Bitcoin trading offers high return rates that attract more and more users. Mining can generate relatively stable profits for those who practice it.
When talking about making money with bitcoin (BTC), experts advise new users to start by buying a few hundredths of the cryptocurrency and wait for its price to rise in the future. There are other ways to profit from cryptocurrencies, such as trading and mining.
Although trading can be complex and risky, a disciplined trading strategy can generate large profits in a short period. More and more cryptocurrency users feel tempted to buy and sell bitcoins or derivatives of the asset in the market.
Those not comfortable with the risks involved in trading may decide to invest their money by participating in crypto mining. Any user who acquires and installs a machine specialized in processing and verifying transactions has the chance to earn a reward for their work on the network. An activity that gives monetary returns and contributes to improving the security and processing of the Bitcoin blockchain.
We'll check the pros and cons of both activities. The idea is to understand and determine which practice benefits each user more depending on their level of difficulty, capital allocation, and potential financial risks.
Trading is the action of buying and selling financial assets, including cryptocurrencies. The main objective of this activity is to generate profits, so those who engage in trading usually develop trading strategies to maximize the return on their investments and control potential risks.
High profits: One of the main benefits of trading that seduces more and more bitcoin users is that buying and selling cryptocurrencies can become a highly profitable activity.
In the last ten years, bitcoin has recorded an average annual return of over 200%, far more than what a stock trader can earn, for example, where indices such as the S&P 500 average "only" 10 or 11% per year.
The volatility of the bitcoin market, and cryptocurrencies in general, can play into trader's hands. And, with the right strategy, a trader can generate hefty profits with a few purchases and sales of crypto assets.
Capital: In the world of cryptocurrency trading, you don't need a large amount of money to start trading. Unlike a mutual fund or in more traditional markets, exchanges do not require the user to have a bank account full of dollars or to begin by buying a high amount in bitcoins.
The reality is that exchanges accept that you buy a minimum of $5 in bitcoin. In this sense, the trader can decide how much he wants to invest and how. It is not mandatory to be rich, nor an accredited investor, to become a trader. In this sense, anyone with some money can take their first steps in the market.
A device, the Internet, and money: bitcoin trading is also an accessible activity. Anyone can start buying and selling cryptocurrencies if they have a computer, internet access, and the capital to acquire the asset.
Unlike other activities such as mining, traders do not need specialized devices or equipment to carry out their activities. The indicators and charts needed to perform a market analysis can be consulted from the web or downloading an application.
Financial risk: Before starting to trade cryptocurrencies, it is essential to keep in mind that there is a high possibility of market volatility endangering trader's capital. Bitcoin can register daily fluctuations that, at times, have exceeded 15%, both in upward and downward movements.
Traders operate based on a trading strategy, where they speculate that the asset's price will behave in a certain way. However, not always the assumptions we have about the market are fulfilled. When this happens, profits are not perceived, and you can lose the investment.
On top of that, trading can be an activity that affects the trader's emotions. The market moves thanks to its participant's greed or fear when buying or selling new assets. If a trader is carried away by his feelings and decides to maintain a strategy, he also faces financial risks even when it has proven wrong.
Lack of regulation: One feature that makes bitcoin trading cumbersome is the lack of clear regulations. Although financial laws vary from country to country, internationally, few governments have decided to promote a stable regulatory framework for the cryptocurrency market.
In this sense, there is little legal protection for bitcoin traders exposed to scams, fraud, and cyber theft. Also, as not all financial authorities supervise the behavior of this market, it is difficult to get compensation or even file taxes on your activities.
Knowledge and experience: Buying and selling bitcoin is a simple activity, but turning it into your main livelihood is difficult. As we said above, traders don't win all the time. Worse, if you don't know the market in-depth, nor do you know how to analyze it or create strategies, you will most likely lose money.
Traders have to know about the asset they are investing in to make a good trade. Experience and knowledge make the difference between "trading" or just betting blindly.
Because of this, veteran traders usually recommend that, before investing your capital in an asset, it is best to research its market behavior, growth possibilities, annual profitability, and network characteristics, to mention a few elements.
Mining is an activity specific to blockchain networks that operate under the Proof of Work (PoW) scheme, such as Bitcoin. Through this process, the network manages to verify, store and secure the transactions made by users. In turn, those users who engage in these tasks receive a reward in bitcoins and commissions paid by users.
More stable earnings: The returns generated by bitcoin mining may not always be as juicy as trading, although they are generally more stable. There are exceptions and seasons where the industry has produced up to $60 million per day. Miners get a 6.25 BTC reward for each mined block, which will only vary until another halving occurs in the network, reducing this amount by half. An event occurs approximately every three years, so the next time is expected to occur in mid-2024.
Also, miners receive the total commissions paid by users to process their transactions. In other words, you get a payout if you manage to mine a block. Of course, having an ASIC machine does not ensure that you can make money immediately. Due to the high competitiveness of Bitcoin mining, people created mining pools that concentrate their processing power to process as many blocks as possible.
When a pool mines a block, the pool is in charge of dividing the reward among participating miners. In this way, they ensure that they consistently earn a profit from their mining activities.
Controllable investment risks: Mining also has fewer investment risks than trading since all the expenses incurred by its participants are manageable, and you must consider them before connecting a computer to the network.
For example, to start mining, the Bitcoin network needs specialized equipment (ASIC) to process transactions. Likewise, you'll incur installation, maintenance, and electricity costs. In this sense, miners can calculate how much money they need to invest per month or per year to stay operational. In addition, they can deduct how much they need to earn daily to replenish their investment as soon as possible and remain profitable.
In other words, a miner's income depends on more stable variables than trading. Traders assume that the price will stay in a particular pattern or change behavior with the cryptocurrency market. However, until this happens, it is not known whether the trade will generate profit or loss. It takes longer to cover the main investment in mining, but you can assure earnings if you do the calculations right.
Mining increases the value of the network: Although it is not directly related to personal earnings, you should consider that the more miners connected to the Bitcoin network, the more valuable it is.
Mining is not only for processing transactions and confirming that nobody is trying to make double payments. The more miners connected to the network and the more decentralization there is in this industry, the greater the security Bitcoin has against spam or 51% attacks.
A more secure network is also a more valuable network. In the long term, security perception by users is likely to be reflected in the price of bitcoin. Participating in mining is also an indirect way to contribute to the value of the community.
New coins without traceability: Another beneficial feature of bitcoin mining is that new coins can be issued to the network thanks to this activity. Because of this, the bitcoins that miners receive are entirely new and have no transaction history.
Brand new coins can be very convenient if you do not want to manage your holdings, possibly toxic assets, from sources such as scams, theft, or money laundering. For example, some BTC collected from victims of the Ryuk ransomware is said to be traded freely on exchanges such as Binance, where traders often trade daily.
If you don't want to have bitcoins in your history that have an illicit origin, cryptocurrency mining is an option to keep your wallet free of speculation. On the other hand, if you do not want them to monitor your transactions and check your trading history, newly issued BTC are coins without any such information.
Ongoing expenses and variation in profitability: As mentioned above, mining is not without costs. Miners must invest money from time to time to buy new equipment, as ASICs have a life cycle and can become obsolete due to constant demand and competition within the same ecosystem.
Similarly, you must consider that electricity, equipment cooling, and facility maintenance are recurring expenses that you must consider if you want to mine optimally. Because of this, although the gains from mining are steady, the costs to stay operational can put many miners out of business.
Likewise, mining can also be affected by market behavior and unexpected events. For example, when bitcoin enters bearish season, some mining equipment does not produce enough profit and becomes unprofitable. Because of this, miners have to decide to switch off their devices.
A power failure, change in regulations, or a natural disaster affecting the facilities (farms) can be fatal for miners. The introduction of new miners and the latest generation of ASIC equipment also makes it challenging to generate profits. They tend to have more computing power and raise the mining difficulty while taking out of competition those miners who are not so up to date by decreasing their profitability.
Need for experience: Anyone can learn to mine, but let's be honest. It is not a simple subject, and you may feel overwhelmed by all the information you must handle to understand how and why a blockchain network works. In other words, it takes time, dedication, and patience.
If, in addition, you decide to oversee your mining equipment, then you will also need experience. ASIC devices do the job automatically, but you need to monitor that they are working in optimal conditions. For example, the equipment needs to have an accurate temperature and not be full of dust, so cleanliness and ventilation are essential.
The installation of a cryptocurrency miner can also be complicated. These devices can make a lot of noise, so residential areas are not ideal for operating. Similarly, they can generate a lot of heat, so a cooling system and constant monitoring are needed not to become a nuisance.
Miner's location is essential: If mining costs are crucial to determine whether your activities will be profitable or not, you also have to consider that the miner's site makes a difference.
Certain countries and communities have better electricity rates, making it more cost-effective to set up your equipment or rent miners from farms located in these territories. To save on cooling, some miners prefer to install their equipment in icy areas where they only need a ventilation system.
The country's regulation regarding mining is also crucial when deciding whether it is good to engage in mining. Not all countries have laws regulating this activity, but some nations are strict about paying taxes, special electricity rates, or even wholly ban mining in their territories, as is the case in China.
When comparing the two options, trading is one of the most profitable activities in the short term. Users who engage in bitcoin trading can generate substantial profits if their strategy is successful. They also do not need to make a significant initial investment to start trading in the market, so it is easy to get started in this practice and grow little by little.
However, trading is a high-risk financial activity, especially for the crypto assets market. Just as a trader can earn a significant income from his actions, he can also lose all the capital he invested if his strategy fails and does not carry out good risk management.
On the other hand, although mining can have setbacks in its profitability and does not generate as much profit as trading right off the bat, the income miners earn more stable than that of a trader in the long run. When you, as a miner, affiliate with a pool, you'll receive a reward depending on how much computing power you provided to mine the block.
Despite all these benefits, mining also has setbacks in its profitability when there are price fluctuations or ongoing maintenance costs. Likewise, to start mining, it is necessary to buy specialized equipment (ASIC), which can be very expensive and indebted to the investor; therefore, in the beginning, it will be required to recover the investment before you earn a reasonable profit.