Mining continues to be the one and only method for generating new precious bitcoins. However, the mining process has undergone a radical transformation since the early Bitcoin days. Mining Bitcoin has become extremely difficult, so these days, you need nothing less than a giant mining farm stocked with ultra-expensive hardware to ensure a competitive edge in such a wild market. 

Still, even though most Bitcoin miners want to make a profit on newly-created coins, some people are just looking for a way to learn the basics of mining and get substantial crypto experience without investing in expensive computer equipment. 

Fortunately, the modern crypto market offers a way of mining without breaking the bank. You can mine cryptos by renting computing power through cloud mining. In this article, we’ll go through the main features of this mining trend from the standpoint of today’s Bitcoin mining standards.

Vector illustration of cloud mining bitcoin

Bitcoin Blockchain Basics

Unlike fiat currencies that circulate in a physical environment, Bitcoin and other cryptocurrencies reside in a unique ecosystem called blockchain. The blockchain is an open, decentralized database of transaction records organized in blocks.

The Bitcoin blockchain isn’t regulated by a central authority and instead relies on a consensus protocol called Proof-of-Work (PoW) to provide security and prevent double-spending. All Bitcoin transactions are verified through the PoW protocol before they are added to a new block on the blockchain. The process of verifying transactions is what we call mining. For each newly-found block, the blockchain releases a predefined amount of Bitcoin units as a reward for miners who contributed to the process.

How Does Bitcoin Mining Work?

Each miner — represented by their hardware — who takes part in the verification process is called a node. Every time a Bitcoin user initiates a transaction from their crypto wallet, they’re sending a request to the Bitcoin network. Nodes get that information and race each other to see who is the fastest to confirm the pending transaction. 

The PoW protocol assigns an SHA-265 hash function to every transaction input, and the nodes try to find the right number (nonce) that produces the same cryptographic output. Since SHA-256 is irreversible, it takes nodes millions of attempts to guess the golden one. 

Therefore, the node with the highest hashing power (measured by the number of hashes processed per second) has a better chance of solving the puzzle faster than its competitors. 

When this finally happens (the average time is 10 minutes), the winning node presents the golden nonce to other nodes involved in the process to prove their work. That’s how the Bitcoin transactions are processed in a trustless and transparent manner. 

The History of Cryptocurrency Mining

Now that you understand how mining works let’s look at its rapid evolution. 

CPU Mining

The pseudonymous developer of Bitcoin, Satoshi Nakamoto, mined the first coins back in 2009. It’s important to remember that at this point, Bitcoin didn’t have a monetary value, and the mining difficulty of the cryptographic puzzles was quite low. Hence, when Bitcoin appeared for the first time, an average personal computer equipped with a CPU was enough to handle the mining. 

GPU Mining

GPU cards handle a narrower scope of computing tasks, mostly in the gaming and entertainment industry. GPUs can also process cryptographic equations required for mining. As the number of Bitcoin users grew, the computer power required for mining started to increase. First miners moved from CPU to GPU mining because the GPUs could increase the performance by 6 times, compared to regular computers.

FPGA miners

The first hardware designed specifically for Bitcoin mining was FPGA miners. Even though they were soon dethroned by ASIC (application-specific integrated circuit) mining rigs, FPGA miners were the turning point that made CPUs and GPUs obsolete and unprofitable for mining. 

ASIC Mining

ASIC mining rigs were absolute game-changers when they entered the scene in 2013, offering incomparably higher hash rates measured in GH/s (Giga) or TH/s (Terra) hashes per second. The manufacturers have been continuously enhancing the existing models with higher processing power and electricity efficiency since then. The most popular ASIC rigs on today’s market are Antiminer S19 Pro, WhatsMiner, and AVALONminer 1246

The Bitcoin mining market is mostly controlled by large corporate data centres employing numerous high-end ASIC miners.

Mining Solo vs Joining a Mining Pool

Theoretically, you can mine any cryptocurrency on your own. All you need is a proper setup, including an active crypto wallet to store the rewards, mining hardware to deliver computing power (GPU or ASIC), and mining software to interact with the blockchain. Last but not least, you need access to cheap electricity as you don’t want your bills to exceed the profits.

However, it’s impossible to successfully mine BTC with this setup due to the industry-level competition. Solo mining works well for altcoins like Ethereum (ETH), Litecoin (LTC) and Monero (XMR), or less popular, new cryptocurrencies. If you want to mine BTC, you need to join a mining pool to increase your odds of success.  

A mining pool is a network of miners that combine their hashing resources to perform cryptographic tasks faster than other nodes. When a pool manages to add a new block to the blockchain, it distributes the block rewards between its participants based on their power contribution.

There are two basic methods for reward distribution: Pay Per Share or Score. The first gives each member a share of the mining reward with a proportional fraction at the end of each mining round. A score-based pool distributes rewards based on the moving average score of the hash rate within a certain period until the miner stops mining. Slush, F2Pool, Binance Pool, and Genesis Mining are among the most popular Bitcoin mining pools on today’s market.

What Is Cloud Mining?

Cloud mining allows individuals to rent hashing power from a dedicated service that owns the necessary mining facilities. You pay for the computing power that somebody else’s hardware produces to mine cryptocurrencies.

This is an ideal setup for newcomers and less tech-savvy enthusiasts who don’t feel ready to invest in expensive machinery and maintain it under specific cooling and storage conditions. Instead, they can borrow the power of an ASIC rig for a pre-defined period (a month or year). 

Cloud mining payment plans are far cheaper than hardware investments, but their profitability and legitimacy can be rather questionable.

But why would someone who has invested a fortune in ASIC rigs rent them?

Very often, the cloud provider operates from a data center or mining farm that is located in an area with cheap electric power and a cool climate. Thereby, they can earn some easy money from lending you that machinery and reduce the costs of running a mining farm. 

With cloud mining, you stay away from all the dirty work that comes with maintaining a mining farm and earn profits just from checking the stats from the comfort of your home. Cloud mining companies offer various types of cloud-mining contracts or subscription plans for a handsome price depending on the average yield, hash rate, and frequency of payouts. 

As for the profits, ROI (return of investment) from cloud mining is volatile since it depends on external market factors and the ratio between your cloud price package and the current Bitcoin price within that period. In some ways, cloud mining is a double-edged sword. If the crypto price rises while you’re stuck in a binding contract, you’ll earn less since mining becomes more difficult and competitive during price surges. And if the asset prices fall, your reward will lose value as well, and the money you invested in mining power goes to waste. What is worse is that you won’t be able to give up the project if the asset price gets out of control because of the “time clause” in your contract (12 months, for example).

Models of Cloud Mining

If you google “cloud mining”, you’ll see thousands of businesses that lend hashing power under different conditions. However, there are only two basic operational models for cloud mining:

  • Host Mining — Users rent ASIC rigs from a mining farm and pay for their configuration and maintenance. This is the recommended approach for cloud mining as it gives you greater control of rigs as well as the opportunity to divert the borrowed hashing power to the mining pools of your choice. 
  • Leasing power — Users rent a certain amount of the hashing power produced by the mining farm. They pick an offered payment plan to receive a portion of the potential profits. Cloud miners don’t get charged for maintenance and earn a fraction of the farm’s profits.

Cloud Mining Scams

Cloud mining stands right next to staking on the list of well-developed Ponzi Schemes in the crypto industry. Scam platforms deceive investors, stealing their money with promises of hashing power and guaranteed rewards. In reality, these platforms don’t have any mining equipment and have no intention of delivering any profits. They usually fly under the radar of regulators because, on the surface, scam cloud services don’t do anything illegal. 

We recommend you research extensively to avoid putting your money, trust, and hopes into an “imaginary” crypto mining farm. Look at the customer reviews and ratings and double-check all the terms and conditions, even those hidden in an asterisk.

Genesis Mining is one of the few cloud mining services that do real mining. However, this doesn’t mean that they’re transparent about their mining operations. 

A Few Words Before You Go…

Bitcoin mining has become an industry of its own, and there are many businesses that offer cloud mining services to crypto enthusiasts. However, Bitcoin cloud mining is hardly profitable, let alone legit, in most cases. It can help you learn the basics of mining, serving as a demo account for the real game, but it isn’t the best way to earn profits. Unfortunately, the cloud mining industry is full of scams, so you need to be at your sharpest to avoid wasting your money.