What is cloud mining and how does it work?

Cloud mining refers to crypto mining done in the cloud. 

Cloud computing is that form of computer processing that is not done with one’s own machines locally, but is delivered as a service via the Internet by third-party machines residing elsewhere. 

Thus cloud mining in the strict sense is not mining, but the use of a mining service provided by a third party. 

True crypto mining

Crypto mining means searching for an alphanumeric string that validates a new block to add to a Proof-of-Work (PoW)-based blockchain. 

Currently, the only major cryptocurrency still based on PoW, and therefore that can be mined, is Bitcoin, followed by Dogecoin, Litecoin, Bitcoin Cash, Monero, Ethereum Classic, and many others. 

Effectively, however, crypto mining is almost totally dominated by Bitcoin. 

Whoever can find the hash that validates a block not only validates all the transactions in it as well, but also adds it to the blockchain, earning the right to receive a reward. 

Currently the reward for those who validate a Bitcoin block is 6.25 BTC, and next year it will be halved. Approximately one block is mined every ten minutes. 

Since the prize only goes to the individual miner who found the validating hash, real mining is a competition, where the one who mines the most hashes is more likely to win. The hashes are extracted at random. 

This is why only large mining farms manage to mine alone: for everyone else there are pools, which are platforms that pool the hashpower of many miners. 

Moreover, mining Bitcoin costs a lot, both because it consumes a lot of energy and because mining machines cost a lot. For these reasons, not many people mine BTC. 

The solution: cloud mining

Because successful Bitcoin mining requires a lot of investment in special equipment, and needs cheap electricity, many are cut off. 

One solution to this limitation may come from cloud mining. 

In fact, a cloud mining service allows anyone to rent a portion of computing power from machines owned by others, and located in places where the cost of electricity is low, regardless of one’s country of residence. 

In fact, usually those providing such services are companies that are located in places in the world where they can take advantage of low electricity costs, or even produce it locally. 

However, as is easy to imagine, this methodology also lends itself to potential scams. 

The problem is that those who rely on a cloud mining service cannot verify that the provider is actually mining. 

These services are fee-based, and they generally do not promise returns because mining returns are variable, and depend on many external and unpredictable factors. 

Thus it can sometimes happen that the service provider just collects the rental payment, and then does nothing else. The user thus only ends up losing what they have “invested,” and they also have no way to check whether they have been scammed or not. 

How to avoid scams

First when you want to buy a cloud mining service it is worth checking how long the company that provides it has been in existence, and how much they pay on average. 

Indeed, if it is a company that has been in existence for many years, and regularly pays those who use their cloud mining services, they are likely to be serious and continue to pay. 

However, if it has been in existence for a very short time, or you don’t know whether it pays or not, you might want to avoid it, because unfortunately the majority of cloud mining offers circulating online are scams. 

There is a specific reason behind the fact that most of them are scams. 

Indeed, there is so much risk involved in cloud mining that it is generally better to simply buy BTC rather than hoping to get it that way. 

By buying BTC one can choose the time of purchase, and thus the price, with the certainty of receiving the purchased Bitcoin if one does so on a serious exchange. Moreover, after the purchase, one can withdraw them to one’s own non-custodial wallet and have the certainty of ownership. 

With cloud mining, on the other hand, there is total uncertainty, because when you buy such a service you do not know how much you will receive. Indeed, those who promise certain and precise earnings are lying, so it pays to stay away from them. 

Cloud mining as a loan

A different matter is when cloud mining services are offered to raise money as a loan in order to finance the business. 

That is, some companies that do mining ask for loans to finance their business, and sometimes offer the possibility for anyone to lend them money with a kind of purely financial cloud mining service. 

In these cases, however, it is necessary for the company to commit, in a written contract, to repay the full amount of the loan including the promised interest. For those who invest in this way however, it is only lending money to a mining company, and not actually mining. 

Sometimes the provider of this type of service shares the risk with the investor, that is, without promising the return of the investment, but in return not for interest but for sharing the earnings. In these cases the client risks as much as the miner, if not more. 

However, it should be pointed out that in order to offer investment products such as these one would have to have the prospectus approved by the financial authorities of the country in which one is selling them, and this often does not happen. 

Conclusions

In conclusion it can be said that unfortunately cloud mining service offers are often scams, or rip-offs. 

There are only a few really serious services in this field, and they are particularly those that have been operating properly for many years now.

There are various types of them, although the types are not many, and they are not necessarily convenient. 

Before buying such a product it is worth comparing it with merely buying BTC on exchanges, because often this second solution is better since it is much less risky, even though it is. 

Mining is now the stuff of experienced professionals with significant capital, and there is no need for millions of people to do it. 

It only takes a number of mining farms scattered around the world to make Bitcoin work, so the only serious reason to do cloud mining is to want to make money by investing. 

For all these reasons, great care must be taken if one decides to engage in this activity.