The data indicates that for most investors, purchasing Bitcoin directly is a more feasible strategy than trying to mine it unless the market is experiencing a significant bull trend.
At first glance, mining Bitcoin might seem like a lucrative endeavor. But studies suggest that the reality is more nuanced.
Upon discovering Bitcoin BTC $25,523, a common question new users grapple with is whether to mine or purchase Bitcoin directly. Many are deterred from mining due to the expense and complexity of operating ASIC miners, not to mention the uncertain regulatory landscape and a lack of technical expertise.
Despite these challenges, if overcome, mining could offer benefits such as complete control over operations and an opportunity to diversify crypto investments through physical hardware rather than direct Bitcoin purchases. However, this route is not without its risks and laborious demands.
A Deep Dive Into Bitcoin Mining
Hashrate Index, a firm specializing in Bitcoin mining data, suggests in its analysis that “under most circumstances, purchasing Bitcoin is a more viable strategy than mining it.”
Jaran Mellerud, a Bitcoin mining analyst at Hashrate Index, projected the potential earnings of miners over the next five years, factoring in various bullish and bearish scenarios. Even under optimistic Bitcoin price projections, Mellerud found that miners are likely to incur losses.
Mining is a fluid industry where hardware tends to become obsolete within five years due to the emergence of more efficient machines.
During the 2016-2017 bull market, for example, Bitmain S9 models were the most effective miners. But as Coin Metrics analyst Karim Helmy discovered, by the end of 2022, the S9s were entirely supplanted by newer models due to market evolution.
The Dominance of Bitmain Models
In 2023, the Bitmain models S19j Pro and S19 XP have become the market leaders in mining. Mellerud’s analysis assumes that the current generation of miners will be obsolete five years from now, around the time of the 2028 Bitcoin halving.
The study factored in a steady electricity cost of $0.07 per kWh and fluctuated the price of Bitcoin and the network’s hash rate to estimate the profit margins of the machines.
Mellerud observed, “Hashrate typically lags behind the hash price during rapid Bitcoin price hikes.”
While electricity costs can differ globally, miners can negotiate exclusive deals with energy providers, which may include long-term fixed rates or discounts. Mellerud states, “Mining becomes a no-brainer if you have access to electricity prices below $0.04 per kWh.”
Assessing Bitcoin Miner Returns Over Five Years
Profitability for Bitcoin miners depends on their ability to recover the entirety of their capital investment in the hardware, excluding operational costs. Any additional BTC earned is a bonus.
Hashrate Index analysts discovered that miners could earn more than their original investment only under the most bullish scenarios where the Bitcoin price escalates to $500,000 per token by 2028 and the network’s hash rate grows 10% slower than its price.
Even in scenarios where Bitcoin reaches $250,000 by 2028 with a moderate increase in hash rate, miners would only recover 83% of their initial investment at best.
River Financial’s historical analysis shows that in the last five years, owning miners was more profitable 53.6% of the time. However, even when Bitcoin’s price increases faster than the hash rate, miners might still incur a loss if the actual price is too low.
Both reports concur that mining Bitcoin is most sensible just before drastic bullish periods, while direct Bitcoin purchases are more profitable in all other situations.