Buying Bitcoin is preferable to mining BTC in most cases

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Although Bitcoin mining might intuitively appear to be a very profitable business, research suggests otherwise.

After discovering Bitcoin, most users go down the rabbit hole and wonder if it is better to mine or buy Bitcoin directly. They usually give up due to the cost and rigor of mining ASIC miners, regulatory uncertainty, and lack of technical expertise.

In theory, if one overcomes the challenges above, they could enjoy benefits such as full autonomy over their operations and diversification of their crypto investment through physical hardware instead of buying Bitcoin directly, but the whole undertaking can be risky and laborious.

To mine or not to mine BTC?

Analysis by Bitcoin (BTC) mining data firm, Hashrate Index, has suggested that buying bitcoin is preferable to mining it in most circumstances.

Jaran Mellurad, Bitcoin mining analyst at Hashrate Index, calculated the projected earnings of miners over the next five years under various bullish and bearish scenarios. Mellurad found that miners are likely to suffer a loss even in optimistic Bitcoin price projections.

Mining is a dynamic business where miners usually become obsolete within five years due to the introduction of more efficient machines in the market.

For example, in the 2016-2017 bull market, Bitmain S9 models were the most efficient miners. However, as more and more models have entered the market, S9s will be completely gone by the end of 2022, according to a recent finding from Coin Metrics analyst Karim Helmy.

Two Bitmain models of the S19j Pro and S19 XP classes dominate the mining sector in 2023. Mellurad calculated the returns assuming that the current batch of miners will be wiped out in five years around the Bitcoin halving in 2028.

Using a constant cost of electricity at $0.07 per KWh and varying Bitcoin price and network hashrate to estimate machine profit margins.

In his report, Mellurad wrote that Hashrate tends to track the price of hash, albeit with a lag during rapid bitcoin price increases.

Notably, the cost of electricity varies around the world and miners can also make exclusive deals with power companies locking in their costs for months, which can also result in a discount. Figures from a New York Times survey found Riot Platforms, a public bitcoin miner, paid around $0.03 per kWh in Texas, while other industries paid around $0.07.

Mellurad also said 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 only profitable if they can recover 100% of their capital spent to buy the machines, excluding operational costs. Any additional BTC the hardware brings to its owner is an additional gain.

For example, if a Bitcoin-denominated investment of 1 BTC in mining rigs returns 0.9 BTC after five years, buying BTC is better than mining.

Hashrate Index analysts have found that miners will only return north of 1 BTC in the most bullish scenarios, where the Bitcoin price rises to $500,000 per token by 2028, while the networks hashrate increases 10 % slower than its price.

Even in situations where Bitcoin reaches $250,000 by 2028 with a modest increase in its hashrate, miners would only recover 83% of the initial cost at best.

Return on investment for BTC-denominated Bitcoin miners over the next five years. Source: Hashrate Index

Related: $160,000 at the next halving? Model counts down to Bitcoin’s new all-time high

While the Hashrate Index analysis was based on future projections, River Financial, a financial services firm specializing in Bitcoin mining research, looked at historical data to find out if mining was a better option than mining. direct purchase of BTC. Analysts at River Financials found that over the past five years, owning miners was preferred 53.6% of the time.

The basis of River Financial’s analysis is similar to that of the Hashrate Index report mentioned above. Miners make a profit if the Bitcoin price increases faster than the networks hash rate over time or if the price decreases at a slower rate than the networks hash rate.

Times when Bitcoin mining was preferred (in gray) to direct BTC purchases (in white). Source: River Financial

However, one caveat of this analysis is that even during times when the Bitcoin price is rising faster than the hashrate, miners can still make a profit due to the low real price.

Bearish periods have been particularly difficult for Bitcoin miners. For example, the period towards the end of 2022 is marked as preferable while Bitcoin miners recorded the lowest revenue levels in two years with a major wave of miner capitulations during this period.

Both reports seem to agree that owning Bitcoin miners only makes sense right before parabolic bulls, with direct Bitcoin purchases being more profitable at all other times.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general informational purposes and is not intended to be and should not be considered legal or investment advice. The views, thoughts and opinions expressed herein are the sole authors and do not necessarily reflect or represent the views and opinions of Cointelegraph.

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