Cloud Mining: Definition & Models Explained

Cloud mining is one approach to mining cryptocurrencies, such as Bitcoin. These methods can be a profitable endeavor for both third-party providers and miners. Unlike the traditional mining methods, cloud mining is a more cost-effective approach for many individuals. If you want to learn more about cloud mining and the different models, we will break down those definitions for you. 

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What Is Cloud Mining?

You’ve heard about cloud mining, but what is it? Cloud mining is a mechanism to mine cryptocurrencies, like Bitcoin. This mining is done by using a remote location. These locations are often called mining farms, and they share the processing power required to mine between the miners. 

Anyone can mine. All you need to do is register and purchase a mining share or contract. The mining rigs are maintained and owned by a mining company. Like blockchain mining, cloud miners can also join a mining pool. Each miner must purchase a certain amount of hash power to carry out their mining duties. Every participant will earn a prorated share of the profits in proportion to the rent hash power amount. 

There is no need to install or operate the software and hardware on your own system with rented computing power. Cloud mining allows individuals to open an account and participate in the cloud mining process for a flat cost. With that, cryptocurrency mining has become more accessible to people from all over the world. You don’t even need technical knowledge to mine cryptocurrencies. Since all mining is done via the cloud, it can reduce those particular issues, such as direct energy costs and equipment maintenance. 

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Understanding Cloud Mining

Cloud mining uses cloud computing to produce blockchain-based cryptocurrencies. Over the years, cloud computing has become a fast-growing trend in the technology sector. All computing services, such as the server capacity, software, file storage, and prices, are accessed through the cloud and over the internet. These cloud-based services also charge based on usage in the same way as for electricity or water usage. 

Mining has always been the backbone of the cryptocurrency model. It is the process where the transactions are added and verified to the blockchain, a type of public ledger. New coins are also released through mining. When you combine cloud capabilities and mining, it allows people worldwide to mine for cryptocurrencies. 

Related: Benefits of Cryptocurrency

Cloud Mining Models

There are several types of cloud mining models. One of the most popular is the hosted mining model. With this model, the miner leases or purchases the mining hardware. That hardware is often located in the miner’s facility. It is the responsibility of the miner to maintain the equipment and make sure it can function for the mining tasks. Hosted mining allows the customer to have complete control over their cryptocurrency. Those expensive costs associated with mining, like storage and electricity, become more manageable for the individual. However, it is still not an inexpensive option. There are plenty of upfront costs associated with hosted mining.

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The second model is called leased hash power. The computing power, or hash power, is leased from a mining farm with this model. Under this agreement, the miner shares the overall profits generated from the farm’s mining. This type of mining model is very popular for altcoins, which are cryptocurrencies other than Bitcoin. The miner will need to open an account with the cloud mining company. The miner must specify certain parameters during the signup, such as the hashing power needs and the contract period. 

There are several advantages to cloud mining. Cloud mining requires less of an investment in hardware and operating costs. However, there are several disadvantages as well. Unfortunately, some miners have lost money due to scammers. These individuals provided contracts for the miners but never gave them access to their servers. 

Along with that, there is always the prospect of diminishing profits. Altcoins are vulnerable to the market’s demands, meaning profits can fall and rise on any day. Plus, the reduction in hashing power could lead to fewer mining profits. These models are also known to promote the centralization of cryptocurrencies, which is often known as a decentralized ecosystem. 

Related: How to Mine Crypto

How Cryptocurrency Mining Works

It does not involve physical mining when you mine for cryptocurrencies, such as Bitcoin. While this process can generate new tokens to be awarded to miners, the operation is more critical to maintaining the security of the blockchain. Mining is performed by high-powered computers that need plenty of power to solve complex math problems. Many of these problems are so tricky that humans cannot solve them. In fact, even the more powerful computers have difficulties solving these problems. 

When a crypto-miner adds a new transaction block to the blockchain, they verify that all transactions are accurate. Miners are also ensuring that the cryptocurrency is not duplicated, which is known as double spend. Like printed currencies, counterfeiting is always an issue. Digital currency can be harder to verify. However, when miners use that computing power to solve those mathematical puzzles, they prevent these tokens from becoming “double-spend” in the decentralized ecosystem. 

Related: Altcoins: Everything You Need to Know

With that, you know a little bit of the definition of cloud mining. You can complete this process through two models: hosted and leased mining. Both have their advantages and disadvantages. You need to find the right one that can be more beneficial for your bottom line. 

Do you want to learn more about cryptocurrency, cloud mining, and more? Check out our free resources to help you invest in alternative currencies with unBanked!

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