Buying Bitcoin better than mining BTC in most cases.
Although it may seem like mining Bitcoin is a highly profitable venture, research shows otherwise.
After discovering Bitcoin, many users consider whether to mine or buy Bitcoin directly. However, they often give up due to the cost and complexity of running ASIC miners, regulatory uncertainty, and the lack of technical expertise.
If one overcomes these challenges, they could enjoy advantages such as full autonomy over their operations and diversification of their crypto investment via physical hardware instead of directly purchasing Bitcoin. However, the entire venture can be risky and labor intensive.
Should you mine Bitcoin or not?
An analysis by Bitcoin mining data firm, Hashrate Index, suggests that “buying bitcoin is preferable to mining it in most circumstances.”
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Jaran Mellurad, a Bitcoin mining analyst at Hashrate Index, calculated the projected earnings of miners in the next five years under various bullish and bearish scenarios. Mellurad found that miners will likely incur a loss even in optimistic Bitcoin price projections.
Mining is a dynamic business where miners usually get outdated within five years due to the introduction of more efficient machines in the market.
For instance, in the 2016-2017 bull market, the Bitmain S9 model was the most efficient miner. However, as more models entered the market, the S9s phased out completely by the end of 2022, according to a recent finding by Coin Metrics analyst Karim Helmy.
In 2023, two Bitmain models in the S19j Pro and S19 XP class dominate the mining sector. Mellurad calculated the returns assuming that the current batch of miners will be scrapped five years from now around the 2028 Bitcoin halving.
By using a constant cost of electricity at $0.07 per KWh and varying the price of Bitcoin and the network’s hashrate to estimate the profit margins of the machines.
In his report, Mellurad wrote, “Hashrate tends to follow the hashprice, albeit with a lag during rapid bitcoin price increases.”
Note that electricity costs vary worldwide and miners can also establish exclusive deals with energy generation companies locking their costs for months, which may also entail a discount. Riot Platforms, a public Bitcoin miner, paid around $0.03 per kWh in Texas while other industries paid around $0.07.
Mellurad also said that, “mining is a no-brainer if you have access to electricity prices below $0.04 per kWh.”
Five-year projections for Bitcoin miner returns
Bitcoin miners are profitable only if they can recoup 100% of their capital spent buying the machines, excluding operational costs. Any additional BTC that hardware brings to its owner is an additional gain.
Hashrate Index’s analysts found that miners will return north of 1 BTC only in the most bullish scenarios, where Bitcoin price goes on to $500,000 per token by 2028, while the network’s hashrate grows 10% slower than its price.
Even in situations where Bitcoin reaches $250,000 by 2028 with a modest increase in its hashrate, the miners would only recoup 83% of the initial cost at best.
Related: $160K at next halving? Model counts down to new Bitcoin all-time high
While Hashrate Index 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 direct BTC purchase. River Financial’s analysts found that in the last five years, owning miners was preferred 53.6% of the time.
The basis of River Financial analysis is similar to that of Hashrate Index’s report mentioned above—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 thing to keep in mind about this analysis is that even when Bitcoin’s price is rising faster than the hashrate, miners may still make a profit if the actual price is low.
Bitcoin miners have faced particularly challenging times during bearish periods. For example, at the end of 2022, Bitcoin miners experienced the lowest revenue levels in two years, and there was a significant wave of miner capitulations during that time.
Both reports seem to suggest that it only makes sense to own Bitcoin miners right before parabolic bullish periods, and that direct Bitcoin purchases are more profitable at all other times.