By now, it’s pretty clear that Bitcoin isn’t going away any time soon. The cryptocurrency that was formerly mostly used by drug dealers and money launderers is currently going through its financialization with an increasing number of institutions starting to take the asset seriously. Even though Bitcoin is still long away from its 2017 all-time high in price, the fact that two huge crashes since did not cause all investors to head for the exits is certainly quite remarkable.
When people learn about Bitcoin, one of the first things they hear is that they can earn Bitcoins by using computers to “mine” the network. Whilst this is technically true, it’s not the full story. A surging Bitcoin hash rate shows that competition to mine Bitcoins has never been fiercer. With solo mining being not really an option for most people, pool or cloud mining can offer a way to profit from mining the cryptocurrency. By the end of this hardware bitcoin mining vs cloud mining comparison, you’ll have all the information to decide which, if either, suits you best.
Before we begin with our Bitcoin cloud mining comparison with hardware mining, it’s first important to understand exactly what is meant by Bitcoin mining. Mining is responsible for adding and verifying new transactions to the Bitcoin network. It’s also Bitcoin’s security system.
When Bitcoin users make a transaction, they submit transaction data (the amount, the recipient, etc.) to the network. Miners group transaction data into a block and attempt to guess a long string of letters and numbers (called a hash) relating to both the block they’re working on and the one most recently added before it. The miner that successfully guesses the hash they’re working on first gets permission to add their block and receives the block reward.
The more guesses at the hash a miner can make, the more likely they are to receive transaction fees and block rewards. This causes an arms race amongst miners. Those wanting to mine the network spend big money on purpose-built units, known as ASICs. The biggest operations will see hundreds, or even thousands, of these units, deployed. Bitcoin mining is no longer the hobbyist pursuit it once was.
Hardware mining is mining for Bitcoin using your own hardware. If you go out, buy your ASIC, and set it to mine the cryptocurrency network, you are hardware mining. This would actually be solo mining, and, unless you have millions of dollars to spend on mining chips, ample land, and a cool climate for your new hobby, it’s probably not for you.
You would only receive revenue when one of your miners successfully adds a block to the Bitcoin blockchain. With even a handful of miners, you still could be waiting a long time – perhaps longer than the usable lifespan of the hardware itself. You would be competing against frankly vast mining operations – like the 300 MW facility recently unveiled in Texas. If you will try going it alone without some serious hashing power, your odds of finding a block in the near future are remote.
There is a way to make a profit in hardware mining without the need to invest crazy money in it. If you pool your own hashing power together with that of other miners and share the rewards, everyone can take relatively small but regular payments. Providing your electricity rate is competitive enough, even a single ASIC unit can be profitable in such a situation.
There are several large mining pools that will happily unite you with other hardware owners. The huge combined hashing power of the larger pools results in regular Bitcoin payments, which then will be split between each operator in the pool according to the hashing power they contributed. For example, one user running a single Antminer S9 would receive one figure and a second user running a pair of the same ASIC units would receive a doubled reward.
Bitcoin mining hardware isn’t cheap, to begin with. Moreover, after buying the equipment, you need some technical knowledge to configure it to mine on the network. This will also serve as a barrier to entry to some.
Even if you do have the money to buy your own hardware and the knowledge to set it up, you still need to consider other costs. Your ASIC unit will run hot and may need cooling. It will also be noisy, so you probably don’t want it near your bedroom.
Finally, the cost of electricity in your area might make mining unprofitable. Commercial miners routinely flock to areas with abundant, cheap natural power. End users, in domestic settings, often pay a much higher price for electricity. Mining at higher power rates may eat into the profits so much that it is no longer worth it.
The following table shows the prices of electricity in different parts of the world. Mining in Ukraine is almost three times as profitable as it is in Germany, for example. It’s no coincidence that many mining operations are found in the three countries that have the cheapest electricity.
Fortunately, you still can take part in Bitcoin mining even if one of the above issues makes owning your own hardware unfeasible. Mining hardware operators working with huge data centers of ASICs rent their hashing power out. This is known as cloud or hosted mining.
A typical cloud mining contract will involve renting a set amount of hashing power for a given period of time. Different companies will offer different hash rates and durations to rent them for. A typical one might involve renting 13 TH/s hashing power for 12 or 24 months.
Cloud mining farms will usually be located in cool parts of the world, which guarantees cheaper overheads in terms of heat extraction. Similarly, they will often take advantage of comparatively cheap power. This can make renting hardware a more cost-effective way to mine (even with cloud mining service fees), depending on the cost of electricity in your area.
There are loads of reasons why cloud mining could be a better option for you than hardware mining. Below are just a few of them:
Hosted mining is not without its own risks. Chief of these is that even if the Bitcoin price were to fall dramatically, you would still be tied into your contract, even if Bitcoin became worthless.
Here are some other risk factors associated with cloud mining:
If you believe in Bitcoin but lack the technical abilities or capital to operate your own mining equipment, cloud mining can be a great way to generate some Bitcoin. If prices return to their all-time highs, which many analysts are predicting, the Bitcoin you mine using someone else’s equipment could become incredibly valuable.
That said, if the price were to suddenly bomb, you might be left having to pay a lot for a contract that is essentially worthless. Given the other risks above, we don’t recommend investing any more than you can afford to lose in cloud mining or any Bitcoin-related project for that matter. Whilst each passing day makes it more likely that Bitcoin will indeed be around in 24-months, some black swan event could still cause it to bomb hard enough to make mining contracts unprofitable.