How Does Cloud Mining Bitcoin Work?

If you want to invest in bitcoin mining without the hassle of managing your own hardware, there is an alternative. You can use the cloud to earn your coins.
Put very simply, cloud mining means using (generally) shared processing power run from remote data centres. One only needs a home computer for communications, optional local bitcoin wallets and so on.

Pros

Here’s why you might want to consider cloud mining:

• A quiet, cooler home – no constantly humming fans
• No added electricity costs
• No equipment to sell when mining ceases to be profitable
• No ventilation problems with hot equipment
• No worry of hardware failures
• Practically instant setup: no system building or software configuration
• Reduced chance of being let down by mining equipment suppliers.

Cons

Here’s why you might not want to consider cloud mining:

• Less fun (if you’re a geek who likes system building!)
• Lower profits – the operators have to cover their costs after all
• Lack of control and flexibility.

Types of cloud mining

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

1. Hosted mining
   Lease a mining machine that is hosted by the provider.
2. Virtual hosted mining
   Create a (general purpose) virtual private server and install your own mining software.
3. Leased hashing power
   Lease an amount of hashing power, without having a dedicated physical or virtual computer. (This is, by far, the most popular method of cloud mining.)

Hosted bitcoin mining

Bitcoin ASIC Mining 
Clients pay monthly rental rates for a large range of bitcoin ASIC mining systems, and can rent a dedicated physical machine for their sole use.
Many manufacturers are working on their own hosted mining facilities. KnCMiner recently announced that they are developing such a scheme in Sweden that uses renewable energy.
Clients pay monthly rental rates for a large range of bitcoin ASIC mining systems, and can rent a dedicated physical machine for their sole use.

Virtual hosted mining

Amazon's EC2 platform

Amazon's Elastic Cloud Computing (EC2) platform was once a popular way of mining scrypt-based currencies, such as litecoin, feathercoin and dogecoin. Amazon comes with added costs either in the form of an advance payment for a year's service or a ‘pay-as-you-go’ model.
However, a potentially more economical model is the ‘spot instance", whereby users can bid for computing time at a price they are willing to pay. When Amazon has spare capacity, it will grant computing power to the highest bidder. However, if you bid too low, your mining system may never come online at all. Furthermore, you may select instances in different geographic regions that can have an effect on price.
The best type of EC2 virtual machine for mining will have virtual graphics cards. But, these are harder to access on spot instances.
At one time, it was profitable to mine litecoin this way, but not currently.

Digital ocean

This VPS service offers a very simple ‘pay-as-you-go’ service that became popular during the early days of primecoin. However, the cheapest plans offer only modest computing power. For example, the $5/month tarriff has but one core and gives single-digit kilohashes per second for scrypt currencies. It should be noted, though, that this could be cost effective for completely new currencies.

The rest

In principal, mining can be done on any type of virtual host service. However, one needs to carefully consider the computing capability on offer. While it is theoretically possible to install mining software on a web server, it would probably not be profitable.
There have been issues with hacker-controlled botnets that have been able to direct a vast amount of computing power at mining cryptocurrencies, or by developing different types of malware to infect more machines.

Leased hashing power

Here are some of the options on offer:
Cloud Hashing
With this service, clients can specify the amount of hashing power they want, on a one-year contract. Contracts of 30Gh/s-350Gh/s are available.

Hash Rack

Clients make a single payment for an indefinite time (basically, until the hardware breaks). A percentage can be reinvested to increase hashing power, and users can move ‘Hashpacks’ between their mining workers.

E-Pickaxe

Offers one-year contracts or indefinite contracts paid in bitcoin, and paid out in bitcoin. The amount of GH per contract is not fixed because, as they put it: “as we add more hardware, your contracts have access to that too, meaning as we grow and invest in more hardware, you benefit from this throughout the term of the contract”.

Bit-Miner

Offers collective mining, a competitive price per GH/sec and rent shares. There are various assets (rigs) on offer, for instance, the Ant Miner rig (6x180 GH/sec) is divided into 10,000 shares, with a price per share of $5.50.

Cex.io

Unlike some of the other services on offer, clients can both trade GH/sec and mine using Cex.io. You can choose to generate income by cloud mining, or trade on the GH/sec price variation. Even if you have a sell order on your GH/sec, it continues to mine in the cloud until sold. Profits are shared using the PPLNS (pay per last N shares) scheme and all hash-rates are guaranteed.

Nimbus Mining

Nimbus Mining offers 12-month contracts of varying hashing powers, using ‘off-the-shelf’ hardware from various manufacturers.

Bit of Glory

This company offers 12-month contracts at 100 GH/sec, 500GH/sec and 1TH/sec.

eBay contracts

For those who wish to dabble in mining contracts, many eBay users are now offering 24-hour mining contracts for as little as £1 ($1.67). These contracts are often fulfilled on old USB Block Erupter miners, so hashing power would be limited. However, there’s nothing stopping anyone offering a more powerful mining contract in the future.

How to determine profitability

We have previously covered ways to calculate mining profitability. However, the web services offered are designed to work with your hardware parameters, not cloud-mining parameters.
Even so, you can still use these calculators by thinking clearly about the costs involved. Profitability calculators (for example, The Genesis Block) often ask for your electricity costs, and sometimes the initial investment in hardware. Effectively, you are being asked for your ongoing costs and your one-off investments.
Therefore, since the provider, not you, is paying the electricity bills, you can enter the monthly mining bill in place of the electricity cost.
The conversion process isn’t completely straightforward, though. In the case of hardware miners, you can work out the monthly running cost by multiplying your electricity charge (ie: $ per KWh) by the power consumption of the unit and by a conversion factor of 0.744 (the ratio of seconds per month to joules of energy per KWh).
But, for cloud mining calculations, you need to do the opposite, because the provider gives you an (effective) monthly running cost. Hence, you need to calculate an equivalent cost per kilowatt hour to feed into the mining calculator. This is done by dividing (not multiplying) the monthly running cost by the 0.744 conversion factor mentioned above.
For example, were you to then plug these numbers into the bitcoin mining calculator at The Genesis Block website, you would enter ‘0’ for the cost of hardware, shipping costs and miscellaneous costs, and you would enter ‘1’ for power usage, and then enter the equivalent electricity cost into the electricity costs line. Note that you could swap the power use and electricity cost values around and it would make no difference to the calculator.
This type of calculation doesn’t apply to all cloud mining businesses, as some have a significantly different cost structure. Hash Rack or Cex.io, for example, would not be suitable for the calculations mentioned here.

Risk vs reward

When engaging in any type of cryptocurrency mining there are risks, but profitability is possible if you make the right choices. In this article, we’ve given you some pointers on how to decide which way to go.
In your test calculations, you will likely see that some cloud mining services will be profitable for a few months, but, as the difficulty level of bitcoin increases, you would probably start to make a loss in four to six months and beyond.
A possible remedy to this situation is to reinvest what you have made into maintaining a competitive hashing rate, but this is highly speculative.
Disclaimer: This article should not be viewed as an endorsement of any of the services mentioned. Please do your own research before considering investing any funds via these services.