What are the main advantages and disadvantages of mining, trading or holding cryptocurrencies?
Mining: pros and cons
Surely the main disadvantage of mining is that you have to invest a lot without having the slightest guarantee of profit.
This is only true for cryptocurrencies based on Proof-of-Work (PoW), such as Bitcoin or Ethereum, whereas those based on Proof-of-Stake do not require mining.
The mining process using PoW as a consensus algorithm is effectively a competition in which those who spend the most money, both in terms of equipment and electricity, collect the most.
The miner who wants to make a lot of money has to invest a lot, but since it is a competition where one is up against all the other miners, the value of what one earns is not necessarily greater than the capital invested in equipment and spent on energy.
The advantage is that as long as the electricity costs are kept low, it is possible to get bitcoin or other cryptocurrencies for much less money than buying them on the market. However, this advantage only applies when prices on the market are high; when they fall, it can also turn into a disadvantage.
Some consider the fact that mining contributes to the functioning of the network to be a kind of “advantage”.
Holding: advantages and disadvantages
The simplest alternative to mining is holding, i.e. buying cryptocurrencies on the market and storing them on your wallet indefinitely.
The main advantage of holding cryptocurrencies is their simplicity: you simply place a purchase order on an exchange, cash it in and then simply wait for a good time to sell it again at a higher price.
Another advantage, often unfairly underestimated, is the fact that you have no worries other than the risk of the value falling as long as you safely store the tokens you buy.
The biggest disadvantage is the risk of losing if the value falls. To be fair, this is a common risk for all those who own cryptocurrencies, but at least in theory it can cause particularly serious damage in the long run if the price falls a lot, especially for those who decide to hold indefinitely.
Another disadvantage, which is often underestimated, is that holding is probably the method that generates the least amount of income, but with the least amount of risk. Many novice investors prefer to limit themselves to holding because it is simple and has lower risks, rather than exposing themselves to higher risks in an attempt to earn higher returns.
Trading: the riskiest method
Trading is probably the most complex and risky system of all.
The trader’s objective is to buy at a good price in the hope of selling again as soon as possible at a higher price.
The main advantage is that, if done well, it is probably the investment strategy that allows for the highest returns, mainly due to the high volatility of cryptocurrency prices which allows for speculation with numerous quick trades over time.
The problem, however, is that while trading can theoretically allow for higher returns, it inevitably forces you to take potentially even greater risks than mining, if you use significant capital or borrowed money.
Thus, the main disadvantage is the consistently high risk.
Unfortunately, most traders usually turn out to be losers, because it is so difficult to trade successfully that in the vast majority of cases they simply do not succeed.
The high risk of trading, on the one hand, theoretically leads to higher profits, but on the other hand, it often leads to higher losses. Generally speaking, only experienced professionals, or those who know the financial markets very well, can trade successfully.
Mining vs trading vs holding, who wins and who loses
Holding is easy and involves less risk, but generally produces lower returns.
Mining is much harder to do, requires large investments, and is riskier, but in theory, can generate somewhat higher returns.
Trading is very difficult to do successfully, so much so that most amateur traders incur losses, but given the higher risks, it theoretically offers the possibility of much higher returns.