In a new market it is always a good idea to diversify across all areas, spreading any risk of capital investment which could play a factor in the future. In the emerging cryptocurrency industry two methods of supporting the industry have manifested themselves in the forms of investing and mining. Both of these methods have their own benefits and risks associated with them which should be considered before allocating capital to these processes.
If 2017 taught investors anything, it’s there is a significant amount of potential for growth in the cryptocurrency industry. This potential growth translates into profits for investors who can take advantage of this still relatively unknown market. With cryptocurrency prices hovering near their lowest prices in over a year, it could be a great time to invest in a market which is primed to take-off in the near future. The prices of Bitcoin, Ethereum, and other major cryptocurrencies have significantly sunk off their all time high, while new cryptocurrencies with potential upside continue to flood the market.
Luckily, it does not take much more than a credit card or bank account to get started investing in cryptocurrency. Onboarding to cryptocurrency from fiat is easier than ever, and requires minimal investment, meaning, there are no major impediments to even the smallest investors trying their luck in the cryptocurrency industry.
Investing in cryptocurrency in its currently under regulated environment provides many security concerns. Potential investors must utilize the services of cryptocurrency exchanges, which have proven to be unsecure time and time again. There is no way to get from fiat currency to cryptocurrency without the use of an exchange or other third-party service. Even decentralized exchanges, which claim to mitigate third-party risk, don’t eliminate these problems entirely.
Additionally, these exchanges come with high fees for depositing and withdrawing cryptocurrencies which can drastically cut into profits for investors. While an individual could invest as little as $50 into a cryptocurrency, separate fees for depositing fiat, trading to cryptocurrency, trading back to fiat, and ultimately withdrawing fiat from an exchange completely eats away at any potential profit.
Investments directly in initial coin offerings (ICOs) have proven to be risky as well. Many ICO projects over the past several years have proven to be fraudulent, scamming investors out of money time and time again. Most other ICOs which do not prove to be fraudulent never amount to more than a whitepaper and a small team of developers trying their luck in a complex field full of experts. ICOs might seem like a pathway to huge returns, but more often end up a risky bet with little to nothing to show for it.
Miners serve as the backbone of blockchain ecosystems by verifying transactions correctly and broadcasting them to the remaining network nodes. In this way, a miner plays a key role in growing a blockchain network and serving as a good actor to ensure valid transactions on a blockchain ledger.
Additionally, mining cryptocurrency comes with its own financial benefit as well. The reward for successfully mining a block of transactions comes in the form of newly minted cryptocurrency, and/or network transaction fees, depending on the blockchain being mined. These rewards can be extremely high, for instance, the current reward for successfully mining one block on the Bitcoin blockchain is 12.5 BTC (equivalent to $87,500 at a price of $7,000 per 1 BTC).
Hosted mining services can provide an easy, quick way to get started in mining cryptocurrency. By outsourcing the installation, maintenance, and power generation of mining hardware, miners can ensure high returns on their mining investment with little to no work required.
In the case of bear markets, where token prices depreciate over an extended period of time, mining profits will be drastically reduced. This will cause miners to lower their profit expectations when translated to fiat currency terms. If coin token prices never recover, miners are left spending capital on electricity and other mining costs to obtain assets with little to no value on the market. This takes some faith in miners that underlying cryptocurrencies will hold value in the future.
Diversifying Across the Board
Mining and investing both represent two key areas in which anyone can support the growth of the cryptocurrency industry. While investing offers the quickest and most simple way to set aside capital for cryptocurrencies, mining gives users the opportunity to play an active role in the industry and get rewarded for doing so. Both of these methods should be explored for cryptocurrency enthusiasts who seek to be a part of this new market for decades to come.