Make the decision to mine or buy Bitcoin

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While mining is certainly one of the most exciting ways to get bitcoin, the real profit and benefit of doing so should be taken into account.

For mining insight, others such as @Diverter and @Econoalchemist have posted detailed reports on their experiences and lessons, helping others through the experience and avoiding pitfalls in the mining space. I would like to complete this collection and address the economics, in particular the issue of mining versus outright bitcoin purchases.

There are many benefits to mining bitcoin, such as acquiring non-KYC bitcoin, increased privacy, and contributing to the bitcoin ecosystem. Apart from these advantages is a more objective advantage: the amount of bitcoin that can be obtained with fiat. By figuring out how much bitcoin one can acquire, this erases some of the uncertainty in the decision to be made and reveals an interesting side benefit: by focusing on the amount of bitcoin, one can ignore exchange rates for go back to fiat.

Thinking in terms of bitcoin takes away the fiat noise, and you can focus on the strong money signal that bitcoin is providing, identifying the path that delivers more bitcoin. I’m not suggesting that other benefits should be ignored, but figuring out which aspect offers the most bitcoin improves your overall analysis and decision making. When you look at the economic performance in terms of bitcoin – the purest form of currency on the planet – we are shedding the baggage associated with traditional finance and rent-seekers pushing the agenda. By first understanding how many bitcoin each alternative will provide you with, you can decide for yourself whether the subjective benefits are worth the difference in the amount of bitcoin.

Miners’ market prices are determined by buyers with low operating costs. Buyers with low operating costs may spend more on a miner for a given yield and outbid configurations with higher operating costs, resulting in a higher market price. Whether the market price is the “right” price for your own situation depends on how cheaply you can install and run a miner, and how much future global hashrate growth you are comfortable with, involved by the cost of the miner.

Putting these concepts into practice, some ground rules that might help anyone facing the same questions.

Bitcoin Miner Annuity

A simple formula for calculating a miner’s break-even price versus actual cost is to measure the net bitcoin received over a short interval divided by the estimated hash rate growth over the same interval. The result is the estimated amount of bitcoin received by mining for the foreseeable future. This formula is comparable to valuing a declining bitcoin annuity. If the result of the calculation is equal to or greater than the miner’s cost in bitcoin, it indicates that mining bitcoin will bring the owner of the miner more bitcoin over time compared to buying bitcoin today. There are exceptions to this formula regarding the time to halving and the growth rate of the global hashrate, the estimates used, how to incorporate the reduction in bitcoin revenue after the next halving, etc. a number of good resources available if you want a more detailed analysis.

Inputs matter

Of the many entries for determining miner profitability, pay attention to the three entries that have the most impact on the analysis: your estimate of overall hashrate growth, your miner’s initial cost, and electricity costs. . Of course, there are many other variables that impact the net bitcoin generated by a miner; you have to analyze this for your own situation. When it comes to these three aforementioned inputs, pay close attention to the cost of the miner and even more to the estimated growth of the hash rate. The market price of a miner implies an overall growth rate of the hash rate for a given set of costs: low electricity costs are important, but one can potentially generate more net bitcoin than the cost of the miner with high electricity costs as long as the cost of the miner was low enough. However, it is possible not to recoup the initial costs when one has underestimated the growth of the global hash rate and overpaid for the miner.

No discounts

Bitcoin’s risk-free rate is zero. It is heresy for some financial wizards, but it is so. Bitcoin’s issuance code could effectively be viewed as an inflation rate; it can be incorporated into the analysis if we feel it better represents the ‘time value’ of bitcoin when looking at actual rates in different currencies, but remember, we are measuring our performance in terms of bitcoin where the delivery of future bitcoin is governed by the mathematics of bitcoin, allowing us to simplify our analysis with a discount rate of zero. Apart from the discount rate, one has to take into account the expected increase in the global hash rate, or, in other words, the rate of contraction of a miner’s income during each period.

Putting these concepts together, here is the simplified formula for the miner’s break-even point:

The impact of the next halving on the annuity can be incorporated by subtracting the lost bitcoin income:

Additional reductions could be added over and over for subsequent halving, but for this simple analysis, that could be overkill. It is important to note that the net BTC per period, after the net halving, will be at the projected overall hash rate, and given the recent history of hash rate growth and time until the next one. halving, the value in (and beyond) the next halving cycle will have little impact on your analysis at the time of writing this article, but be sure to check for yourself and your own situation. .

The circle has come full circle, bitcoin as a non-sovereign currency creates a zero-rate, risk-free currency allowing a simple comparison for the decision to mine or buy. In a hypothetical world, the value provided by a bitcoin miner would be the price at which the buyer deciding between mining and buying would be indifferent to the choice made, but there are many factors in the value of mining. Mining inputs and the many benefits of mining vary across the world, and given a relatively free market, a miner’s price is unlikely to come close to an individual’s hypothetical value. All is not lost for the potential miner, as it involves a diverse market where low cost inputs exist and where value is placed on various aspects of bitcoin, tangibly demonstrating in a way other than mining. contributes value beyond the bitcoin generated.

This is a guest message from DP. The opinions expressed are entirely their own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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