In the cryptocurrency environment, most especially with bitcoin, you will often come across the terms ‘mining’ and ‘trading’. These are two different processes of acquiring cryptocurrencies or virtual coins. Should you intend to engage in the cryptocurrency sphere, these are the terms that you must get familiar with whether you are planning to buy and sell bitcoin, invest in bitcoin, or just hold fractions of it for other purposes.
Knowing which method is effective for you is vital to the success of your cryptocurrency journey. To start off, here’s the definition of ‘bitcoin mining’ and ‘bitcoin trading’, along with their advantages and disadvantages.
Mining vs. Trading
One notable thing about bitcoin is that it is often correlated to gold. This is because of the similarity between the process of acquiring this leading cryptocurrency and this highly volatile asset. Minerals that contain metal like gold, diamonds, and others are acquired through excavation or a process called hard rock mining.
On the other hand, bitcoin is generated through a process called bitcoin mining, which is done by individuals who are called ‘miners’. These miners use special software and high-powered computers and equipment in solving extremely complex mathematical problems. Bitcoin is hidden inside data blocks and is collected or mined with the use of a distinct algorithm designed by its pseudonymous creator named Satoshi Nakamoto.
The software used for bitcoin mining can be downloaded and installed for free. However, it must be noted that running the entire process of mining bitcoin consumes high levels of electrical energy and storage space. This has been an ongoing concern for some nations since bitcoin’s creation in 2009 as it releases some negative effects in the environment. While bitcoin mining has this downside, it is still considered as the most common way of acquiring bitcoin, most especially during its early years.
Benefits and drawbacks
When miners mine bitcoin, they don’t only acquire bitcoin or fractions of this virtual currency but they also gain profits from verifying certain transaction data and solving complex mathematical problems that will serve as a “proof of work” to land in a solution called hash.
Mining is considered a long term investment. Miners also pay for the hash rate for the cryptocurrency of their choice and wait until small amounts come back every day. With the fluctuating characteristics of bitcoin, it is certain that miners will earn bits of amounts each day.
To add, once the mining equipment is set, the process will run on itself and goes on autopilot. However, these heavy-duty equipment are known to consume high electricity levels and digital storage space. It also sets some concern about negative environmental effects and spike in energy consumption in different nations across the world, which makes the entire process restricted and illegal in some countries.
Now that we’re done briefly discussing bitcoin mining, let’s proceed to bitcoin trading.
Another known way of obtaining bitcoin is through trading, where buyers and vendors buy and sell cryptocurrencies. This is commonly done on cryptocurrency exchanges, which can be classified as centralized and decentralized or those often referred to as peer-to-peer (P2P) platforms.
As of the present time, there are over 500 available cryptocurrency exchanges available for conducting trading. This method is much more simple compared to bitcoin mining since it makes use of a website where a user can conduct cryptocurrency-related transactions either with the aid of third-party or intermediaries (for centralized platforms) or directly to an individual offering a transaction (P2P platforms).
Benefits and drawbacks
While bitcoin mining may sound too technical, bitcoin trading will not require you to have state-of-the-art equipment and other resources in running a trade. This approach does not require too many technical skills, unlike mining. All you will need is capital to start from and a trusted cryptocurrency exchange platform. The amount can be as small as 10 USD or less, or even greater depending on how much you want to invest once you get the hang of the process.
Additionally, trading bitcoin uses crypto or bitcoin wallets that are also accessible in various devices like personal computers and even smartphones. With these, tracking the fluctuating movements of the market as well as the amount of bitcoin you’re holding is much more convenient as you have it on hand.
Bitcoin trading also gives users a wide variety of payment options to choose from. Some exchanges today offer over 300 payment methods, which allows buying, selling, receiving or sending of bitcoin to be more accessible and efficient. Since this is done through cryptocurrency exchanges where users can set specific grounds for trading, traders have more control over their coins.
However, the profit margins in cryptocurrency trades are based on market trends. This sets the limit in increasing margins on trade. This method is also known to be fast-paced and highly volatile. The movements in the market are highly unpredictable, which makes it inadvisable for individuals who are always in a hurry to redeem investment profits. Cryptocurrency exchanges are also known to be prone to frauds and scams, which means individuals who are considering this approach must be wary of every type of scams to avoid.
Which is better?
In terms of accessibility, you can opt for bitcoin trading most especially if you are just new in the crypto game. You can start with small amounts and have it increased over the course of time.
For long term and passive investment, bitcoin mining might be a good option notably if you have the equipment to start with. This is also a good start to learn more about the technical side of acquiring virtual currencies and gain valuable skills that might be beneficial in the future.
After learning what the differences between these two methods are, it can be seen that each has its own highlights and challenges. It is never too late to learn each should you want to know which one will be more effective and efficient for you. With a few of the many considerations mentioned previously, it is still difficult to tell which is better between the two. In the end, choosing which one to use for bitcoin engagement will vary on the preference of the user.