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Buying, Selling, and Mining Cryptocurrencies
The cryptocurrency boom began in 2016, but the industry had been around for years before that. Before the price of Bitcoin was being reported on the news and your favorite online store started accepting cryptocurrencies as payment, people were buying, selling, and mining cryptocurrency.
Now EVERYONE seems to want in on the action. Many of them don’t know where to start, though, or even if it’s right for them to get involved at all. The world of cryptocurrencies can be a confusing one, especially for beginners.
That’s why we’ve put together our comprehensive guide to cryptocurrencies. Our goal is to teach you everything you need to know about the digital currency phenomenon. In this particular article, we help you to understand the processes involved in buying, selling, and mining cryptocurrency.
Topics we cover include what the processes entail, how much it costs to get involved, and how much money you can expect to make.
Buying Cryptocurrencies – Getting Started
The first step for most cryptocurrency beginners is to buy one of the many available cryptocurrencies. This can be done in a few different ways. Cryptocurrencies can be purchased at online exchanges such as Coinbase or Gemini, via Bitcoin ATMs, or through person-to-person transactions.
But in order to begin buying cryptocurrency, you need to first open a wallet.
What is a cryptocurrency wallet?
A cryptocurrency wallet is essentially where all of your currency will be kept after you purchase it. Wallets are basically an equivalent to your bank account, but there is no bank or financial institution to look after the money you put into your wallet.
This can be problematic during a security breach situation, where the funds in your wallet are uninsured. For this reason, it’s important to choose the right option to safeguard your funds.
Most of the exchanges where you can buy or sell cryptocurrencies have “built-in” wallets you can use. There are some alternatives, too, though. You’re not necessarily obligated to use the wallet provided by the exchange, and in fact, some exchanges don’t even offer the option.
The main alternatives are as follows:
Desktop or Mobile Wallets
Third-Party Online Wallets
Here’s a brief overview of each of these types of wallet.
Desktop or Mobile Wallets
Desktop or mobile wallets are the most common type of wallet. They run through an app which stores your private keys on your device. It is highly recommended that if you use a mobile wallet, you back up your information regularly onto a different device.
Mobile wallets are the closest thing to a literal wallet that you would keep in the back pocket of your jeans. Just as you wouldn’t carry around your life savings in your physical wallet, you should not carry a large amount of your cryptocurrency in your mobile wallet.
Spreading your funds out into a few different wallets is a good way to ensure that your cryptocurrency is kept safe.
Third-Party Online Wallets
These are hosted on a web server and are secured by a password. They are the most user friendly of all of the wallet options, but they also require a dependency on a third party, which means that if the third party falls victim to a hacking or theft, the security of your wallet is out of your control.
These are a more expensive option, but they are also a lot safer than most of the other wallet options. A hardware wallet like KeepKey uses a USB port to your computer and a password authentication that keeps you in sole control of your wallet.
Paper wallets are a free option for those that still want to maintain a private wallet. The biggest drawback is that they require a lot of in-depth knowledge for setup and maintenance, so they are not advised for beginners.
The private keys and information used to get to your wallet are not stored or transmitted to anyone, and some platforms even offer online downloadable versions if you are still wary of the online version.
It’s important to back up your wallet immediately after you create it, because if you lose access to your wallet for any reason, you may not ever be able to get it back.
There are various ways to back up a cryptocurrency wallet. A common method for desktop, mobile, and online wallets is to use a 12- to 24-word recovery phrase. This will typically be provided you to automatically when you first create your wallet.
Here is an example of a backup phrase:
Please note that most wallets will display the recovery phrase only once, so you’ll need to record it as soon as you have it. The best approach is to write it down and then store in a safe place. Storing it on your computer still makes it susceptible to hacking or infiltration.
When it comes to sending and receiving currencies using your wallet, the process is usually quite straightforward. Your wallet has its own unique address, which you will use in the event of sending or receiving cryptocurrencies. It’s similar to your bank account number; when coupled with a routing number, it can be used by other people to deposit money into your account.
Wallets will often use QR codes to make the transfer a little simpler.
When you transfer cryptocurrency, you need to wait for it to be validated. Depending on the congestion of the network, it can take anywhere from one second to several minutes. Fees are often charged to your account for every transaction you make, and they also differ depending on your provider.
Now let’s take a look at how to actually go about buying and selling cryptocurrencies. Remember, you MUST have a wallet before you can start doing this.
Using Online Cryptocurrency Exchanges
Online exchanges are one of the most common ways to buy and sell cryptocurrency. Most allow you to buy using cash, credit cards, your checking account, or other cryptocurrencies that you have in your wallet. There are lots of different platforms to choose from, but we have highlighted three that have reputations for security and reliability.
Here are some details on each one of these.
Widely known as the best and most popular exchange, Coinbase hosts over 35 million wallets and 10 million users. It is based in San Francisco, California, USA.
In addition to Coinbase being the best and largest exchange platform, it is also one of the few exchanges that insures all of the funds that are stored on the platform. So, if there were ever a security breach, you would know that their insurance policy would cover any of the losses you may have sustained.
Gemini is a US only platform based in New York that allows for both institutional use and individual use. The FDIC insures Gemini users up to $250,000 (US dollars only). It only trades in Bitcoin, Ethereum, and US dollars.
It stores information offline and features a multi-factor authentication.
Kraken is another highly-regarded exchange that has a reputation for security and reliability. It’s based in San Francisco, California, US, but also operates in Europe.
It offers low fees, high liquidity, and fast funding.
How to Sell Cryptocurrency
The methods for buying cryptocurrency can also be used to sell it. The same exchanges can be used, and you can sell via peer-to-peer transactions.
But when you are selling, there is an extra factor that needs to be considered. The price and value of different cryptocurrencies fluctuates every day. They all have very volatile prices, so if you are planning to sell a certain type of currency, you should pay attention to what has happened with the currency in the last 24 to 48 hours.
If you see it’s on an incline, be aware that you very well may sell your cryptocurrency before a price spike, meaning you will miss out on some extra profit.
On the other side of the coin, if you wait too long and the price suddenly drops, you may end up losing a lot of the money that you put into it and may not even break even.
Cryptocurrencies are often used as an investment tool and treated the same as an investment in the stock market. You can find more information on that in the following article.
If you are a new cryptocurrency user, it is unlikely that you’ll be jumping in headfirst and starting to mine right away. Especially if you have no experience with cryptography. It never hurts to know how things are done, though.
Let’s start with what mining means in the context of cryptocurrency.
Cryptocurrency mining has to do with the transaction verification process and how they are added to the blockchain (public ledger). It’s also how more of each currency makes its way into the world.
Try to think of miners and the mining process as being kind of the cryptocurrency equivalent of the US Mint. It makes, controls, and secures the supply of the currency across the network.
How It Works
The first duty of a miner is verifying transactions. Miners collect all the transactions made within the network and put them into a block. After that, all of the transactions in that block need to be deemed as valid. If Jack tries to send Jill five Bitcoin, but he only has four in his wallet, the transaction would be rejected from the block.
After every transaction in the block has been verified, the miner has to compute something known as a cryptographic hash. A cryptographic hash is “a function that converts a long data string of an arbitrary length of values to a fixed, shorter length.” In other words, it compresses the string of data. This process is vital in protecting the network from fraudulent blocks.
The entire mining process requires certain hardware that is capable of putting out a lot of computing power. This can make it very expensive to do a “solo” mine, but there are some viable alternatives.
A popular alternative to solo mining is called a ‘mining pool.’ This is basically a group of cryptocurrency miners who put their knowledge and hardware together to mine currency.
The appeal of this type is the ability to share the cost of mining, both through the price of the computers and technology needed and the cost of using extra energy.
Another appeal to mining pools is that they can be used to mine more than one type of currency. You can switch the types of currency you mine based on which one is the most profitable at any given time. This is known as multi-pool mining.
Mining Pool Pros and Cons
Mining pools are a great option for those who would like to mine cryptocurrency, but do not have the means to do it solo. There are some disadvantages, though. Here’s a list of the main pros and cons.
Lower costs of mining cryptocurrency
Depending on which pool you join, you can generate a higher return
Stable and scheduled payouts
Block rewards are shared among the miners in the pool
Large pools offer small or unfavorable rewards or reward structures
Pool interruptions or malfunctions have been known to occur
After a block is added to the blockchain, the mining pool is rewarded. There are a few different methods or structures for distributing or sharing that reward among all the members of the pool.
The first is called Pay-Per-Share (PPS), and it is one of the most basic structures for reward distribution. A PPS approach takes the payout from the existing balance of the pool and gives an instant payout for each share.
Another frequently-used one is called a Pay Per Last N Shares (PPLNS) method. After a block is found, the last N shares (‘N’ being a given number of shares) are what result in a payout.
The profitability of a currency can be determined in a number of ways.
Exchange rate between currencies
The hash rate (the speed that the currency is processing at)
How difficult it is to mine the cryptocurrency
Leading Mining Pools of 2020
So, who should you link up with to join a mining pool? Here is a short list of a few mining pools that are working hard and accepting new members in 2020.
Slush Pool is the oldest mining pool in existence, “beginning in 2010 as “Bitcoin Pooled Mining Server,” then later changing its name and brand. Because it has been around for so long, it has a reputation for accuracy and stability.
It is the fourth-largest pool and accounts for 11.4% of hash power.
They are very beginner-friendly, even offering a service to create a demo miner in order to practice and make yourself more familiar with how they have things set up within their system. But it isn’t for beginners only! Slush Pool offers a more advanced interface for veteran miners as well.
At 2%, Slush Pool fees are higher than some other popular pools, but they have a pattern of success and stability and offer a worldwide server.
Oldest mining pool in operation
Reputation for accuracy and stability
Fees are 2%, which are higher than many other pools
AntPool is the largest mining pool currently in operation, accounting for around 25% of hash power in the world.
Payments are scheduled to be sent out every day from 8 am – 3 pm Beijing time as long as you have mined at least 0.001 BTC for the day.
You can choose the way you are rewarded (Payment Per Share, Payment Per Last N Shares, etc.), but because it is the largest mining pool in the world, the individual payouts are smaller than those from a smaller pool.
Choose how you are rewarded
Largest mining pool in operation
Individual payouts are smaller
KanoPool has been in operation since 2014, and is one of the smaller pools in existence, currently only representing 0.3% global hash power.
They don’t require you to register — they only ask for your BTC wallet address — but if you’d like to register, you are able to see detailed mining pool stats.
KanoPool operates exclusively on a Payment Per Last N Shares (PPLNS) reward method, where ‘N’ is five times the network difficulty.
The pool fee is 0.9%, and the payouts are generous compared to those of the larger pools, but they may take longer to get to your wallet.
KanoPool isn’t beginner-friendly, offering no tutorials and a very simple layout, but if you do have questions, they are answered quickly by Kano.
Registration not required
Takes longer to receive payout
Cloud mining is often seen as a better alternative for beginners, people who are not as tech-savvy, and those who don’t want to run their own hardware.
It uses a remote data center to mine cryptocurrency, as opposed to using the tangible hardware needed for traditional mining or a mining pool. Unlike mining pools, cloud miners operate on a contract that needs to be purchased after registration.
Depending on your provider, you will have to sign yourself for a contract that lasts anywhere from six months to two years, but the average contract length for most Bitcoin contracts are around a year to 18 months.
You then need to decide the type of contract you want, usually measured in Gigahash (GH). Hash is the rate that hashes are processed, and a gigahash processes one billion hashes per second. In order to maximize your cryptocurrency mining, you need a lot of hash power.
Cloud mining is also a kind of “outsourcing,” where the equipment is housed in-country with a lower energy cost.
In order to supplement the cost of energy, you pay before you begin to mine. Any cryptocurrency that is mined during your contract is what your return or payout amounts to. In addition to the initial payment, you may be charged additional fees throughout the duration of your contract, but this depends on where you are contracted.
Cloud mining is more volatile, and sometimes riskier in nature. There is a risk of cloud-mining scams that will accept your up-front payment and then shut down before you have the chance to make your return.
Leading Cloud Mining Sites of 2020
In order to take the guesswork — and some of the risk — out of cloud mining, here are three sites to get you started, along with their respective pros and cons. A longer list can be found here.
Mining Rig Rentals
Hashflare was founded in 2014 and is based in Estonia. It prides itself on being accessible to everyone, regardless of your experience level in mining cryptocurrency.
Unlimited contract length
Payouts are immediate if you purchase hashpower with Bitcoin
Offers a partner program
Commission fee charged for wire transfers made
Additional fees for Litecoin and Bitcoin
Coins Supported by Hashflare:
Bitcoin, Litecoin, Ethereum, Zcash, Dash
Genesis Mining was established in 2013, and it offers a multi-algorithm model and efficient and reliable mining rigs.
Mining farms are spread across different locations, making them more secure
Offers custom mining plans
Maintenance fee for certain contracts (SHA256)
Contracts for X11 and Ethereum are valid for only 2 years
The website linked above, CoinWarz, states the following:
The cryptocurrency profitability information displayed is based on a statistical calculation using the hash rate values entered and does not account for difficulty and exchange rate fluctuations, stale/reject/orphan rates, a pool’s efficiency, and pool fees. Your individual profitability may vary.
So, while the difficulty of mining and exchange rate fluctuations are not a factor in determining the provided list, they can give you an idea of what you may expect over a period of time.
The CoinWarz site defines their difficulty chart as “a chart of the difficulty daily average values from the last 14 days and indicates the percentage range in which the difficulty has changed in the last 14 days.”
They use different colors to indicate the degree to which the difficulty of mining a cryptocurrency fluctuates.
For instance, Ethereum’s current difficulty level is displayed as light green, meaning that in the last 14 days, the difficulty of mining it has had a below-average fluctuation. So, you should see a pretty steady financial outcome from mining it, though the payout won’t be huge.
The exchange rate is very similar, with the same color codes, and same time frame of 14 days. But there is an added element underneath the chart that shows the current highest exchange rate for the coin (in BTC) and the exchange where it is the highest. In the case of Ethereum, it is HitBTC.
Knowing which cryptocurrencies are the most popular is important, but it is only a piece of the puzzle. The longevity of return is equally important, if not more important, to those who are serious about mining.
Tools for Mining Cryptocurrency
For most, this means software. If you have never stepped foot in a pool before, it’s best not to jump right into the deep end, right? The same basic principle also goes for those who are complete cryptocurrency-mining beginners.
To get you started, here are a few different types of software to consider. These can be downloaded from various sources on the web.
CGMiner has been in operation for six years and is compatible with almost every operating system because it is coded in C. It has a simple interface and supports an array of mining pools and devices.
It was designed to work with hardware devices but can also be used with most graphics processing units (GPUs).
The layout is easy to read and understand, and you can change and customize to your liking or to what is easiest for you.
It should be noted that Windows Defender will block the download of CGMiner, but there are ways to enable the software in your settings.
Easy to customize based on what you find most important or helpful
Works across a number of platforms
Is difficult to install on computers that are Windows-based
BFGMiner is essentially the same as CGMiner but is designed to be used with ASIC mining hardware instead of GPU. It can also be programmed to work with some graphics cards, but they do not work with enough power to turn a profit.
It can also be used with FPGA (Field-Programmable Gate Array) devices.
BFGMiner has a lot of features that can end up saving you money and effort, such as its ability to cut off connection from unreachable pools.
Can be used on Linux and Windows
Can be used with FPGA devices
Not usable with GPUs
MultiMiner is the answer for those who like the idea of BFGMiner but are not as computer- or tech-savvy. It’s also a great choice for newbies, as the software guides you through your first launch of the program and has helpful tooltips to explain terms that you may not yet be familiar with.
It will give you information about the mining devices, like the average hash power, and also can show you your daily projected profit with the mining hardware.
Easy, intuitive interface
Can be used to manage multiple devices
Costs and Profits of Mining
Your profits made from cryptocurrency mining are heavily dependent on a number of things, but we’ll first cover the basic startup costs.
Starting up, regardless of which currency you are mining, is almost guaranteed to be expensive. Remember, this is an investment.
Equipment is the first major expense involved in mining. You’ll need graphic cards, which cost around $700 each, and mining rigs, which can cost anywhere from $3,000 to $10,000, in some cases.
The other major cost is the cost of the energy needed to power your equipment. Mining a single Bitcoin can rack up more than $3,000 in electricity bills in even the cheapest areas.
Smaller currencies like Zcash and Monero may be cheaper to mine, so your return rate will be faster.
This high startup cost is why mining pools gained popularity, but mining pools charge fees, and the payouts can be very small depending on the size of the pool.
Cloud mining can cut down on your costs, but you still have to pay for the contract up front with no guarantee that you will make back what you spent.
Your profit is completely dependent on which cryptocurrency you are mining, the speed and quality of your equipment, and how much you spent initially. So, really, it’s hard to say how much profit you might see from your investment.
For instance, if you are mining Bitcoin, your reward is cut in half every four years.
If you are worried that you may not see a profitable return, but you’d still like to make an investment in cryptocurrency, you may want to try a less involved approach. You have the option of buying a currency that you think will do well in the future and saving it until it reaches a higher price, and then selling it to gain a profit.
That is a risky investment as well, depending on which currency or coin you choose and how volatile it has shown itself to be.
So, is cryptocurrency mining worth it?
The answer to this question differs based on your priorities and reasons for trying out cryptocurrency mining.
If you are a seasoned cryptocurrency buyer and trader, it can give you a deeper knowledge of the entire process. You can better understand your chosen currencies inside and out, but it comes at a price. Your returns may not come as quickly as you had hoped or planned for, and they may not come in large installments.
But if you are trying to get rich through mining cryptocurrencies, you probably want to look elsewhere.
Participating in buying, selling, and mining cryptocurrency can be beneficial, but it isn’t for everyone.
Mining requires a lot of up-front cost with no promise of even breaking even with payouts but can be beneficial for those who would consider themselves serious about cryptocurrency. Mining gives you an inside look into your cryptocurrency of choice, showing you the technology required and effort put into creating the blocks and producing the sellable finished product.
If you are a novice, consider buying a very small amount of cryptocurrency as an investment, and sell it when it has reached a higher price. This way, you are able to get in on the action and get practice in using exchanges and different wallets but don’t have as much invested.
The name of the game is turning a profit, so it’s important to not only do as much as you’re comfortable with but also put an amount in that you are certain you can afford to lose in the worst-case scenario.