Should You Invest In Cloud Mining?

Oct 15, 2020 06:41 PM ET
Should You Invest In Cloud Mining?

Overview

The unprecedented rise of Bitcoin and countless altcoins in recent history has spurred massive appeal towards cryptocurrencies mining. The main attraction of mining is the general accessibility of the required equipment, which tends to be graphics cards and CPUs. The other motivation is the rewards of the mined coins, and their potential to grow in value. Mining that occurred in one’s capacity using laptops or desktops was very accessible back when Bitcoin was still relatively obscure. 

Throughout the years, the need for more advanced equipment grew in line with the competition and value of the coins, to the point where people began investing in expensive mining rigs. In some countries, large warehouses were in demand to house these rigs that only mined Bitcoin, for example. All of these innovations left at-home miners unable to compete. 

As a result of these frustrations, cloud mining started gaining popularity in a bid to alleviate a miner’s biggest problem: expenses. Mining itself is a costly and energy-consuming activity. Nonetheless, it is necessary to keep all coins that need to be mined alive and for their rewards to miners. For those seriously considering mining, questions arise about whether it’s best to mine the coins themselves or use a cloud mining service. It’s best to look at the pros and cons of both methods after defining what each of them is.

What is cryptocurrency mining?

Cryptocurrency mining refers to cryptographically solving mathematical hashes on the blockchain using specialized computers. By computers, we mainly refer to CPUs (central processing units), GPUs (graphical processing units), and ASICs (application-specific integrated circuits). In solving the equations, the miner receives a reward of a block of the cryptocurrency. This block is then validated and added to the blockchain. Decentralization allows for anyone to perform this process if they have the necessary hardware and electricity.

On the other hand, cloud mining merely refers to renting computational power from a company that mines on your behalf remotely using their equipment. In this scenario, the user does not require any physical equipment whatsoever as they rely on that of the mining company. The cloud mining company should provide daily difficulty charts to reflect the ease or difficulty of mining in the network. When a block is solved, the company would reward the user according to the power paid for, minus any fees.

Pros and cons of mining yourself

Pros and cons of mining yourself

Pros: The biggest advantage in this regard is you have more confidence over the mining process since you own the equipment. When you receive the tokens, there is more trust that you gain direct access without the need for intervention (aside from a regular exchange). In any event, you can decide to sell the hardware since it would be under your ownership.

Cons: The main disadvantages are the costs, specifically the upfront cost of the hardware and the electricity. Depending on the coin, buying the mining hardware ranges from a few hundred to a few thousand dollars. There may be shipping and customs costs if the hardware is coming from abroad. After this process, electricity is an ongoing cost that affects how worthwhile and profitable the endeavor becomes. Some countries have higher electricity costs than others, which is a significant consideration. There may be concerns about the cost of cooling the hardware as it probably will heat due to the energy-consuming nature of mining. Furthermore, there could be noise coming from the equipment itself. 

Pros and cons of cloud mining

Pros and cons of cloud mining

Pros: The most evident benefit of cloud mining is the tremendously reduced cost in the form of a one-time contract price. This simplicity cuts out any need for equipment, admin, maintenance, and electricity costs you’d incur mining yourself. As a result, you wouldn’t need to own the physical equipment, worry about cooling and noise.

Cons: Currently, the chief disadvantage of cloud mining is its transparency, leading many mining communities to label it a scam. The idea itself is still relatively novel for most, and there certainly have been many scams in the last few years. It’s harder to verify whether a company really has mining equipment and if real mining takes place. For various technical reasons, a common scam involves companies just going out of business without warning, running away with client funds. There are a few companies that have excellent reputations and transparency, though these are the exception than the norm.

While, with cloud mining, you don’t need to own any hardware, this lack of ownership means you can’t sell it. Depending on how much the fee would be and the coin mined, paying the monthly or yearly fee may or may not offset this opportunity cost. 

Other considerations

One of the key questions to decide whether to use a cloud mining service or mine a coin themselves is assessing the profitability. The few genuine cloud mining services provide the rates at which they charge per hash, depending on the coin. Using that information, you would need to factor a hypothetical scenario of buying the equipment outright, how many hashes it could solve, and the electricity that would consume. 

For example, it’s a well-known fact that mining Bitcoin as a solo miner is not a profitable task for the very reason you’d be competing with warehouses stacked with tens of ASICs. These computers have almost become the standard just for having any shot at mining a fraction of Bitcoin, though they are quite expensive for the average investor. 

In such a situation, it may be a calculated but slightly safer risk to go with a reputable cloud mining service for Bitcoin, where you’d be paying significantly less for hash power. However, of course, you would likely make less from your investment with the smaller risk.

The more expensive the coin is, the less profitable it becomes to mine as demand increases on the mining network. Furthermore, mining difficulty continually changes every day.  So, whether you’re mining yourself or with cloud mining, you are not guaranteed to mine a set number of coins, meaning additional costs come into the picture.

Conclusion

What is crucial to appreciate is that while, with cloud mining, you are paying one set fee, you do have to consider the opportunity cost and mining difficulty of the coin in question. Cloud mining services rarely provide this information in grest length. Therefore, it’s the responsibility of the investor to thoroughly assess these circumstances as to which method is likelier to give a good return. Alternatively, simply buying a specific coin and holding it long term may be another good investment if mining presents too many variables.  


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