Many Bitcoin users consider whether it is better to mine or buy Bitcoin directly. However, the cost and rigor of running ASIC miners, regulatory uncertainty, and the lack of technical expertise often deter people from mining. While mining can provide full autonomy over operations and diversification of crypto investments via physical hardware, it is a risky and labor-intensive venture.

According to an analysis by Bitcoin mining data firm Hashrate Index, “buying bitcoin is preferable to mining it in most circumstances.” The firm’s Bitcoin mining analyst, Jaran Mellerud, calculated the projected earnings of miners in the next five years under various bullish and bearish scenarios. Mellerud found that miners will likely incur a loss even in optimistic Bitcoin price projections.

The Profitability of Bitcoin Mining

Bitcoin mining is a dynamic business where hardware usually becomes outdated within five years due to the introduction of more efficient machines in the market. Mellerud calculated the returns assuming that the current batch of miners would be scrapped five years from now, around the 2028 Bitcoin halving.

The analysis used a constant cost of electricity of $0.07 per kWh and varied the price of Bitcoin and the network’s hash rate to estimate the profit margins of the machines. Hashrate tends to follow the hash price, albeit with a lag during rapid Bitcoin price increases.

Bitcoin miners are profitable only if they can recoup 100% of their capital spent in buying the machines, excluding operational costs. Any additional BTC that hardware brings to its owner is an additional gain. For instance, if a Bitcoin-denominated investment of 1 BTC in mining rigs returns 0.9 BTC at the end of five years, buying BTC is preferable to mining.

Hashrate Index’s analysts found that miners will return north of 1 BTC only in the most bullish scenarios, where the Bitcoin price goes on to $500,000 per token by 2028 while the network’s hash rate grows 10% slower than its price. Even in situations where Bitcoin reaches $250,000 by 2028 with a modest increase in its hash rate, the miners would only recoup 83% of the initial cost at best.

While Hashrate Index’s analysis relied on future projections, River Financial, a financial services firm specializing in Bitcoin mining research, looked at historical data to find out whether mining was a better option than directly purchasing BTC. River Financial’s analysts found that in the last five years, owning miners was preferred 53.6% of the time.

The basis of the River Financial analysis is similar to that of Hashrate Index’s report — miners make a profit if Bitcoin’s price increases faster than the network’s hash rate over time or if the price decreases at a slower rate than the network’s hash rate. However, one caveat of this analysis is that even during times when Bitcoin’s price is rising faster than the hash rate, the miners may still incur a loss due to the actual price being low.

Bearish periods have been particularly tough on Bitcoin miners. For instance, the period toward the end of 2022 is marked as preferable, while Bitcoin miners recorded the lowest revenue levels in two years with a significant wave of miner capitulations during that time.

Both reports appear to agree that mining Bitcoin only makes the most sense right before parabolic bullish periods, with direct Bitcoin purchases being more profitable at all other times.

Analysis

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