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Ultimate Guide to Mining and Trading Bitcoin

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Ultimate Guide to Mining and Trading Bitcoin

Gold Bitcoin

 

 

 

 

 

 

 

 

 

Bitcoin (BTC) is seen as the public face of cryptocurrency. It’s prominence means that, often, it’s what new miners and traders consider focusing their attention on first. For total outsides, it’s often seen as the ultimate reference point for what cryptocurrencies are – despite the fact that, in reality, other coins all have their own unique traits.

Bitcoin has a legacy: it’s the original cryptocurrency, founded in 2009 by the pseudonymous Satoshi Nakamoto. Bitcoin sets the pace.

Communities involved in crypto have their own ideas about how to participate in the market. Altcoins, which are defined as everything other than bitcoin – like XRP, Shiba Inu, and Solana – represent a cheaper entry point, and miners and traders hope to take advantage of potentially higher margins of growth to see a large return on investment. However, bitcoin is a staple of many portfolios. While the price of bitcoin remains significantly higher than most, the general hope is that, despite heavy declines – for instance, BTC dropped from November 2021’s all-time high of $69K to below $25k in May 2022 – bitcoin’s trajectory remains positive.

There is no such thing as ‘safe’ participation (via mining and trading) in cryptocurrency. The prices are far too volatile. Fluctuations are steep, as outlined above with the example of bitcoin’s decline from $69K to below $25K in 6 months. However, Bitcoin is and remains the cryptocurrency leader. What its future looks like as other coins evolve and adapt will continue to be debated, influencing the prices across the market as significant upgrades are made to competitor coins, as regulation and legislation is discussed, passed, and rejected by governments globally.

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 focusses on state intervention to restrict capital flight and secure financial channels and behaviours. Additionally, figures like Warren Buffet have come out against crypto, despite Nubank, who he backs, launching a crypto trading. European Central Bank President Christine Lagarde emphasised crypto’s lack of intrinsic value too – though, of course, cryptocurrency’s organising 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 recognised 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 BTC 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 that there is a world in which crypto adoptions 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 themselves for long-term prosperity. This ultimate guide will now walk you through what it means to mine bitcoin and trade bitcoin, so you can understand how you may begin your journey into 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 is to ensure that the ‘double-spending problem’ isn’t, well, a problem, which is more difficult in the decentralised, peer-to-peer system that underpins cryptocurrency. In short, it guarantees that users aren’t copying their tokens and reusing them, inflating the overall supply, and devaluing coins.

It’s the miners that execute the POW mechanism. What the miners do is solve a very complex mathematical problem, which should – in an optimal cycle – take about 10 minutes. It’s a game, essentially, in which miners race to find a number for the reward. Mining is the fundamental activity on which bitcoin rests.

Satoshi Nakamoto created Bitcoin to be digital gold. To reflect the scarcity and finite nature of the precious metal, he capped how many bitcoins can be mined. That number stands at 21 million. Within the code, how many bitcoins minted per block declines by 50% every 210,000 blocks or every four years – whichever occurs first. This decline subsequently increases the difficulty of the mathematical problem.

In all likelihood, the issuance of Bitcoin will never max-out. As the number of bitcoins minted reduces, so will the what the miner earns. 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 there 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 transactions fees for participating in the system. As mentioned above, over time, the mathematical problem miners are required to solve becomes increasingly difficult as issuance declines. This requires that the miners’ rig – the PC they’ve constructed – to be able to perform more calculations per second. The dual pressure of other miners in the race and the strain of the maths 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 the high-end gaming PCs which often redefine 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. Customising a PC can be time consuming, as miners will be looking to find the combination of GPUs, motherboards, and cooling systems which works for their set up.

Cloud-based mining has become popular in recent years, as it offsets the computational power to remote servers or to other miner’s hardware. Miners essentially rent the power. The strict code within the 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 is what keeps the chain secure and creates the ‘trust free’ system crypto enthusiasts promote. However, cloud mining been susceptible to hijacks in the early months of 2022 or fraudulent behaviours because often those investing in cloud mining can’t verify independent set ups. Instead, they invest in the mining pool, sharing the profits between 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 solo 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 does successfully mine 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. There are various organisational structures 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 many rigs through their node equal to that of a pool, meaning that 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 was 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 better story.

Legality and Energy Consumption

As with all of cryptocurrency, 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 individuals from hacks, scams, and fraudulent behaviours.

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 of time by the Bitcoin system. 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 more green-conscious future may be the key to its future.

Trading Bitcoin
Stock graphs for Bitcoin

Trading Bitcoin vs. Trading Stocks

While all coins have their own utilities, Bitcoin’s is that it is exists to be used as digital money, be it online or in physical stores. Comparing Bitcoin to Ethereum highlights the differences in what cryptocurrencies can be used for. For instance, Ethereum is a digital money but, also, users can create applications that run on its chain like software. Bitcoin doesn’t have this scope; it’s specialised as digital money. Most often, though, cryptocurrencies are used as speculative assets.

While the word ‘trading’ generally brings with it images of the stick market, trading crypto and stocks are totally different. Distinctions can be made on two points: utility and pay-outs.

To trade stocks means that there is a very real, tangible link with a company which contains people, products, and relationships, and gives the trader or investor an ownership in that company.

To trade 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, that it will be a healthy store of value. This lack of 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 is a distribution of a company’s earnings – and, also, in capital gains – which is the difference between what stocks were bought for versus 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 its traded into another crypto asset or into fiat money that traders and investors stand to profit. To sell a bitcoin is to make profit. 

Trading and Investing: Is it an ‘And/Or’?

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 – minutely, hourly, 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 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.

Investing, on the other hand, is all about the long-term, bigger picture. Investors buy bitcoin on the basis that they will hold onto it for undefined period. What determines when they sell is entirely up to them, whether they’re influenced by their financial position or the market itself. Investors believe bitcoin’s price will always rise.

Where to Trade Bitcoin and How to Trade Bitcoin

To trade bitcoin, you must use a crypto exchange. This is a platform that enables the buying and selling of crypto assets in exchange for traditional fiat currencies or other digital assets.

The exchanges to choose from all have mixed histories with crypto: some have been here 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 were 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 went public that they’d been victim of hacks starting back in 2011, when a hacker found a way into every wallet, siphoning of funds totalling 850,000 bitcoins. The CEO knew for 8 months before going public.

Since then, the crypto exchange market has become a multi-billion-dollar industry. Binance, Coinbase, Kraken, Robinhood, and PayPal have since become major figures.

Here are what defines good crypto exchanges:

  • Accessibility: not all countries allow you to trade cryptocurrencies. Other countries and states in the US impose regulations which 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 clearly 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, they may charge more.
  • Liquidity: not all exchanges have the same liquidity. Size, as with security, is often indicative of scope. The bigger exchanges have the capacity to process high volume 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 use a crypto wallet that’s offline. However, being able to store coins at an exchange can be appealing for beginners.

Other indicators can 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 which 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 are not stored in there 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 pass keys 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 as an 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 relies 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 centralisation of power that happens through its POW mechanism. If Bitcoin undermines itself, marring its ethos as a decentralised money, then it 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 $150k.

What brands offer good mining hardware and software?

Whether going for ASIC or GPU, there will be models and brands that serve you better. Antminer, for instance, is an excellent ASIC option. While more recognisable brands – like Nvidia 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 a best way to trade. What defines best is a longlist of historically successful strategies applied to what your goals and capabilities are as a trader. From day trading to swing trading, from scalping to HFT, what’s best is what suits you. Find out more here.

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