Bitcoin Cloud Mining Guide

Despite its signature ups and downs, the trend for the value of Bitcoin continues to climb. And due to how many stories have been posted about overnight millionaires investing in Bitcoin, the global awareness about this digital token has exploded.

Especially for newbies, the concept of using your computer to mine Bitcoin can seem like a lucrative venture – at least a first. However, after a bit of research, the amount of required hardware, electricity costs, and technical expertise usually dissuades most would-be miners from entering the market. But these financial and technical barriers to entry have been lowered thanks to the popularization of cloud mining.

Cloud mining gives people an alternative way to mine cryptocurrencies, as it eliminates the need for expensive equipment, figuring out mining pools, or managing the mining platform.

What is Cloud Mining?

Cloud mining is a new method of mining cryptocurrencies such as Bitcoin by using a distributed network of computers that sit “in the cloud”. These computers share the processing power and resources amongst each other, and have been configured for the specific use of mining these coins at minimal costs for customers. In practice, cloud mining companies rent out their servers for customers to mine cryptocurrencies, which are stored in datacenters.

This method of mining has a few distinct advantages. For example, if you reside in a country where electricity costs are high, it would make sense for you to outsource your mining activities to a place where electricity is less expensive. There are other advantages of cloud mining too: not dealing with technical problems such as overheating, troubleshooting, or upgrading hardware.

How Cloud Mining Works

To ensure that transactions with Bitcoin and other currencies are valid, a process of validation for each transaction is required. To put it simply, if a person purchases an item using Bitcoin, an algorithm checks to see if the coins spent are taken from the customer’s wallet. This process prevents the problem of double spending.

This process of verifying each transaction, as well as the coin’s rising supply, means that there is always a demand for additional computing power. This process is described as mining, as it controls both the validations of transactions and the creation of new Bitcoin into circulation. Miners provide the needed computational power, and in return, they are rewarded with Bitcoin. This process will continue until Bitcoin hits its hard cap of 21 million coins, which makes this currency limited in supply.

For each block to be created in the blockchain, miners are required to solve a computational puzzle. This puzzle is really a guessing game of being the first to discover what’s known as the hash key to verify a transaction, or to mine through a block of Bitcoin. Trillions of guesses, otherwise known as hashes, are required to win the reward of the block. For this reason, there have been Bitcoin mining “pools” set up to guess the right hash number faster. Each member of the pool is rewarded for their contribution, with the Bitcoin split amongst all members when they find the correct number.

Is Cloud Mining Profitable?

There is no shortage of people who regret getting in during the earliest days of Bitcoin. This was a time when people could mine coins using their regular desktop computers. As an idea, cloud mining may seem like a way to return to the golden years of Bitcoin, back when everyone was making money without any technical expertise.

Unfortunately, the reality is that cloud mining could fail to live up to customer’s expectations. Although there are situations where remote mining could be worthwhile, most ventures into Bitcoin mining will struggle to break even. This is due to a number of reasons, as we will explore below.

To get started with cloud mining, you will be required to enter a mining contract. This contract will specify the hash rate and length of time. A higher hash rate will lead to more coins being mined and electricity consumed. You should expect to pay about $170 USD for a 1000GH/s hash rate. A cloud mining contract’s length can range from 6 to 36 months or more.

When it comes to making money with cloud mining, your return on investment will be determined by a number of factors. Things like the price of Bitcoin, its exchange rate, power cost, and the mining provider you use will all play a part. Also, the maintenance fees that a platform charges will affect your bottom line. To get an idea of how much you could make from cloud mining, you can use a mining profitability calculator to see if the investment is worth your money.

How to avoid being scammed through Cloud Mining

Some companies in the cloud mining space are scams, while others are sophisticated Ponzi schemes. For this reason, you should evaluate the legitimacy of the company in question before entering into a contract with these firms.

Some key factors of these companies include the following:

Pictures of the data center:

If a company is running a legitimate cloud mining business, then there should be photos of its datacenter available.

Available mining address:

You can often verify a company through its address on the blockchain. Also, the company should sign the blocks that it mines, as this can confirm ownership.

Avoid claims of limitless processing power:

Any mining business will be constricted by how many hashes it is able to rent out to its customers. If a company claims that there is no limit to its hashing power, or does not disclose this information at all, then the firm should be avoided.

Inability to withdraw balance:

If a platform does not give you a clear and easy way to get your coins, then it is most likely a scam.

Hidden domain contact details:

A legitimate business should bend over backwards to prove that it is trustworthy, with available contact details as a priority. Private domain registration is an indicator that a cloud hashing platform is a scam.

So, it is important that you conduct your own due diligence when it comes to cloud mining. You need to understand what you are signing up for before entering into a contract with any service, and the exact risks and costs involved. However, this not to say that every company in the mining space is illegitimate. Although the cloud hashing business is filled with scams, there are some reputable companies out there, and they could provide you with a profit under the right economic conditions. Yet still keep in mind that cryptocurrencies are a high risk investment with no guarantees of success or even getting your money back.

Categories of Cloud Mining

There are some different kinds of cloud mining platforms that you can sign up for. Each has its strengths and weaknesses and can vary in price.

In general, there are three forms of remote mining available at the moment:

  • Hosted Mining: Leasing a machine that is provided by the cloud mining provider.
  • Virtual Hosted Mining: Your own virtual private server with mining software installed.
  • Leased hashing power: Lease a portion of the company’s hashing power, without the need for a physical or virtual machine. (This is the most popular method of cloud mining).

Calculating The Profitability Of Cloud Mining

Through the use of a cloud mining calculator such as the Genesis Clock, the cost of electricity and the initial investment for hardware is factored in. Yet most cloud mining services work on a month to month basis with the electricity and down payment factored into the charge. This bundling of costs means that it can be difficult to calculate your return on investment.

Calculating the Return on Investment for Cloud Mining

Calculating the return on investment for cloud miners differs from hardware miners. With physical miners, you can calculate your monthly charge by how much it costs to power it. This is calculated by multiplying your dollar per KWh by the power consumption of the unit. Once you figure this number out, you then multiply the sum by a conversion factor of 0.744, which is the ratio of seconds per month to joules of energy per kilowatt.

However, for cloud mining, you need to follow a reverse process for calculating your costs. This is because you are working with a monthly cost, and not a once-off investment. So, you are calculating the cost per kilowatt. This figure is found through dividing the running cost by a factor of 0.744.

Calculating Risk vs. Reward

When you put money into anything related to cryptocurrencies there will always be certain risks. Yet there is a way to make cryptocurrencies and the mining of these digital coins a profitable venture – provided that the math works out in your favor.

If you use a cloud mining calculator, you will discover that they will typically net you a return for 2-3 months before falling off in value. This drop-off is due to the fact that Bitcoin becomes harder (and less profitable) to mine over time. This means you could begin to lose money over a 4 to 6 month horizon.

Doing the math

If you visit a company’s pricing page, you will see the amount of hashes (mining power) and its cost to rent per month. For example, you could purchase 10 tera-hashes per second (10Th/s), and it may cost you $1,300 or the equivalent in Bitcoins. Using a Bitcoin mining calculator, you may see some surprising results.

After one month, you’d earn around $217 dollars in Bitcoin. This means after a year, you would end up with 4.1 Bitcoin in total. This figure may seem rather profitable, as it means you’d break even after just 6 months of mining.

But there are fees that you need to pay that would lower your net profit. These fees are known as MEF or Maintenance and Electricity Fees. For some cloud mining services such as Hash flare, the company charges 0.00045 USD per every 10 gig hashes per second, and 0.01 USD for each mega hashes per second using Scrypt.

With these extra fees included, the overall profit will be much lower: 0.0045 USD per 10 gigahashes per second each day equals $4.5 USD in fees. In one month, these fees will total $135, leaving only $82 per month in profit. This means you’d break even on your investment of $1,300 in 16 months. Provided that everything stayed the same in the world of Bitcoin, you would only be making a 6.8% return on your investment. This is highly unlikely however, as its exchange rate and mining difficulty fluctuates month to month.

The good thing about the volatility of Bitcoin is that if the coin increases in price, you’d make money on your investment equity, as the coins you mined before are now worth more. However, it could be argued that you’d be better off buying some Bitcoin to begin with and holding onto that initial investment of $1,300 in Bitcoin.

But what would happen if Bitcoin were to drop in value? If the price drops, then it would take you far longer for your investment to break even. And for the cloud mining company, they would’ve already made their money from the mining contracts it supplies, leaving them with little incentive to worry about their customer’s returns. Also, there is always the possibility that Bitcoin’s value will be wiped out entirely, so the return on investment for mining the coin would be zero.

The news gets worse for investors, as the above scenarios are the best case scenarios. As we discussed, most cloud mining companies are scams, or sophisticated Ponzi schemes claiming to be legitimate investments. What usually happens is that these firms will take money from new customers and use that revenue to pay out established customers. This scheme continues until the platform either falls apart or owners decide to book it with its investor’s money.

The Bottom Line: is Cloud Mining worth It?

Like gambling, cloud mining is much like a casino where the odds are heavily stacked against you.  And even if you do end up making money (through sheer luck), you may have been better off buying Bitcoin or another currency and holding on to it in the first place.

For those who are committed to the idea of investing in cloud mining, you should always double the check the company’s credentials and understand how much you could lose before you start counting your profits. The value of Bitcoin can change daily, so be prepared the ride out the volatile swings as you are in this game for the long run.

Be careful with your money and never take a company’s claims at face value.

Written by MyBitcoin Team Staff

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