Bitcoin could be worth

Is Bitcoin Mining Worth It? Is Bitcoin mining profitable? (2021 Updated)

Is Bitcoin mining worth it?

In this article, we’ll answer that question given that today, large scale mining operations now dominate the landscape. We’ll consider equipment costs, what can give you an advantage in mining and how to determine profitability. В

Before we dive in though, if you’d like a primer on what Bitcoin mining is, including some interesting facts that you might not be aware of, we’ve published another article: What is Bitcoin Mining. The article is a great introduction to the topic of Bitcoin mining and if you’re new to crypto you might want to check it out before reading this more technically rich article.

In this article

The State of Bitcoin Mining Today

Bitcoin mining today is dominated by mining farms, large Bitcoin mining operations with thousands or tens of thousands of ASICs (specialized mining devices) all under one roof. These operations benefit from economies of scale as well as the financial acumen to hedge their operations using futures and options.

As of publication, the Bitcoin hashrate has not quite reached its all-time high from March 2020. However, that won’t last long and at some point over the summer of 2020, the hashrate will break old records. Why is this important?

A high hashrate means that it’s more difficult to make a profit mining Bitcoin. The higher the hashrate the more miners there are (or fewer but more efficient miners) which means you’ll earn less by mining.

So when deciding whether you want to mine Bitcoin you should consider the hashrate and how that will affect your bottom line.

Bitcoin Mining Costs

The two major costs in mining Bitcoin are electricity and equipment costs, I.e. the ASIC miner costs. If you live somewhere with cheap electricity this puts you at an advantage.

In fact, this is why Bitcoin mining is common in China, which has cheap hydroelectric power, as well as in Venezuela, with its cheap, state-subsidized electricity. University dorm room mining, where electricity is a fixed cost per semester, is also increasingly a thorn in university housing budgets. В

The other cost, the ASIC miner, is nothing to dismiss. A top of the line miner can cost anywhere between $1,000 and $3,000. Again, the small guy who is buying a handful of miners (or just one) is at a big disadvantage to the large mining farms getting a discount by buying in bulk. В

As expensive as an ASIC is, it’s advisable to buy top of the line equipment as the latest generation of miners usually provide the best ROI. When you look at Amazon and see old ASIC Bitcoin mining rigs selling for $100 each, there’s a reason that they’re that cheap.

These old rigs are so inefficient that the electricity costs dwarf any potential returns – unless you have a source of nearly free electricity (we do not recommend mining from WeWork or moving to Venezuela).

There is a reason this miner only costs $99. Image credit: Amazon

To throw another wrench in the gears of profitability, ASIC miners become obsolete faster than anyone would like. If you buy a miner when it first comes out you can typically get between 6 to 12 months of peak efficiency before the next generation comes out and makes your ASIC old news.

You can still mine on older equipment of course but the cost to reward ratio is going to be increasingly disappointing. Also, as shown above it’s not as though you can sell the old rig to recoup your costs. Old ASIC miners are just about worth their weight in high grade firewood.

Finally, you have mining pool fees, cooling fees, mining software fees, the time cost of maintaining your rig, and the set up costs.

An ASIC is as loud as a hairdryer and almost as hot. When you’re mining, you’ll need to keep your rig in a noise insulated container, or somewhere outside, like your shed, which will require some special planning to avoid fires.

So having mentioned those factors, let’s take a look at the next question, is it worth it?

So is Bitcoin Mining Worth It? For Most, No

Is mining Bitcoin worth it? As a financial investment, probably not. For it to make financial sense you would need very cheap (or free) electricity, strong technical acumen to optimize the operation of your ASIC(s), and plain luck.

As an example of how mining might go wrong, you can imagine how well all those people did who started mining in January of 2018…

Anyone who began mining in January 2018 had a very, very rough go of it. Image credit: TradingView

If you still want to mine BTC, a tool like a Bitcoin mining profitability calculator can be a great resource to help you decide whether mining Bitcoin is worth it. You can select different coins, input the cost of your electricity and so forth.

One consideration when running a cost-benefit analysis is that a Bitcoin ASIC will allow you to mine several different coins, including BTC, BCHSV, and BCH among others. So you can switch between networks to arbitrage opportunities.

That being the case, mining BTC is usually the most profitable opportunity and you shouldn’t count on a financial windfall from mining other coins.

Still, it does appear likely that we’re entering into a new crypto bull market. Or at the very least, that another protracted depression in prices is fairly unlikely. You can probably count on prices at least remaining where they are now, if not going higher as we move toward 2021.

Probably the best way to look at mining is as a hobby. Mining may be profitable, it may not be, but the experience is where the enjoyment comes from. Setting up the mining rigs, learning about Bitcoin, contributing to network security and bragging to your friends that you do some Bitcoin mining on the side. All part of the fun.

From a strictly financial point of view the best way to make money is probably to buy Bitcoin from an exchange and hold it in your Bitcoin wallet. But if you have a realistic idea of what mining will be like, and how much you can expect to earn, then by all means it’s worth it.

Here’s How You Can Still Benefit From Bitcoin’s Rise

All signs point toward a new crypto bull market. Arther Hayes, the CEO of Bitmex, has suggested Bitcoin will be $20,000 again by the end of 2020. Macro trader turned Bitcoin bull Raoul Pal doesn’t give a timeline but he suggests Bitcoin is headed to $100,000 in the not too distant future. Plan B, a prominent crypto analyst, is calling for $288,000 sometime by 2024.

The very best way to benefit from this potential upside for most people will be buying Bitcoin and keeping it somewhere safe.

Given all of the costs associated with Bitcoin mining, and the unfortunate advantage that large mining operations have from buying ASICs and electricity in bulk, it’s not likely that you’ll earn a positive return from investing a few thousand dollars in Bitcoin mining.

Buying Bitcoin and storing it safely is the best strategy for most people.

Once you’ve purchased your Bitcoin, it’s paramount that you store it safely. Billions (with a B) of dollar’s worth of cryptocurrency are stolen every year. Nobody thinks it will happen to them, until it does, and centralized exchanges are notorious for losing customer funds.

One of the best ways to store your Bitcoin, as well as any other cryptocurrencies that you’re invested in, is with the Exodus wallet. Exodus is one of the most well reviewed wallets in the cryptocurrency ecosystem thanks to a couple of important features:

• It supports over 100 crypto assets
• It’s both easy to use as well as visually appealing
• Exodus is the only cryptocurrency wallet that supports desktop, mobile, and hardware wallet (Trezor) integration
• Exodus allows you to exchange your Bitcoin for other cryptos right from your wallet — without creating an account!
• You can sync your wallet balances between desktop and mobile
• There is 24/7, fast human support if you ever need help

From left to right: Exodus on Trezor, mobile, and desktop. Download Exodus BTC wallet

Conclusion

It’s important to be realistic. There are too many articles that make it sound like Bitcoin mining is an easy way to make a quick buck.

Bitcoin mining is firmly in the hands of the big players and they have all of the advantages, from cheap equipment and electricity to dedicated engineers who do nothing all day, every day, but optimize operations.

If you’d like to mine as a hobby that’s awesome! Contribute to the network and earn some coin on the side. Just make sure that you’ve already got some Bitcoin safely tucked away so that, fingers crossed, when a new bull market begins you can benefit from rising prices.

This content is for informational purposes only and is not investment advice. You should consult a qualified licensed advisor before engaging in any transaction.

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Why Do Bitcoins Have Value?

Bitcoin offers an efficient means of transferring money over the internet and is controlled by a decentralized network with a transparent set of rules, thus presenting an alternative to central bank-controlled fiat money. There has been a lot of talk about how to price Bitcoin, and we set out here to explore what the cryptocurrency’s price might look like in the event it achieves further widespread adoption. First, however, it is useful to back up a step. Bitcoin and other digital currencies have been touted as alternatives to fiat money. But what gives any type of currency value?

Key Takeaways

• Currencies have value because they can be used as a store of value and a unit of exchange.
• Successful currencies have six key attributes—scarcity, divisibility, utility, transportability, durability, and counterfeitability.
• The cryptocurrency bitcoin has value because it holds up very well when it comes to these six characteristics, although its biggest issue is its status as a unit of exchange as most businesses have yet to accept it as payment.
• Bitcoin’s utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces.
• However, if bitcoin gains scale and captures 15% of the global currency market (assuming all 21 million bitcoins in circulation) the total price per bitcoin would be roughly $514,000.

Why Currencies Have Value

Currency is usable if it is a store of value, or, put differently, if it can reliably be counted on to maintain its relative value over time and without depreciating. In many societies throughout history, commodities or precious metals were used as methods of payment because they were seen as having a relatively stable value.

Rather than require individuals to carry around cumbersome quantities of cocoa beans, gold, or other early forms of currency, however, societies eventually turned to minted currency as an alternative. Still, the reason many examples of minted currency were usable was because they were reliable stores of value, having been made out of metals with long shelf lives and little risk of depreciation.  

In the modern age, minted currencies often take the form of paper money which does not have the same intrinsic value as coins made from precious metals. Perhaps even more likely, though, individuals utilize electronic currency and payment methods. Some types of currencies rely on the fact that they are «representative,» meaning that each coin or note can be directly exchanged for a specified amount of a commodity.

However, as countries left the gold standard in an effort to curb concerns about runs on federal gold supplies, many global currencies are now classified as fiat. Fiat currency is issued by a government and not backed by any commodity, but rather by the faith that individuals and governments have that parties will accept that currency.

Today, most major global currencies are fiat. Many governments and societies have found that fiat currency is the most durable and least likely to be susceptible to deterioration or loss of value over time.  

Scarcity, Divisibility, Utility, and Transferability

Aside from the question of whether it is a store of value, a successful currency must also meet qualifications related to scarcity, divisibility, utility, transportability, durability, and counterfeitability. Let’s look at these qualities one at a time.

1. Scarcity

The key to the maintenance of a currency’s value is its supply. A money supply that is too large could cause prices of goods to spike, resulting in economic collapse. A money supply that is too small can also cause economic problems. Monetarism is the macroeconomic concept which aims to address the role of the money supply in the health and growth (or lack thereof) in an economy.

In the case of fiat currencies, most governments around the world continue to print money as a means of controlling scarcity. Many governments operate with a preset amount of inflation which serves to drive the value of the fiat currency down. In the U.S., for instance, this rate has historically hovered around 2%.   This is different from bitcoin, which has a flexible issuance rate that changes over time.  

2. Divisibility

Successful currencies are divisible into smaller incremental units. In order for a single currency system to function as a medium of exchange across all types of goods and values within an economy, it must have the flexibility associated with this divisibility. The currency must be sufficiently divisible so as to accurately reflect the value of every good or service available throughout the economy.

3. Utility

A currency must-have utility in order to be effective. Individuals must be able to reliably trade units of the currency for goods and services. This is a primary reason why currencies developed in the first place: so that participants in a market could avoid having to barter directly for goods. Utility also requires that currencies be easily moved from one location to another. Burdensome precious metals and commodities don’t easily meet this stipulation.

4. Transportability

Currencies must be easily transferred between participants in an economy in order to be useful. In fiat currency terms, this means that units of currency must be transferable within a particular country’s economy as well as between nations via exchange.

5. Durability

To be effective, a currency must be at least reasonably durable. Coins or notes made out of materials that can easily be mutilated, damaged, or destroyed, or which degrade over time to the point of being unusable, are not sufficient.

6. Counterfeitability

Just as a currency must be durable, it must also be difficult to counterfeit in order to remain effective. If not, malicious parties could easily disrupt the currency system by flooding it with fake bills, thereby negatively impacting the currency’s value.

To assess Bitcoin’s value as a currency, we’ll compare it against fiat currencies in each of the above categories.

Bitcoin Compared Against Fiat Currencies

1. Scarcity

When Bitcoin was launched in 2009, its developer(s) stipulated in the protocol that the supply of tokens would be capped at 21 million.  

To give some context, the current supply of bitcoin is around 18 million, the rate at which Bitcoin is released decreases by half roughly every four years, and the supply should get past 19 million in the year 2022.   This assumes that the protocol will not be changed.

Bitcoin Mining

Changing the protocol would require the concurrence of a majority of the computing power engaged in Bitcoin mining, meaning that it is unlikely.

The approach to supply that Bitcoin has adopted is different from most fiat currencies. The global fiat money supply is often thought of as broken into different buckets, M0, M1, M2, and M3.   M0 refers to currency in circulation. M1 is M0 plus demand deposits like checking accounts. M2 is M1 plus savings accounts and small time deposits (known as certificates of deposit in the United States). M3 is M2 plus large time deposits and money market funds.

Since M0 and M1 are readily accessible for use in commerce, we will consider these two buckets as mediums of exchange, whereas M2 and M3 will be considered as money being used as a store of value. As part of their monetary policy, most governments maintain some flexible control over the supply of currency in circulation, making adjustments depending upon economic factors. This is not the case with Bitcoin.

So far, the continued availability of more tokens to be generated has encouraged a robust mining community, though this is liable to change significantly as the limit of 21 million coins is approached. What exactly will happen at that time is difficult to say; an analogy would be to imagine the U.S. government suddenly ceased to produce any new bills. Fortunately, the last Bitcoin is not scheduled to be mined until around the year 2140.   Generally, scarcity can drive value higher. This can be seen with precious metals like gold.

2. Divisibility

Notably, 21 million bitcoins are vastly smaller than the circulation of most fiat currencies in the world. Fortunately, Bitcoin is divisible up to 8 decimal points. The smallest unit, equal to 0.00000001 Bitcoin, is called a «Satoshi» after the pseudonymous developer behind the cryptocurrency. This allows for quadrillions of individual units of Satoshis to be distributed throughout a global economy.

One bitcoin has a much larger degree of divisibility than the U.S. dollar as well as most other fiat currencies. While the U.S. dollar can be divided into cents, or 1/100 of 1 USD, one «Satoshi» is just 1/100,000,000 of 1 BTC. It is this extreme divisibility that makes bitcoin’s scarcity possible; if bitcoin continues to gain in price over time, users with tiny fractions of a single bitcoin can still take part in everyday transactions. Without any divisibility, a price of, say, $1,000,000 for 1 BTC would prevent the currency being used for most transactions.

3. Utility

One of the biggest selling points of Bitcoin has been its use of blockchain technology. Blockchain is a distributed ledger system that is decentralized and trustless, meaning that no parties participating in the Bitcoin market need to establish trust in one another in order for the system to work properly. This is possible thanks to an elaborate system of checks and verifications which is central to the maintenance of the ledger and to the mining of new Bitcoins. Best of all, the flexibility of blockchain technology means that it has utility outside of the cryptocurrency space as well. 

4. Transportability

Thanks to cryptocurrency exchanges, wallets, and other tools, Bitcoin is transferable between parties within minutes, regardless of the size of the transaction with very low costs. The process of transferring money in the current system can take days at a time and have fees. Transferability is a hugely important aspect of any currency. While it takes vast amounts of electricity to mine Bitcoin, maintain the blockchain, and process digital transactions, individuals do not typically hold any physical representation of Bitcoin in the process.

5. Durability

Durability is a major issue for fiat currencies in their physical form. A dollar bill, while sturdy, can still be torn, burned, or otherwise rendered unusable. Digital forms of payment are not susceptible to these physical harms in the same way.

For this reason, bitcoin is tremendously valuable. It cannot be destroyed in the same way that a dollar bill could be. That’s not to say, however, that bitcoin cannot be lost. If a user loses his or her cryptographic key, the bitcoins in the corresponding wallet may be effectively unusable on a permanent basis.   However, the bitcoin itself will not be destroyed and will continue to exist in records on the blockchain.

6. Counterfeitability

Thanks to the complicated, decentralized blockchain ledger system, bitcoin is incredibly difficult to counterfeit. Doing so would essentially require confusing all participants in the Bitcoin network, no small feat. The only way that one would be able to create a counterfeit bitcoin would be by executing what is known as a double-spend. This refers to a situation in which a user «spends» or transfers the same bitcoin in two or more separate settings, effectively creating a duplicate record. While this is not a problem with a fiat currency note—it is impossible to spend the same dollar bill in two or more separate transactions—it is theoretically possible with digital currencies.

What makes a double-spend unlikely, though, is the size of the Bitcoin network. A so-called 51% attack, in which a group of miners theoretically control more than half of all network power, would be necessary. By controlling a majority of all network power, this group could dominate the remainder of the network to falsify records. However, such an attack on Bitcoin would require an overwhelming amount of effort, money, and computing power, thereby rendering the possibility extremely unlikely.    

Bitcoin Challenges

Generally, Bitcoin holds up fairly well in the above categories when compared against fiat currencies. So what are the challenges facing Bitcoin as a currency?

One of the biggest issues is Bitcoin’s status as a store of value. Bitcoin’s utility as a store of value is dependent on its utility as a medium of exchange. We base this in turn on the assumption that for something to be used as a store of value it needs to have some intrinsic value, and if Bitcoin does not achieve success as a medium of exchange, it will have no practical utility and thus no intrinsic value and won’t be appealing as a store of value.

Like fiat currencies, Bitcoin is not backed by any physical commodity or precious metal.   Throughout much of its history, the current value of Bitcoin has been driven primarily by speculative interest. Bitcoin has exhibited characteristics of a bubble with drastic price run-ups and a craze of media attention. This is likely to decline as Bitcoin continues to see greater mainstream adoption, but the future is uncertain.

Bitcoin’s utility and transferability are challenged by difficulties surrounding the cryptocurrency storage and exchange spaces. In recent years, digital currency exchanges have been plagued by hacks, thefts, and fraud.  

Of course, thefts also occur in the fiat currency world as well. In those cases, however, regulation is much more settled, providing somewhat more straightforward means of redress. Bitcoin and cryptocurrencies more broadly are still viewed as more of a «Wild West» setting when it comes to regulation.  

Different governments view Bitcoin in dramatically different ways, and the repercussions for Bitcoin’s adoption as a global currency are significant.  

Bitcoin Worth vs. Rival Fiat Currencies

In order to place a value on Bitcoin, we need to project what market penetration it will achieve in each sphere. This article will not make a case for what the market penetration will be, but for the sake of the evaluation, we’ll pick a rather arbitrary value of 15%, both for bitcoin as a currency and bitcoin as a store of value. You are encouraged to form your own opinion for this projection and adjust the valuation accordingly.

The simplest way to approach the model would be to look at the current worldwide value of all mediums of exchange and of all stores of value comparable to bitcoin, and then calculate the value of bitcoin’s projected percentage. The predominant medium of exchange is government backed money, and for our model, we will focus solely on them.

Roughly speaking, M1 (which includes M0) is currently worth about 4.9 trillion U.S. dollars, which will serve as our current worldwide value of mediums of exchange.

M3 (which includes all the other buckets) minus M1 is worth about 45 trillion U.S. dollars. We will include this as a store of value that is comparable to bitcoin. To this, we will also add an estimate for the worldwide value of gold held as a store of value. While some may use jewelry as a store of value, for our model, we will only consider gold bullion.

The U.S. Geological Survey estimated that at the end of 1999, there were about 122,000 metric tons of available above-ground gold. Of this, 48%, or 58,560 metric tons, was in the form of private and official bullion stocks. At an estimated current price of $1,200 per troy ounce, that amount of gold is today worth upwards of 2.1 trillion U.S. dollars.

Since there has in recent years been a deficit in the supply of silver and governments have been selling significant amounts of their silver bullion, we reason that most silver is being used in industry and not as a store of value, and will not include silver in our model. Neither will we treat other precious metals or gemstones. In aggregate, our estimate for the global value of stores of value comparable to bitcoin, including savings accounts, small and large time deposits, money market funds, and gold bullion, come to 47.1 trillion U.S. dollars.

Our total estimate for the global value of mediums of exchange and stores of value thus comes to 52.1 trillion U.S. dollars. If Bitcoin were to achieve 15% of this valuation, its market capitalization in today’s money would be 10.8 trillion U.S. dollars. With all 21 million bitcoin in circulation, that would put the price of 1 Bitcoin at $514,000.

Difficulties of Valuing Bitcoin

This is a rather simple long term model. Perhaps the biggest question it hinges on is exactly how much adoption will Bitcoin achieve? Coming up with a value for the current price of Bitcoin would involve pricing in the risk of low adoption or failure of Bitcoin as a currency, which could include being displaced by one or more other digital currencies.

Models often consider the velocity of money, frequently arguing that since Bitcoin can support transfers that take less than an hour, the velocity of money in the future Bitcoin ecosystem will be higher than the current average velocity of money. Another view on this though would be that velocity of money is not restricted by today’s payment rails in any significant way and that its main determinant is the need or willingness of people to transact. Therefore, the projected velocity of money could be treated as roughly equal to its current value.

Another angle at modeling the price of Bitcoin, and perhaps a useful one for the near-to-medium term, would be to look at specific industries or markets one thinks it could impact or disrupt and think about how much of that market could end up using Bitcoin. The World Bitcoin Network provides a nifty tool for doing just that.

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