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Why Run a Bitcoin Mining Operation When You Can Just Purchase Bitcoins Instead?

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The world of cryptocurrency is growing quickly. Even though there are lots of options for digital currency, one of the most popular is Bitcoin. As the first currency payment method, it is now used for various transactions worldwide. Even though the Bitcoin network is verified using a system of network nodes, there are lots of people who are wondering how they can get their hands on bitcoin. Given that this has provided a steady rate of return during the past few years with the exchange rate, this not only represents a solid way to diversify possible investment opportunities but could also become a readily accepted form of payment during the next few years. The two possible ways that someone could obtain Bitcoins either through Bitcoin mining or through purchasing them. Which is the better option? There are a few points to keep in mind.

What Is Bitcoin Mining?

In order for Bitcoins to be brought into existence, they have to be mined by individual miners. Mining is the process of verifying transactions that take place on the blockchain. Then, when these transactions are verified using proof of work, new Bitcoins are released.

Over time, recent transactions are going to be placed into blocks. Then, the Bitcoin miner has to solve a cipher puzzle which is a series of complex mathematical equations. The first person to solve the puzzle is going to add the next block to the blockchain. Then, he or she will get rewarded in the form of Bitcoin as compensation for his or her time and scale. Because Bitcoin mining is a decentralized process, anyone who has a strong internet connection and powerful hardware are able to participate in Bitcoin mining.

Because of the time and hardware it requires to mine Bitcoin, this is going to be one of the most important factors when deciding whether Bitcoin mining or Bitcoin purchasing is a better way to obtain this cryptocurrency.

How Can I Purchase Bitcoins?

The other way to obtain Bitcoins to purchase them directly. Similar to the stock market, the price of Bitcoin is going to rise and fall over time. Therefore, similar to trading shares of the company on the stock market, individuals are welcome to purchase Bitcoins as well. They simply have to be connected to the Bitcoin exchange and be willing to purchase them at the current price.

Some of the other ways that people can purchase Bitcoins include credit cards, debit cards, wire transfers, physical cash, and even other crypto-currency depending on where the buyer is from and what he or she might accept. Some countries even have Bitcoin ATMs.

Of course, the biggest risk that people take when they purchase Bitcoins is that they may drop in value. Even though Bitcoins have risen steadily since they first came into existence, there is always a chance that they may drop in value. This is a risk that people take; however, purchasing Bitcoins directly is also the easiest way for someone to get their hands on them.

What Are Some of the Benefits of Mining Bitcoins?

There are a few major advantages that come with mining bitcoins using an ASIC (application specific integrated circuit). Some of the biggest advantages include:

  • When someone decides to mine Bitcoins, the users are able to keep track of the transactions they make, meaning the Bitcoins have a 0 percent chance of being tainted in anyway.
  • For those who are able to obtain Bitcoins by mining them, there is never going to be an extra fee that is charged for acquiring the coin, apart from the cost of acquiring the hardware and paying for the utilities required to mine them.
  • As people mine more Bitcoin, they will be able to complete the required mathematical equations faster because they look at more experience.

There are lots of people who use Bitcoin mining as a way to not only make extra money but also support themselves in general.

What Are the Advantages of Buying Bitcoin?

There are also a few advantages to buying Bitcoin directly. These include:

  • The hardware required to mine Bitcoins could be a substantial overhead cost. Therefore, some people decide to cut through these overhead costs and purchase Bitcoins directly.
  • Purchasing Bitcoins is an instantaneous way to get someone’s hands on them, while mining does take some time to complete the equations as well.
  • Even though there is a transaction fee associated with purchasing Bitcoins, the transaction fee is relatively low when it is compared to the price of electricity and Bitcoin mining hardware.

Even though the value of Bitcoins will rise and fall, purchasing Bitcoins is one of the most effective ways for people to obtain them.

A Detailed Comparison of Bitcoin Mining vs. Bitcoin Buying: Which Is Better?

This is only a very brief overview of how someone might be able to obtain Bitcoins. In order to truly assess whether Bitcoin mining or Bitcoin buying is the better option, it is important to work the numbers.

When Bitcoin mining first started, computing power was relatively cheap. Unfortunately, this was not permanent. Eventually, more people got involved in Bitcoin mining and competition between fierce. In the world of today, some people might be wondering if Bitcoin mining is still more profitable than turning to the open market. There are several phases that have taken place when it comes to the Bitcoin mining world and it is important to look at each of them in detail.

The Year 2018

First, let’s take a look at 2018, which was not a good year for Bitcoin mining. If the miner purchased a few Ph/s of Antminer S9, the price at the time was $2.675 per machine. If the units depreciate linearly over the next 2 years, and the miner’s electricity cost was $0.0507 per KwH (which was the average industry rate in China), there are three strategies that would unfold:

  • Moderate: The miner will sell enough coins to cover overhead expenses such as the daily power bill and the daily depreciation and then keeps what is left in BTC
  • Long: The miner only sells enough to cover the daily power bill and keeps the rest in BTC
  • Daily: The miner will sell all coins into USD immediately, with the goal to arbitrate the difference between the production expenses and the spot price

The last of these strategies is not exactly tax efficient but it could be a viable choice.

In order to compare the performances of these mining strategies, there are two ways to do that:

  • Upfront Purchase: This strategy looks at the mining valuation period starting on 1/1/2018 and assumes someone buys coins and then holds them until the end of the valuation period.
  • Dollar-Cost Averaging: This open market purchase strategy looks at gradual purchases over the year instead of buying them all at once.

So, because 2018 was not a great year for miners, none of the mining strategies performed that well. They all lost money when compared to their overhead expenses. The “sell daily” strategy lost the least amount of money while the long strategy lost the most amount of money. While it is safe to assume that miners who were smart would turn off their machines after a while when they start to realize they are losing money, those who are selling daily might have even been able to make a profit if they turned off their machines halfway through the year.

On the other hand, those who incurred a direct upfront cost by purchasing their Bitcoins directly would have lost even more money in 2018. Similar to a stock dropping on the stock market, purchasing Bitcoins directly would have proven to be a losing strategy as well.

The Year 2019

2019 was a much better year for those who were involved in the world of Bitcoin mining. In the middle of 2019, a new generation of Bitcoin mining machines became available. For those who might not know, those in the world of Bitcoin mining tend to sell their old machines and rotate into new ones in an effort to remain competitive in the world of Bitcoin mining while also shedding some of their overhead costs. In some situations, the miners could actually sell their old machines and make a profit on those thanks to the massive price gain that happened in Bitcoin that year. For example, those in Bitcoin mining might have sold all of their Antminer units and purchased Whatsminer units for 2019 in the second half.

Now, for 2019, we are going to apply the same strategy as 2018 to see what comes out on top. Some of the relevant points to note include:

  • The original purchase cost of the Whatsminer is $271,269 for a total of 108 machines
  • At the end of the year, the machines will still have a residual value of $166,050
  • The power expense is the same rate, at $0.0705 per KwH, meaning the total daily expense is $815.67 based on the machine cost and the price of power
  • For the Bitcoin purchases, the dollar-cost averaging strategy proved to be a little bit more expensive than the upfront strategy, as Bitcoin went up in value during the course of the year

At the end of the year, the Bitcoin mining strategies come out on top. While all strategies could make a profit in 2019, because the market was doing well, Bitcoin mining ended up making more money, even though the upfront purchase strategy was relatively close to the best Bitcoin mining strategies.

Bitcoin Mining Operations Are About Managing a Portfolio

In the end, those who would like to get involved in the world of Bitcoin mining need to look at this as though they are managing a portfolio. Bitcoin miners are never going to be tied into a specific method when it comes to mining and selling their Bitcoins. Even though it is possible to move back and forth between different strategies, it is important for Bitcoin miners to think about how they are going to respond to the market. Remember that Bitcoin miners are going to have three separate options when it comes to managing their Bitcoins. These include:

  • Selling all the Bitcoins they have obtained at the end of the day
  • Selling enough Bitcoins at the end of the day to cover their depreciation costs as well as their electricity bills
  • Selling only enough Bitcoins at the end of the day to cover their electricity bills

Regardless, these decisions are going to impact their overall profits because they involved the market from the instant they get their first Bitcoin.

Furthermore, Bitcoin miners also need to assess whether are going to sell old machines to purchase new machines in the middle of the year. New machines are usually able to mine Bitcoins faster; however, they also come with an added overhead expense. New machines may also use more (or less) power, which is something else the mining operation has to weigh.

When looking at the numbers, it is clear that running a Bitcoin mining operation is very similar to managing a portfolio of directly purchased Bitcoin. Therefore, it is entirely possible to run a Bitcoin mining operation in the same way people manage their stock portfolio. In some situations, this might even be more profitable than purchasing Bitcoin on the open market.

Keep These Points In Mind While Running a Bitcoin Mining Operation

Bitcoin is only continuing to increase in value. Therefore, it is critical for everyone to think about how they are going to go about getting involved in the Bitcoin market. Bitcoin mining and Bitcoin buying are both viable options for those who are looking to obtain Bitcoin. Keep in mind that the value of Bitcoin can rise and fall and that Bitcoin mining does have some overhead costs associated with it. Therefore, those who are looking to maximize their profits when they get involved in Bitcoin need to make sure they plan carefully. Those who have a firm strategy when they enter the Bitcoin world are more likely to be successful during their adventure.

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