Bitcoin cloud mining usually refers to the process of Bitcoin mining using the shared processing power of a bitcoin miners at a remote data center (Leased hashing power). Instead of owning your own physical bitcoin mining hardware on your premises, you pay for bitcoin mining power provided by a bitcoin cloud mining company.
Bitcoin mining was designed to be just profitable enough to be enough incentive for enough miners to secure the network. It was not designed to be a bitcoin mining arms race.
Typically the user purchases a contract and or hashing power from a data center in the form of GH/s (Gigahash / seconds). Customers of the data center purchase the desired amount of hashing power for the period of the contract. Some cloud mining companies allow customers to trade their hashing power they have purchased.
Cloud mining can also take the form of leasing or owning a bitcoin miner that is hosted remotely by a data center. Generally this type of cloud mining has data centers located in areas where electricity is cheaper or cooling of the miners is easy to do, or sometimes both. The data center will host the miner on your behalf, and you are able to connect to the miner and control it remotely.
Advantages of bitcoin cloud mining
- Instant activation – buy GH and start mining quickly, instead of waiting for delivery of your bitcoin mining hardware which could waste valuable days of mining. With cloud mining you never have to send back faulty equipment or troubleshoot new hardware.
- No risk of hardware failure – The data center is tasked with providing you with hardware that works and will absorb the cost of hardware failure, maintenance and configuration to provide you with a guaranteed up-time and payout
- No noise or heat or space – Bitcoin miners are notoriously noisy and generate extreme heat. By using a cloud mining company you do not have to put up with any of the noise and heat associated with mining. Worrying about adequate ventilation, cooling systems, backup generators, and safety
- No rise in electricity bill – bitcoin miners use a lot of electricity and by using a cloud mining company, your bill stays the same. Cloud mining companies usually get discounted or cheaper electricity because of their location, or bulk pricing.
Disadvantages of bitcoin cloud mining
- Risk of fraud – The bitcoin cloud mining industry is crawling with schemes and fraudsters who take advantage of people eager to grow their bitcoin holdings.
- Lower profits – The profit margin in bitcoin mining is minuscule, but paying for all the conveniences of cloud mining comes at a cost which often means lower profits than if you had your own hardware.
- Lack of control – Many cloud mining companies do not give you full control over your hashing power. Some do not allow you to choose the mining pool you want to use for example, or to tweak the miners settings and hashing output in the mining software.
Is bitcoin cloud mining profitable?
Profitability depends on the kind of cloud mining you are doing. For most people, unless there are very unique circumstances, right now the answer is NO. For people who know what they are doing, then it is possible to see opportunities and buy GH at the right times, to make sure you see a profit. A lot of people make good money with cloud mining, and many also lose everything.
Cloud mining companies would only sell their hashing power to you, if it were more profitable than simply keeping the bitcoin they mine.
At the moment most users starting new cloud mining contracts and buying GHs will never get a return on investment, due to the cost of the contract and BTC price. Having to mine back the cost of the contract as well as the GH to be break even, it is unlikely to be profitable.
Bitcoin mining becomes unprofitable when the cost of running your cloud mining is more than the amount of bitcoin you are mining, and it would be more economical to simply buy bitcoin.
It is extremely difficult to accurately calculate the profit you will get for mining bitcoin over the long term. The main reason for this is the ever increasing bitcoin difficulty which itself is influenced by the ever expanding and contracting Hash rate of the bitcoin mining network. The Hash rate is grows and shrinks depending on how profitable it is to mine based on the market price of bitcoin.
Cloud mining companies and scams
(Please also read Bitcoin schemes in South Africa)
Many cloud mining companies are actually ponzi schemes that eventually will become unsustainable and collapse. There are a few cloud mining companies that do have real datacenters and can provide proof of all their hardware etc. One such company is www.genesis-mining.com, who are one of the oldest cloud mining companies. As of June 2014, www.genesis-mining.com are operating on three bitcoin mining farms that are located in Europe, America and Asia.
Criteria to help you spot a cloud mining scam/ponzi:
- No public bitcoin mining address / no user selectable pool.
When you buy hashing power from a cloud mining company, you should be able to direct the hashing power to a mining pool of your choosing. The cloud mining company should also have a public mining address that proves that they are mining bitcoin on the network, and they should be able to sign blocks to prove they own an address. If they cannot do this, they are very likely a scam.
- No endorsement from any asic miner vendor
Legit cloud mining companies have a lot of very expensive hardware and the ASIC vendors who supplied them will gladly make a public post or acknowledgement to show that the company in question is one of their customers. This is free advertising for the ASIC company and the endorsement gives confidence to the cloud mining company so everyone wins. There is no reason why any ASIC vendor would not happily do this and real cloud mining companies usually ask this of them right in the beginning to get off on the right foot. If there is no endorsement, then you can assume that the cloud mining company simply does not have the hardware they protest to have.
- No relevant pictures of their mining hardware and datacenter
All legitimate cloud mining companies are able to provide you with details of their datacenter and even pictures of all the bitcoin miners that they have. Some even go so far as to provide proof of their electricity consumption. Although its easy to fake pictures, it should be even easier for a company to walk into their datacenter and record a video of all the equipment running, and take a few pictures to proof its existence.
- Open ended IPO / fractional reverse mining risk
The amount of GH you can sell is limited by the amount of mining hardware you have in the datacenter. Getting more hardware in order to sell more GH takes a long time to order, arrive and deploy. Legit mining companies will have limitations on the amount of GH they can sell and will make public how much they have (provably) access to, and how much has been sold.
Any company that doesnt limit sales or make public how much hashrate they sold vs what they have deployed should be considered highly suspicious.
- Referral programs and social networking for cloud mining
Cloud mining companies that have referral programs, especially those that have other members that join under you are a massive red flag. This is especially true when the cloud mining companies have referral programs that pay almost 10%. The mining market has razor thin margins and no real company can afford to pay 10% referrals on below market cloudmining prices. Referral programs almost always serve only to feed the ponzi scheme and provide financial incentive to posters to lie about the true nature of the company. Cloud mining companies that use this technique are some of the most dangerous out there, BEWARE!!
- Anonymous operators of website domain
The owners of the cloud mining website domain should not be anonymous and should provide full contact details when registering the website domain. If the contact details of the domain owner for the cloud mining website are hidden, then you would be crazy to deal with a company that has gone out of its way to make sure it stays anonymous.
- No exit strategy from cloud mining website
A decent cloud mining company will allow you to sell your GH and withdraw your money. If the mining website does not allow for the sale or trade of your GH then it is most likely a ponzi and you should stay away.
- Cloud mining companies that offer “guaranteed profit”
If any cloud mining website guarantees you a bitcoin denominated profit, especially a 15%+ one, you can be 100% sure it is a ponzi scheme. There is no such thing as certain profit when it comes to bitcoin mining. Nobody knows how the network will evolve or what the BTC price will be tomorrow, let alone in months time.
Please also read Bitcoin schemes in South Africa