Cloud mining in cryptocurrencies: a complete guide to risks and opportunities

In summary - Cloud mining is the process of participating in crypto mining without physically owning the hardware. - While it offers convenience for those who want to mine without technical skills, it is important to know that the industry is rife with scams. - Before investing, thorough research and verification of legitimacy are crucial steps.

What is meant by cloud mining?

In cloud mining, participants rent computing power from specialized companies instead of acquiring and managing the equipment directly. They pay a fee and receive a share of the rewards when blocks are mined.

The term originates from cloud computing, where remote servers handle data processing. Similarly, cloud mining delegates the entire process to professional facilities, reducing the burden on those who wish to participate in the extraction of cryptocurrencies like Bitcoin.

The various forms of cryptocurrency extraction

To better understand cloud mining, it is helpful to know the other available approaches:

Solo mining: The original method, where a single individual carries out the entire process with personal equipment. It requires a high initial investment. If the block is mined, the entire reward goes to the miner. However, with the increasing difficulty of networks, the chances of success have drastically decreased.

Mining pool: More miners combine their computational resources to increase the chances of finding blocks. The reward is divided based on each one's contribution of computational power.

Mining ASIC: Specialized hardware (Application-Specific Integrated Circuit) designed specifically to mine certain cryptocurrencies. Highly efficient but expensive, primarily used by professional operations.

Mining GPU/CPU: Requires standard graphics or central processors. Effective in the past for Bitcoin, now mainly used for other cryptocurrencies, as it has become inefficient for harder networks.

How cloud mining works step by step

The process is quite linear:

Step 1: Select a reliable cloud mining company after careful research - as frauds abound in the industry.

Step 2: Choose a mining package. Providers offer various options based on the desired computing power. More power means higher costs but potentially greater returns.

Step 3: You may be allowed to choose a specific mining pool to contribute to.

Step 4: Pay for the service, usually in cryptocurrency, although some platforms accept traditional currencies.

Step 5: The company configures, manages, and initiates the operation. Your share of power is used for mining.

Step 6: The rewards from the activity are distributed based on the power provided. It is necessary to set up a wallet compatible with the mined crypto.

Key metrics to monitor

Hash rate and its units of measurement

The hash rate represents the number of calculations performed per second. Higher values increase the likelihood of finding the next block. It is measured in various scales:

• Kilohash (KH/s): 1.000 hash/second
• Megahash (MH/s): 1 million hash/second
• Gigahash (GH/s): 1 billion hashes/second
• Terahash (TH/s): 1 trillion hashes/second
• Petahash (PH/s): 1 quadrillion hashes/second
• Exahash (EH/s): 1 quintillion hash/second

Other relevant metrics

Energy consumption: Espresso in watts. Efficiency is measured in joules per terahash (J/TH) - lower values indicate greater efficiency.

Cost per hash: The total cost of the contract divided by the total hash power, useful for comparing different offers.

Mining difficulty: Determines how hard it is to find the next block. Increases with more miners present on the network.

Block Reward: Amount of crypto received for each mined block. For Bitcoin, it halves every four years during the halving.

Cryptocurrency Price: The current market value directly affects the profitability of the trade.

Pool Fees: If you participate in a pool, the fees reduce the net earnings.

Advantages that attract users to cloud mining

Lack of required technical skills: The company manages everything, eliminating the need for specialized knowledge.

No initial hardware investment: Avoid high equipment costs and technological obsolescence.

Freedom from heat and noise: The hardware resides in professional data centers, not at home.

Potential passive income: After the initial payment, rewards flow in without further effort.

The risks that cannot be ignored

Widespread fraud and scams: The sector is notoriously rife with dishonest operations that vanish with users' funds. Due diligence is essential.

Profits lower than expected: Since the company has to cover operational costs and achieve margins, the returns for the user are lower than independent mining. Sometimes, buying and holding crypto might be more profitable.

Loss of decision-making control: You have no say in which crypto to mine, when to sell it, or other critical decisions. Legal or technical issues of the company compromise your earnings.

Insufficient transparency: Many companies do not clearly disclose fees, operations, and other vital information, making it impossible to accurately calculate risks and returns.

Cryptocurrency market volatility: The value of the rewards received can collapse quickly, wiping out profit margins.

Regulatory uncertainty: Cryptocurrency and mining laws vary by jurisdiction and frequently change. Make sure to comply with local regulations and those of the company.

Final recommendations before investing

Before committing capital:

Read public reviews and check the reputation on cryptocurrency dedicated forums. Companies with years of experience, recognized brands, and significant sizes tend to be more reliable.

Fully understand the fee structure of the contract, including all hidden charges. The costs of electricity and maintenance are usually incorporated into the price.

Diversify: avoid relying solely on cloud mining. Consider it as part of a broader investment strategy, not as the only source of return.

Preliminary research is your best defense against scams in the cloud mining sector.