Mining And Investing Cryptocurrency: Two Sides Of The Same Coin?

Bitcoin mining and crypto mining are often used interchangeably, but there are some differences. Bitcoin mining is the process of earning Bitcoins (BTC) only, while crypto mining involves earning different cryptocurrencies through mining operations. Crypto mining embraces mining operations for over 5,000 other cryptocurrencies, including Bitcoin.

Crypto mining involves validating transactions through cryptography. Cryptocurrencies use publicly accessible ledgers to record and store financial transactions. Every transaction is linked to all the previous and following transactions and is time-stamped in what is called a blockchain. Each transaction is validated through cryptography to eliminate fraud, and crypto miners compete to solve these complex mathematical challenges.

Bitcoin mining, on the other hand, requires a great deal of energy consumption and dedicated hardware, such as ASIC miners, which tend to be very expensive. This is why some people choose to pursue other forms of crypto mining.

Mining Bitcoin vs. investing in it

Bitcoin mining is the process of creating new bitcoins by solving extremely complicated math problems that verify transactions in the currency. When a bitcoin is successfully mined, the miner receives a predetermined amount of bitcoin.

Bitcoin is a cryptocurrency that runs on a decentralized computer network or distributed ledger that tracks transactions in the cryptocurrency. When computers on the network verify and process transactions, new bitcoins are created, or mined. These networked computers, or miners, process the transaction in exchange for a payment in Bitcoin.

Bitcoin is powered by blockchain, which is the technology that powers many cryptocurrencies. A blockchain is a decentralized ledger of all the transactions across a network. Groups of approved transactions together form a block and are joined to create a chain. Think of it as a long public record that functions almost like a long-running receipt. Bitcoin mining is the process of adding a block to the chain.

In order to successfully add a block, Bitcoin miners compete to solve extremely complex math problems that require the use of expensive computers and enormous amounts of electricity. To complete the mining process, miners must be the first to arrive at the correct or closest answer to the question. The process of guessing the correct number (hash) is known as proof of work.

Miners guess the target hash by randomly making as many guesses as quickly as they can, which requires major computing power. The difficulty only increases as more miners join the network. The computer hardware required is known as application-specific integrated circuits, or ASICs, and can cost up to $10,000.

If a miner is able to successfully add a block to the blockchain, they will receive a bitcoin reward. The reward amount is cut in half roughly every four years, or every 210,000 blocks. As of April 2024, the reward was 3.125 bitcoins, worth around $196,875.

Investing in Bitcoin means buying and holding Bitcoin in the hope that its value will increase over time. This can be done through a cryptocurrency exchange, such as Coinbase, Trezor, or Exodus. Investors can also gain exposure to Bitcoin through other investment vehicles, such as exchange-traded funds (ETFs) or stocks of companies that deal with Bitcoin.

While mining and investing in Bitcoin both offer potential financial gains, they involve different processes and require different types of expertise and resources. Mining requires specialized hardware and a deep understanding of the blockchain and cryptographic principles. On the other hand, investing in Bitcoin is more similar to traditional investing, where individuals buy and hold an asset, hoping for its value to increase over time.

In conclusion, mining Bitcoin and investing in it are two different ways to participate in the Bitcoin ecosystem. Mining involves solving complex mathematical problems to validate transactions and secure the network, while investing involves buying and holding Bitcoin in anticipation of price appreciation. Both approaches come with their own set of risks and potential rewards, and individuals need to carefully consider their goals, expertise, and financial situation before deciding which path to pursue.

Barriers to entry for mining

There are several barriers to entry for those looking to mine cryptocurrency. Firstly, the equipment required to solve the complex mathematical problems involved in mining is expensive and out of reach for many enthusiasts. This includes the cost of purchasing the hardware, renting space to house it, and paying for the large amounts of electricity it consumes.

Secondly, the volatility of the cryptocurrency market poses a significant barrier. The highly volatile nature of cryptocurrencies leads to large potential gains but also comes with a high risk of substantial losses.

Thirdly, the lack of education and resources about cryptocurrency and blockchain technologies is a common barrier for new users. Many users do not know how to set up a wallet, use a private key, or utilise a decentralised exchange. The information that is available can often be overly technical or filled with marketing jargon, making it difficult for newcomers to understand.

Lastly, the legal and regulatory status of cryptocurrency mining varies across different jurisdictions. In some places, mining and using cryptocurrency may be illegal, while in others, the regulatory stance and sentiment towards it may impact the viability of mining operations.

The environmental impact of mining

Cryptocurrency mining has a large environmental impact. It requires energy, equipment, internet, and a global networking infrastructure to be useful. Some networks use as much energy as small countries to maintain a blockchain.

Bitcoin and other proof-of-work cryptocurrencies require large amounts of energy to perform the work associated with crypto mining. The energy intensity of crypto mining is a feature, not a bug. The transaction validation process is designed to use large amounts of energy—the network depends on the computational power of thousands of computers. This dependency maintains the security of cryptocurrency blockchains that use proof-of-work consensus.

The energy consumed by cryptocurrency mining will likely vary over time, assuming that prices and user adoption continue to change. Cryptocurrency mining is a competitive process: as the value of the block reward increases, the incentives to start mining also increase. Higher cryptocurrency prices mean more energy is consumed by crypto networks because more people join the mining networks, trying to profit from the increases.

The amount of energy consumed by cryptocurrency mining will also depend on the energy sources available. Miners seek out the cheapest energy sources to remain profitable. Most crypto-mining occurs in areas with renewable energy sources because the costs are lower. However, when compared to the amount of energy generated by renewable sources in Canada, any cryptocurrency mined in China would generate four times the amount of CO2 emissions.

Cryptocurrency mining also generates significant electronic waste as mining hardware quickly becomes obsolete. This is especially true for Application-Specific Integrated Circuit (ASIC) miners, which are specialized machines designed for mining the most popular cryptocurrencies.

Due to the heat generated by mining machines, miners, manufacturers, and maintainers have turned to water cooling to reduce the costs of keeping equipment cool. In some cases, large mining farms have discharged hot or warm water into lakes or other water bodies, raising concerns about raising the average temperature of or contaminating these bodies of water.

The profitability of mining

Bitcoin mining is a process that creates new Bitcoins and releases them into circulation. It is crucial to the operation of Bitcoin and some other cryptocurrencies as it incentivizes users to enter accurate information into the shared ledger that keeps track of transactions and balances on an underlying blockchain network. Miners who participate in this process compete for rewards in the form of Bitcoin.

The current Bitcoin mining reward is 3.125 BTC per block, and it shrinks by half roughly every four years. The reward for successfully validating a new block on the Bitcoin blockchain is currently 3.125 Bitcoin (about $196,875 as of April 2024). The reward amount is cut in half roughly every four years, or every 210,000 blocks.

Bitcoin mining is a business venture. Profits generated from its output—Bitcoin—depend on the investment made into its inputs. There are three main costs involved in Bitcoin mining: electricity, mining systems, and network infrastructure.

Electricity costs can be substantial, as mining can run up a substantial bill. When you consider that the process (network-wide) consumes as much electricity as certain countries do, the costs can be pretty high. It's also important to consider the costs of cooling the area your mining system is in. They produce a lot of heat while mining—the more units you have, the more heat they produce. These rigs need to be cooled, so the air conditioning you need can also add to the cost.

Mining systems can also be expensive. To be competitive, you'll need to buy several ASIC miners and join a pool—which can set you back between $4,000 to $12,000 per rig. The faster they can mine, the more you'll pay.

Network infrastructure costs are also a factor. While network speeds do not significantly affect the Bitcoin mining process, latency does. Latency is the amount of time it takes to communicate with the rest of the network. Also, mining farms require multiple internal connections to connect each mining rig to a main router or server with a connection to the internet.

The total costs for these three inputs should be less than the output—in this case, Bitcoin's price—for you to generate profits from your venture.

Given the economic difficulties of Bitcoin mining, you may have to resign yourself to accepting lower profits and a longer time to break even after purchasing equipment. The hardware and electricity costs required to make real money from Bitcoin mining are substantial.

While anyone can participate in the Bitcoin mining process, your chances of winning a Bitcoin reward are low unless you have access to powerful computers known as ASICs (application-specific integrated circuits). Mining has become a multibillion-dollar industry, and the miners with the best shot at rewards are those with warehouses full of ASICs.

To help smaller-scale miners compete, some groups have formed mining pools. These arrangements allow users to join their computing power and then share any rewards they take home, minus a fee. But even if you join a pool, you're unlikely to get much without an ASIC.

Bitcoin mining is generally allowed in the U.S., but some other countries have outlawed it, including China.

The legality of mining

The legality of cryptocurrency mining varies from country to country. While it is legal in most countries, some have proposed strict rules and regulations to minimize environmental impacts.

The legality of cryptocurrency mining in different countries

• United States: Crypto mining is legal in the USA in all states except New York, which imposed a two-year ban on cryptocurrencies that employ PoW mechanisms to cut down on electricity consumption.
• Canada: Crypto mining is legal in most parts of Canada, except for the province of Manitoba, which has imposed an 18-month ban on crypto mining.
• Australia: There are no prohibitions on crypto mining operations in Australia.
• New Zealand: Crypto mining is legal in New Zealand, and the country imposes income tax on any crypto mining profits.
• United Kingdom: Crypto mining operations in the UK face no specific restrictions under formal regulatory systems, but customs taxes are imposed on mining equipment imported into the country.
• Russia: In January 2022, the Central Bank of Russia proposed a ban on all cryptocurrency issuance and operations, but in February 2022, the Russian government announced it would support, legalize, and regulate cryptocurrencies, and not ban them. In July 2024, Russia regulated mining and allowed businesses to use cryptocurrencies in international trade while keeping the ban on domestic cryptocurrency payments.
• China: China has cracked down on cryptocurrency mining, and many mining operations have moved elsewhere.
• India: In 2021, the Indian government was exploring the creation of a state-backed digital currency while banning private ones. There is currently no prohibition or allowance for investment in the cryptocurrency market in India.
• European Union: In January 2022, Erik Thedéen, vice-chair of the European Securities and Markets Authority, called for an EU ban on proof-of-work crypto mining to favor the proof-of-stake model and fight climate change.

Factors affecting the legality of cryptocurrency mining

• Taxation and reporting: Miners should be aware of the tax implications of their mining activities, such as income tax, value-added tax (VAT), or capital gains tax.
• Electricity consumption and environmental impact: Crypto mining is energy-intensive and can have a significant environmental impact. Some countries may find this alarming and prohibit mining activities. Miners can minimize the carbon footprint and environmental impact by finding energy-efficient mining alternatives and using renewable energy resources.
• Scams and fraud: Crypto mining scams are prevalent, and governments are keen to set laws and safety standards to protect investors.

Frequently asked questions