Crypto Profitability Analysis: Holding vs. Mining

1,451 reads

The current conditions of the market force private miners from around the world to seriously consider the potential value of their business. The reason: the prices of Bitcoin and large-scale regulatory restrictions literally make them fight for the small incomes or to even breakeven. On the other hand, the growth potential of the entire cryptocurrency market and Bitcoin in particular has been noted by many industrial experts, encouraging a promising future for all related activities.

Together, we will consider the profitability of mining in the current conditions, as well as the yields of mining and speculation for Bitcoin, taking into account the trends of the coming year. The idea is to finally find out whether miners have to care about the market and their position in general. Will the above mentioned opportunities bring the desired yield? Let’s dive in and find out.

The market is bearish, but signs look positive

The Bitcoin mining process is essentially generating new blocks in a blockchain and recording the transactions that take place within that blockchain. When an individual miner or a group of miners manages to find a new block, they receive a reward for the work done — a certain amount of cryptocurrency of the respective blockchain, which is BTC in this case.

The external key factor that determines crypto mining profitability is the sentiment of the crypto market, which happens to be led by Bitcoin. In December 2017, the cost of Bitcoin went over the $20,000 mark, due to sustained strength, growing interest, and wide media coverage. The community stated positive forecasts for Bitcoin’s growth, boosting interest around the mining process and the possibility of wide technological recognition.

However, in the beginning of 2018, something (not quite so) unforeseen happened — Bitcoin’s value dropped dramatically. By the beginning of February, a single BTC was worth less than $7,000. Due to the huge cryptocurrency correlation to Bitcoin the whole market was hit by a 65% decline for the first half of 2018 year, which in turn seriously alarmed both the potential and current investors. Cryptocurrency is said to currently be (or has been) in an overall fall in the broad market dynamic, popularly known as a bearish trend, which has even been called the “crypto winter.”

The environment had also changed. Twitter and Facebook have since banned cryptocurrency ads (attributed to the ICO hype). The space suddenly transformed from anarchy to a regulated and institutionalized setting. The legal status of the blockchain still varies among countries as well. Moreover, regulators from all over the world have begun to address the challenges presented by virtual currencies that mostly bypass regulated banks, financial firms, exchanges, and central clearinghouses.

Bitcoin seems to have found its bottom under $4,000, and we might see the market in recovery already, especially after considering the opinions of industry experts. They have predicted a price diversity from $7,700 to an unthinkable $150,000, with no future BTC price decline. Aside from that, the SEC’s decision about the introduction of Bitcoin ETF in February 2019 is treated as a positive sign for growth. ETF is an investment vehicle that tracks the performance of a particular asset or group of assets. This would attract a large amount of investors, as ETF allows one to diversify investments without actually owning the underlying assets. So, the owners will not have to worry about the complex storage and security procedures required by cryptocurrency investors. This “crypto winter” seems to be thawing already as we are beginning to ender “crypto spring.”

Is mining still profitable?

It’s obvious that all market participants are excited by BTC’s price hike, but miners are also influenced by a number of other factors:

The cost of the electricity

Power consumption

The availability and price of the hardware

The difficulty in providing the services (value used to show how hard was it to find a hash).

BTC Price

Thus, mining costs depend on both external factors such as geography, as well as intrinsic factors relating to the choice of mining hardware. Having analyzed and quantified all of these factors, we can determine the revenue and costs of mining and make conclusions about the profitability of the process for the next year.

Key assumptions: Taking into account the growing BTC hash rate and the complexity of the required PC knowledge, the mining on a CPU or video card is gradually losing its relevance. Effective Bitcoin mining remains possible only on high-performance specialized integrated circuits — ASIC (Application-Specific Integrated Circuit). Being the most powerful of currently available, ASICs, and the Antminer S9, are the basis for this assessment.

Technical characteristics of the Antminer S9:

Given the large dependence of mining profitability on the entire cryptomarket dynamic, in this calculation we assumed that the price of the Bitcoin is absolutely constant for the forecast period and amounts to $4,352 as per Bitfinex’s exchange rate for the last seven days. Other technical specifications are also fixed at the current level. Thus, to make this analysis more today-oriented, we set out to calculate the current profitability of mining at current prices and costs for estimating profitability without the influence of a market shift or reversal effect.

The efficiency of the opportunity is estimated by the total return on investment (ROI). ROI measures the amount of profit from an investment relative to its initial cost. To calculate the ROI, the benefit (or return) of an investment is divided by the cost of the investment.

The calculation runs as follows:

ROI of mining = Profit/Costs * 100% = (Revenue-Costs)/Costs * 100%

Revenue = ((Hash rate * Time * Block reward) / (2³²*Difficulty))*Bitcoin price

Costs = (Power*Electricity costs) + Initial Hardware Costs

Results: These calculations led us to the results of an -$972.28 absolute annual return or a -243.07% ROI for the one-year period. In fact, miner returns are currently negative based on the current price of BTC. In order for miners to break even again, prices will have to increase to $9,640 per BTC while using our equation.

Case study: Comparing Bitcoin mining vs holding returns

The idea of this case study is to define what is more profitable in terms of ROI — to continuously mine Bitcoin for one year or to buy 1 BTC and hold it within the same time before selling it.

The computation of the ROI for a Bitcoin holder will be the ratio between the current and forecasted next year BTC price. The formula of ROI for Bitcoin holding run as follows:

ROI bitcoin holder = (X percentile BTC price — Current price)/Current price

Looking at BTC’s price history, if we take the median price over the last 15 months we have roughly $7,600. Over the course of this time we can use the average high and low months to account for data irregularities. This isn’t a perfect prediction, by any means, but as the past has shown the BTC market ebbs and flows with little to no obvious logic.

The final result should be presented in the form of percentiles — a number on a scale of 100% that indicates the percent of all distribution values that is equal to or below it.

Finally, the one-year period BTC holder’s ROIs by percentile ranks are presented in the following table:

Now let’s compare these results with the returns earned by miners. First, we assumed that the BTC price will gradually increase to a consensus median ($7,600) by the end of the year. After that, we need to take the average between the current price and the price in 1 year (to estimate expected miners’ earnings):

Average next year BTC price = (Median analyst forecasted price + Current price) / 2

Having implemented this price in the miners’ ROI calculation strictly with the same inputs, we found the final return equal to the -168.49%.

Results: Given the forecasted BTC/USD price, it is obvious that mining won’t be lucrative in the near future if predicted prices hold. Individual miners cannot sustain in the market unless the price of BTC increases heavily. Even then, the difficulty will increase with it and mining returns will diminish proportionately. On the other side, if you were to buy 1 BTC today and hold it for the next year, you’d experience an ROI of about 75%.

Where should you hold your Bitcoin?

When it comes to storing your Bitcoin (and other cryptocurrencies), there are a few key options that users should consider:

Cold Storage — This option typically entails using a USB wallet, such as the Ledger Nano S or Trezor to store your cryptocurrencies offline. This option is great if you are planning to hold your cryptocurrencies for long periods of time, have no interest in spending them, and would rather put them in a drawer and forget about them. The major drawback of using a cold storage is that your currencies cannot easily be traded since you have to “send them” to an exchange. If you lose your flash drive (and your mnemonic phrase), you lose your money, and it requires a bit of expertise knowhow to set one up. Granted they now come with step-by-step instructions, it still requires more time and energy than signing up for a bank account.

— This option typically entails using a USB wallet, such as the Ledger Nano S or Trezor to store your cryptocurrencies offline. This option is great if you are planning to hold your cryptocurrencies for long periods of time, have no interest in spending them, and would rather put them in a drawer and forget about them. The major drawback of using a cold storage is that your currencies cannot easily be traded since you have to “send them” to an exchange. If you lose your flash drive (and your mnemonic phrase), you lose your money, and it requires a bit of expertise knowhow to set one up. Granted they now come with step-by-step instructions, it still requires more time and energy than signing up for a bank account. Store on an Exchange — For those who trade daily, or don’t have a lot to trade, sometimes it is easier to leave your crypto on an exchange so that it is always available to trade. Typically exchanges, like Binance or Bitfinex, have very high security, and you only need to remember a username/password in order to login (or you can activate two-factor logins). This is the least recommended option, as sometimes exchanges get hacked and crypto cannot be recovered.

— For those who trade daily, or don’t have a lot to trade, sometimes it is easier to leave your crypto on an exchange so that it is always available to trade. Typically exchanges, like Binance or Bitfinex, have very high security, and you only need to remember a username/password in order to login (or you can activate two-factor logins). This is the least recommended option, as sometimes exchanges get hacked and crypto cannot be recovered. Using a Crypto Bank — A “Crypto Bank” combines the best of both worlds, as your funds are easily accessible (as they would be on an exchange), but they are also locked in cold storage to make them secure. BitSafe is a Crypto Bank option, and the theory behind it is the same as with a fiat bank: you can easily transfer between your accounts (or to a friend), pay merchants, trade on exchanges, and more with the ease of a user friendly app or online. It differs from a regular bank in that it is cryptocurrency based, and instead of simply displaying your account balances with no verification, they use account solvency to link your account to actual (verifiable) bitcoins on the blockchain. BitSafe will offer credit/debit cards if you don’t want to take your phone with you, which means you can spend cryptocurrency anywhere that the card is accepted.

No matter where you store your coins, the important thing is that you know how to access them and you understand the pros and cons of each service. Oftentimes the trade-off between security and convenience is well worth it, as in the case of BitSafe, but if you’ll be storing huge amounts of money it is always recommended to use cold storage wallets.

Conclusion

Summing up, the crypto market still offers various opportunities for earning. Despite the fact that BTC mining is now below the threshold of profitability, solo miners shouldn’t expect positive ROIs in the next year next year, assuming that the expectations of the market based on past history remains true. On the contrary, the classic buy-and-hold strategy allows Bitcoin investors to earn about 75% in the meantime. This provides ease in the implementation and there is no need to handle the extra technical and energy issues.

About the author:

Kirill Shilov — Founder of Geekforge.io and Howtotoken.com. Interviewing the top 10,000 worldwide experts who reveal the biggest issues on the way to technological singularity. Join my #10kqachallenge: GeekForge Formula.

Tags