While intuitively, mining Bitcoin may appear like a highly profitable endeavor, research suggests otherwise. 

After discovering Bitcoin, most users go down the rabbit hole and consider whether it is better to mine or buy Bitcoin directly. They usually give up due to the cost and rigor of running ASIC miners, regulatory uncertainty, and the lack of technical expertise.

Hypothetically, if one overcomes the above challenges, they could enjoy advantages such as full autonomy over their operations and diversification of their crypto investment via physical hardware instead of directly purchasing Bitcoin, but the entire venture can be risky and labor intensive.

To mine, or not to mine BTC?

Analysis by Bitcoin (BTC) mining data firm, Hashrate Index, suggested that “buying bitcoin is preferable to mining it in most circumstances.”

Jaran Mellurad, a Bitcoin mining analyst at Hashrate Index, calculated the projected earnings of miners in the next five years under various bullish and bearish scenarios. Mellurad found that miners will likely incur a loss even in optimistic Bitcoin price projections.

Mining is a dynamic business where miners usually get outdated within five years due to the introduction of more efficient machines in the market.

For instance, in the 2016-2017 bull market, the Bitmain S9 model’s were the most efficient miners. However, as more models entered the market, the S9s phased out completely by 2022 end, according to a recent finding by Coin Metrics analyst Karim Helmy.

Two Bitmain models in the S19j Pro and S19 XP class dominate the mining sector in 2023. Mellurad calculated the returns assuming that the current batch of miners will be scrapped five years from now around the 2028 Bitcoin halving.

By using a constant cost of electricity at $0.07 per KWh and varying the price of Bitcoin and the network’s hashrate to estimate the profit margins of the machines.

In his report, Mellurad wrote, “Hashrate tends to follow the hashprice, albeit with a lag during rapid bitcoin price increases.”

Notably, the electricity cost varies worldwide and miners can also establish exclusive deals with energy generation companies locking their costs for months, which may also entail a discount. Figures from a New York Time’s investigation revealed that Riot Platforms, a public Bitcoin miner, paid around $0.03 per kWh in Texas while other industries paid around $0.07.

Mellurad also said that, “mining is a no-brainer if you have access to electricity prices below $0.04 per kWh.”

Five-year projections for Bitcoin miner returns

Bitcoin miners are profitable only if they can recoup 100% of their capital spent in buying the machines, excluding operational costs. Any additional BTC that hardware brings to its owner is an additional gain.

For instance, if a Bitcoin-denominated investment of 1 BTC in mining rigs returns 0.9 BTC at the end of five years, buying BTC is preferable to mining.

Hashrate Index’s analysts found that miners will return north of 1 BTC only in the most bullish scenarios, where Bitcoin price goes on to $500,000 per token by 2028, while the network’s hashrate grows 10% slower than its price.

Even in situations where Bitcoin reaches $250,000 by 2028 with a modest increase in its hashrate, the miners would only recoup 83% of the initial cost at best.

Return on investment from Bitcoin miners denominated in BTC over the next five years. Source: Hashrate Index

Related: $160K at next halving? Model counts down to new Bitcoin all-time high

While Hashrate Index analysis relied on future projections, River Financial, a financial services firm specializing in Bitcoin mining research, looked at historical data to find out whether mining was a better option than direct BTC purchase. River Financial’s analysts found that in the last five years, owning miners was preferred 53.6% of the time.

The basis of River Financial analysis is similar to that of Hashrate Index’s report mentioned above—miners make a profit if Bitcoin’s price increases faster than the network’s hash rate over time or if the price decreases at a slower rate than the network’s hash rate.

Times when Bitcoin mining was preferred (in gray) over direct BTC purchases (in white). Source: River Financial

However, one caveat of this analysis is that even during times when Bitcoin’s price is rising faster than the hashrate, the miner’s may still incur a profit due to the actual price being low.

Bearish periods have been particularly tough on Bitcoin miners. For instance, the period toward the end of 2022 is marked as preferable while Bitcoin miners recorded the lowest revenue levels in two-years with a significant wave of miner capitulations during that time.

Both reports appear to agree that owning Bitcoin miners only makes most sense right before parabolic bullish periods, with direct Bitcoin purchases being more profitable at all other times.