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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—other ways to profit from cryptocurrencies, such as trading and mining.
Although trading can be complex and risky, a disciplined strategy can generate large profits quickly. 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 can 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 users. This depends on the difficulty level, capital allocation, and potential financial risks.
Trading
Trading is the action of buying and selling financial assets, including cryptocurrencies. The main objective of this activity is to generate profits. Those who engage in trading usually develop trading strategies to maximize the return on their investments and control potential risks.
PROS
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 a stock trader can earn—indices such as the S&P 500 average “only” 10 or 11% annually.
The volatility of the bitcoin market, and cryptocurrencies in general, can play into traders’ hands. And, with the right strategy, a trader can generate hefty profits with a few purchases and sales of crypto assets.
Capital: You don’t need much money to start trading in cryptocurrency 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.
In reality, exchanges accept that you buy at least $5 in bitcoin. In this sense, the trader can decide how much he wants to invest and how. Being rich or an accredited investor is not mandatory to become a trader. In this sense, anyone with 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 online or by downloading an application.
CONS
Financial risk
Before starting to trade cryptocurrencies, it is essential to remember that there is a high possibility of market volatility endangering the 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, speculating 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 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 simple, but turning it into your main livelihood is difficult. As we said above, traders don’t win all the time. Worse, you will most likely lose money if you don’t know the market in-depth, nor do you know how to analyze it or create strategies.
Traders must know about the asset they invest in to make a good trade. Experience and knowledge distinguish between “trading” and 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
Mining is an activity specific to blockchain networks that operate under the Proof of Work (PoW) scheme, such as Bitcoin. The network verifies, stores, and secures user transactions through this process. In turn, those users who engage in these tasks receive a reward in bitcoins and commissions paid by users.
PROS
More stable earnings: The returns from bitcoin mining may not always be as juicy as trading, although 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 users pay to process their transactions. In other words, you get a payout if you mine a block. Of course, having an ASIC machine does not ensure 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 divides the reward among participating miners. In this way, they ensure they consistently profit from their mining activities.
Controllable investment risks: Mining also has fewer investment risks than trading since all the expenses its participants incur are manageable. 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 must invest monthly or yearly to stay operational. 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, whether the trade will generate profit or loss is not known. 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 are 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 are said to be traded freely on exchanges such as Binance, where traders often trade daily.
If you don’t want bitcoins with an illicit origin in your history, 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.
CONS
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. 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, market behavior and unexpected events can affect mining. 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. Introducing new miners and the latest generation of ASIC equipment makes generating profits challenging. They tend to have more computing power and raise the mining difficulty. All those 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 work optimally. For example, the equipment must have an accurate temperature and not be full of dust. Cleanliness and ventilation are essential.
The installation of a cryptocurrency miner is complex. These devices can make a lot of noise, so residential areas are not ideal for operating. Similarly, they can generate heat, so you need a cooling system and constant monitoring.
Miner’s location is essential: If mining costs are crucial to determine whether your activities will be profitable, you must also consider that the miner’s site makes a difference.
Certain countries and communities have better electricity rates. This makes setting up equipment or renting miners from farms in these territories more cost-effective. 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 and special electricity rates. They may even wholly ban mining in their territories, as is the case in China.
Conclusion
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 start this practice and grow little by little.
However, trading is high-risk, 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 manage good risk.
On the other hand, although mining can have setbacks in its profitability and does not generate as much profit as trading, the income miners earn more stability than 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 provide 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, buying specialized equipment (ASIC) is necessary. They are very expensive and indebted to the investor; therefore, in the beginning, you’ll be required to recover the investment before earning a reasonable profit.