Crypto Mining vs Crypto Trading: Which is More Profitable?

OVIDIU POPESCU

29 June 20228 min read

Everyone knows that trading crypto can be profitable. But given crypto’s volatility, traders are often looking for other ways to leverage their involvement in the space, and one way is through mining. In fact, miners are vital to the crypto ecosystem.

Just think of Bitcoin. During its early days, Bitcoin miners only needed a computer and an internet connection and voila: hundreds, if not thousands of BTC could be mined from the comfort of a miner’s home without any special equipment. But those days are long gone. Bitcoin miners today need expensive mining rigs and graphics processing units (GPUs), a low-cost power supply, mining software, and even a mining pool membership.

Bitcoin mining, BTC mining, crypto mining

Nevertheless, mining BTC is not the only game in town, with mining growing in popularity over the years, with some even resorting to mining crypto using a mobile phone. Whether you want to explore the viability of crypto mining as an investment and how it stacks up to trading crypto, or you’re just curious about the mining process itself, read on as we take a closer look and even unravel some misconceptions along the way.

What is Crypto Mining?

Mining takes place on the blockchain, a process that creates new units of a virtual token, which then enter circulation on the market. Crypto mining also describes how transactions are confirmed on the network and is a critical element in blockchain operations.

To better understand the concept of mining, let's go over the blockchain, a shared, immutable record of transactions. A blockchain is made up of a decentralized network of computers run by individuals (miners) worldwide. It gets its name from its description as a series of linked blocks, and each time a transaction takes place, the relevant data is stored on a block. As stated earlier, miners are in charge of validating blockchain-based operations and do this with special hardware.

The miners race to first complete a complex computational math puzzle generated by the network. Whoever "wins" the race successfully approves a block of transactions, and, in the case of BTC mining, they are rewarded in Bitcoin. Note that these are newly minted BTC tokens.

Is Crypto Mining Still Profitable?

The short answer: Yes, mining is and can be profitable, but it depends on many factors.

Efficient Equipment

Nearly anyone could mine Bitcoin shortly after it was first created. A good home computer worked well enough at the time. However, the market has expanded since then. It's now far more competitive and the quality of your equipment plays a massive role in determining whether or not mining is rewarding for you.

Thousands of miners compete for the same earnings simultaneously, and inefficient hardware puts an individual at a disadvantage. The mining process requires a vast amount of computational power, and there is specialized (translation: expensive) hardware to handle these computations.

Energy Costs

Besides speed, another important consideration with equipment is whether or not it is energy-efficient. The mining process consumes a great deal of energy, and equipment that helps you cut down on how much power you use is essential. Quality hardware is non-negotiable if you intend to set up a profitable mining rig.

Also, mining in a region with free or cheap electricity can help increase your profit margin. The importance of this is highlighted in the geographic distribution of miners, where the USA stands at number one in terms of the global hash rate due to the plentiful electricity in certain jurisdictions. Mining is incentivized, but the earnings have to cover the costs of the process, and an electric bill is one of those.

Block Reward and Mining Difficulty

The block reward and mining difficulty are two additional features that play a central role in how profitable mining is. The hash rate is a measure of the mining difficulty of a cryptocurrency: a higher hash rate indicates that it will take a greater quantity of computing power to earn the same amount of tokens. This, in turn, means it will be much harder for a lone miner to make a profit. Meanwhile, the block reward for most digital currencies is cut in two at a set frequency until the project hits the maximum coin supply.

Token Choice

Mining revenue also varies based on the coin you have chosen to mine. While Bitcoin is a popular choice, it is not the only one. There is a broad range of altcoins from which to choose, including Monero (XMR), LiteCoin (LTC), Ethereum Classic (ETC), Zcash (ZEC), Bitcoin Gold (BTG), and Dash (DASH), among others.

You can use a cryptocurrency profitability calculator to estimate the potential mining earnings of most tokens. A good example is WhatToMine. The website lists several tokens, for example, that offer $0.50-$1.00 daily in earnings. While such sums don’t necessarily equate to significant profits instantly, they can add up over time.

Is it Worth Investing in Crypto Mining?

For a lone miner, it probably isn't a cost-effective option, at least not unless you invest substantially in the process (and even then profits aren't guaranteed). The risk-return ratio is quite unbalanced (more below), but there is one key point to consider.

While an individual with a mining rig is unlikely to pull much profit, the same cannot be said for specialized groups or companies. Most mining nowadays has fallen to professional operations such as mining pools. A mining pool is a group of individuals who "pool" their computational resources for the mining process.

crypto mining, BTC mining

In a mining pool, the probability of finding a block is much higher, and, if the process is successful, the profits are divided among members. Although payouts differ from group to group, the profits are less than a lone miner would pull (if they were successful). This arrangement is a good option because it eases the burden on all participants and increases the chances of success.

Is There a Downside to Crypto Mining?

As you might expect from having read this far, the answer is yes.

Mining is Expensive

Perhaps the most significant drawbacks to crypto mining are the high costs involved. As a miner intent on making a profit, you'll have to shell out funds for equipment, electricity fees, and maintenance fees warehousing if you own a mining farm. It takes a long time and a lot of patience to amass earnings that scale your capital. Additionally, you need more than expensive hardware to mine, you also need to know how to operate and maintain all of that expensive tech, which comes with its own costs in time and money.

High Energy Consumption

A frequently discussed disadvantage is how much energy is required for the mining process. This again increases the fees as the investor will have to foot the bill for electricity and internet costs. The high energy intake isn’t exactly environmentally friendly, and could be off-putting to traders interested in mining (and therefore investing in) the most energy efficient cryptocurrencies.

Mining Pools

It is undeniable that mining can be a lucrative venture, but not all mining efforts guarantee success. If you plan on entering the business, you'll need a thorough understanding of the process and sufficient funds for a sizable head start.

An excellent way to profit from mining is to join a mining pool. However, there are a few basic things you need to begin.

A Crypto Wallet

The crypto wallet is probably the easiest to obtain, and you'll need it to store the cryptocurrency you earn from mining. There are various digital wallets, custodial and non-custodial, and even cold storage wallets such as those offered by Ledger and Trezor, which store virtual tokens offline.

Mining Software

Mining software is an essential part of your operation; it works with your equipment to help you monitor how it runs and ensure your mining goes smoothly. There's a great deal of free software for various operating systems (or others that cost up to $250). As a Forbes article on the best mining software explains, newer users might be better off opting for cloud-based software, particularly if it has low withdrawal requirements (an important consideration with Bitcoin mining). At the opposite end of the spectrum are more advanced users with advanced software, which they can tailor to their individual needs.

Mining Hardware

As Cryptopedia notes, there are a range of different rigs from which to choose depending on your needs (ASIC, GPU, CPU, FPGA, and cloud mining) that vary according to mining rewards and hasing power. Hardware can be expensive, often prohibitively so, which can make mining profitably a difficult proposition. However, as with most things, it depends on your needs and the availability of resources.

Something like cloud mining, for example, might be an attractive option. The same Cryptopedia article suggests that anyone interested in mining can limit costs by taking out a contract from a mining contractor. In this way, you get to take part in mining, but don't need to buy and maintain any expensive equipment.

Tips For Joining a Mining Pool

However, let’s say that you have your equipment and access to low-cost electricity. Now you're hunting for a mining pool. Here are some things to keep in mind.

  • The size of the pool: Bigger pools mean smaller but more frequent payouts, more hashing power, and more blocks. A pool with fewer participants won't find as many blocks and will probably have a more extended waiting period. However, the earnings will be split between a small group, so you'll get larger profits than you would with a big group.

  • Fees: Some mining pools have a membership fee; the owner deducts the charges from the payouts, usually around 4% or under.

  • Security: Try to join an established mining pool with a good reputation. This could help decrease the risk of members' funds being stolen.

Is Crypto Mining More Profitable than Trading Crypto?

And now the question that you’ve all been waiting for: Is it better to mine or trade cryptocurrency? Unfortunately, there's no clear-cut answer, as different setups can accommodate different expectations.

Crypto trading is far more accessible and is a good place for newbies to begin. With a few taps on your mobile phone, you can enter the world of crypto trading with ease. And while crypto trading can be a volatile business, there are things that can help traders mitigate the risks, such as automated crypto trading. If you would like to make quick profits off digital tokens despite the risk, this might be a viable path to take, especially if you start with fewer funds to get accustomed to crypto trading.

On the other hand, crypto mining really requires a significant commitment right from the start (although it can have its own long-term rewards). It also requires expensive hardware and moderately-priced software as well as higher levels of expertise and endurance. To put it simply, it's nowhere near as flexible as crypto trading

Conclusion

In the end, what matters are your goals and what resources you have at your disposal. Both crypto trading and crypto mining are important parts of the crypto ecosystem. Whatever your inclinations, both can certainly be viable, profitable options for individual traders, but there are key considerations to keep in mind when deliberating on either path.

As always, do your own research and never risk more than you can afford to lose.