Buying bitcoin on an exchange is not the only approach to bitcoin investing. Investors can also mine bitcoin. Here’s what bitcoin mining means and how it might factor into your investing strategy.
What Is Bitcoin Mining?
Computers have to perform a series of complex cryptographic operations to create a new bitcoin. (Technically speaking, there is a bit more to bitcoin mining than this, but for most investors, the technical details are not important.) This process is known as bitcoin mining.
Initially, bitcoin mining was relatively easy. However, because bitcoin was designed in such a way that creating additional currency would become more computationally difficult as the number of existing one increased, bitcoin mining today requires a huge amount of computing resources.
Because of this fact, mining bitcoin on ordinary computers is no longer feasible. Today, it would take years to create just a fraction of a bitcoin using your PC.
That is why investors now use special computer hardware called mining rigs to create bitcoin. Mining rigs are high-powered computers designed specifically for performing the operations required to create bitcoin.
Why Would You Want to Mine Bitcoin?
Bitcoin mining can be useful as an alternative means of acquiring bitcoin. For most people, buying bitcoin using fiat currency on a cryptocurrency exchange is the easiest and fastest way of investing in bitcoin. However, for more sophisticated investors, bitcoin mining may lead to higher profits.
That said, whether or not bitcoin mining is actually the most profitable way to invest in bitcoin hinges on a few key factors, which include the following:
How Can You Mine Bitcoin Profitably?
Before you turn to mining as the basis of your investing strategy, consider the following factors, which will determine whether or not it ends up being more cost-efficient than buying bitcoin on an exchange:
The cost of bitcoin mining hardware
A single bitcoin mining rig costs several thousand dollars. To recoup your investment in the hardware, you’ll need to use it for a long time. Bitcoin mining using rigs is, therefore, best for long-term bitcoin investing.
Alternatively, if you only want to mine bitcoin for a short time and don’t want to purchase a mining rig, you can use a cloud-based service, which provides access to mining rigs hosted in the cloud. (Ultimately, cloud-based mining is more expensive than owning your own rigs, but in the short term, the costs are lower.)
The electricity required to power bitcoin mining rigs during the time they take to mine a single bitcoin will cost several thousand dollars in the United States. Be sure to factor electricity costs into your strategy. If you live in an area with high electricity costs, mining bitcoin profitably will be more difficult.
Mining a new bitcoin involves a certain amount of probability because your mining rig has to discover random “blocks” in order to produce new bitcoin.
What this means in practice is that, depending on how lucky you are, your mining rig might take more time to create a new bitcoin than an identical rig owned by someone else. Therefore, the amount of time and resources invested in bitcoin mining don’t translate to a completely predictable payoff.
One way of addressing this issue is to participate in a bitcoin mining pool, where a group of miners search for random blocks concurrently and share the rewards each time one miner finds a new block.
The price of bitcoin
Whether mining is profitable depends in large part on how much the bitcoin that you create will be worth when traded on a cryptocurrency exchange.
If it costs you, say, $10,000 in computer hardware purchases and electricity to mine a bitcoin, and bitcoin is trading on Coinbase for only $8000 at the time, bitcoin mining won’t have paid off. If, on the other hand, the price of a bitcoin shoots up to $15,000, your mining investment will have been worth it. Therefore, before you invest in the resources required to mine bitcoin, consider whether the future price is going to make your investment worth it.
A related factor to consider is that, if the price of bitcoin tanks, you can quickly liquidate your bitcoin investment when you invest in it using an exchange, but liquidating your investment in bitcoin mining hardware will be considerably more difficult; therefore, mining entails a higher amount of risk.