Mining Cryptocurrency: Investing In Companies: A Beginner's Guide

Cryptocurrency mining is the process of verifying transactions on a blockchain and adding them to the public ledger. Crypto miners use powerful computers to solve complex mathematical equations to validate transactions. The first miner to find the solution receives a reward, usually in the form of the cryptocurrency they are mining.

There are several ways to invest in companies mining cryptocurrency, including equity investments or stock purchases. When considering investing in a cryptocurrency mining company, it is important to understand the key factors that determine profitability, such as hardware costs, energy prices, and the price of the cryptocurrency being mined. It is also crucial to carefully evaluate the risks and potential costs associated with mining before making any investment decisions.

The pros and cons of investing in crypto mining

Pros

• Control and Authority: In crypto, you have full control and authority over your money, unlike traditional banking systems where your savings are controlled by banks and governments.
• Counterfeit-proof: Cryptocurrency exists in the digital space, making it impossible to counterfeit.
• Low Transaction Fees: Crypto transactions are much cheaper than traditional bank transactions, which often charge hefty fees for processing and cross-border payments.
• Secure Identity: Crypto transactions use the push and pull method to keep your identity secure, leaving no room for hackers to access your information.
• Fast Processing: Crypto transactions are processed much faster than traditional transactions as they do not involve any third parties.
• Software Rewards: Crypto mining software often provides rewards for donating your system for crypto mining in a particular cryptocurrency. For example, if you are mining Bitcoin, the software may compensate you for your efforts.
• Profitability: Despite the high price of cryptocurrencies, mining can yield significant profits, especially for those with powerful mining setups.

Cons

• High Cost: Setting up a crypto mining rig or farm can be extremely expensive, and long mining hours can result in hefty electricity bills.
• Decreased Lifespan of Hardware: Crypto mining requires GPUs to operate at their maximum potential, which can decrease the overall lifespan of your graphic cards and other hardware components.
• Volatile Market: The cryptocurrency market is highly volatile and fluctuating, making it a risky venture for miners and investors. Sudden price drops can lead to significant losses.
• Regulatory Risks: The regulatory status of cryptocurrencies is still unclear in many areas, and a sudden regulatory crackdown could make it challenging to sell or cause a market-wide price drop.
• Energy Consumption: Crypto mining requires a significant amount of energy, contributing to environmental concerns and high energy costs.
• Security Risks: Off-chain crypto-related key storage repositories, such as exchanges and wallets, are vulnerable to hacking, leading to potential losses for investors.
• Scam and Fraud Risks: The crypto industry is sometimes flooded with scams and frauds, and the constant fluctuation of the market can result in financial losses for investors.

The three variables of crypto mining profitability

Crypto mining can be a profitable endeavour, but it is essential to consider the various factors that can influence the potential earnings. Here are the three critical variables that determine the profitability of crypto mining:

• Hardware Costs: The price of the hardware required to mine crypto plays a significant role in profitability and return on investment. Setting up mining rigs involves purchasing motherboards, CPUs, GPUs, RAM, and specialised chips like ASICs. While it is possible to mine on a standard PC, full rigs provide more mining power and, consequently, higher earnings. The cost of hardware varies depending on the manufacturer and the balance between energy efficiency and computational power.
• Energy Prices: As mining becomes more complex, the electricity requirements increase, making energy prices a crucial factor. Crypto mining is an energy-intensive process, and the price of electricity can significantly impact overall profitability. Miners are incentivised to seek out the cheapest energy sources, and in some cases, this can include renewable energy options. The use of renewable energy also helps address concerns about the environmental impact of crypto mining.
• Cryptocurrency Price: The value of the cryptocurrency being mined is a major influencing factor in mining profit. A rise in the price of a cryptocurrency like Bitcoin directly correlates to an increase in mining profits, as the amount of crypto earned remains the same while its value increases. Conversely, a drop in price results in lower profits. Most miners need to sell their earnings to cover costs, so the price volatility of cryptocurrencies, especially Bitcoin, is a critical consideration. If miners can afford to hold their earnings for the long term, price fluctuations become less important.

These three variables are subject to rapid change, and potential earnings favour large mining farms with access to cheap electricity and efficient hardware. Crypto mining remains profitable, and the returns are expected to be significantly higher than those of the stock market or other asset classes, excluding any market-wide collapses.

The types of cryptocurrency mining

There are several types of cryptocurrency mining, each with its own advantages and disadvantages. Here is an overview of the most common types:

• GPU mining: This method utilizes graphics processing units (GPUs) to mine cryptocurrencies. It has become popular due to its efficiency and relatively low cost. GPU mining typically involves using a set of GPUs under one mining rig, along with a motherboard and a cooling system. The computational power of GPUs makes them much faster and more efficient than CPUs, with GPU hash rates measured in megahashes per second (mh/s). However, GPU mining can be costly, with a well-performing rig priced around $3,000.
• CPU mining: Central processing units (CPUs) are used in CPU mining, which was a common approach in the early days of Bitcoin. However, due to increasing difficulty levels and high electrical and cooling costs, CPU mining has become impractical for mining most cryptocurrencies. It is extremely slow, and the revenue generated may not cover the associated costs.
• ASIC mining: Application-specific integrated circuits (ASICs) are specialized devices designed solely for mining cryptocurrencies. They are very powerful and can produce significantly more cryptocurrency units compared to GPUs. ASIC miners are expensive, typically ranging from $2,000 to $15,000. They also become obsolete quickly as the difficulty of mining increases. Additionally, some cryptocurrencies are designed to be ASIC-resistant to maintain a level of fairness among miners.
• Cloud mining: This method allows individuals to rent mining rigs or purchase cloud mining contracts from companies that own large-scale mining facilities. Cloud mining is a hands-free approach that doesn't require the same level of investment in hardware and maintenance as other methods. It offers both free and paid options, but the "free" options tend to have very slow mining speeds and extra conditions. Cloud mining can be cost-effective, but it's important to carefully choose a reputable provider to avoid scams.
• Solo mining: This approach involves using personal equipment to mine cryptocurrencies independently, without joining any pools. All the coins mined and transaction fees belong to the solo miner. However, solo mining requires significant computational power, and the rewards are not guaranteed.
• Pool mining: Pool mining, or collective mining, involves a group of miners combining their computational power and resources to increase their chances of mining blocks on a blockchain. The rewards are distributed among the miners based on their contribution to the pool. Pool mining reduces costs for individual miners and improves their chances of earning rewards.

Each type of cryptocurrency mining has its own set of considerations, including equipment costs, energy consumption, hash rate, and profitability. It's important to carefully evaluate these factors before choosing a mining method.

How to choose a cryptocurrency to mine

With thousands of cryptocurrencies available and new ones constantly emerging, choosing which one to mine can be challenging. Here are some factors to consider when selecting a cryptocurrency to mine:

• Mining Hardware Limits: Your hardware will determine which cryptocurrencies you can mine. For example, if you have an ASIC miner, your options will be limited to one or a few specific currencies. GPUs are also commonly used for mining but may not be as competitive as ASICs for certain currencies, such as Bitcoin.
• Profitability: Consider the profitability of mining a particular currency. Factors such as difficulty, block award, network hashrate, your hashrate, and market price will impact profitability. Use online calculators like WhatToMine to estimate potential profits, keeping in mind that actual profits may vary.
• Electricity Costs: Electricity costs can significantly impact your profitability. If you have access to cheap or free electricity, more currencies may become profitable to mine.
• Mining Pool: Joining a mining pool can increase your chances of earning rewards. Consider factors such as pool fees, payout schemes, stability, transparency, and size when choosing a pool.
• Long-term Potential: Evaluate the long-term use of the mining equipment and the potential for withdrawing to fiat currency.
• Legitimacy and Exchange Support: Ensure that cryptocurrency mining is legal in your country and consider the number of reputable exchanges that support the coin.

How to set up a crypto wallet

Setting up a crypto wallet is a crucial step for anyone looking to trade, manage, or invest in cryptocurrencies. Here is a step-by-step guide on how to set up a crypto wallet:

Choose the type of wallet:

There are three main types of crypto wallets: software wallets, cold wallets or hardware wallets, and custodial wallets or hosted wallets. Software wallets are digital wallets that can be downloaded onto a computer or mobile device. Cold wallets or hardware wallets are physical devices that store your crypto offline. Custodial wallets or hosted wallets are managed by third-party providers, such as a crypto exchange, and allow users to store assets directly on the exchange.

Select a wallet provider:

Research and compare different wallet providers based on their features, security protocols, customer reviews, and reputation. Some popular software wallets include Exodus, Electrum, and Trust Wallet. For hardware wallets, Ledger and Trezor are well-known brands.

Create an account:

For software wallets, download the wallet app to your phone or computer and create an account by providing basic information such as your name, email address, and a strong password. Non-custodial wallets do not require personal information, while custodial wallets may require additional verification and personal details.

Set up security measures:

For software and hardware wallets, create a secure password or security method such as facial recognition. Write down your recovery or "seed" phrase, which is typically a random 12-word phrase corresponding to your private key. Keep this phrase in a safe place, as it is crucial for retrieving your funds if you lose your login credentials.

Transfer or purchase cryptocurrency:

For software and hardware wallets, you can transfer crypto to your wallet from another wallet or exchange. Some cold wallets also allow you to purchase crypto directly and load it onto your device. For custodial wallets, you can purchase coins directly on the exchange or transfer crypto from another wallet using your wallet address.

Frequently asked questions