Is mining Bitcoin more profitable than buying it for institutional investors?

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Regardless of Bitcoin’s price in the future or economic scenarios, Bitcoin mining will be a profitable activity. But is mining more profitable than buying Bitcoin?

For years, institutional investors have been just watching Bitcoin, with little to no participation. Although they were attracted by the high returns, they were worried about Bitcoin’s infancy, lack of regulations, and the myriad headlines warning of hacks, bankruptcies, and frauds. In its early years, Bitcoin (BTC) lacked the on- and off-ramps needed for most institutional investors, making it virtually impossible to get approved by any corporate investing mechanism.

Pre-2017 Bitcoin investing

But a strange thing happened in 2017. As institutions were saying it’s too risky at the corporate level, many of the insiders were investing in Bitcoin personally in various ways.

They bought Bitcoin through exchanges, Bitcoin ATMs, and participation in initial coin offerings (ICOs). Many of these people become passionate, even obsessive, about Bitcoin, and with them, Bitcoin started digging its roots into the financial world.

Post-2017 bear market

During the bear market that followed the 2017 rally, a massive number of Bitcoin products were created and launched particularly for institutional investors. Publicly-traded Bitcoin mining firms started providing investors with exposure to the most fundamental part of the industry.

Bitcoin holdings were securitized so that investors on leading exchanges could speculate on Bitcoin’s price without setting up and using Bitcoin wallets. Companies started taking on debt to invest in Bitcoin because speculating the long-term appreciation on Bitcoin is worth more than the interest on the debt.

Bitcoin’s response to COVID-19

When Bitcoin crashed and bounced off its approximately $4,000 low in March of 2020, the global COVID-19 pandemic was just getting started. Governments around the globe largely followed the same strategy — lock people down and print more money. Lockdowns, quantitative easing, and fiscal stimulus were normalized before markets could fully digest what was happening.

Markets became inefficient pricing mechanisms, and that was not because participants were acting in bad faith but because participants were acting only on faith — on faith that things couldn’t continue like this for much longer.

As cash came in daily, the market reacted almost daily without looking for valuable parking spots for their capital. The market was competing with itself on how much and how fast capital could be parked. What does a smart person invest in as nearly every economy and industry in the world shrinks and world equity prices are surging to record highs?

Buying and holding Bitcoin in 2020

This time, everything was in place for investors when they started to pay attention again. There were securitized products, on/off ramps, precedence, experience, and many passionate supporters inside major institutions. Most important of all were the on/off ramps. For the first time, investors could use their normal tools and exchanges to invest in Bitcoin safely, easily, and without any special approval. With proper mechanisms in place, institutions and investors did what most investors should do: buy and hold.

In the real world, the simplest solutions are usually the best. This makes intuitive sense as it seems to embrace other seemingly natural laws of life, like the 80/20 rule or the inevitability of death and taxes.

This is true in Bitcoin as well. While there are lots of ways to make large amounts of money off Bitcoin, mining, day trading, speculating, etc., for most people around the world, regardless of who or where they are, the best investment strategy has simply been to purchase and hold Bitcoin.

The reason for this is clear: Anybody can buy and hold Bitcoin, but almost nobody can beat the market forever. The industry is simply growing at such a tremendous pace that no one can keep track of everything that is happening currently, let alone predict the future. You have to live and breathe crypto for a chance at beating the market odds. Even so, we have seen true legends in this space completely wiped out by thinking they can do better than just holding their Bitcoin.

Why Bitcoin mining is more profitable than just buying and holding

In the history of cryptocurrency, mining has been the clear exception to the rule of “buy and hold.” If you can create a scenario with the optimal blend of cheap energy and efficient mining hardware, Bitcoin mining is a profitable activity in almost any economic scenario and at any Bitcoin price point.

To prove this, we ran an opportunity-cost comparison with purchasing Bitcoin or purchasing a Bitcoin miner the day it was announced from Bitmain, operating it at $0.06 and selling enough Bitcoin to pay your electricity bills.

In every scenario, you end up with more Bitcoin from mining than holding.

This one simple economic incentive has in just seven years bootstrapped the Bitcoin mining industry into a $5-billion industry today; done right, mining is one of the most predictable and safe ways to turn your BTC into more BTC.

Of course, “done right” assumes one very considerable thing: that you will reliably and consistently operate this equipment. This is often a lot easier said than done. Bitcoin mining can be highly technical: the equipment is sparse and highly varied in quality, performance, and condition. Also, like any other equipment, it needs the right operating environment and skilled operators and systems to run well and cost-efficiently.

From the network’s perspective, Bitcoin doesn’t care how well or cost-effectively you mine. One terahash coming from a desert is equally valuable and indistinguishable from one terahash coming from snowy Quebec. But you as the owner will surely notice the cost difference, as no one is in the mining business because they want less Bitcoin.

It doesn’t take a genius to make money mining or buying Bitcoin in a bull market, however, it takes a genius to plan for and survive a bear market. When we brought Bitfarms to the Toronto Stock Exchange in 2018, we were surrounded by several large peers, who mostly did not survive to this point. Those of us who did survive the bear market have come out stronger, more experienced, and better operators with operations and equipment ready to capitalize on the 2021 Bitcoin rally and survive whatever market that follows it.

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