With Bitcoin gaining increasingly more popularity by the day, individuals look for ways to leverage it other than trading.
Even if trading can be highly profitable, earning considerable gains is not always easy. And here comes the question, “Is there any lucrative strategy to adopt?” It is! Mining is another tactic used by investors to make money on cryptocurrencies. In fact, economic players are split into traders and miners. Of course, there are people devoted to both, but these are proficient, knowledgeable market participants. Firstly, and most importantly, you need to learn what differentiates these strategies, and then you can decide on either one or both.
Keep reading for valuable insights into Bitcoin mining and trading and many more details about cryptocurrency.
What is Bitcoin Mining?
Bitcoin mining is a crucial component of the blockchain’s development and maintenance. It involves creating new bitcoins that are about to enter circulation. But how do miners get these coins? Surprisingly or not, by solving puzzles. But no, these are not typical puzzles but complex and complicated mathematical problems that require time and knowledge to be guessed. Miners are all about sophisticated, state-of-the-art hardware that solves these puzzles. The first computing system to solve the problem is recompensed with bitcoins, and the process starts again. The mining process also validates transactions on the blockchain and strengthens their trust level.
Cryptocurrency mining first occurred on desktop computers equipped with basic CPUs (central processing units), making the process painstaking, slow, and occasionally rewarding. Nonetheless, the technology has evolved, and now miners dispose of large mining pools (mining software, hardware, crypto wallets) that help them solve that 64-digit hexadecimal number, which is the puzzle. It sounds as complicated as it is. “0000000000000000057fcc708cf0130d95e27c5819203e9f967ac56e4df598ee” is an example of such a math problem. Special computers help miners generate as many “nonces” (numbers used only once) as possible, further solving the problem.
The problem with mining is that it consumes astronomical amounts of electricity, one of the main reasons it is considered harmful to the environment, particularly in regions where electricity is produced using fossil fuels.
It might sound surprising, but Bitcoin needs miners more than miners need Bitcoin. These market participants perform, in fact, exhaustive computational work as auditors. They validate Bitcoin transaction legitimacy and thus avoid the so-called “double-spending” issue. Satoshi Nakamoto, the founder of Bitcoin, devised this convention, so for anyone assuming mining is pointless, here is an argument that proves the contrary.
Why Mine Bitcoin?
Besides helping the Bitcoin ecosystem, mining has another crucial purpose: allowing new coins to be circulated. Mining is often called minting, and we can only relate. Any additional bitcoin into circulation is due to miners, as at the moment Bitcoin was invented, there were only coins minted through the origin block. Without miners, the Bitcoin network would still be here and available for use, but there would never be as many bitcoins in circulation as in the present moment. And in the absence of bitcoins, there would be neither as many traders nor investors. Nevertheless, the mined bitcoin rate is diminished as time passes, which is why the final bitcoin is forecast to come into being not earlier than 2140.
Downsides to Mining
Mining has, indeed, remarkable benefits, but there are also some downsides worth noticing.
Mining is Expensive
Perhaps the major disadvantage of Bitcoin mining is that it is costly. Apart from the exorbitant electricity and maintenance fees, there is a need for modern, advanced equipment, including graphics processing units (GPUs). Crypto miners must shell out funds for all these, so if you are considering Bitcoin mining, weigh all advantages and drawbacks to make a wise decision.
High Energy Consumption
Needless to say, the vast amounts of energy required to mine cryptocurrency are detrimental to the environment. This leads to expensive fees, so the question is, “Is it worth the money?”
Slow Rate of Profit
Before starting to mine, it is worth considering that this also implies a slow rate of profit. That is because you have to depend on halving, the process of cutting the supply of new bitcoins in half, letting aside the challenges and headaches of mining in the first place. If you rely on second-rate equipment, the process will be even slower.
What is Bitcoin Trading?
Trading Bitcoin is like trading any other cryptocurrency: buying it when its price decreases and selling when it increases in value. The profit, in this case, is generated from the price fluctuations when purchases and sales are made. Like altcoins, Bitcoin is also volatile in nature, alluring increasingly more traders to buy the dip and sell the rip when the perfect moment has come.
Unlike mining, trading is a much more accessible method to earn money, which is why it is more adopted among users. The risk is, indeed, high, but well, not everyone has a talent for guessing complex mathematical puzzles. Nonetheless, if you have the right strategy in place, as well as market knowledge, you can mitigate the risks. If you are a newbie into the crypto space, it is advisable not to jump mining but opt for trading and always, but always, start with fewer funds. There are some unwritten rules every Bitcoin enthusiast must follow when embarking on the trading journey, including checking the current Bitcoin price, liquidity, adaptation potential, and trading history. Being aware of these aspects can keep you safe from the so-called bear and bull traps that mainly target novice traders.
What are the Trading Strategies for Bitcoin?
- day trading
- buy and hold (position holding)
- swing trading
- arbitrage trading
There are various trading strategies for Bitcoin or altcoins, so the choice is yours. Ensure you document each and weigh the risks so you can make an informed, rational decision.
Advantages of Bitcoin Trading
Trading comes with a series of significant benefits, including:
- high potential for profit
- portfolio diversification
- outsized returns
- short settlement times
- low fees
- inflation hedge
- it is easy to get into
So, are you an eager-to-learn miner or a risk-taking trader?