Unless you’ve been living under a rock these last few years, you’re probably aware of cryptocurrencies like Bitcoin or Ethereum. According to a Pew Research Center survey from September 2021, 86% of Americans have heard about cryptocurrencies, and 16% have invested in, traded, or used a cryptocurrency.
The cryptocurrency boom is showing no signs of slowing down, and there are numerous opportunities to earn money from this new technology. The two most popular ways for turning a quick profit are trading and mining. “Hodling” (or holding a cryptocurrency for future profits and not selling) deserves honorable mention, but we won’t include it because it’s a strategy that typically takes time to come to fruition.
Every investor inevitably has to choose between mining or trading, so in this guide we’re going to take a look at both mining and trading and help you figure out which investment method is best for you.
What exactly does crypto mining involve?
Crypto mining is the process of earning crypto in exchange for running the verification process to validate blockchain transactions. Many factors can determine whether mining is a profitable venture. These include the cost of dedicated mining equipment and the cost of the electricity to power the system.
You can approach crypto mining in several ways:
- Solo mining: Once upon a time, it was possible to mine Bitcoin and other crypto assets profitably using a basic CPU or GPU and a powerful PC. These days, solo mining is no longer profitable. You need to invest in specialized equipment called ASIC (application-specific integrated circuit) mining rigs for it to be even remotely profitable. Even then, you’ll be competing with server farms with racks of ASIC rigs that are specifically set up for mining crypto.
- Mining pool: New miners are better off joining a mining pool—these are groups of crypto miners who pool together their computational resources to increase their probability of finding a block. The block reward is usually divided between the miners proportionate to each individual’s contributed processing power.
- Cloud mining: A third option is cloud mining, which involves purchasing hashing power from a cloud mining firm and earning a pro rata share of the rewards based on the amount of power you purchase.
Mining is also available via phone. Read our comprehensive guide for mining bitcoin through a mobile phone here.
Miners earn profits from block rewards and the transaction fees users pay when they transfer crypto from one wallet to another. For example, Bitcoin’s current block reward is 6.25 BTC; that figure will be halved to 3.125 BTC in 2024. In November 2021, transaction fees for Bitcoin fluctuated between $2 and $5, but fees have reached as high as $62, according to Bitinfocharts. Miners must also factor in the cost of electricity, which varies from country to country.
It’s tough to turn a profit when you try mining older cryptocurrencies like Bitcoin and Ethereum. A better strategy is to focus on mining newly minted coins or those which aren’t as established, such as Ravencoin (RVN), Monero (XMR), Litecoin (LTC), Ethereum Classic (ETC), and Zcash (ZEC), among others.
To figure out if mining is worth the investment, consider using a mining profitability calculator to get a rough estimate of the potential profits or losses.
What is automated trading all about?
Automated trading involves using crypto trading bots, which are basically computer programs that automatically buy and sell cryptocurrencies on your behalf based on preset instructions or rules. The instructions could be something as simple as “buy X amount of ETH when Y price target is reached.” Once that criterion is met, then the bot will automatically execute the trade.
Trading bots are not a new concept. They’ve been used on Wall Street for decades, with some reports estimating that around 80% of trading on the stock market today is done using these programs. Crypto trading bots follow the exact same logic with the added advantage of trading 24/7 because, unlike traditional stock markets, crypto markets never sleep.
Crypto bots communicate directly with exchanges by using application program interface (API) keys. The API key gives the trading bot the ability to programmatically place trades on an exchange. The result? You can open and close deals in your sleep and you’ll never miss out on a good deal ever again.
Automated trading using bots has several benefits:
- Emotionless trading: Perhaps the biggest advantage of automated trading is that it takes the emotion out of the process. You simply set the rule criteria and leave the bots to execute the trades if your criteria are met, so you can avoid falling prey to FOMO or panic selling.
- Backtesting: Another big advantage is that trading bots allow you to backtest your trading strategies. The bot can take a strategy you want to use and apply it to historical market data, providing you with concrete information on how well your strategy would work.
- Diversify your portfolio: Crypto bots simplify trading by simultaneously accessing and trading multiple cryptocurrencies on multiple exchanges. Automated trading can give you incredible reach without the need for a complex system of PCs for tracking the markets in real time. You can diversify your portfolio and keep track of several assets at once right from your laptop.
The main objective when trading is to buy at a good price and sell soon at a higher price. It requires you to take much larger risks than mining and, unfortunately, many traders usually end up losing because it’s so difficult to correctly anticipate crypto market trends.
The good news is that crypto trading has a very low entry barrier. You can get started with as little as $50 or even less depending on the trading platform you use. E.g. If you trade manually or with a bot on Binance, the minimum trade would be as little as $10.Extra features like leverage are great additions to amplify your trade position and reap even larger profits.
Auto-trading bots or crypto mining: which one to choose?
It’s tough to say definitively whether mining or trading will be profitable for you specifically. Profitability largely comes down to your investment amount, risk tolerance, and personal preferences.
Although trading is inherently risky, it allows for the highest returns due to the unpredictable volatility of the crypto market. It has a low barrier to entry and is easy to start, but it is difficult to do successfully.
On the other hand, mining is less risky, but it requires a much larger investment, especially if you choose to build your own mining rig or buy a dedicated miner. The ongoing global chip shortage has made sourcing parts incredibly difficult and expensive, too.
The Bottom Line
If dealing with mining rigs and ASICs is too technical for you, then consider trading. It doesn’t require any equipment or technical know-how and you have plenty of coin options from which to choose. It’s the best option for people who are new to the crypto world.
But if you’re a techie who already has the necessary equipment to build a mining rig, then you should try out mining. It’s less risky, less stressful, and less time consuming once you have everything set up. However, even if you do opt to be a miner, consider trying crypto trading—it’s accessible to everyone!