Is bitcoin mining profitable? Will it be profitable in 2018? You can easily find numerous articles about these questions. A more useful question might be, 'Should I buy bitcoin, or mine it?' In truth, no one knows. We do know that in January 2018, the bitcoin exchange rate steadily declined, while mining difficulty and total mining capacity increased – all bad news for miners. This post offers a high-level overview of mining vs buying bitcoin, to provide some insight and intuition on the buy vs mine decision, and to set the context for future posts.

Why Mine?

Let's assume you want to invest in bitcoin. Why mine it rather than buy it? Either way, you put money in and get bitcoin out. To choose mining, you have to believe that mining offers a better risk/reward balance than buying. Mining and buying are different types of investment, with different risks, rewards, and timing.

Define 'Profitable'

To state the obvious, purchased bitcoin is profitable whenever you can sell it for more than you paid. At any time, an investor can easily check the value and know immediately whether it meets expectations. Whether you trade or buy and hold, your investment has a value right now, either higher or lower than your cost. Investors can take out their profits as opportunities arise, or hold in anticipation of higher profits later.

Miners invest in production capacity, not bitcoin. The initial investment buys a mining machine or a cloud contract. Hardware or cloud doesn't matter for this overview, so let's just say you bought 'a mine.' A bitcoin mine provides computing power to the bitcoin network, to verify transactions and thereby help maintain the integrity of the blockchain. In return, miners receive a ‘block reward’ for verifying a block of transactions, and a share of the transaction fees from that block.

A bitcoin mine earns money continuously, but only becomes profitable when its earnings exceed the initial cost of the mine. Miners can make money whether the bitcoin exchange rate goes up or down, but they make it faster with higher prices. If the exchange rate falls too low, the pace of earning slows to zero as the mine fails to produce bitcoin sufficient to cover operating expenses. At that point, the miner shuts down the mine until conditions improve. In an extended down market, a mine might never become profitable. This suggests buying a mine only when market conditions support a quick payback.

Make Up Your Mind

So, here are the differences, in broad terms. To make money, investors need the price of bitcoin to increase. Miners can make money in up or down markets, but they need the price to remain above a minimum level as long as mining continues. Investors might make money immediately. Miners always start off in a loss position, and stay in a loss position until the mine earns its cost. (This statement ignores any resale value the mine might have, but as I said, 'broad terms.') Please note every miner is also an investor. As soon as the mine starts producing, the miner owns both the mine and bitcoin. I should also note that the two activities have different tax consequences (at least for US taxpayers).

Which strategy gives better results over time? It could go either way, and the answer can change from day to day. Investing in a mine is different from investing in bitcoin, and past performance does not predict future results. Each person has to run his or her own models and projections to decide which one better fits his goals and risk tolerance. Speaking again in broad terms, high bitcoin prices favor mining. Mining offers the possibility of accumulating high-priced bitcoin at a cost lower than market, and the mine can continue to earn money as the exchange rate falls. Conversely, low bitcoin prices favor buying rather than mining. Starting a mine when the price is too close to the break-even point greatly increases the risk that the mine never becomes profitable.

My next post will take a closer look at mining profitability calculations, predictions, and projections. I'll get more technical, and might even put up a graphic or two. Thanks for reading!