What are the differences between mining and buying crypto? It is good to know the ways in which you can earn more crypto coins and store them to use them as and when required.
If you want to lay your hands on the crypto coins, you can either mine them using appropriate hardware or buy them over a crypto exchange.
There are lots of differences between these two approaches and if you are unaware of them this perhaps is the best place to be. This article will clear out all your doubts and help you in making the right choice.
Whether it is Bitcoin or any other favorite Altcoin, crypto coins today are used quite freely and extensively to make payments digitally all over the world.
Though mass adoption of crypto coins is yet to happen, it will soon have a wide acceptance and may even soon replace the traditional form of making payments worldwide some day.
Crypto mining is typically done by using specialized computers that come with high-power Central Processing Units and Graphics Processing Units.
This is needed to solve the complex mathematical and computational problems that cannot be solved manually and will be taxing for an average computer.
However, crypto buying is a comparatively easy and quick process to gain more coins.
8 Differences Between Mining and Buying Crypto
Mining and buying crypto coins are the two approaches to follow but which one you should choose will depend on its suitability and your preference.
Know these differences before you get started with either of them. Check out Differences Between Trading and Buying Crypto.
You can buy crypto coins either from a crypto exchange or from the market directly through other people who are holding the specific crypto coin you wish to buy and are willing to sell them off.
It is just like buying any other commodity online. There are lots of ways in which you can buy crypto coins such as by using your credit or debit cards, through hard cash, or wire transfers. You can also buy them physically using a specific P2P platform.
Also, you can exchange your cash for crypto coins. A few countries now even have special ATMs installed for that matter. It all depends on whom you buy them from and where you live. Ideally, crypto buying is a process through which you gain ownership of the said asset.
On the other hand, crypto mining is a process that brings the coins into existence and circulation. This specific process involves verifying the transactions on a blockchain system as well as releasing new coins as a reward for such verifications.
Typically and technically, mining is a process that involves amassing of the recent transactions made into new blocks in the blockchain and attempting to solve a cipher puzzle.
The person who can solve this puzzle gets the reward along with a chance to place the next new block in the blockchain. The rewards offered in the mining process typically include transaction fees paid through the crypto coin. All these result in a healthy and an increased competition in mining.
Typically, crypto mining is a decentralized process. Therefore, for successful mining you will need a strong and stable connection to the internet as well as a powerful set of hardware along with it. It will also need a considerable amount of energy.
On the other hand, for buying crypto coins you do not need any expensive and powerful hardware. All you need is an account with a particular crypto exchange of your choice and either an offline or an online digital wallet which is with the exchange to store your crypto coins till the time you want to trade them.
Mining crypto is much more difficult in comparison to buying crypto coins. In mining, the level of difficulty varies according to the level of effort put in across a specific network.
There is a specific protocol laid out and followed in the software so that the network can make repeated adjustments in the difficulty level in mining. These adjustments are typically made after every 2016 blocks are mined, as in the case of Bitcoin, or approximately after every two weeks.
This is done in order to keep the rate of block discovery invariable. This means that mining will be less profitable when the level of difficulty is higher or if more people are mining at a time.
It is for this reason the miners now use ASICs or Application Specific Integrated Circuits that are dedicated hardware to mine crypto coins and work much better than an ordinary computer or graphics card.
In contrast, when it comes to buying crypto coins it is not as difficult as mining. All you have to do is research properly about the specific crypto coin that you want to buy to know the price movements and just the right time to buy it.
This will prevent you from paying more for a crypto coin that you could have bought for a lower price if you waited for a couple of hours or days longer.
4. The Cost Factor
Crypto mining is a far more expensive process in comparison to crypto buying. The most important thing that will make a significant portion of the entire cost is the mining rig that you need to use for the process.
This dedicated machine for mining can cost a lot due to the powerful and efficient hardware that it comes with. Along with that, the other aspects that will add to the cost of mining include the cost of electricity, internet connection, storage and security.
Also, it will be unwise to overlook and exclude the maintenance factor from the cost. In addition to these, there are a couple of invisible expenses such as the considerable amount of effort you need to put in and the long hours that you need to devote for mining crypto coins.
With all these factors and initial investments taken into consideration, mining may not seem to bring any extra profit to an average miner or one who has just begun.
However, in mining, there is no additional fee charged for acquiring the coins and you can also keep a track of your transactions when you mine untainted crypto coins.
In contrast, you will not need to invest a lot of money initially to buy crypto coins from an exchange. You will also not need a lot of electricity for the same and no specific hardware as well.
What you will need is to put in some effort and time into your research to find the best and more prospective coin to buy at the best time to make the most profit eventually when you sell it.
However, at this point, you should not forget about the transaction fees and commissions that you need to pay to the crypto exchanges as well. Still, taking all these things into account together, buying crypto coins will not be as expensive as crypto mining.
5. Time Factor and Its Effects
Mining crypto coins is not a walk in the park and cannot be done instantaneously. In fact, even if you put in your best efforts and use one of the best computer systems and hardware for mining, the entire process can take anywhere from several hours to several days to complete.
This may also have a significant effect on the value of the specific crypto coin that you wish to mine since the price can fluctuate moderately or drastically while you mine it.
Moreover, in case there are any glitches in the system or in the crypto market on the whole, the value of the particular crypto coin being mined can deflate as well.
On the other hand, there is no chance of such price fluctuations happening when you buy crypto coins through an exchange. The process is almost instantaneous depending on the time it takes to verify the transaction and achieve a consensus.
Since you are buying coins that come with a specific and pre-existing valuation, you will not have to pay more than what you intend to, provided you open and close your positions precisely.
6. Revenue Generation
Since everything is about investing and making money, it will be much cheaper to mine crypto coins provided you follow a specific strategy for it. Surprising as it is, this is true when you use a cloud mining website instead of your own expensive mining rig.
Without having to buy and use costly mining hardware, with cloud mining you can even get more than one Bitcoin for the cost of one coin or even less. If you can mine more Bitcoin and sell them at a high price, it will significantly add to your revenue.
On the other hand, buying crypto may not provide you with the same amount of revenue. For example, if you want to buy 1 Bitcoin for $8000 you will either need to invest the entire amount now or buy it in parts, if you cannot afford it, but in the end, you will have to pay the entire amount of $8000.
And, with the growth potential of the crypto coins, the cost will be even more in the coming days making it harder for people with modest capabilities to own a large number of coins. This will limit their sale proceeds and in turn their revenue generation abilities.
7. Diversification Needs
While buying crypto coins, it is important to diversify your portfolio to avoid losing them all at one go. This is in accordance with the ‘putting all eggs in one basket’ theory.
In fact, you will need to have at least three different types of coins for a proper diversification of your crypto portfolio. This will mitigate the risk of losing all your money invested in one particular crypto asset if in case the value of it falls dramatically and does not rise quickly.
Apart from minimizing the losses, a proper diversification will also save you from needing to check the market environment and price swings constantly to make the best purchase.
However, with crypto mining, especially cloud mining to be more specific, you will not need to worry about such diversification needs of your crypto portfolio.
The cloud mining service will do it all for you and save you from all the hassles, and most importantly, everything will be done automatically. Therefore, there will be no margins for any errors even when three different types of crypto coins are mined.
It will be done in equal proportion so that risk is spread evenly. Moreover, the system itself will determine which specific type of crypto coin is more lucrative to mine at the given point in time and switch to that specific currency automatically and most dynamically.
Test results have shown that such an approach results in making 10% more profits.
8. The Security Aspect
When you buy crypto coins, as said earlier, you will have to store them in a digital wallet. If this is an online wallet or the one that is with the crypto exchange, it is vulnerable to malware attacks and hacking.
If the security system of the crypto exchange is not exceptionally strong, all your money can be stolen in no time. Such instances of hacking and losing of crypto coins have been growing alarmingly in the recent past and therefore, buying crypto coins does come with this indispensable risk.
Mining crypto coins with a cloud based service will be free from such risks because usually the coins mined are not stored in a hot wallet. Whatever coins are mined, all of them are transferred to a safe and secure cold storage as and when generated.
Also, reliable service providers do also perform payouts manually at least once in a day. All these features eliminate the chances of stealing the crypto coins by the hackers.
Which is Better – Mining and Buying Crypto?
For some people, mining proves to be more profitable and lucrative but for others crypto buying is more feasible. This question itself is debatable and therefore it can be best said that it all depends on which way YOU want to go.
With such diverse benefits and requirements, a clear solution or answer cannot be provided. However, do not just choose one way over the other based on the basic differences only. You will be better off if you have an in-depth knowledge of both.
If you choose an easier and inexpensive way to get your hands on some crypto coins, buying them at the right time and at the right price from an exchange should be an ideal option.
When it comes to buying crypto coins, it is actually a form of trade that benefits both the exchange as well as the buyer. The crypto exchanges make money through the transaction fees charged on each trade and the buyers or traders benefit from price swings.
The primary intention of buying crypto coins is to gain ownership of them at a low price and hold them till the time the price rises to sell them off at a profit.
If you want to take this route, just make sure that you first choose a reliable and reputable crypto exchange that comes with an excellent user interface, impeccable customer service, top-notch security and privacy.
Also, consider the trading speed, coin support, and trading pairs approved by the exchange. As for selecting the crypto coins, focus on factors like volatility and choose a more liquid trading pair.
On the other hand, if you have a lot of money to invest in and can put in a lot of effort and time regardless of the fact that you make anything in return or not, crypto mining would be a more suitable move for you.
However, crypto mining is not as simple as it was a decade back because only a few people knew about cryptocurrencies and it was much easier for them to acquire new coins more efficiently and rapidly by solving the code.
However, over time, as and when a dramatic surge was noticed in the popularity of cryptocurrencies, the complexities regarding mining also increased making it difficult for people to mine crypto coins.
Also, considering the huge costs involved in mining, the quicker you mine some coins, the cheaper, more feasible and profitable it will be. Crypto mining is typically a long-term activity on the network that involves algorithm refinement and product creation.
It is related to the growth of the crypto market and typically has a higher entry barrier in comparison to crypto buying, most of which is in terms of initial investments and deposit requirements.
Moreover, chance plays a big role in mining crypto coins apart from the basic requirements of a specific skill set, awareness, and hardware.
However, mining will put you in the bracket of people who build the infrastructure of a digital currency at different scales of the financial institutions.
Well, there is no specific reason as to why you cannot do both, though that will depend largely on the particular situation, time and money you can put in, and whether or not both align with your priorities.
However, if you choose to go with mining crypto coins, you should also understand the risk involved in it. Typically, for a beginner, these risks may seem to be limited to the regulatory and financial risks only. However, these are true, but partially.
As for the financial risks, you may go through a lot of effort in buying mining equipment worth hundreds or even thousands of dollars and even after that you may not have the desired return on your investment.
However, there is no reason to be disheartened. You can mitigate the financial risks by joining and working with the mining pools.
As for mitigating the regulatory risks, you should first find out whether or not you live in an area where mining is prohibited. If it is then reconsider.
However, if it is not, then make sure that you research quite a bit about the rules and regulations of your country regarding mining before you step in.
Also, consider the overall sentiment of the people towards crypto mining before you invest your money in a mining rig.
Another significant risk is the rapid growth of the mining network which has outpaced technological development.
The mining algorithms have become more and more complex and now need a lot of resources and powerful computers.
However, this has had a serious environmental impact which has raised concerns of the people and the governments as well regarding the carbon footprint due to crypto mining.
However, there are lots of steps taken and strategies followed nowadays in order to mitigate such risks and the adverse externalities by opting for greener and cleaner energy sources for the crypto mining operations.
These include using solar or geothermal resources, using carbon offset credits, and switching to less energy-intensive consensus mechanisms like PoS or Proof of Stake as Ethereum has done.
However, the PoS strategy comes with its own set of inefficiencies and drawbacks.
And finally, if you are hell-bound for mining, you will be better off if you choose a cloud mining website for that matter.
This will not only reduce your initial investment amount since you will not need to own an expensive mining rig but will also offer you some other significant benefits as mentioned earlier.
There are two ways in which you can expand your crypto portfolio: either by mining or buying coins. However, both have their pros and cons as well as other differences. Your choice should be based on them to find a suitable approach.