Cloud Mining Glossary
What is cloud mining actually?
A service provided by a relatively large mining company to retail users or small companies. The service is based on a contract for the purchase of miners or the rental of their hashrate, which allows the buyer to use the contract hardware in order to generate daily mining rewards.
The expenditure part of the contract comprises the contract value which is paid out at its conclusion and the equipment maintenance fee (MF), paid out daily from the user's personal account on the platform, or from daily income by enabling auto payment.
Cloud mining is beneficial for both sides. It allows the company to provide the service to accumulate funds for faster growth (prepaid contracts), and for retail investors to use ready-made mining infrastructure instead of investing in the purchase of expensive equipment.
Buy a miner / Buy a contract
A mining company uses different miner models, offering the user to choose the appropriate one. Each miner has its own average expected profitability level, depending on its characteristics (hashrate, energy efficiency).
The miner purchase contract allows users to utilize this miner during the contract period through an electronic cloud service (platform), paying a daily maintenance fee (MF). Contract value is calculated as an average value in standard market conditions, profitable for both the mining company and the user.
At the same time, the cryptocurrency market situation may significantly shift both favorably and unfavorably during the contract period. In this sense, the risks of a cloud mining contract are distributed equally between the parties.
Users often believe that a miner purchase contract provides for the physical supply of equipment during or after the end of the contract period. This is theoretically possible, but it makes no economic sense due to the high costs of equipment delivery.
The best option for such contracts is to exhaust the miner’s lifespan, that is, prolong the contract until the point of unprofitability is reached ( it usually takes about 3 years for a miner to become unprofitable or fail for natural reasons.), or trade it in on individual terms at a residual price.
The residual value of a miner at a trade-in is almost entirely determined by its payback period. The brand and the model are minor factors.
Equipment hosting
Hosting is the installation of client equipment in the data centers of a service provider. You can buy a lot of miners, but you may have nowhere to install them. The hosting company provides everything necessary for equipment placement and its effective operation for the benefit of the client.
The purchase of a miner (contract) from a mining company involves the operation of this equipment in a data center, so this type of relationship can also be called hosting. The client buys a miner and places it in the mining company's data center. This is beneficial because the customer does not incur transportation costs, and the equipment is free from the risk of damage during transportation.
At the end of the contract, the client also does not need to bear the cost of equipment disposal, as the miner is usually sent to scrap metal by the hosting company.
Temporary freeze / pause the miner / stop the miner
In an unfavorable market situation, the miner may become unprofitable. In this case, the best option for the user is to “temporarily freeze,” or temporarily disable it.
A disabled miner will not generate a loss, which does not mean that the user does not have to pay for its maintenance. The miner takes up space on a rig and requires maintenance even when disconnected, for which a minimum fee is charged.
This negative scenario is the opposite of the scenario where a miner, on the contrary, generates super profits due to an increase in the bitcoin exchange rate or a drop in difficulty.
In certain cases, the company can trade in the stopped miner at the contractual residual value. Each situation is discussed individually and depends on many market and non-market factors.
Rent hashrate
Unlike buying a miner, renting hashrate does not imply a specific model of mining hardware, but specific hashrate, that is, the amount of mining power specified in the contract, expressed in terahashes per second (TH/s).
Let's say a user wants to rent 1000 TH/s, rather than a specific miner model with a capacity of 110 TH/s. In this case, instead of buying a miner, the user enters into a contract to rent the hashrate and is provided with the required mining power, without specifying the miner models that provide hashrate.
When renting hashrate, the user also pays a daily maintenance fee (MF) and can enable auto payments. If profitability is lost, the hashrate can be put on pause, and MF can be reduced to a minimum.
Hashrate trade-in is not an option, since this type of contract does not provide for specific equipment.
[[promo title='How Does Cloud Mining Work?' subtitle='A few words about why cloud mining is beneficial for everyone, including the mining company.' url='/blog/articles/how-does-cloud-mining-work' link_name='Read article' bgcolor='#F4F4F7' imageurl='https://cdn.prod.website-files.com/654934b026105b911adee15f/67caee01b3ac9e7422f78db5_900%C3%97560%20Inside%20article.jpg']]
Upgrade your equipment
If a miner purchased under a cloud mining contract has ceased to be profitable, it is most reasonable to put it on pause so as not to generate losses. In order to continue mining, it is best to choose and buy a contract for the most energy-efficient miner model in order to minimize the risk of reaching the point of unprofitability.
Like any other, a miner that has become unprofitable can be traded in, that is, returned to the company at its residual value if there is a mutual desire. Each trade-in case is discussed individually.
MF (maintenance fee) / daily maintenance fee
The cloud mining contract presumes a one-time payment of the contract value for the entire period, as well as daily commission payments, comprising the cost of electricity consumed and the cost of the miner's maintenance, periodic cleaning and preventive measures.
Besides, the miner takes its place in the data center and cannot be quickly replaced, e.g., by other, more efficient equipment as long as it is used by the consumer under the contract. Therefore, even if the miner has become unprofitable and its work is paused, MF is a small fee for the actual placement of the miner in the data center.
The most convenient form of MF payment is auto payment, which can be configured in your personal account. In this case, MF is deducted daily from the mining reward at the current exchange rate. In some cases, in an unfavorable market situation, income generated by the miner may not be enough to pay the MF, and the miner is then automatically paused. You have to carefully monitor the sufficiency of funds to pay for MF in your personal account.
Autopay
The cloud mining contract (purchase of a miner or hashrate rental) involves the payment of a daily equipment maintenance fee (MF). It can be done manually by adding funds in your personal account, or by enabling the autopay function. In this case, the daily commission will be deducted from the daily mining reward.
However, it is necessary to ensure that mining profitability is sufficient for MF payments. The fact is that in an unfavorable market situation, mining income may fall below the point of profitability, which does not cover the cost of miner maintenance, including the cost of electricity consumed.
Regardless of the reasons, when the MF payment is stopped, the contract is suspended, that is, the daily mining rewards are no longer transferred to the user. If this happens for market reasons (loss of profitability), it is recommended to “temporarily freeze” the miner so as not to increase the loss.
The Bitcoin network difficulty or the BTC mining difficulty
Bitcoins are issued approximately once every 10 minutes by paying mining rewards for the extracted block, that is, for solving a computational problem of a certain level of complexity. As the number of miners increases (the total mining power of mining equipment increases), the block mining rate increases naturally. The Bitcoin network runs an automatic difficulty correction algorithm every 210,000 blocks (about once every 2 weeks), so that a block is always mined in about 10 minutes, regardless of the amount of mining power. If the calculations are accelerated, the difficulty increases accordingly. If the total mining power is reduced, as it was after the mining ban in China, then the difficulty decreases.
Mining income is inversely proportional to difficulty and is calculated using the formula:
N = (t*R*H) / (D*2^32), where
N - income in BTC
t - mining period in seconds (for example, a day = 86400)
R - reward for a block in BTC (6.25)
H - hashrate (H/s)
D - difficulty (H)
Thus, the increase in difficulty limits mining profitability and requires an increase in mining power to maintain the same level of profitability. This in turn entails an increase in difficulty, etc.
The bitcoin network difficulty can be viewed on various resources, e.g., here
Mining power (hashrate)
The value is expressed in terahashes per second (TH/s), which characterizes the miner's ability to solve a problem at a certain speed. The higher the hashrate, the greater the miner’s profitability per unit of time.
Also important is the energy efficiency parameter, that is, the amount of electricity consumed to power a unit of hashrate (W/TH).
BTC rate
It is usually assumed to be equal to the ratio in currency pairs BTC/USD or BTC/USDT, where USDT is the US cryptodollar from Tether. 1 USDT is assumed to be equal to 1 USD, is its reflection in the cryptocurrency world, and is backed with appropriate reserves in the world of traditional finance (TradFi), e.g. US bonds.
Since bitcoin is a mining product, and mining rewards are paid in bitcoins, the mining income in dollars increases in line with the increase of the bitcoin exchange rate. Bitcoin’s growth period is the most favorable for mining in general and for concluding cloud mining contracts in particular.
Daily income
When a cloud mining contract is purchased, mining rewards are paid out once a day. Daily income is the daily revenue (minus expenses). It can be paid out in bitcoins, dollars or USDT, or converted into any other asset at the appropriate exchange rate.
Net income (net profit)
Every day, a user who has signed a cloud mining contract pays a commission (MF), which includes payment for electricity and miner maintenance. Net income is calculated as the difference between mining revenue and MF, and comprises the user’s net profit.
Conversion
Conversion is the process of converting the value of one asset into another at the appropriate exchange rate. For instance, the conversion of bitcoin to dollar is carried out using an exchange where the respective currency pair is traded. Sometimes the conversion may take place at the internal exchange rate of the company offering the asset exchange. The rates of the most liquid pairs, which include BTC/USD and BTC/USDT, are usually independent of the site and approximately the same.