Analysis: Why Buying Bitcoin is Preferable to Mining BTC in Most Cases

Although it may seem to be a financially beneficial activity, research indicates that mining Bitcoin is not as profitable as one might think.

Upon uncovering Bitcoin, the majority of users delve into the depths of the matter and ponder if it is more advantageous to mine or purchase Bitcoin outright. However, they often abandon the idea due to the expense and difficulty of running ASIC miners, the lack of legal clarity, and the absence of technical know-how.

If one were to surmount the aforementioned difficulties, they could benefit from benefits such as complete control of their activities and the ability to diversify their cryptocurrency investment by utilizing physical hardware instead of buying Bitcoin directly, although the whole venture could be dangerous and require a lot of effort.

To mine, or not to mine BTC?

According to an analysis of Bitcoin (BTC) mining data conducted by Hashrate Index, it is generally more advantageous to purchase Bitcoin than to mine it.

Jaran Mellurad, an analyst at Hashrate Index specializing in Bitcoin mining, has calculated the expected earnings of miners over the next five years in both bullish and bearish market conditions. His research determined that, even in the most optimistic of Bitcoin price forecasts, miners will likely still experience losses.

Mining is an ever-evolving industry, with miners typically becoming obsolete within five years as newer, more efficient machines enter the market.

In the 2016-2017 bull market, the Bitmain S9 models were the most efficient miners. However, a recent finding by Coin Metrics analyst Karim Helmy showed that by the end of 2022, these S9s had been completely phased out due to the emergence of other models.

Mellurad estimated the returns if the current batch of miners from the Bitmain S19j Pro and S19 XP class were to be disposed of five years from now, near the 2028 Bitcoin halving.

By keeping the cost of electricity at $0.07 per KWh constant and changing the price of Bitcoin and the hashrate of the network, it is possible to estimate the profit margins of the machines.

In his report, Mellurad noted that the hashrate tends to follow the hashprice, albeit with a delay during times of fast-moving bitcoin price increases.

Notably, the cost of electricity differs globally and miners can even make special agreements with energy production firms that secure their costs for a certain period of time, potentially resulting in a reduction. An investigation conducted by the New York Times revealed that Riot Platforms, a public Bitcoin miner, paid approximately $0.03 per kWh in Texas, while other industries paid around $0.07.

Mellurad asserted that mining is a straightforward endeavor if one has access to electricity prices at or below $0.04 per kWh.

Five-year projections for Bitcoin miner returns

Bitcoin miners are only profitable if they can fully recover the money spent on purchasing the equipment, not including operational expenses. Any Bitcoin that the hardware generates is an extra benefit.

If an investment of 1 Bitcoin in mining rigs yields 0.9 Bitcoin after five years, purchasing Bitcoin is more advantageous than mining it.

Analysts from Hashrate Index have concluded that miners will only be able to obtain more than 1 BTC under the most optimistic of scenarios, where Bitcoin reaches a price of $500,000 by 2028 and the network’s hashrate increases at a rate that is 10% lower than the price.

Even if Bitcoin reaches $250,000 by 2028 with a moderate increase in its hashrate, miners would be able to recover a maximum of 83% of their initial investment.

Can we expect a $160K price tag at the next halving? The model predicts a new all-time high for Bitcoin.

Analysis conducted by River Financial, a financial services firm focused on Bitcoin mining research, utilized existing data to determine if mining was a more advantageous choice than simply buying BTC. Their analysts discovered that over the past five years, holding miners was the better option in 53.6% of cases.

River Financial’s analysis is based on the same principles as Hashrate Index’s report – miners make a profit if Bitcoin’s value rises quicker than the network’s hash rate or if the price drops at a slower rate than the hash rate.

Despite this analysis, it is possible that miners may still make a profit even when Bitcoin’s price increases more rapidly than the hashrate, due to the actual price remaining low.

During bearish periods, Bitcoin miners have experienced difficulty. For example, the end of 2022 was particularly hard as miners saw their lowest revenue levels in two years, resulting in a considerable amount of capitulations.

The two reports seem to concur that the most opportune moment to own Bitcoin miners is prior to parabolic bullish cycles, whereas buying Bitcoin directly is more profitable in other scenarios.