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Mining, staking and investing in cryptocurrencies: a beginner’s guide

Over the course of 2021, the cryptocurrency market cap dropped to USD 1.2 trillion, then rose to USD 2.9 trillion, then dropped again. From January 1, 2021, Bitcoin (BTC) price ranged within $29.37K - $69.3K.

cryptocurrency market cap

Certain coins show a profitability of over 100% within a few days. This means that traders could earn more than 100% in several months from volatility of the cryptocurrencies both ways. Active trading is not for everyone, as it involves emotional stress, risks and shortage of time. Meanwhile, mining is an alternative way to earn a profit from cryptocurrencies at minimum risk.

What is mining?

Mining is a technology for creating new blocks in a blockchain and “minting” new coins of a cryptocurrency. From an investor’s standpoint, mining involves the following: a miner buys hardware capable of computing and connects it to the network. The hardware performs calculations and the miner receives a reward.

1. Classic cryptocurrency mining based on the PoW algorithm

Basic mining terminology:
  • ASIC is an application-specific integrated circuit. This basically means that this hardware was designed specifically for mining. A simpler option is mining with graphics cards (GPU).
  • Mining difficulty is a measurement unit that determines the difficulty of computations. The higher the price of the coin, the more people wish to mine it and the higher the total capacity of the network hardware. As the capacity grows, the difficulty of computation increases. Miners with outdated equipment receive a smaller reward and are forced to buy new farms.
  • Hashrate is the total power of the network equipment. A block found as a result of computations brings a fixed reward, which is distributed among the participants of the network. Participants of the network join to form pools. The higher the hashrate of a pool, the faster its participants get the reward.

The goal for a novice miner is to buy hardware that provides the best ratio of its price and hashrate. An ASIC miner with the maximum (at the time, this guide was prepared) hashrate cost from USD 10,000. However, it is not a guarantee that you will get your investment back. A small farm on graphics cards costs USD 1,000-2,000.

How to start mining:
  1. Choose cryptocurrency. You can only mine cryptocurrencies on the basis of the Proof-of-Work consensus mechanism. There are many cryptocurrencies you can mine. The key criterion is the required power and profitability, which it brings.
  2. Choose hardware. The determining factors are hashrate and liquidity. The price difference in different regions of the world can be more than 10%. Liquidity means the possibility to sell the hardware at any time and at the price close to the market level.
  3. Install software. Mining software is individual for each cryptocurrency. You will need a wallet, where you can have the coins credited to and stored. Also, you need a pool to connect to the network. It is chosen by the hashrate, fees and reliability. You can also get a recommendation on mining software in the pool.

Specifications of mining, fan operation to cool the mining hardware are provided in the software.

Pros:
  • No financial risk. A miner only invests in the hardware, which he can sell at any moment at a discount. He can hold cryptocurrency or immediately convert it into fiat money.
  • Universality. The hardware can be reset to mine any coin based on the PoW consensus mechanism.
  • Automation. A miner does not need to monitor the charts. He sets up the software once and then only controls that it operates.

ETF remains one of the most promising coins for mining. The coin has a positive price outlook and a relatively small hashrate. However, once the network switches to the Proof-of-Stake algorithm, investors will have to seek new options.

Cons:
  • Technical risks. A farm may fail at any moment. If you do not monitor the condition of the fans, the hardware will fail. Power outages are also a big issue for miners.
  • Long investment return period. The investment return period of mining is from six months. However, there are risks that the difficulty of mining increases and, accordingly, the investment return period will become longer.

Organizational issues are another thing to consider. A private miner with ambitious goals will have to come up with a place to house his farm. Some newest miners consume 3-3.3 kWh of power and also emit a lot of heat during operation, thereby heating the room – this advantage can be used in winter. On the other hand, appropriate wiring is required.

2. Cryptocurrency cloud mining based on the PoW algorithm

What it means. This is the same classic mining, but of a different format. Traditional hardware mining implies that a miner needs to purchase the hardware. Meanwhile, with cloud mining, a miner leases or rents this hardware or part of hardware.

Clouse mining is a model, where a large investor invests in the hardware, thereby creating a data center. This data is then leased out to private investors in fixed packages with the specification of the hashrate, lease rate and the lease period. Often, a platform that leases the capacities has several data centers in different countries. The location is chosen based on the cheap electricity, and availability of alternative energy sources.

How to start mining?
  1. Choose a platform that provides cloud mining services. Criteria to take into consideration: presence of a real office, operation for more than 5 years, reviews, conditions of subscription plans. Below you can see an example of subscription plans of one of the European platforms.
cloud mining services

You can see the price of the subscription plan, the hashrate and approximate profitability.

  1. Read FAQ. This section contains a lot of information related to the rates and conditions of your platform. Mined cryptocurrency is credited daily to your account balance, but the majority of platforms have the minimum withdrawal amount requirement.
  2. Compare the rates of several platforms. You can lease any power and pay for any number of contracts. Reduce the hashrate to a common denominator first in order to understand which platform has a lower rate.
  3. Open an account on the platform and use the prompts to pay the contract.

Every platform has its own conditions. Take notice of the hashrate and its ratio to the rent, of the service fee and the minimum withdrawal amount.

Pros:
  • A relatively lower entry threshold. You need a minimum of USD 1,000 for hardware mining, USD 500 – for cloud mining, but there are also cheap options from USD 50-100.
  • No technical risks. The data center is responsible for the hardware.
  • No organizational issues. An investor leases hardware and all he has to do after that is withdraw cryptocurrency. He does not need to deal with finding pools, cooling the farm, etc.

Cloud mining is a cheaper option for those who want to learn and understand the mining principles, but are not prepared to invest a lot.

Cons:
  • Mandatory payments. First, an investor must make a full payment for the plan, which often implies a period of one year and more. This way, the data center shifts the risks onto the investor. The center has purchased the hardware already, while the profitability of the investor will depend on the quotes. The majority of platforms also charge the “service fee”, which is deducted daily from the reward.
  • Impossibility of predicting the future profit. An investor rents a hashrate, which is the same until the end of the lease period. Its reward is the mined cryptocurrency, which is credited daily. If the price of the cryptocurrency falls, the profit will decrease.
  • Small choice of cryptocurrencies. On the majority of platforms it is limited to BTC and several other coins – ZCash, BCH and 5-7 altcoins/tokens.
  • Withdrawal limits. It may take weeks for an investor with a minimum plan to achieve the limit. Most frequently, the limits range from 0.001 to 0.05 BTC.
  • Low liquidity. Hardware miners can sell their mining farm at any time, thus at least partially returning his investment. A cloud miner pays the lease for a 12-month period and it is impossible to get the money back, as you cannot terminate your lease contract early.
  • Fraud risks. Cloud mining platforms are not regulated. An investor cannot check whether they really exist. Therefore, some rather unpleasant surprises may happen, when you try to withdraw the mined cryptocurrency.

Every platform has a calculator to help you evaluate the prospects on your investing in cloud mining.

The example of this calculator shows that with the current difficulty of computations (hashrate) and the price of BTC unchanged, none of the proposed contracts pays off. Therefore, consider the following:

  • Cloud mining pays off only if the quotes grow.
  • Subscription plans are designed in such a way that it is difficult to compare them between each other, which is a marketing ploy. It is a way to encourage investors to buy higher hashrates.
  • The calculators do not provide accurate information. Change of the difficulty of computations, service fee, etc. may not be taken into account in the calculators.

Cloud mining carries higher risks than hardware mining.

3. Cryptocurrency staking based on the PoS algorithm

What it means. The coins based on the Proof-of-Stake consensus mechanism are ‘minted’ fully, and therefore the process does not involve hardware mining. The network, however, does require support: maintaining cryptocurrency liquidity is required, validation of transactions is required – participants of the network, who are determined by the availability of coins perform this role. For their participation, they receive a reward.

Staking means blocking investor’s cryptocurrency to support the operation of the network. This is how the mechanism works for an investor:

  • An investor buys cryptocurrency available for staking – the coins based on the PoS or DPoS algorithm. You can buy them at the cryptocurrency exchanges that offer this service, or use wallets, although then a part of the organizational tasks will transfer onto the investor.
  • An investor activates the staking service. The cryptocurrency is blocked for a fixed period of time specified by the investor. In case of an exchange, the coins remain on the exchange’s account. If staking is activated on an installed wallet, the key requirement for the investor is that his computer must be online 24 hours a day. Otherwise, the investor may be penalized.
  • Upon the expiry of the staking period, the cryptocurrency will be unblocked and the investor will earn an interest. Early unblocking is possible, but mostly like it takes several days and the profit will be partially or fully lost.

From an investor’s standpoint, staking is similar to a bank deposit.

How to start staking:
  1. Choose a platform. Interest rates of the exchanges and wallets differ, but the difference is insignificant – up to 1-2%. This makes the fees and reliability of the platform the defining factors. Below, you can see the example of Binance.

There are also independent aggregators where you can see comparative rates for different assets of different platforms.

  1. Choose a cryptocurrency. Staking period is 30-120 days, but each asset has specific conditions, just like the platforms. The annual return rate is from 5% to 100-120%. Since it is not the platform that offers the profit, but the network, there are risks involved. There is no need for a stable network to try and attract investors with high interest rates. Therefore, the higher the rate, the higher the risks.
  2. Register on the chosen platform. Verify your account, make a deposit, buy cryptocurrency and start staking it.

Pay attention to the fees of the network, platform, and conditions of early unblocking. Unblocking often takes 3 days.

Pros:
  • Low entry threshold. It depends on the coin and the conditions of the exchange/platform, but for many coins, USD 10-50, converted into an equivalent of the corresponding cryptocurrency, is enough.
  • No accompanying costs. Unlike mining, it is not necessary to invest in hardware; there is no risk of hardware malfunctioning, no electricity costs. At the start, an investor only risks the deposit amount.
  • Fixed return. An investor knows in advance the interest rate in cryptocurrency that he will get after a specific period of time.

The technical risks that are typical for PoW mining disappear with PoS. Large exchanges are not interested in scamming the clients, and therefore there is no risk of unreliability of the counterparty that exists in cloud mining.

Cons:
  • Low return rate. The profitability of the majority of coins is up to 20%. On some coins, the annual return is possible at 50-60% or more, but nobody can guarantee that these startups will still exist when the staking period expires.
  • Volatility risks. Cryptocurrencies can move 5% or more in a day. There have been multiple examples, when cryptocurrencies plunged 20-50% in a matter of several weeks. Since it is impossible to instantly unblock the staked amount, the potential profitability from staking can be offset by the loss from declining quotes.

Profitability of staking does not correspond to the risks of the price changes. Therefore, it is not recommended to view this investing option as the one and only. This option, however, is suitable for those, who ‘freeze’ the cryptocurrency for a long period of time, expecting it to “soar”. If an investor plans to hold cryptocurrency for several months anyway, why not earn additional profit from it?

Is it worth getting into mining?

This is your decision to make. Mining BTC is now practically not profitable for private miners, but there are alternative coins that require relatively low power consumptions, which makes them attractive. Do not expect quick pay off – there are no coins that would ensure return of investment in hardware faster than in 3-6 months. There is, however, one other thing – mining hardware is getting more expensive and selling it at the same price you bought it in 1-2 months is a possibility. Your net profit is the profit from mining. The question is whether you will be able to sell the hardware.

Mining is no less risky than active trading or long-term investing. Speaking about staking, this option is more suitable for long-term investors who are prepared to freeze money and wait out the deep drawdowns of the entire cryptocurrency market.

Alternative cryptocurrency investing options

Mining and staking are not the only options for earning a profit from cryptocurrencies. The alternatives, however, also have their peculiarities and risks.

Cryptocurrency investing options:
  1. Active trading and investing. There are several options here:
    • Cryptocurrency exchanges. This is the most popular option. Register on top exchanges (Binance, Coinbase, DEX exchanges, etc.), pass verification (not required by DEX exchanges) and enjoy the opportunities the platforms offer. You can buy/sell any cryptocurrencies, earn from additional products, etc. For example, in addition to active trading, Binance offers staking, NFT auctions, a P2P platform, etc. Pros: access to hundreds of cryptocurrencies, instant transactions. Cons: the system of commissions and fees of the exchanges is confusing, you will have to learn the notions of taker/maker, native token, etc.
    • Hot/cold wallets. These are the services working with one specific or several cryptocurrencies. They are not trading platforms and therefore are not designed for active trading. Their purpose is to ensure holding and relatively rare exchange; therefore, they are used for long-term holding. Pros: reliability, as the coins are not held on the accounts of the exchanges. Cons: high fees.
  2. Investing in non-standard cryptocurrency assets. This involves development of NFT tokens and their sale at the auctions, investing in the assets of the virtual metaverses of the GameFi sector, earning money on fast Flash Loans in DeFi sector startups, etc. For beginners, it will seem difficult, but the return rate can be much higher.

Conclusion. Despite that the PoW consensus mechanism is believed to be outdated and is being gradually replaced by other algorithms, there are coins that are mined based on the PoW algorithm. This means that mining will continue to exist. Its profitability will gradually decline, but at the same time it will represent an additional passive income for an investor, which can be combined with other tasks. Is it worth getting into it? Consider the risks and your goals, and make an informed decision.

Good luck with investing!