Bitcoin is the first cryptocurrency, making it one of the most popular and valuable on the market. Due to these reasons, many people want to profit from it. The two most common ways to make money from Bitcoin are trading and mining. Although they are completely different processes and require different skills, risk levels and financial requirements, both can be profitable if done correctly.
So let’s explore Bitcoin mining and trading and compare the two. That way, you can find out which one suits you best.
What is Bitcoin Mining?
Users mine Bitcoins by verifying transactions on the Bitcoin blockchain. The verification process involves solving highly complicated mathematical problems, and the first miner to solve it receives a predetermined amount of Bitcoin as a reward.
Bitcoin mining helps maintain the security and integrity of the Bitcoin network through the proof-of-work (PoW) mechanism. At the same time, the price that the miner receives increases the amount of Bitcoin in circulation, thereby increasing the supply.
Bitcoin is not the only cryptocurrency you can mine; other cryptocurrencies validated by mining include Monero, Litecoin, ZCash and Grin.
How does Bitcoin Mining work?
As previously mentioned, users mine Bitcoin by solving mathematical equations to confirm transactions. The first miner to successfully solve the math problem is then awarded Bitcoins for their effort, which stands at 6.25 BTC at the time of writing.
However, the Bitcoin network does not simply assign a particular problem to a user; instead, miners must compete against each other to be the first to solve the puzzle. To gain an advantage over others, miners usually run their computers at full capacity.
Before the popularity of Bitcoin and cryptocurrencies, it was easy for a person to mine Bitcoin using inexpensive hardware and personal laptops. But as more miners joined the network, the puzzle became more difficult, and the competition stiffened. This made Bitcoin mining significantly more challenging, requiring ever-increasing computing power and electricity.
To make mining easier, miners pool their computing power to find solutions faster, and each miner is rewarded proportionally. Furthermore, they started investing in application-specific integrated circuits (ASICs) to ensure that they can make the most efficient use of their powerful Bitcoin mining hardware.
What is Bitcoin trading?
Bitcoin trading is the buying and selling of Bitcoin for profit. Bitcoin and crypto traders speculate on the future price of Bitcoin, buying low and selling high. They buy when they think the price will rise and sell when they think it will fall.
Crypto trading can be done in various ways, including spot trading, derivatives trading and P2P (peer-to-peer) trading. These activities are carried out on crypto exchanges or P2P trading platforms.
How does crypto trading work?
When you trade Bitcoin, you buy and sell at different prices to profit from price movements. For example, you buy Bitcoin at a certain price with the expectation that its value will increase. Once you have achieved this increase, you sell it on the market for a profit. Some trading types even allow you to make money when the price of Bitcoin falls and you have a sell position.
You need to open an account with a reputable crypto exchange to trade Bitcoin. Once you have your account, all you need is money to buy Bitcoin. You can then sell these Bitcoins that you buy later at a profit.
Bitcoin price is usually determined by various supply and demand factors, which are also affected by various circumstances. That is why you need to use technical, fundamental and sentimental trading analysis or use properly created trading algorithms to predict price movements.
The difference between Bitcoin mining and trading
Although mining and trading will make you money, you need to find out which method works best for you.
Profit and risk expectation
Trading can be rewarding, but it is not without risk. Although you can trade with almost any amount, you need to make a large deposit to make a lot of money.
The larger the deposit, the higher the earning potential. Some trading types also allow you to trade crypto with leverage, which means you can trade with borrowed capital and earn far more than you would have earned without such leverage. However, you are also risking your capital with these trades and you can lose them all.
On the other hand, Bitcoin mining is also highly rewarding but has a relatively lower risk. Mining can allow you to generate a consistent stream of income, but factors such as Bitcoin price and electricity cost affect your net income. Furthermore, you have to invest a lot in hardware before you can even start mining.
Cost and ease of start-up
To start mining, you need access to specialized computers, technical expertise and electricity. These require high upfront costs, making it expensive to set up a mining rig.
Bitcoin trading is easier to set up and costs far less than mining. You can buy and sell Bitcoin with your smartphone, an internet connection and almost any amount. You can also learn how to trade from many free sources online.
Crypto exchanges allow traders to deposit and trade as little as $10 to $20 of cryptocurrency to start trading. Thus making Bitcoin trading more accessible and easier to start than Bitcoin mining.
Technical requirements
You cannot rely on luck if you want to trade successfully. You need to perform different types of analysis to know what decisions to make, and learning how to perform these analysis methods takes time. You must also be up-to-date on market trends and news reports, so that you can react quickly to changes in the market.
You can become an effective crypto trader when you understand how to read charts, perform crypto risk management and make informed decisions. But you risk losing your investment if you don’t understand these things (which sometimes happens with professionals too).
Bitcoin mining is also challenging because it requires technical knowledge in setting up and maintaining the mining hardware and software. Furthermore, the increased number of miners means you need to upgrade your equipment to remain competitive, which requires additional investment.
Should You Go Bitcoin Mining or Bitcoin Trading?
Bitcoin mining and trading has advantages and disadvantages; which one you should choose depends on your circumstances and goals. Bitcoin mining is lucrative but requires large investments in equipment and energy.
You also need to consider your energy costs – if you live in an area with high prices per kilowatt hour, Bitcoin mining may not even be profitable to begin with. Furthermore, you need constant maintenance to ensure that the system works efficiently and periodic upgrades to remain competitive in the market.
On the other hand, you don’t need a lot of money to start trading. You can start small as you learn the ropes and build your strategies, then slowly increase your investment as you gain more confidence.
However, trading has a significantly higher risk than mining. You are exposed to more losses with trading, as Bitcoin prices experience significant peaks and nose dives quickly. Furthermore, if you play the game wrong, you risk wiping out even your capital. That is why experience traders use strict management practices to protect their investments.
Increase your money with Bitcoin
If you are risk-averse, have the capital to buy and maintain a mining rig, and can spend time learning how to run a Bitcoin mining operation, then mining is an excellent option to start earning Bitcoins. But if you want to start small and don’t mind the higher risk that comes with it, trading Bitcoin might work for you.
Whatever you choose, study it first before diving into it. In this way, you avoid unpleasant surprises and ensure that you use your resources most efficiently.
