What is more profitable: mining cryptocurrency or just buying cryptocurrency?

In 2017, cryptocurrencies made a splash in media and technology. The popularity attracted to the industry investors who want to buy a coin cheaper and sell it at a higher price, and miners. The latter actively purchased computing equipment, turning the mining of digital money into a full-fledged business. The popularity of cryptocurrency made it difficult to find powerful processors and video cards on the market for some time.

In the period from 2017 to the beginning of 2018, in one day, coins could increase in price by 10-20%, while during the entire period of rapid growth, such cryptocurrencies as bitcoin, Ripple and Ethereum increased in price by 20-100 times. So, having bought ETH in February at $ 10 per coin, in January one could sell it for 1200 USD. Such a return was not provided by any deposit, bond or mutual investment fund, therefore, not only ordinary people, but also large investors became interested in the sphere of digital money.

Today the market has gone through a recession and is slowly and steadily recovering to January 2018. Experts predict the growth of BTC to $ 50,000 per coin, and with it the growth of other cryptocurrencies. Now is the time to enter the market and choose a way to make money: investing or mining digital currency. We will figure out how to start mining, which coins are profitable to buy now in order to sell later.

What is cryptocurrency mining

Mining (from the English mining - mining) is the process of obtaining new cryptocurrency coins through the creation of new blocks in the blockchain. To create a block requires computing power, so miners use the resources of the CPU and video cards. In cryptocurrencies, mining is simultaneously a tool for issuing (issuing new coins), earning and creating new blocks in the chain.

To understand the essence of mining, you need to delve into how cryptocurrencies work. Up to 90% of all digital money is based on blockchain technology - a distributed decentralized database. Blockchain is a sequential continuous chain of blocks that stores transaction data. In turn, a transaction is the process of transferring coins from one user to another.

Transactions are linked by the exchange history: thanks to the blockchain, you can track how each denomination was formed for each transaction. Also, each block has a header file associated with the next block, and has a link to the previous one. This makes it impossible to forge a new block: to create a file that "correctly" references a large number of previous files, many variations have to be calculated. There are so many of these options that a new one will already be created during the calculation of the fake block.

In such a system, mining acts as a means of confirming transactions. Confirmation is a mechanism to protect against the creation of fake transactions and a method of making payments on the blockchain network. Depending on the protocol of the cryptocurrency, miners confirm the legitimacy of the transaction by inscribing them into new blocks. For the creation of new blocks and the processing of transfers, miners receive a reward in the form of coins of the cryptocurrency in the network of which they placed their computing power. For example, for creating a Bitcoin block, miners receive 12.5 BTC - about 112 thousand US dollars at the rate for 2019.

In addition to the reward for creating a block, in some cryptocurrencies, miners receive a commission for confirming a transaction. The size of the commission can be very different, the sender of the payment himself sets the amount in BTC. At the same time, the transaction enters the queue and is ranked in it by the miners by the size of the commission, the greater the amount of additional reward, the faster the cryptocurrency miners will begin to confirm your sending. At the peak of the bitcoin network congestion, the commission for confirming some transactions reached 40-50 USD.

Thus, the mining of digital money brings income in two ways at once: commission fees and reward for creating a block. When calculating the profitability of mining, the former are most often not taken into account, since in a normal situation the commission for making payments does not exceed 1 US dollar, such fees, at best, will allow half the cost of electricity costs.

Initially, it was assumed that each user would mine cryptocurrency on their own computer with one processor. Later, the community began to mine digital money on more powerful video cards, users thought of collecting several processors together, creating powerful mining rigs. Such installations began to be called farms. Depending on the capacity, the farm brings in earnings from $ 10 to $ 500 per day. Sometimes businessmen assemble entire clusters of farms, which in terms of capacity can be compared with small thermal power plants. Today, the total energy consumed by miners exceeds the annual electricity consumption in Switzerland.

To start mining, you need to purchase expensive computing equipment. With the rise in popularity of cryptocurrencies, the prices of powerful processors and GPUs have skyrocketed, but the high cost of hardware is not the only challenge facing todays digital money miner. Lets analyze the nuances of mining, plunging into the intricacies of creating your own farm.

The nuances of mining cryptocurrency

Using the computing power of your own computer or farm is not the only way to receive a reward for confirming a transaction. This method is called Proof-of-Work (in translation from English - proof of work), and it is initially written in the blockchain protocol. The first bitcoin cryptocurrency works exactly on this principle, which ensures the reliability and security of the system, minimizes the risks of forging new blocks and interference in the process of confirming transfers.

The implication was that each user of the network would be an independent and disinterested person who would be able to confirm the transaction in the system and create a new block. The miner does not know the sender or the recipient, and he is interested in high-quality confirmation of the transaction. With the increasing popularity of digital money due to the large reward, miners began to gather in communities. And the main blockchain vulnerability is a hypothetical 51% attack. It lies in the fact that a person or a group of people who have more than 51% of the computing power of the network can easily create new blocks independently of other miners. Thus, an individual or group of individuals can collect all the rewards.

To somehow avoid this problem, the developers began to look for other mechanisms for confirming the transaction and reward. One of the first alternatives was Proof-of-Stake. This security protocol makes it more likely to create a block for the user who has a large number of coins of a certain cryptocurrency. For example, a user who owns 10% of all coins will create a new block with a 10% probability. The method was first applied in 2011 for the PeerCoin, which was a step towards avoiding the accumulation of mining power.

However, this system turned out to be imperfect. There is a problem of double spending - when funds legitimately for the blockchain are sent twice to different recipients, which creates the risk of reducing the popularity of cryptocurrencies on PoS. Today, other protection protocols are being developed, hybrid technologies are gaining popularity - a combination of power costs and distribution of coins in a percentage ratio. These include:

1. Proof-of-Space : to start mining cryptocurrency, you need to allocate a certain amount of memory on your computer, each megabyte of spent memory increases the chances of getting a reward. Hypothetically, this can lead to the fact that the owners of a large number of information storage devices will become dominant.
2. Proof-of-Research : This is evidence of research conducted where a miner is rewarded for successful work. It combines elements of PoW and PoS, the first time the method was implemented in the BOINC program.
3. Proof-of-Burn : the probability of receiving a reward for creating a new block is proportional to the number of coins that the user “burned” (or froze), in this regard the protocol is similar to the reverse principle of PoS. Probably, this method of protection will be applied in the later stages of the emission of digital money.
4. Proof-of-Activity: the owners of some of the coins begin to receive rewards only after they have done some computational work, this method will help completely eliminate the 51% problem. Until now, PoA has not been implemented in any cryptocurrency.

Note that the PoW method has never come close to a 51 percent attack in all algorithms of key cryptocurrencies. The miners themselves are interested in receiving stable remuneration for their work, which will then be normally converted into fiat money.

To mine cryptocurrencies, it is not necessary to have a large amount of computing equipment if you use a hybrid method. At the same time, cryptocurrencies with PoW analogs require certain investments to start receiving rewards: in order to be competitive, developers assign large amounts of a PoS deposit.

Spending computing power remains the most common and profitable way to mine digital currency. If initially users assembled large CPU and GPU farms, then with the arrival of large players on the market, more efficient equipment was required. This is how ASIC miners appeared - processors specially designed for bitcoin mining. With the advent of ASIC processors, the use of other equipment for mining BTC became unprofitable, and for this reason, the stratification in the network increased: more users with large farms appeared, and single miners went to other markets.

It turns out that if more power is required to increase the likelihood of receiving a reward, then even the purchase of several ASIC miners will be unprofitable, the user simply will not be able to compete with the holders of large farms and clusters of miners. To be able to make money on cryptocurrencies, crypto enthusiasts began to unite in large groups or mining pools.

Pool is a service that allows you to combine the computing power of thousands of people to create a single "account" for a miner on the network. The responsible person alone receives the reward for creating the block, and later divides the amount between the miners in proportion to their contribution to the process. This allows you to start earning money from mining even if you only have a few ASIC machines at your disposal.

How to start mining cryptocurrency on your own

The process of creating your own farm seems simple at first glance. It is necessary not only to take into account the specifics of the market, but also to be technically savvy in matters of blockchain and setting up digital equipment.

First of all, you need to choose the cryptocurrency that you want to mine, or the computing equipment that you want to use. Each digital coin has its own protocol for calculating the hash sum, which does not work with all equipment. So, if you want to mine bitcoin , you will have to buy ASIC miners, and high-performance video cards are more suitable for Ethereum.

There are two main indicators that you should focus on: energy consumption (equipment maintenance costs) and equipment hash / sec. The last index determines the computing power of the processor or video card, the more h / s - the more income the miner will receive every day. Mining is considered to be profitable if the daily profit (minus electricity and maintenance costs) is at least two to five dollars. For the calculation, you can go to the WhatToMine.com website and choose the most convenient calculation protocol and the amount of the corresponding equipment.

Do not forget that the complexity of cryptocurrency mining is constantly growing. In the bitcoin algorithm, the mining difficulty is recalculated every 2016 blocks, or approximately every two weeks. This is done so that one block is always created in a certain amount of time, about 10 minutes. As the number of miners increases, the amount of energy required to compute a block increases. In other cryptocurrencies and altcoins, the block formation time may differ, but the complexity of mining always grows simultaneously with the spread of popularity.

It is important to calculate the ROI of your farm in advance. Compare the approximate prices for GPUs and ASIC miners and divide the amount by the approximate monthly earnings: if the payback is more than 2 years, then you should not spend money on the purchase of equipment, it is better to look for a more profitable option. There are processors with a payback period of 150-180 days, allowing you to earn up to $ 10 per day from one device, this is a very high payback even for an IT business.

But after choosing the necessary equipment, the difficulties do not end - you need to order processors. Sometimes even new models of ASIC miners are sold out in a few days, and good video cards will have to be ordered if you do not live in a large city.

Also, think over the mining room and its infrastructure in advance. Inside, there must be access to electrical power as well as cooling. If there is no natural cooler, you will have to buy separately fans or a powerful air conditioner.

Before you get your hands on computing technology, buy a special case to create a farm. It is best to use metal or plastic trusses with open air access or built-in cooling system. In addition, you will have to purchase the following equipment:

• powerful server power supply or several conventional ones;
• a motherboard with appropriate connectors for processors or video cards;
• risers - boards that allow you to connect several video cards or CPUs to the motherboard;
• RAM and SSD drive for at least 200 GB;
• monitor and its emulator to keep track of farm performance.

All parts must be correctly connected to each other, taking into account the different power. If you are not strong in computer technology, we recommend that you contact a professional for help (assembling a mining farm by a specialist will cost $ 150-300) or watch a training video.

After assembly, you will start making money, but do not rush to relax: you need to monitor the condition of your processors daily. As a rule, the warranty for video cards does not exceed 6 months, if at least one GPU fails - this will greatly reduce the mining income. Closely monitor running farm temperatures, leaks, cooler breakdowns, or other visible changes. On average, high-quality video cards under serious loads can last 2-3 years if you take care of additional cooling.

What equipment for mining to choose

It all depends on your personal preference. At the end of 2017 and the beginning of 2018, it was possible to mine any cryptocurrency - due to the unprecedented rise in the cost of altcoins and bitcoin, mining became extremely profitable. But after the recession of the cryptocurrency market, the situation has changed dramatically and today a beginner miner has two ways:

1. Construction of a small ASIC farm for mining BTC, BCH, ZEC. ASICs are very expensive, do not ship directly to Russia and sell out quickly, while they have the best performance for mining BTC - the most expensive cryptocurrency. For example, the new ASIC Antminer S17 model from Bitmain costs about 180 thousand rubles. At the same time, the average daily income from mining will be about 10-12 USD. So, a farm with at least one processor will pay off in 8 months with a six-month warranty on the processor.
2. Creation of a farm with video cards for mining altcoins. Unlike ASIC processors, there are a huge number of coins that can be mined using video cards. The most profitable are traditionally considered Ethereum, Ethereum Classic, ZEL and RYO cryptocurrency. The advantage of this method is that you can gradually build your farm, since buying video cards is not as expensive as specialized processors for BTC. At the same time, the payback is much lower, in order to beat off the price for one Nvidia 2080Ti video card - you will have to mine for about 3-4 years.

Please note: even the WhatToMine website lists only an approximate amount of funds mined per day, 3 days and a week. In addition, you need to take into account the costs of maintenance and the risks of failure, as well as include in advance the commission for using the mining pool in the costs (usually it is 1-3% of earnings from mining cryptocurrencies).

Today, the blockchain technology market is filled with a large number of scammers, whole media are working that promote failed projects in advance. Due to the popularity and perceived high profitability, uninformed users buy low-quality equipment, so keep an eye on suppliers and order processors only from original manufacturers. Refuse to buy video cards from hands - you run the risk of buying a computer without a guarantee, which has worked longer than its allotted time. Better to wait a few months for the original ASICs with a six-month warranty than to buy a pig in a poke.

What are the most promising cryptocurrencies for mining

Not all blockchain projects are equally good, sometimes even in the top 50 digital money in terms of capitalization, projects fall that later greatly lose in value. For 3-4 years of the high popularity of cryptocurrencies, a lot of coins, which were previously called the "new gold" or a breakthrough in the blockchain industry, came off Olympus.

In fact, the miner is no different from the investor: he mines a specific coin, which can then be sold profitably if it rises in price. Often, after several months of mining an altcoin, it loses in value several times. If the miner does not sell the savings on the exchange in time, he will lose a significant part of his earnings.

To prevent this from happening, you need to carefully analyze the coins that you mine. Approach the choice as a full-fledged investment task: read the Whitepaper and Roadmap of the company, communicate on the forums, check information about the project managers and developers, build investment schedules. Choose not the most profitable coin, but the most stable and most promising one. But at the same time, do not strive for the extraction of top cryptocurrencies and bitcoin - sometimes it is more profitable to extract an altcoin from the top 100 currencies in terms of capitalization.

If we are talking about mining on ASIC processors, then the choice of coins for mining is not so great: BTC, BitcoinSV, BitcoinCash, ZEC and Horizen coin. BitcoinSV is considered the most profitable as of 2019 - for a day of mining on Antminer S17, you can earn up to $ 14 a day with this coin. At the same time, BTC, BCH and Zcash remain the most stable in terms of profitability.

It is worth highlighting the following projects that are suitable for mining on video cards:

1. Ryo is the most profitable GPU mining cryptocurrency. RYO is a private super-profitable coin that allows you to very quickly form a block and conduct transactions. In doing so, she works with a Proof-of-Work consensus. The daily profitability when mining with 10 2080Ti graphics cards will be approximately $ 11. 
2. Zcoin is a technology for private transactions using the Sigma protocol. The Zcoin system is completely confidential and integrated with the Tor private browser. Zcoin profitability is about 9.5 USD per day, while the cryptocurrency value is predicted to increase due to integration with the most popular private browser.  
3. Swap is a new coin with low network complexity. Block creation time is only 15 seconds and miners are paid a fair commission even for empty blocks. The profitability, taking into account the cost of electricity, will be about $ 7 per day. The coin is considered one of the most stable young projects and is designed for long-term emission.
4. Zel is a full-fledged cryptocurrency ecosystem that allows you to quickly exchange most of the most promising cryptocurrencies. In the future, Zel plans to create their own semblance of a blockchain-based operating system. In the future, a similar farm can earn up to 8.5 USD per day of mining.

The most stable cryptocurrencies in this sector are ETC and ETH. For several years they have been gathering around themselves a huge audience of miners, supporting the community and providing the value of cryptocurrencies. Ethereum is generally considered the most promising blockchain project, if you do not take into account bitcoin.

Pros and cons of making money on mining

Cryptocurrency mining attracts thousands of new users every year. Unfortunately, not all of them are satisfied with the profit and soon leave the industry. On the Internet, you can find a large number of ads for the sale of video cards previously used to extract digital money. People dont realize that mining has the following advantages over business as usual:

1. The main advantage of mining is the high payback of large farms. In some cases, it takes 8-10 months to completely recoup investments, and in cases of traditional entrepreneurship, the minimum payback is 1 year with high growth rates. In the cryptocurrency market, even if the rate of digital money falls, you can continue to earn money.
2. No taxes. Since the status of cryptocurrencies is not defined in most countries, mining is not subject to taxes. A more significant advantage follows from this: you will avoid opening your own individual entrepreneur, legal red tape, quarterly and annual reports to regulatory authorities.
3. Small expenses. Among the costs of maintaining a mining farm are payments for electricity, cooling and repairs. The cooling system can be made from improvised means or even lower the temperature using natural conditions by organizing mining in an unheated room in winter. There will be no particular difficulties with the payment for electricity, in Russia and the CIS the tariff is much lower than in European countries, China and the USA.
4. Low competition. Despite the hype around cryptocurrencies, the industry remains one of the most unclaimed. In addition to the main digital money, there are many altcoins that can be easily mined even without pools, alone. At the same time, even popular mining pools do not overestimate the commission on income and offer the most insignificant requirements.
5. Relatively small start-up capital. To launch your own farm with a payback period of 8-12 months will take about 200-300 thousand rubles. This is a small amount when compared with a full-fledged IT business, retail and other highly competitive areas.

Cryptocurrency mining is described as a simple, highly profitable business that generates stable passive income. Unfortunately, many entrepreneurs lost large sums when they did not take into account the obvious disadvantages of mining:

1. High risks: the coin you are mining may seriously drop in price, several video cards or processors may fail at the wrong time, the electricity will be temporarily cut off in the mining building or a power surge will spoil your computing resources. There are a lot of risks in mining and no one is responsible for them, except for the businessman himself.
2. Technical savvy: To run a stable and high-quality farm, you need to have some knowledge. If you have skills in programming, administration, assembly of computers, then after thoroughly studying the instructions, you can try to create a farm yourself, if not, we advise you to contact the professionals.
3. No Warranties: Apart from a temporary and short-lived hardware warranty, no one guarantees you a stable income and payback. ASIC shops, mining pools and exchange owners where you later sell digital money are private, independent entities. The other side of the confidentiality of cryptocurrencies is the inability to find the culprit or make claims for damages.

Is it possible to invest in cryptocurrency

Another popular way to make money on cryptocurrencies is by investing in specific coins. Investors buy certain cryptocurrencies and wait for their rate to increase by a certain percentage. Later, the cryptocurrency is exchanged for fiat money, thus fixing the profit. Like ordinary investments , investments in cryptocurrency can be divided into long-term and short-term, the latter imply constant trading on exchanges - trading.

As you know, digital currency is extremely volatile. Due to the sharp jumps in the exchange rate, you can buy a coin at 10 USD apiece, and after a few hours sell it for 15 USD. Although investment analysis tools have not been invented for cryptocurrencies, many traders develop their concepts and try to apply technical analysis. At the same time, much depends on the general state of the market and the value of the first cryptocurrency - bitcoin.

To implement speculation, traders use cryptocurrency exchanges. On them, the user can sell or buy cryptocurrency at market value , set stop orders and track their own income. In order to trade for large amounts, most exchanges require you to provide personal information, including a scan of your passport and a statement from the service bank.

In order not to understand the intricacies of trading, novice investors use the usual investment policy. For example, you can simply buy the currency you are interested in in an online exchanger, and sell your savings at the right time. So, if you could buy Bitcoin in January 2017, already in December you could calculate a 15-fold profit - 1500% per annum. With the fall of the market, the situation has changed, but users still hope and do not sell investments.

But experts do not advise keeping large savings on exchanges and exchangers. There are frequent cases when such services are hacked by hackers or user funds are stolen personally by the creators. Use trusted exchanges for purchases: Binance, Kraken, Coinbase, Bitfinex, Bittrex. But it is recommended to store it on cold storage wallets or in special desktop programs - so there are more chances that investments will not be stolen.

There is also an alternative to simple buying of coins - ICO . An initial coin offering or ICO is the process of raising investment to launch a blockchain startup, similar to an IPO. In the process of investing, the buyer receives a cryptocurrency token - a coin that can then be exchanged for fiat money or other cryptocurrency on the exchange. Tokens are like bonds. If these "bonds" are bought from a startup at a fixed price, then they are sold at the market price on the exchange, and if the project is successful, it will be possible to increase the investment by 10-50 times.

In investing in cryptocurrency, there is an important rule - the diversification of the investment portfolio. In other words, it is not recommended to invest all your money in one currency. So it is more difficult to completely lose the money invested and it is easier to track the overall market decline in time. There are other investment rules, we will tell you a little more about them and find out how to invest in cryptocurrency profitably.

How to determine the prospects of a cryptocurrency or blockchain startup

Buying cryptocurrencies is a full-fledged investment tool, which is recognized even by the US Securities Commission. Therefore, they are covered by all the main methods of investment analysis and strategy building. In general, the process of investing in cryptocurrencies looks like this:

1. Search and study the most relevant coins or ICOs.
2. Analysis of the Roadmap and Whitepaper of the project.
3. ROI and profitability estimation.
4. Selection of 5-10 projects with good grades.
5. Purchase and organization of secure storage of cryptocurrency.

Lets look at each stage in more detail.

The search and study stage is the initial acquaintance with the project, the companys website and basic information about it. In this case, all low-quality products, dubious and fraudulent sites are cut off. You can use CoinMarketCap sites or ICO calendars to search. The latter allow you to quickly find relevant blockchain startups, find out the timing of the ICO, the status of the project and brief information about it.

Next, you should read the two most important documents of a startup or cryptocurrency project, Whitepaper and Roadmap. The first is a small file outlining the basic principles, goals and technical aspects of the digital currency, the second is a map of achieving goals, a project development plan for the coming years (usually 5-10 years). Here it is important to analyze how the creators are following their own plan. These documents are written in English and, more often than not, are not translated, so you will have to translate the content yourself.

ROI and investment attractiveness can be assessed on the CoinMarketCap website, where the profitability of a cryptocurrency or token is indicated for the entire time that it is traded on the market. In addition, it is important to assess the news background and find out what the media writes about the selected projects.

Next, you need to choose the most promising coins or startups. If you decide to invest in classic cryptocurrencies, your portfolio must include the following items:

• bitcoin;
• Ethereum;
• Ripple;
• EOS;
• Dash or Zcash.

Moreover, investments should be divided in proportion to the position of the coin in the cryptocurrency rating by capitalization level. So, most of the investments should go to Bitcoin, about 30% to Ethereum, and so on. If you decide to invest in new projects or blockchain startups, divide investments in proportion to the popularity of the projects.

What is more suitable for a beginner?

If we try to determine what is more profitable and better, mining or investment, then for a beginner it will definitely be an investment in coins. It is much easier and does not require a lot of investment. Investments allow you to get better acquainted with the world of cryptocurrencies and study the basic principles of blockchain operation. To better understand the cryptocurrency market and pricing, it is recommended that you try your hand at trading on an exchange.

But if you consider yourself a professional and are ready to invest a large amount, mining will bring more stable income. Creating a large farm will allow you to get much more profit and pay off in 8-12 months. In either case, it is important to invest only your own free money so as not to involve yourself in additional risks.