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How Does Cloud Mining Work?

Last Updated on February 26, 2024

James Headshot
Written by
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Disclaimer: This is not a validation of cryptocurrency or any particular provider, service, or product. It should not be taken as advice to engage in trading or use any services. Please check our terms and conditions.

Quick Answer:

Cloud mining is a way to mine cryptocurrency using remote third-party hardware accessible via the internet. Users rent computing power from data centers without needing to install or manage the mining equipment themselves, saving on initial investment and maintenance costs while avoiding the noise and heat produced by physical miners.

There are several methods of cloud mining, including using a Virtual Private Server (VPS), leasing hash power directly, or opting for hosted cloud mining where the provider maintains the hardware. Legitimate cloud mining companies, such as IQ Mining and Genesis Mining, actually own mining equipment and offer different levels of hash power for rent.

However, there are many scams in the cloud mining space, and it’s important to be vigilant, looking out for red flags like unrealistic promises and lack of transparency. Cloud mining’s future remains promising as it offers a cost-efficient alternative to traditional mining, especially for those unable to afford their own rigs.

While cloud mining can be free of upfront fees, some providers charge monthly maintenance or service fees. A crypto wallet is necessary to store the mined cryptocurrency securely. To calculate cloud mining profitability, consider the required power and hashrate against the costs involved. In conclusion, cloud mining can be a good option if approached cautiously, and it’s essential to protect your assets from potential scams.

Cloud mining means a process used for verifying and completing transactions between users on a public ledger called a blockchain.

There are four types of cryptocurrency mining based on the mining hardware you use: mining using graphics cards (GPU), mining using a computer processor (CPU), mining with special equipment designed for the purpose of mining digital currencies only (ASIC), and cloud mining.

Mining digital currencies, such as Bitcoin (BTC), Ethereum (ETH), Litecoin, or Monero requires a sizable initial investment and may be less rewarding for new network participants. Moreover, with the arrival of data centers that are using specialized ASIC devices, the process of mining is becoming less and less efficient for retail miners. This is especially true for Bitcoin miners who, because of the nature of the Proof-of-work algorithm, the mining difficulty becomes higher and higher.

If you don’t want to spend a large amount of money on specialized mining equipment and its maintenance costs and are looking for another way to buy hashing power, you can choose to use a cloud mining service provider.

How does cloud mining work? Cloud mining is simply renting out the computing power of mining farms via the internet for a fee without installing anything.

Keep reading to find out the most popular cloud mining methods and cloud mining service providers. You’ll also get the inside scoop on both the advantages and disadvantages of this type of crypto mining.

Cloud mining technology concept

What is Cloud Mining?

Cloud mining operation is a way of mining cryptocurrency using third-party mining hardware that you have access to remotely, via the internet. This type of cloud mining hardware, especially the one for Bitcoin mining, can be found in data centers specialized for this purpose.

With cloud mining, you’re renting computing power without installing or directly running the mining software and hardware. This type of mining is useful if you don’t have enough resources for regular crypto mining because you can rent mining equipment from a third-party cloud provider.

The cloud mining algorithm operates like this:

  • First, individuals or businesses that offer cloud mining services buy, install, and configure the hardware equipment (i.e. they build data centers).
  • Next, they present all the data to potential borrowers. This includes the prices, conditions for closing contracts, and technical capabilities offered by the particular cloud mining company.
  • If you want to rent part of the cloud computing power, you have to register for the cloud mining services, select Cloud Mining Contracts, and rent the mining hardware for a fee.
  • After this transaction, miners will receive a hash rate (the speed at which mining hardware operates) directly to their mining pools and receive payouts for taking part in the mining process.
monitor and cpu set up

Cloud Crypto Mining Methods

Cloud mining can be performed either from virtual or physical mining servers by using one of the following cloud mining methods.

VPS (Virtual Private Server)

In order to use this method, you have to establish a virtual private server and then install mining software. Using a Virtual Private Serve simply means renting a computer that you can access remotely via the internet.

Leased Hash Power

This method involves acquiring a cloud mining arrangement with a mining farm in order to lease part of the company’s hash power. In general, it’s up to the cloud miners to decide the amount of computing power they would want to rent.

When a new block is validated, the earnings of the cloud miners are proportional to the acquired amount of computing power. 

The main advantage of this method is that you can start mining without actually purchasing any mining hardware equipment. That’s why this is the most commonly used cloud mining method. Rented hash power is a favorite form of cloud mining for altcoins (digital currencies other than Bitcoin).

Still, you have to be very careful because there are numerous companies who claim to be providing computing power but turn out to be mere scams

Hosted Cloud Mining

The expenses of the cloud miners in this method are covered by the contract providers. This means that the providers are in charge of the support and upkeep of your mining hardware.

This method is less common, but its popularity is on the rise because many people that own mining equipment for running a data center don’t have the resources to pay the cloud miner. With hosted cloud mining, the companies can get better hash rates since they’re in charge of these expenses.

Man hands using laptop

Cloud Mining Companies

Legit Companies

Cloud mining companies are called legit not when they are reputable or profitable, but when they actually own mining equipment and mine Bitcoin. There are numerous good and legit cloud mining platforms that guarantee security for your cryptocurrency. Here are some of the best cloud mining companies: 

Scam Companies

The rising popularity of Bitcoin cloud mining has led to the appearance of opportunistic villains and scammers working the internet. Therefore, it’s crucial for you to be more careful when you engage with cloud mining companies. In order to help you choose the right cloud mining provider, we’re sharing the key pointers that tell you you’re dealing with a scam company:

  • The company uses fake personal data to register a domain name;
  • The company has published pictures of a CEO who’s not associated with the project;
  • The company claims you’ll earn returns on a daily basis;
  • The company offers promotions that sound too good to be true;
  • The company has a suspicious digital footprint.

These are some notorious scam cloud mining companies you should keep away from:

  • BitBRX
  • MiningMax (Ponzi schemes)
  • My Big Coin (fake Bitcoin scam)
  • and MyBtgWallet (Bitcoin Gold Scam). 
Warning icon on a digital LCD display

The Pros and Cons of Cloud Mining

It’s always a good idea to first get familiar with the advantages and the disadvantages of cloud mining before you decide to get involved with this type of mining. If you find it too troublesome, you can consider an alternative form of mining

Pros of Cloud Mining

  • There is no need for any previous technical knowledge. Beginners are welcome!
  • You don’t need to understand how the mining rigs are assembled.
  • You save time on assembling and buying mining rigs (computer systems for mining crypto coins).
  • Someone else is keeping your mining rigs in working order for you.
  • You’re saving on electricity bills because you are renting processing power.
  • You’re spared the noise and hot air coming out of the mining equipment. 
  • You can start mining right away and choose from various digital currencies. 
  • Cloud mining enables you to earn additional passive income by using referral programs. 
  • Cloud mining doesn’t require a large initial investment for mining equipment.

Cons of Cloud Mining

  • There are a large number of scams. 
  • This type of mining is centralized because it’s done through centralized data centers.
  • There is a higher price per hash rate.

Cloud Mining Is the Future

If we put scammers aside, cloud mining is crucial for the crypto mining community as network hashing power will always be in high demand.

In many cases, utilizing other networks’ hashing power can be far more cost-efficient than maintaining or buying your own mining rig.

You can increase your rewards by buying more hash power, even though your mining rig is a part of a larger mining pool.

As you can see, cloud mining is likely to remain one of the main mining methods in the cryptocurrency industry for the foreseeable future.

powerful bitcoin concept

Frequently Asked Questions

Are there fees for cloud mining?

Cloud mining has no fees associated with it. However, some cloud mining providers charge monthly maintenance fees for using their services. Some also require monthly fees. The best way to find out about these fees is to read the terms and conditions of each provider.

Do you need a crypto wallet for cloud mining?

Yes, you do need a crypto wallet for mining cryptocurrencies like Bitcoin, Ethereum, Litecoin, etc. This is where you can store your mining rewards after a successful validation. The best wallets are hardware-based, such as Ledger Nano S and Trezor One. They provide better security compared to software-based wallets, which are vulnerable to malware attacks.

How to calculate mining profitability in cloud mining?

Cloud mining is a new business model for cryptocurrency miners who do not want to invest in expensive hardware. Instead, they use third party providers such as Hashflare, Genesis Mining, etc., which provide them with access to cheap electricity and other resources needed to mine cryptocurrencies. The profit margin depends on how much power you need to run your miner, and what kind of hashrate you require.

A Few Words Before You Go…

In simple terms, we’ve described how cloud mining works.

Hopefully, our intro to cloud mining will help you decide on the best method for you, and the differences between legit and scam cloud mining companies will be useful so you can protect your assets from scams.

About The Author

James Headshot
Written by

Crypto Technical Writer

James Page, previously the lead writer at Crypto Head and a registered psychologist, brings a unique perspective to the world of blockchain and cryptocurrency.

His extensive experience in the industry and ability to present complex concepts in an understandable manner make his articles a valuable resource for readers seeking to navigate the ever-evolving crypto landscape.

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