Bitcoin is the first cryptocurrency, making it one of the most popular and valuable in the market. Because of these reasons, many people want to earn from it. The two most common ways of earning from Bitcoin are trading and mining. Although they are entirely different processes and require different skills, risk levels, and financial requirements, both can be profitable if carried out correctly.
So, let’s explore Bitcoin mining and trading and compare the two. That way, you can determine which one is better suited for you.
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 Bitcoin amount as a reward.
Bitcoin mining helps maintain the security and integrity of the Bitcoin network through the proof-of-work (PoW) mechanism. Simultaneously, the award that the miner gets increases the amount of Bitcoin in circulation, thereby increasing its 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 said earlier, users mine Bitcoin by solving math equations to verify transactions. The first miner to successfully solve the math problem is then awarded Bitcoins for their efforts, which stands at 6.25 BTC as of the time of writing.
However, the Bitcoin network doesn’t just assign a particular problem to a user; instead, miners must compete against one another 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 an individual to mine Bitcoin using low-cost hardware and personal laptops. However, as more miners joined the network, the puzzle became harder, and competition became stricter. This made Bitcoin mining significantly more challenging, requiring ever-increasing computational power and electricity.
To make mining easier, miners pool their computing power to find solutions faster, and each miner is rewarded proportionately. Furthermore, they started investing in application-specific integrated circuits (ASICs) to ensure they can get the most efficient use from 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 believe it will drop.
Crypto trading can be done in different 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 trading Bitcoin, you buy and sell at different prices to profit from price movement. For example, you buy Bitcoin at a specific price with the expectation that its value with increase. Once you’ve achieved this increase, you then sell it on the market for a profit. Some trading types even allow you to earn profits when the price of Bitcoin drops and you hold a selling position.
You must open an account with a reputable crypto exchange to trade Bitcoin. Once you have your account, you just need money to buy Bitcoin. You can then sell these Bitcoins that you buy later for a profit.
Bitcoin price is usually determined by different supply and demand factors, which are also affected by various circumstances. That’s why you need to employ technical, fundamental, and sentiment trading analyses or use properly created trading algorithms to predict price movement.
The Difference Between Bitcoin Mining and Trading
Although mining and trading will make you money, you need to determine which method works better for you.
Profit and Risk Expectation
Trading can be rewarding, but it is not without its risks. Even though 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, meaning you can trade with borrowed capital and make far more than you would have made without such leverage. However, you’re also risking your capital with these trades, and you might lose all of them.
On the other hand, Bitcoin mining is also highly rewarding but has a relatively lower risk. Mining could let you generate a consistent income stream, but factors like Bitcoin price and electricity cost affect your net income. Furthermore, you must invest a lot in hardware before you can even begin mining.
Cost and Ease of Starting Up
To start mining, you need access to specialized computers, technical expertise, and electricity. These require high upfront costs, making setting up a mining rig costly.
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 of money. 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 worth of cryptocurrency to start trading. Thus, making Bitcoin trading more accessible and easier to start than Bitcoin mining.
You can’t rely on luck if you want to trade successfully. You need to carry out different types of analysis to know what decisions to make, and learning how to carry out these analysis methods takes time. You must also be abreast of market trends and news reports, allowing you to react promptly to market changes.
You can become an effective crypto trader when you understand how to read charts, carry out crypto risk management, and make informed decisions. But you risk losing your investment if you fail to understand these things (which sometimes happens to 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 gear to remain competitive, requiring further investment down the line.
Should You Go Bitcoin Mining or Bitcoin Trading?
Bitcoin mining and trading each have pros and cons; which one you should pick depends on your circumstances and goals. Bitcoin mining is lucrative but requires heavy investment in equipment and energy.
You also need to consider your energy costs—if you live in an area with high per-kilowatt-hour prices, then Bitcoin mining might not even be profitable, to begin with. Furthermore, you need constant maintenance to ensure your 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 while learning the ropes and building your strategies, then slowly increase your investment as you gain more confidence.
However, trading carries a significantly higher risk than mining. You are prone to more losses with trading, as the Bitcoin prices experience significant spikes and nose-dives quickly. Furthermore, if you play the game wrong, you risk wiping out even your capital. That’s why experience traders employ strict management practices to safeguard their investments.
Grow Your Money With Bitcoin
If you’re risk-averse, have the capital to purchase 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, then Bitcoin trading might work for you.
Whichever you choose, study it first before diving into it. That way, you avoid any nasty surprises and ensure you’re using your resources most efficiently.