How Cloud Mining Works and What to Look Out For

Crypto miners are the backbone of proof of work blockchains. Being a miner means being part of a global network of computer nodes responsible for verifying every single crypto transaction and adding them to the blockchain. Miners are what keep networks like Bitcoin and Kadena decentralized and secure, but being a miner is becoming less accessible as blockchain networks grow and demand more computing power. 

Cloud mining is a service where you pay a company to mine cryptocurrencies on your behalf for a certain amount of time. Although crypto mining can be profitable, it also can be challenging and expensive. Mining requires powerful computer hardware and constant electricity consumption, which can be costly. Plus, supply chain shortages of GPUs and ASICs are making mining hardware harder to procure, especially as demand for them continues to increase.

In addition to the expensive overhead costs, setting up and maintaining a crypto mine can be difficult since doing so requires substantial technical knowledge. Cloud mining eliminates these obstacles because it enables companies to sell hash power to investors who then use it to mine a proof of work (PoW) cryptocurrency of their choice. This means investors can use cloud mining services to earn crypto without dealing with the setup, maintenance or energy costs associated with mining.

What is hash power?

PoW cryptocurrencies like Bitcoin require lots of computing power to verify transactions and propose new transaction blocks. This process is called mining and a hash is a measurement of computing power. The more data a PoW miner can process, the more likely it is to win new crypto in the form of a block reward. So, the more hashes per second a crypto miner can process the higher its profitability. Mining becomes more competitive as hardware becomes more efficient and blockchains increase in difficulty.

Proof of stake and PoW are different because the former doesn't require powerful hardware, thus consuming less electricity than the latter. In fact, proof of work mining has become so technically demanding that cloud mining services now measure computing power by the gigahash (one billion hashes) or terahash (one trillion hashes) per second. Hash rates are the most crucial factor determining the profitability of crypto mining, so more hashes per second tends to mean higher mining profits.

Most cloud mining services are on a contractual basis based on how much hash power will be used and the duration it'll be used for. Hash rate and duration are the two main determining factors of the price of a cloud mining contract, meaning higher hash rates and longer durations cost more. Some cloud mining services rent entire mining devices rather than just leasing hash power. Renting a miner can be more expensive up front, but more profitable in the long run.

Leasing hash power

Leased hash power is the most common and affordable type of cloud mining contract. Leasing hash power means paying for a certain amount of computing power over a fixed duration—usually months or years. Hash power is denominated in either terahashes or gigahashes per second and the more hash power you pay for the higher your profitability will be. In addition to a fixed cost based on contract duration and hash power per second, most cloud mining services also take a cut from your profit.

One important thing to keep in mind before leasing hash power is choosing a cryptocurrency to mine. While Bitcoin is the most common choice, its blockchain is the most competitive network to mine and is arguably the most difficult to profit from. Alternatively, you can choose a service that offers cloud mining for different PoW blockchains like Litecoin, Dogecoin, or Ethereum (until the proof of stake merge). Whichever blockchain you choose to mine, your rewards will be denominated in its native cryptocurrency.

Renting miners

Another cloud mining model is hosted mining, which means renting the actual mining hardware rather than just a fixed hash rate. This involves renting a specific mining device or 'rig' and paying for the hash power it produces. Mining rigs vary in their hash rates and compatible blockchains, so choosing a device depends on which crypto you want to mine and how much you aim to profit. 

Hosted mining can be more expensive, but it's possible to get more value out of renting a miner than leasing its hash power. Despite being a more capital efficient way to invest in crypto mining, platforms that rent out their mining rig will usually take a cut of the profit it generates in addition to the rental cost. While these fees help cloud mining platforms cover the costs of electricity and maintenance, they can eat into your bottom line as an investor. 

Selling hash power

Cloud mining is a great way to earn crypto without the overhead expenses of purchasing and operating a PoW mining rig, but what if you want to sell your hashpower instead? Luckily, there are cloud mining broker platforms that enable owners of high-end GPUs or ASIC miners to profit from selling their hash power. Platforms like NiceHash enable anyone to sell their computing power to buyers who use it for their crypto mining operations.

While selling your hash power is a great way to utilize your idle computer time to earn extra crypto, there are risks to auctioning off your processing power. Installing pooled mining software to your computer could compromise the security of your device, so always make sure there isn't any personal data on your computer before you start selling your hash power. If done correctly and energy efficiently, selling your hash power can generate a steady stream of passive income.

Like any crypto investment, it's important to assess your risk tolerance before adding cloud mining to your portfolio. The first and main risk when it comes to cloud mining is asset volatility. Since all your earnings are denominated in crypto, your profitability is highly contingent on whether its price goes up and down. This is also true for crypto staking on proof of stake blockchains like Polygon. Since crypto prices are totally out of your control, you should take the market into account since possible price dips could impact your profitability. 

While you don't have to worry about energy costs eating into your cloud mining profits, there are major risks when it comes to cloud mining scams. The size of the cloud computing industry has blown up in recent years, resulting in thousands of cloud computing platforms offering leased hash power at different price rates. This has also meant several scams posing as cloud mining services have hit the market to target unsuspecting cloud mining beginners. The best way to avoid scams is to read customer reviews and do your due diligence before purchasing a cloud mining contract.