Bitcoin mining is essentially the process of “creating” new Bitcoin. Since Bitcoin is decentralized, that means that anyone with the proper hardware and an internet connection can participate in the mining process, which also serves to create new Bitcoin. In fact, the stability of Bitcoin depends on as wide a range of miners as possible all making network decisions, since decisions are made by majority. If anyone were to control more than 50% of the mining, they could theoretically corrupt the block chain. This is prevented by a wide network of individual bitcoin miners all working separately rather than in tandem.
Bitcoin relies on this vast network to both create more Bitcoin and ensure the safety of existing Bitcoin. More specifically bitcoin mining takes place by adding transaction records to Bitcoin’s public ledger of past transactions. This ledger is called a blockchain. The purpose of the ledger – or blockchain – is to confirm to the network that all transactions taking place are legitimate transactions. This also makes Bitcoin secure, since nodes use the blockchain to differentiate between legitimate Bitcoin transactions and fraudulent attempts to re-spend Bitcoin that has already been previously spent.
Bitcoin cloud mining can potentially be a lucrative business, but also comes with a number of drawbacks and risks. Some of the drawbacks of bitcoin mining are related the costly equipment needed and the high energy consumption that Bitcoin mining colocation hardware and hosting eqipement demands. The other drawback to investing in Bitcoin mining equipment is that at the moment, it has a limited potential for ROI.
Each time a block is mined a new amount of Bitcoin is released into circulation. This is called a block reward. Currently, however, the block reward is being halved every 210,000 blocks, which is being mined roughly every 4 years. In 2009, the block reward started at 50 bitcoin and was reduced to 25 in 2012. In 2016, it was halved once again to 12.5. This will continue until a total of 21 million Bitcoin have been released, after which no more Bitcoin will potentially be mined. However, since Bitcoin relies on a network of miners for security, there is a good chance they will need to find a way to still incentivize mining, potentially with transaction fees, which currently represent 0.3% of mining revenue.
Bitcoin mining can be a hot, noisy proposition with a limited life-span, which is why cloud-based or remote mining can be an attractive option. In cloud based or remote mining, you essentially pool your computing resources with a network of other individuals to create a powerful collective network. The drawback to this, of course, is he who controls the network controls the profits. You essentially become a small cog in a big wheel. This creates lower risk, of course and as we all know, the bigger the risk, the bigger the potential reward. The lower the reward, however, the lower the risk.
The positive benefits of cloud mining include:
- A quieter, cooler operatin, with no hot, noisy equipment or loud cooling fans
- No additional electrical costs
- No concerns about having to offload expensive equipment when mining stops being profitable
- No concerns over proper ventilation for overheated equipment
- No dependence on the suppliers of mining equipment
The drawbacks of cloud mining include:
- Higher risk of being defrauded
- Not as much fun if you actually enjoy building your own systems
- Lower profits with less control
- Potential for Bitcoin mining operations to cease
Essentially, there are currently three ways to mine remotely:
- Lease a mining machine hosted by a provider
- Create an all-purpose virtual private server that utilizes your own personal mining software
- Lease an amount of hashing power. This is by far the most popular option as it doesn’t require you to have a dedicated virtual or physical computer.
Risks vs. Rewards
The profitability of Bitcoin mining can be difficult to determine over the long run. This is because profitability is determined by difficulty. Approximately every 2 weeks, or every 2016 blocks, the network automatically adjusts the mining difficulty. The more computational power being employed, the more difficult mining becomes. When computational power drops, so does the difficulty. This means the fewer the miners there are, the more profitable mining becomes because the pie is being split between a smlaler number of people. As difficulty rises, not only does mining become more difficult, but the eventual reward pie must also be split between a greater number of miners.
Essentially, as with all investments, you should never risk more than you are willing to lose. Theoretically, it can become more expensive to mine Bitcoin than the profits it generates. It is this exact situation that also makes it easy for cloud Bitcoin mining operators to perpetuate fraud, as it is difficult for individuals participating in group operations to determine what their actual profit should be.
Again, just like any other investment, it is important to do your due diligence and thoroughly investigate any cloud mining operators prior to investing with them.