Local AI vs. Cloud AI

When you set up an AI tool, one of the biggest choices you'll make, often without realizing it, is where the AI itself actually runs. This is usually described as "Local AI" versus "Cloud AI." It's a different question from what the AI can do (like Generative versus Agentic); it's about where the thinking actually happens. This article explains what that means, why it matters, and how it applies to AI tools available on Bluehost.

Important: One quick clarification before we start, because the word "cloud" gets used in two different ways, and mixing them up is where most of the confusion happens:

Term	What It Actually Means
Cloud hosting	Just means your server lives in a data center instead of your house. Your Bluehost VPS or VDS is this kind of "cloud," but it's still fully yours to manage and secure.
Cloud AI	Means your request gets sent to a separate AI company's servers (like Anthropic, OpenAI, or Google) that you don't own or control, so they can process it and send back an answer.

So to be direct about it: for AI purposes, your Bluehost VPS or VDS counts as "local," not "cloud." Throughout this article, "Local AI" refers to the AI model running on your own Bluehost server, and "Cloud AI" refers to a separate AI company's servers, not Bluehost itself.

What is Local AI?

Local AI means the AI model itself runs on a server you control, like your own Bluehost VPS or VDS, instead of being sent off to another company's servers. Your questions, documents, and data are designed to stay on your own server the entire time.

A simple way to picture it: it's like cooking a meal in your own kitchen instead of ordering delivery. You're in full control of the ingredients, nothing leaves your house, but you're also the one responsible for having a working kitchen in the first place.

Example on Bluehost: Installing Ollama together with a model like DeepSeek, and then using Open WebUI as the chat window, gives you a fully local AI chatbot. The model runs entirely on your own server, and your input isn't sent to an outside AI provider.

What is Cloud AI?

Cloud AI means the AI model runs on a separate AI company's servers, not your Bluehost server, and you're sending your questions to them over the internet to get an answer back. Most well-known AI chatbots work this way.

Going back to the cooking analogy, this is like ordering delivery. It's convenient, and you don't need your own kitchen at all, but your order (your data) does leave your house, and you're relying on someone else's kitchen being open and working.

Example on Bluehost: Claude Code, one of the agentic AI apps you can install on your VPS or VDS, is a good example of this. Even though the app itself is installed on your own server, by default it sends your requests to Anthropic's cloud to actually "think." The app runs locally, but the AI brain behind it lives in the cloud.

Key Differences at a Glance

Aspect	Local AI	Cloud AI
Where it runs	Your own server	Another company's servers
Privacy	Your data stays on your server	Your data is sent over the internet to be processed
Cost	Mainly the cost of your server's resources	Often billed per use, or included in a subscription
Setup effort	You install and maintain everything yourself	Usually just needs an account or an access key
Performance	Limited by your own server's hardware	Usually faster and more capable, backed by powerful hardware
Availability	Works as long as your server is running	Depends on the other company's service being online

Everyday Examples

Local AI: You chat with a private AI assistant running on your own Bluehost server through Open WebUI, Ollama, and DeepSeek. Your input isn't sent to an outside AI provider.
Cloud AI: You use a well-known AI chatbot through your browser. Your questions travel over the internet to that company's servers, get processed there, and the answer is sent back to you.

Installed on Your Server Doesn't Always Mean Local

Here's the part that trips people up: installing an app on your own Bluehost VPS or VDS doesn't automatically mean the AI itself is local. Many of the agentic AI apps available as one-click installs, like OpenClaw, Nanoclaw, n8n, Hermes Agent, GatorClaw, Paperclip, BMAD, Langflow, Dify, and Sim, act more like a "control center." That control center runs on your server, but by default, it's often still connecting out to a cloud AI provider to do the actual thinking, unless it's specifically set up to use a local model instead, such as one running through Ollama.

So there are really three setups you might end up with:

A fully local setup, where both the app and the AI model run on your own server (for example, Open WebUI with Ollama and DeepSeek).
A fully cloud setup, where you talk to an AI company's chatbot directly through your browser, with nothing installed on your server at all.
A mixed setup, where an app is installed on your own server, but it's still sending requests out to a cloud AI provider to get its answers (this is how Claude Code works by default).

Why This Matters to You

If privacy is your main concern, for example, you're working with sensitive business data or simply don't want your questions sent to an outside company, a fully local setup gives you the most control. If you want the strongest performance with the least setup, and you're comfortable with your data being processed elsewhere, a cloud AI setup is usually easier and more capable.

It's also worth remembering that self-hosting isn't automatically private by default. Just because something is installed on your own server doesn't mean it's cut off from the internet. Many agentic AI apps are set up to use cloud AI providers unless you deliberately configure them to use a local model instead.

Summary

In short, Local AI runs entirely on your own server, keeping your data in-house, while Cloud AI sends your questions to another company's servers to get an answer. On Bluehost, some one-click apps (like Open WebUI with Ollama and DeepSeek) give you a fully local setup, while others (like Claude Code) run on your server but still rely on a cloud AI provider behind the scenes. Knowing which setup you're using helps you make an informed choice about privacy, cost, and performance.