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 without installing and directly running 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 fee. This helps make mining accessible to a broader base of people because it reduces the need to purchase and maintain equipment or pay 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.

Understanding Cloud Mining

Cloud mining leverages cloud computing to produce 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. Such companies charge on a usage basis, just like paying for water or electricity.

Mining is the backbone of some cryptocurrency blockchains, like Bitcoin. It is the process by which transactions are verified and added, and it is also the means by which new coins are released. The combination of cloud mining and blockchain opens the world of crypto mining to people in distant locations with little or no technical knowledge or hardware infrastructure.

Advantages of Cloud Mining

• Cloud mining relieves you of the financial burden of buying and maintaining expensive equipment.
• Equipment owners and cloud mining hosts incur considerable upfront costs, so they use economies of scale to offset the expenses. Leasing equipment or hashrate gives them multiple sources of income. Calculated correctly, a cloud mining provider could break even and begin profiting in considerably less time than mining alone.
• By renting hash power from a mining farm, you get a share of the farm's overall profits.

Disadvantages of Cloud Mining

• One of cryptocurrency's downfalls is that because some command such a high price, scams have become common. It's important to research cloud mining providers to ensure they are not scams.
• There is the prospect of diminishing profits because of increasing mining difficulty and more miners entering the networks to compete for earnings. Mining farms, where cloud mining usually occurs, have a dominant grip on cryptocurrency hashing power.
• This dominance promotes the centralization of cryptocurrencies, which were intended to be decentralized financial systems.

How Cryptocurrency Cloud Mining Works

Mining for cryptocurrencies such as bitcoin, whether via the cloud or locally, is the automated process of using computational resources to verify transactions with a cryptocurrency reward. 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 generate numbers until a certain value is met. Once the value is guessed, the information contained in the block is validated by the network, a new block is opened, and the process starts all over. It is energy intensive because these 64-digit alphanumeric numbers are generated over and over. For instance, since December 2023, the Bitcoin network has generated more than 500 exahashes (500 quintillion guesses) per second, taking a little less than 10 minutes to open a new block.

When cryptocurrency miners add a new block of transactions to the blockchain, part of their job is to verify that those transactions are accurate. This is accomplished by checking the hash of the closed block and ensuring it meets other criteria. If even one character in the information of a block was changed, the hash is different. The block is rejected if there is a difference.

One of the issues present in early blockchains was the ability to duplicate blocks, which allowed the same information to be used twice. This is something called “double spending,” which is using the same token for more than one transaction. Sending block information through a hashing function and requiring a majority of the network to agree that the resulting hash is valid prevents this from happening.

The Bottom Line

Cloud mining is a service provided by businesses that own enough equipment and computational power to make mining more cost-effective for people who don't have the means or knowledge to acquire and maintain mining equipment.

Finding the right cloud mining service can be challenging because there are many legitimate ones, but scams are also very frequent in the cryptocurrency industry. It pays to do your research and investigate whether the services you will be paying for will be provided and profitable.

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