Why Invest in Mining Instead of just Buying Bitcoin?
Investing in Bitcoin mining under the right conditions is a safer bet than simply buying and holding the coins. In a study conducted by Cointelegraph in February 2021, they compared the profitability of investing in Bitcoin mining equipment against simply buying and holding Bitcoin. The results were a much higher profit for the mining investment every single year considered. The reasons are simple: Buying Bitcoin exposes you to its high price volatility, making your portfolio value fluctuate wildly over time. Conversely, investing in Bitcoin mining provides a steady income that materializes your profit day by day.
In 2021, near the Bitcoin price peak, miners were earning more than $60 million a day. This attracted a huge number of investors to the industry, who wanted to take advantage of the Crypto boom to make a profit. Because of the exceptional profitability of mining, we have seen the mining hash rate continue to grow even through the bear market.
Bitcoin Mining Difficulty Over Time
Nevertheless, obtaining a profit from mining does have its hurdles. Bitcoin mining is designed to be profitable only when using cheap energy sources. Returns diminish substantially as energy prices increase, making it impossible for some individuals to obtain a profit. A few countries have also applied higher than average electricity costs for cryptocurrency miners. Besides, energy costs introduce an additional level of uncertainty to the investment. As we have seen over the last year, electricity prices have fluctuated drastically all over the globe, making it difficult to correctly predict the costs of a Bitcoin mining operation.
Daily Returns for a Bitmain AntMiner for Different Electricity Prices
To this you have to add the competition from other miners entering the space. Blockchains have a variable called “difficulty” which determines how many block rewards a miner can obtain from their efforts. The more miners mine a cryptocurrency, the higher the difficulty of mining becomes. Eventually, mining difficulty rises to a level such that miners with too high electricity costs become unprofitable. Crypto mining is a game of energy efficiency. Only miners that manage to minimize their energy costs will survive in the long run.
Furthermore, as in most industries, economies of scale are very important. A Bitcoin mining operation will always be more profitable the larger it is. This is due to the existence of additional costs such as maintenance, staff, and supplementary equipment.