Cryptocurrency mining, in general, is the practice of using computer hardware to perform the computational work necessary to secure the operation of a blockchain in return for rewards paid out by the network in newly created coins.
There is competition between cryptocurrency miners in any particular blockchain: their success depends on the efficiency of their mining rig. The most important characteristic of a mining device is its computational power, or hashrate — the number of hashes it can calculate per second, usually measured in GH/s or TH/s.
However, even the most powerful ASIC device that can calculate dozens of terahashes per second will not be efficient if it spends a disproportionate amount of electric power to do so, eating into the miner’s profit; this makes energy efficiency a second key factor.
Another consideration is the need to cool the rig — mining devices produce a lot of heat during operation so some additional electric power expenses are needed to remove that heat from the system.
Besides these key ones, many other factors come into play when determining the overall efficiency of a mining setup. To design a truly well-optimized crypto mining operation, one needs to have advanced software and hardware engineering skills or to obtain the services of a qualified engineer, which not every miner can afford.
Cloud mining emerged as the answer to this problem. Cloud mining companies set up dedicated crypto mining outfits in locations with relatively cheap electricity and often cold climates (alleviating the need for artificial cooling systems) and spend considerable effort to optimize the overall setup. They then rent out parts of their hashpower to remote clients via so-called mining contracts.
This arrangement allows small-scale miners to leverage the efficiency of the cloud mining provider’s setup by proxy. At the same time, the provider transfers some of the risks associated with the volatility of the crypto market onto its customers. They can also expand their operation faster due to the fact that by purchasing mining contracts the customers, in a way, credit them the mining profits which would be otherwise spread over time.
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