosing a more hands-off approach to crypto mining, or what is popularly called cloud mining. But first, you need to have at least a basic understanding of how crypto mining in general works.
What Is Crypto Mining?
Crypto mining involves a sequence of processes designed to secure, in a decentralized manner, a given blockchain network. Through their activities, miners validate transactions and collectively generate the supply of new cryptocurrencies.
A crypto miner is expected to:
- run a node on a blockchain network;
- complete specific tasks to find a new block;
- load new transactions onto the block;
- ensure that there is no double-spending of cryptocurrencies.
Following the completion of these processes, the blockchain network is designed to automatically reward successful miners with new coins. This is the primary distribution mechanism used by proof-of-work (PoW) blockchains (blockchains that support mining). Note that the special task assigned to miners depends on the type of PoW mechanism in use.
For instance, the Bitcoin network and other blockchains using the SHA-256 (secure hash algorithm 256-bit) mechanism require miners to compete to solve extremely difficult mathematical equations before a new block can be found. This process demands a high level of computing power, which means that miners that want to be successful should be able to invest a certain amount of funds in adequate hardware to ensure they have a chance of running a profitable mining operation.
Also note that blockchain networks are designed in such a way as to constantly adjust the mining difficulty in order to ensure that new blocks are found at a fixed interval.
Therefore, whenever there is a rise in the number of mining nodes on a given network, or an increase in the computing power of its existing mining nodes, the network’s mining difficulty increases accordingly. If the reverse is the case, the network self-adjusts to reduce the difficulty of the SHA-256 equation. In most cases, aspiring miners therefore need to invest in specialized and powerful mining rigs to even have a shot at becoming profitable.
With this in mind, it takes the following to become a successful crypto miner:
- Investment in high-performing mining rigs. A solid piece of mining hardware can cost as much as $8,000 and one rig is not enough for a miner hoping to make a profit.
- Acquiring the coding and technical expertise needed to run a full node on a blockchain network.
- The electricity bill for running and cooling mining rigs 24/7 can potentially eat into miners’ profits. So, miners should opt for a cheap power source or choose locations with colder climates to reduce the amount of electricity needed to cool mining hardware.
In sum, an independent crypto miner needs to have the technical prowess, alongside sufficient commitment and capital, to have a chance at success. Since not all crypto miners can meet these requirements, nor scale them further, other less hands-on mining options offer viable alternatives. This is where cloud mining enters the picture.
Cloud Mining: What Is It?
Now that you’ve understood the basic concept of crypto mining, it should be easier to make sense of cloud mining. As its name implies, cloud mining is the process of using cloud computing power to mine cryptocurrencies. In this case, you pay third parties to do all the work for you. In essence, you do not need to buy nor maintain special mining rigs, nor do you need to run a blockchain node.
With cloud mining, participants usually either lease mining rigs or rent hash power. The latter is a measure of the power of a mining rig and is normally calculated in units of Gh/s and Th/s. The cloud mining provider owns and operates a facility or farm loaded with mining rigs, and offers users the opportunity of buying or renting a share of the hash power it generates.
The cloud mining provider needs to have invested in top mining hardware and, optimally, established its farm in a location with access to cheap electricity and a cooler climate. This approach ensures that the overhead costs of running the farm are kept within an acceptable limit.
Such a solution is ideal for individuals who are not interested in engaging with the technical side of crypto mining. In most cases, participants are able to keep track of their hash rate and cloud mining revenue using their smartphones. Some cloud mining set-ups even automatically redirect the generated hash power to the most profitable mineable coin during a given period.
Different Types of Cloud Mining Models
Host mining involves the buying or leasing of rigs on mining farms. In this scenario, you may have to pay for the setup and maintenance of the rig. The good thing about this model is that it often reduces the overhead costs associated with access to sufficient electricity. Also, you have more control over your leased rig(s) and can choose to redirect the generated hash power to mining pools in order to strengthen your chances of finding a new block. Lastly, you have full control over the generated rewards, as you only need to pay maintenance and set-up fees to the cloud mining provider.
Lease Hash Power
In contrast to host mining, leasing hash power involves the leasing of a share of the hash power generated by a mining farm. Here, you are not burdened with either maintenance or set up fees. You only need to subscribe to a plan in order to receive a share of the farm’s profit. When the farm finds a new block and receives cryptocurrencies as rewards, the revenue generated is shared among users according to the share of the hash power they control.
What Are the Benefits and Drawbacks of Cloud Mining?
Cloud mining is an ideal choice for those who want to reap the economic benefits of mining without needing to deal with all the technical and hardware requirements outlined earlier in this guide. Cloud mining can also potentially help with reducing the overhead costs of running a mining rig.
However, there are potential drawbacks that you need to consider before opting for a cloud mining model. The first is the high rate of scams in the cloud mining sector. Over the years, the sector has become fertile ground for fraudulent schemes. Since investors may not have the opportunity to assess the mining farms in person, it can be difficult for them to verify the claims made by the cloud mining provider.
Some cloud mining providers even run pyramid schemes, in which early investors are paid with deposits from new investors. Knowing that this is unsustainable, the providers eventually perpetrate exit scams. Therefore, the onus is on you to carry out due diligence before opting for a given cloud mining service. You should explore reviews, investigate the credibility of the platform on crypto forums, consider the withdrawal limits, and avoid offers that promise implausibly lucrative deals.
Another detail you need to look out for is the potential profitability of the offering. If the amount paid to lease, buy or maintain cloud-based rigs does not align with the hash power offered, then you might incur losses. Carefully analyze the mining capital and potential revenue before going all in with a cloud mining offer.
Lastly, beware of cloud computing platforms that have complete control over your earnings. It is advisable to choose those that offer some level of autonomy when it comes to your crypto wallet.
Cloud mining is a viable means of earning passive crypto income. However, as mentioned in this guide, it comes with its peculiar pitfalls. It is therefore important to carry out extensive research and to have a firm grip on core mining concepts before dabbling in the practice.