Bitcoin (BTC) is seen as the public face of cryptocurrency. Its prominence means that, often, it’s what new miners and traders consider focusing their attention on first. For total outsiders, it’s often seen as the ultimate reference point for what cryptocurrencies are—even though, in reality, other coins all have their own unique traits.
As the first cryptocurrency created in 2009 under the pseudonym Satoshi Nakamoto, Bitcoin has a rich history. Bitcoin sets the pace.
Communities involved in crypto have their own ideas about how to participate in the market. As everything other than Bitcoin is referred to as an altcoin, such coins as XRP, Shiba Inu, and Solana offer a lower barrier to entry. Miners and traders are hoping to take advantage of potential higher growth margins to realize a sizable return on investment. But many portfolios include Bitcoin as a core asset. The general belief is that despite significant declines—for instance, BTC dropped from its all-time high of $69K in November 2021 to below $25K in May 2022—Bitcoin’s trajectory will remain positive, even though its price is still significantly higher than most.
There is no such thing as “safe” participation (via mining and trading) in cryptocurrency. The prices are far too volatile. Bitcoin’s 6-month decline from $69K to around $25K provides an illustration of how dramatic changes can occur. However, Bitcoin is and will remain the cryptocurrency leader. What its future holds as other coins evolve and adapt will be debated, influencing market prices as significant upgrades are made to competitor coins, and as regulation and legislation are discussed, passed, and rejected by governments worldwide.
Trading Bitcoin in the Wider World
The mix of use-case success presents unsure footing for Bitcoin’s future. China has banned crypto in large part due to the country’s economic policy, which focuses on state intervention to restrict capital flight and secure financial channels and behaviors. Additionally, figures like Warren Buffet have come out against crypto, despite Nubank, which he backs, launching crypto trading. European Central Bank President Christine Lagarde emphasized crypto’s lack of intrinsic value too, though, of course, cryptocurrency’s organizing principle, which purists stick ardently to, is that it exists outside of central banks like the ECB.
On the other hand, El Salvador has made Bitcoin an official currency, and others, like CAR, have recognized it as legal tender. Fashion houses like Gucci, sports teams and leagues like the Los Angeles Lakers and the NWSL, and major private companies like Microsoft accept trading Bitcoin as a payment method for items and services and, at the same time, are launching NFT collections and collaborations. These are promising use cases, showing a world in which crypto adoption has become widespread and consistent.
Currently, Bitcoin’s key role is functioning as a stock, as an asset, and this is what individuals and groups have developed their stances around. From miners to traders, BTC has become a vehicle to make short-term gains and position itself for long-term prosperity. This comprehensive guide will now explain what it means – mining Bitcoins and trading Bitcoins so that you can decide how to enter the market.
Mining Bitcoin
The Process of Mining
Bitcoin uses the Proof-of-Work (POW) consensus mechanism to validate transactions, add the new block to the chain, and issue new coins. This prevents the “double-spending problem“, which is more challenging in the decentralized, peer-to-peer cryptocurrency system, from actually becoming a problem.
It prevents users from copying and reusing their tokens, which would increase the supply and lower the value of the coins.
The miners are the ones who operate the POW mechanism. The work of the miners entails solving a difficult mathematical problem, which should take about 10 minutes during an ideal cycle. In essence, it’s a game where miners compete to find the right number to receive the prize. The fundamental activity that underpins Bitcoin is mining.
To serve as electronic gold, Satoshi Nakamoto designed Bitcoin. He set a limit on the number of Bitcoins that can be mined in order to reflect the rarity and finite nature of the precious metal. There are 21 million of them. The code reduces the number of Bitcoins created per block by 50% every 210,000 blocks or every four years, whichever comes first. The mathematical problem becomes more challenging as a result of this decline.
Most likely, Bitcoin issuance will never reach its maximum. The miner will make less money as fewer Bitcoins appear. At the time when the reward is using the smallest unit of Bitcoin—Satoshis—the programming will use bit-shifting operators to round down to the nearest whole integer. This is why there will always be a gap between how many Bitcoins are in existence and the maximum there can be.
The Hardware
The miner’s computational power, otherwise known as hash power, is key to being able to win the race and earn coins and transaction fees for participating in the system. Issuance declines over time, making the mathematical problem that miners must solve more challenging. This requires that the miners’ rig—the PC they’ve constructed—be able to perform more calculations per second. The dual pressure of other miners in the race and the strain of the math means the demand for more powerful hardware grows.
GPUs quickly displaced CPUs as one of the most important components of a rig as Bitcoin began to boom. This is the technology found in high-end gaming PCs, which often redefines what we can graphically imagine experiencing in video games. Fundamentally, though, miners aren’t building “normal” PCs. Instead, they are building a machine that completes a highly specific, singular task. Customizing a PC can be time-consuming, as miners will be looking for the right combination of GPUs, motherboards, and cooling systems for their setup.
Cloud-based mining has become popular in recent years, as it offsets the computational power of remote servers or other miners’ hardware. Miners essentially rent the power. The strict code within blockchain technology ensures that miners only earn for doing what it needs. The odds of nefarious events happening are infinitesimally small. It’s not financially feasible or viable to cheat.
The energy, effort, and funds it would require are what keeps the chain secure and create the ‘trust-free’ system crypto enthusiasts promote. However, cloud mining has been susceptible to hijacks in the early months of 2022 or fraudulent behaviors because often those investing in cloud mining can’t verify independent setups. Instead, they invest in the mining pool, sharing the profits with others.
Solo and Pool
Whether you mine solo or in a pool, then, is a key decision.
Solo Mining
- The solo miners are fully responsible for the whole operation. From paying the electricity bills to installing the GPU to choosing the best crypto wallet, it is the individual who makes the decisions, reaps the rewards, and shoulders the failures. They are the sole contributor to their node – or, in other words, the computer that is constantly running the Bitcoin Core that updates with every new block across the whole peer-to-peer system.
- This control creates security, in the sense that the miner is taking a chance on themselves rather than risking their money with an anonymous other. However, the odds of mining a block are notoriously small when mining solo because only one computer is working to solve the mathematical problem. That being said, if the solo miner successfully mines a block then the rewards are all theirs.
Pool Mining
- Individual miners team with others to create a ‘pool’, combining computational power as a single node to improve the odds of successfully mining a block. Various organizational structures are underpinning these pools, but, often, the shares are distributed proportionally to the computational power contributed. Pool miners receive more reliable income from their investments as opposed to solo miners, but it will be lower.
One thing that collapses the distinction between solo mining and pool mining is that solo miners can run as many rigs through their node as a pool, meaning that their computational power is the same. However, as you can imagine, the costs to do this would be very high.
Pool mining is the most popular way to mine because it offers the highest potential ROI. That being said, while rare, there have been instances of multiple solo miners successfully mining blocks and, as a result, earning the rewards in full. CK Pool, fronted by bitcoin legend Con Kolivas, has announced these lucky miners with a regularity that has made the community wonder if solo mining is the way to go. However, it’s not that solo mining with dreamt-of results is impossible. It’s just unlikely. While the glamorous stories of victory are inspiring, the community is immediately reminded that pool mining offers better odds, though not the best story.
Legality and Energy Consumption
As with all cryptocurrencies, mining is subject to two key areas of discourse: legality and energy consumption.
The following countries have outlawed crypto mining on religious, financial, and environmental grounds:
- Algeria
- Bangladesh
- China
- Egypt
- Iraq
- Morocco
- Oman
- Qatar
- Tunisia
Other governments around the world are looking to regulate crypto. A lot of that regulation is spurred on to protect people from hacks, scams, and fraudulent behaviors.
The energy consumption issue represents an intersection with the larger, global issue of climate change. The POW system requires a lot of energy. This is felt by solo and pool miners who pay the bills and the wider national and global infrastructure. A country’s worth of electricity is used in a short period by the Bitcoin system. As a by-product of this power usage and the demand for better performance, the turnover of hardware creates waste issues too. Ethereum’s upcoming merge means it’s moving away from POW to a Proof of Stake system, which requires far less energy, presenting a greener solution for the crypto-climate discourse. Whether Bitcoin has a more green-conscious future may be the key to its future.
Trading Bitcoin vs. Trading Stocks
While all coins have their uses, the unique thing about Bitcoin is that it exists to be used as digital money, be it online or in physical stores. Comparing trading Bitcoin to Ethereum highlights the differences in what cryptocurrencies can be used for. For instance, Ethereum is digital money, and users can create applications that run on its chain like software. Bitcoin doesn’t have this scope; it’s specialized as digital money. Most often, though, cryptocurrencies are used as speculative assets.
While the word ‘trading’ generally conjures images of the stock market, trading crypto and stocks is different. Distinctions can be made on two points: utility and payouts.
To trade stocks means that there is a very real, tangible link with a company that contains people, products, and relationships and that gives the trader or investor ownership in that company.
Trading Bitcoin, though, isn’t to invest in something tangible. Bitcoin, like all cryptocurrencies, has no intrinsic value as such. What traders and investors are doing is speculating that it will be a medium of exchange in the future and that it will be a healthy store of value. This lack of a fixed reference is what causes its price to be volatile.
In terms of pay-out, stock investors and traders receive payment in terms of dividends, which are a distribution of a company’s earnings, and also in capital gains, which are the difference between what stocks were bought for and what they’ve been sold for.
In crypto, it’s only when assets are sold that money is made. No matter how Bitcoin is acquired, for instance, it’s only when it’s traded into another crypto asset or into fiat money that traders and investors stand to profit. To sell a Bitcoin is to make a profit.
Is there an “And/Or” between trading and investing?
Trading and investing are different strategies, rather than interchangeable terms, but they can be used together.
As traders, people take much more active roles in their portfolios—minute, hourly, and daily actions. The idea is to make gains in the shortest time possible. Due to the volatility of the crypto market, many seek to exploit the price changes by purchasing Bitcoin when it’s cheaper and selling it when it’s more expensive. There are different strategies to accomplish this—and some, like crypto futures trading, appear more like investments. It sounds simple, but the market complicates what’s simple.
On the other hand, investing is all about the long-term, bigger picture. Investors purchase Bitcoin with the intention of holding onto it for an ambiguous amount of time. It is entirely up to them to decide when to sell, regardless of whether their financial situation or the market itself influences them. Investors believe Bitcoin’s price will always rise.
Where to Trade Bitcoin and How to Trade Bitcoin
Trading Bitcoin in a crypto exchange is convenient enough. This platform makes it possible to buy and sell crypto assets in exchange for conventional fiat money or other types of digital assets.
The exchanges to choose from all have mixed histories with crypto: some have been around since its earliest days—like CoinBase—and others have adapted their services as crypto boomed—like eToro. When Bitcoin launched in 2009, the market for crypto exchanges was unregulated. Scams and hacks happened regularly. Mt. Gox’s monopoly from 2010 to 2014—accounting for upwards of 80% of transactions—ended abruptly when it became public that they’d been the victim of hacks starting back in 2011 when a hacker found a way into every wallet and siphoned off funds totaling 850,000 Bitcoins. The CEO knew for eight months before going public.
Since then, the crypto exchange market has become a multibillion-dollar industry. Binance, Coinbase, Kraken, Robinhood, and PayPal have since become major figures.
Here is what defines good crypto exchanges
Accessibility
Not all countries allow you to trade cryptocurrencies. Other countries and states in the US impose regulations that can impact your activity. Understanding how this affects your ability to use crypto exchanges is important.
Security
Ensuring that the crypto exchange you’re using is secure is your number one priority once you’ve established it’s legal to use one. As exchanges have a history of hacks and scams, doing your due diligence is essential. However, this only applies if you plan to store your coins in an online account. Some exchanges have insurance to protect the assets they’re holding in case of a hack, for instance. Crypto wallets can help circumvent these issues. General account security practices are also a good indicator. However, the best is how much volume they traffic and the general size of the exchange you’re using. Some have gone public, meaning you can track the health of an exchange.
Fees
Exchanges charge transaction fees. Variables apply to what percentage they take, such as whether you’re buying or selling. Additionally, if the exchange has more explicit and high-quality protections and other features, it may charge more.
Liquidity
Not all exchanges have the same liquidity. Size, as with security, is often indicative of scope. The bigger exchanges can process high volumes and have the coins to complete them.
Coins available
Linked with liquidity, not all exchanges will have the coins you may be looking at. With an interest in trading Bitcoin, this will largely be a non-factor. However, for altcoins, it’s best to research.
Storage
As mentioned above, it’s possible to store your coins in an online account with the exchange. Some crypto enthusiasts view this as a no-no. For security, they will advise you to use an offline crypto wallet. However, being able to store coins in an exchange can be appealing for beginners.
Other indicators could be:
- Educational blogs: if you are still working your way through all the big crypto concepts and their minutiae, educational blogs linked to exchanges can be invaluable.
- Tax information: taxing crypto is a relatively new concept that governments are still getting to grips with. It varies where you are. Some exchanges, like Robinhood, will help you with this. But this is rare.
Crypto Wallets
Crypto wallets aren’t physical objects, and your cryptocurrency holdings aren’t stored in them like your physical money. All coins live on the chain. It’s impossible to remove them from this context. Instead, what a wallet does is hold the passcodes to access your funds.
There are custodial and non-custodial wallets.
- Custodial wallets: passkeys are held by third parties who have their own sets of data protection and security practices.
- Non-custodial wallets: your passkeys are secured by you, meaning you take full responsibility.
A further subdivision is hot and cold.
- Hot: wallets with an internet connection.
- Cold: wallets with no internet connection, which is an external device similar to a USB stick.
A further subdivision is software, hardware, and paper.
- Software: wallets as apps on your smartphone or computer. These, aesthetically and functionally, are similar to more traditional banking and fintech products and are, as such, more user-friendly.
- Hardware: wallets as external devices. You simply plug in and unplug your wallet when you need it. These are popular because of their inherently high level of security.
- Paper: passkeys written on paper. This is an ancient method in comparison to other options and there are obvious risks involved with simply having your information written down, such as innocently losing it.
The Bottom Line
The future of Bitcoin largely depends on it being a frontrunner, on it being adopted and used by consumers, companies, and, potentially, governments around the world. Competitor coins will rise and fall in tune with Bitcoin’s shadow, all the while trying to prove themselves better. Beyond competitors, its main obstacle could be the centralization of power that happens through its POW mechanism. If trading Bitcoin undermines itself, marring its ethos as a decentralized currency, then its purpose is diminished. Bitcoin is the legacy of cryptocurrency. It’s its first, a horizon battling the onrush on feats.
Q&A
How Much Can Bitcoin Miners Earn?
As of June 2022, Bitcoin miners can earn 6.25 BTC as a reward for mining a block. That reward will decrease at fixed intervals: every four years or every 210,000 blocks. Based on current prices, this is just over $150,000.
What Brands Offer Good Mining Hardware And Software?
Whether for ASIC or GPU, there will be models and brands that serve you better. Antminer, for instance, is an excellent ASIC option. While more recognizable brands –vidia and ASUS—from the gaming market offer excellent GPUs and custom rig hardware. Find out more here.
Are There Established Strategies For Trading Bitcoin?
There is always the best way to trade. What constitutes “best” is a long list of historically effective trading techniques for use in conjunction with your individual trading objectives and skill level. From day trading to swing trading, from scalping to HFT, what’s best is what suits you. Find out more here.
