What Is Cloud Mining? A Complete Beginner’s Guide

Cloud mining offers an enticing value proposition with its claim to allow crypto users to profitably mine cryptocurrency using hardware hosted by a third party. However, the realities of cloud mining are not that rosy. Read on to learn what cloud mining is, how it works, and if you can actually make money by taking part in cloud mining.

What Is Cloud Mining?

Cloud mining refers to renting computing power from crypto mining companies that host mining hardware on behalf of their customers, allowing individuals to mine crypto “in the cloud”  instead of having to personally own and run crypto hardware to earn mining rewards. 

Bitcoin cloud mining has opened up the opportunity for individuals across the globe to receive bitcoin mining rewards without requiring a capital-intensive mining setup and the expertise to operate it efficiently. 

To start cloud mining, users have to sign up with a cloud mining services provider, purchase a cloud mining contract, and then watch mining rewards enter their crypto wallet. 

Now, let’s take a look at how cloud mining actually works. 

How Does Cloud Mining Work?

Cryptocurrency mining involves using high computational power to solve cryptographic equations on a Proof of Work (PoW) blockchain to validate and confirm transactions with the aim of finding the next block to earn the block reward. In addition to transaction fees, miners receive their share of the block reward every time they manage to mine a new block. 

A cloud mining company runs crypto mining machines, such as ASICs and GPUs, and sells contracts to users who will receive the mining rewards minus the operator’s fee. 

By using a cloud mining services provider, you will be cutting out costs like purchasing and maintaining equipment, electricity, and renting out space to operate your miners. Additionally, you will not require the technical expertise to successfully run a mining rig.

Currently, there are two models of cloud mining that you can use to access mining services, depending on your needs and the company you choose to work with. The first is Hosted Mining. Here, you purchase or lease hardware in a mining company’s facility. 

During the mining process, the company’s role is to ensure that the equipment works efficiently and is always operational. Whatever is mined using the hardware and software in the company is yours to keep, giving you more direct control over your cryptocurrency.

The second model is Leased Hash Power. Here, you will be leasing computing power from a mining company. In this model, you sign up for an account, contribute a specific amount of money and choose a time period and hashing power before investing. During this period, you will be receiving a share of the mining company’s overall profits from mining.

Regardless of the model you choose, cloud mining has been seen to be an easier alternative to traditional crypto mining and as a way to potentially make money in the crypto markets. 

Can You Make Money Cloud Mining?

Cloud mining has the potential to help you make money passively, especially since you don’t actively have to take part in the mining process. However, just like many investment opportunities in the crypto world, there are several factors that determine whether you will make money or not. 

1. The first thing is the amount of investment that you put in. For instance, if you rent out a large space or equipment in a mining company’s rig, you will have a higher chance of mining a bigger amount of crypto. However, this is an expensive venture since it will cost you a higher initial investment. 

2. Secondly, the market performance of the crypto asset you are mining will determine your mining revenues. For instance, in 2022, the crypto market faced one of its biggest crashes after a tremendous bull market in 2021. If the coin you are mining is on a downward spiral, chances are that you will make a loss cloud mining. 

3. Lastly, the credibility of the company you choose to invest in will make the difference between making or losing money in this market. 

A credible company with a good team and an established track record is the safest way to ensure that your mining efforts have a positive outcome. Therefore, it is essential to research the company and its management to look at the company’s performance over time, before making a final decision.

Unfortunately, scams are very prominent in the cloud mining industry, which has resulted in an incredibly large number of people falling victim to such scams in the bull market of 2017. 

Is Cloud Mining Legit?

While there are a handful of legitimate cloud mining providers, cloud mining is widely considered a bad investment as fees eat into mining rewards. Furthermore, mining contracts typically become invalid once cloud mining providers are forced to switch off their machines if market conditions make mining unfeasible. 

Moreover, most cloud mining operations have turned out to be scams operating Ponzi schemes under the guise of mining. 

BitClub Network, for example, was arguably the most prolific cloud mining scam. Founded in 2014, the BitClub Network solicited up to $722 million from BitClub Network investors by selling shares to non-existent cryptocurrency mining operations. The company functioned as a pyramid scheme, where members were rewarded for recruiting new investors into the company. Furthermore, the company also provided false figures, which investors were told came from profitable bitcoin mining, although this was not the case.

While the BitClub Network is one of the well-known scams, cloud mining scams have been plenty. Therefore, it’s important to conduct in-depth research on companies and look out for red flags like a false website, anonymous testimonials, lack of information on a mining company, and so forth. 

If you ask pretty much anyone who has been in crypto for a while, they will likely tell you to avoid cloud mining. 

The profitability of cloud mining depends heavily on asset price performance, which means you will likely be better off buying and holding a cryptocurrency than mining it in the cloud. Moreover, historically, the majority of cloud mining operators have turned out to be Ponzi schemes, which has put the cloud mining industry in a bad light. 

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