What are the differences between buying and mining cryptocurrency?

Bitcoin is the world’s (and our) favourite crypto-currency, and a rapidly growing method of digital payments used worldwide. Transactions made through bitcoins are verified by the network nodes and are recorded in a public distributed ledger called ‘Blockchain’. But how can you get your hands on some bitcoins? And what does blockchain have to do with this?

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Bitcoin Mining

Bitcoins are ‘mined’ into existence. Mining is what the world calls the process of bringing them into circulation. Bitcoin mining involves both verifying transactions on the Blockchain and releasing new bitcoins (as the reward for the verification).

The process of mining involves an accumulation of recent transactions into blocks and trying to solve a cipher puzzle. The first participant to solve the puzzle gets to place the next block on the blockchain and claim his rewards. The mining reward which includes both transaction fees (paid to the miner through Bitcoins) and the newly released Bitcoin encourages competition in mining.

Since bitcoin mining is decentralized, anyone with a proper connection to the internet along with powerful enough hardware can participate in mining.

Block rewards

The number of new Bitcoins that are released with each mined block is known as the ‘Block reward’. The block reward is halved every 2,10,000 blocks or approximately every four years. This way, the diminishing block reward results in a total number of bitcoins that is always less than 21 million. According to current Bitcoin protocol, 21 million is the cap and no more can be mined after that number has been reached. This cap of Bitcoin is expected to reach in about 100 years.

Transaction Fees

A few bitcoins are included in many transactions, as a reward for the miner who mines the block. These are called the transaction fees. These transaction fees are voluntary by the person who sends a transaction. Whether or not a transaction is to be included in a block, is also a voluntary decision taken by the miner. Thus, users who send transactions can also use transaction fees to incentivise miners to verify their transactions in priority.

Mining Difficulty

The difficulty level of mining depends on the level of efforts being put into mining across the network. Following the protocol which has been laid out in the software, the Bitcoin network repeatedly adjusts the difficulty of the mining after every 2016 blocks or almost every two weeks. This is done with the aim of keeping the rate of block discovery constant. The higher the difficulty level, it becomes less profitable to mine for the miners. Hence, if more are people mining, it is lesser profitable to mine for each of the participants.

Bitcoin mining ASIC — 2012

Over the past half decade, mining has become extremely challenging — it is now futile to mine bitcoins using your computer or even your graphics card. Miners now need ASICs (Application Specific Integrated Circuits) — dedicated machines designed to mine bitcoins.

Buying Bitcoins

Bitcoins can be bought either from exchanges directly from market places through other people. Like any other commodity, you can purchase bitcoins from anyone holding some themselves.

You can get started with buying bitcoins in a variety of ways, ranging from credit and debit cards, wire transfers, physical, hard cash money and even with other crypto-currencies. This is entirely dependent on whom the Bitcoins are bought from and where they or the buyer lives. In fact, some countries even have bitcoin ATMs now.

A bitcoin ATM

Exchanges and Online wallets

There are a variety of exchanges and wallets that are competing in the Bitcoin business. Some include full blown exchanges for institutional traders and other can include simple wallets with limited buying and selling capacities.

Advantages of buying bitcoins over mining

  • Mining can get really expensive. Costs include buying the miner (a dedicated machine) itself, accounting for its storage, security, electricity costs and even internet costs, its maintenance and the long duration of time and efforts. Therefore, with the amount of initial investment, there are no extra profits.
  • The value of bitcoins can fluctuate while mining. Bitcoins can deflate in value and remain unstable in cases of technical glitches with the system or bitcoin exchange markets.
  • It’s instant — even the best bitcoin miners can take hours or days to mine their bitcoins. Buying on the other hand — is instant since you’re picking up pre-existing bitcoins.
  • The transaction fee is negligible compared to the costs for hardware, electricity etc. that you have to bear when mining your own coins.

Advantages of mining over buying bitcoins

  • Bitcoin mining allows their users keep a track of their transactions. The bitcoins are untainted.
  • There is no extra fee that is charged for acquiring the coin apart from the investment in hardware (this itself may be substantial though).

Conclusion

There are two sides for bitcoin; both buying and mining have their own pros and cons. Mining, however, is unsuitable for the vast majority of bitcoin users today.

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