Bitcoin Mining: A Highly Profitable Venture for ANYBODY
There’s a lot of crazy things happening in the world right now.
Between random shortages of everyday goods, official inflation rates peaking above 6% on a year over year basis, the persistent threat of business lockdowns, and a national shift in the make up of the labor force, it’s hard to find a cash flowing opportunity that doesn’t possess some sort of unforeseen risk.
But when it comes to bitcoin mining, the risk/reward on a personal level might be one of the best opportunities around.
Historically, bitcoin mining has been a very under-discussed aspect of the overall bitcoin market. Unlike simply holding bitcoin, mining bitcoin requires physical real estate and technical expertise. If you do it wrong you can lose a lot of money! But with facilities offering to host your miner popping up all over the world, a lot of these risks and barriers to entry have been reduced, making it easier than ever for anyone to get involved with mining bitcoin.
As I dug into the prospect of mining bitcoin myself, I realized that the operation generates a phenomenal, multi-faceted opportunity that increases your overall chances of financial success in today’s environment.
Using today’s numbers of a bitcoin price of $65,000, and a new miner cost between $13,000–$15,000, a top of the line bitcoin miner like the s19j Pro generates over $1,000 in revenue a month and pays for itself in a little over 1 year. The costs associated with this are only the monthly energy bill generated by the miner, which averages to about $150/month (depending on the cost of electricity).
I believe this opportunity revolves around four main components: the mining hardware asset, the favorable tax treatment of your operation, your cashflow being specifically denominated in bitcoin, and the jurisdictional arbitrage that’s available. I think you’ll find that in an inflationary environment with an unstable supply chain, mining bitcoin through a hosting facility like Compass is an extremely compelling business opportunity — and one that only requires a couple minutes per month of your time.
Below I’ll discuss the four main components of this business opportunity and then conclude with the various risks involved with such an operation.
THE BITCOIN MINER IS AN ASSET
When you purchase a bitcoin miner you are purchasing an asset. You will be able to sell this asset at a later date to recoup some of your capital expenditures.
So what determines the cost of a bitcoin miner?
The price of a bitcoin miner is relative to a few major factors. One, of course, is the price of bitcoin. The higher the price of bitcoin goes, the more profitable (in USD terms) bitcoin mining becomes, and the more pricey this makes new bitcoin miners. The reverse is of course true as well. If the price of bitcoin drops you will see the value of bitcoin miners follow suit (albeit at a slower pace).
A second major factor in the price of a bitcoin miner is how much TH/s (terahash per second) the model produces relative to the total hashrate of the Bitcoin Network. Today’s most popular miners produce between 90 and 110 TH/s, but every year or two new models with better efficiency hit the market. As the total hashpower of the Bitcoin Network increases, miners that produce less TH/s will depreciate in value (as their hashing share of the network decreases).
As innovations in bitcoin mining progresses you can assume that your older mining hardware will decrease in value. You can generally assume your miner’s original value will decrease by about 20% per year.
But with that said, the lifetime of a bitcoin miner has been increasing over time. When the Antminer S9 was released in May of 2016, the industry predicted it would have a working life of about 2 years before it became obsolete. The industry was wrong. The miner is still profitable today under certain conditions… that’s 5 years and counting!
If this trend continues (a big IF, of course, but not to be discredited), a bitcoin miner you buy today may hold its value better than you would otherwise expect.
Also, if there is a sharp increase in the price of bitcoin during the period you own your miner, there is a chance your miners may actually APPRECIATE in value. You can almost think of a bitcoin miner as a derivative of the price of bitcoin. If you’re bullish on bitcoin, a bitcoin miner may actually produce a greater return than just holding bitcoin.
Even though $15,000 seems like a lot of money to spend on mining equipment, after a year of mining through a company like Compass you will have the option to sell that equipment to someone else. If the price of that miner has depreciated by 20%, or $3,000, you will need to have mined a total of $3,000 in value over that year long period in order to break even.
Astute readers will see that under current market conditions that break even rate should be hit in about 3 months. The other 9 months are pure profit.
But wait, there’s more. Creating bitcoin miners is a resource intense process. As supply chain issues continue to reduce the accessibility of electronic parts and machinery, there may be a period of time where fewer bitcoin miners hit the market than the market wants, driving up demand for the miners you purchased. By owning a bitcoin mining asset you are partially protecting your portfolio from issues regarding the electronics supply chain.
So even if the price of bitcoin goes sideways or down during your ownership period, if the market’s ability to create new miners continues to be hindered, the value of your miner may still be protected.
THE TAX BENEFITS
There’s a few places where proper tax reporting could itself act as an asset. First off, your miner’s monthly energy bill is an expense that offsets your monthly revenue.
Second, the miner’s assumed depreciation of 20% per year is important. Even if you don’t sell your miner after the first year and continue to mine with it you can depreciate 20% of its original value against your income, and you can do this every year until you reach zero, further reducing your tax bill.
Where the numbers get even juicier is if you use a loan to purchase your bitcoin miner. For instance, you can use bitcoin you already hold to get a 1-year 11.92% APR interest loan from Unchained Capital to purchase your miner. The interest you pay every month to service the loan will be tax deductible — and if the miner pays for itself within 12–15 months you won’t have spent a single penny to acquire the asset and it will be generating free bitcoin in a little over a year!
Many hosting facilities are beginning to rollout their own financing options.
BITCOIN DENOMINATED CASHFLOW
Now let’s talk inflation.
One of the biggest risks for anyone with a monthly income denominated in fiat during a period of high inflation is that your purchasing power will be eroded away while you’ll be locked into a yearly salary. 10% yearly inflation means that your paycheck in December will buy you 10% less goods than your paycheck in January of that same year.
With bitcoin mining, your cashflow is not denominated in USD. If inflation really takes off, your income will be insulated from a reduction in purchasing power. Not only that, but the value of your miner will also increase — protecting the USD you spent to acquire the asset in the first place.
While having bitcoin denominated cashflow in a bitcoin bear market will give you a reduction in your total monthly income, bitcoin denominated cashflow in a highly inflationary market like the one we are moving into is a phenomenal hedge against monetary destruction.
In a bitcoin bull market, bitcoin denominated cashflow means that your miners will likely become MORE profitable. If the price of bitcoin doubles the income generated by your miner in USD terms will also double as well. Some of this income will be offset by an increase in hashrate that will reduce the total amount of bitcoin you mine, but a fast enough increase in bitcoin’s price will more than make up for this.
JURISDICTIONAL ARBITRAGE
Compass has a unique offering where you can purchase miners to be hosted in facilities all over the world. This means the assets in your bitcoin mining business don’t necessarily have to be held in the state or nation you belong to.
I see this mostly as an extraordinary benefit. Your ability to make money off your bitcoin miners is not tied to the jurisdiction that you call home. If you live in an area that’s anti-bitcoin mining (like China) you can still earn an income mining bitcoin.
Furthermore, most hosting facilities have different rates. You can shop around and find the rates that are best for your bottom line.
BITCOIN MINING RISKS
There are a few risks to mining bitcoin.
The first and most obvious risk is if bitcoin enters into a bear market. In this scenario it is likely that you will see the USD value of your mined bitcoin reducing in value. If you are using certain price assumptions to pay off a loan (especially a bitcoin backed loan) this could put you in some hot water.
This also poses a risk for your tax liability. If you’ve been earning bitcoin at a rate of $60,000 and then the price drops to $30,000, you will still have a taxable event from the bitcoin you received at $60k — and yet less money overall to pay that tax bill. This would largely be a concern if you earned the pricier bitcoin in one tax year (December) and were then forced to sell that bitcoin at a discount in a new tax year (January) to pay the previous year’s tax obligations.
A redeeming quality of a bitcoin bear market is that oftentimes the overall network hashrate decreases, which means you are likely to earn more bitcoin per month, although this most likely won’t offset the USD value you will lose.
At current prices, however, even an 80% drawdown in the price of bitcoin will most likely not cause a new S19j Pro to produce LESS bitcoin than the cost of your monthly electricity bill. So I believe it is unlikely at this time that a new bitcoin miner becomes a liability rather than an asset.
Another risk in bitcoin mining actually comes from the increasing adoption of bitcoin. As bitcoin gains global attention, more and more people will see the profitability of bitcoin mining and connect to the network, leading to an increase in hashrate. A sharp increase in hashrate does reduce your overall share, and means your bitcoin payout will shrink.
If bitcoin mining becomes hyper-competitive the shelf life of miners may begin to drop and the overall earnings from them may drop as well. This, however, would only take place if the hashrate grows faster than the price of bitcoin. So far that has not been an issue — in fact, the opposite has taken place if you consider the continued profitability of the Antminer S9 as an example.
A third risk factor to consider is if your miner breaks down. Most facilities will run maintenance on your miner, but some fixes may require them to send your miner back to the factory or even throw it out. If your miner goes offline for any period of time that means less bitcoin in your wallet — and sometimes can result in fees you didn’t expect.
One solution for this is to only buy new miners. Most new miners come with a one year factory warranty. Another solution is to go through reputable hosting facilities who have it in their best interest to sell you a miner that works.
The final issue, and one that may be relocated to specific jurisdictions, is if your electricity costs skyrocket. This could be caused by a grid malfunction, government policies that reduce the amount of energy the jurisdiction produces, or a hyperinflationary event. There is not much historical precedent for this risk at the moment, but considering everything going on in the world it feels prudent to include.
Overall I believe that the rewards from a bitcoin mining operation far outweigh the risks. If you are bullish on bitcoin’s price over the next 1–2 years, purchasing a bitcoin miner today could be one of the best ways to take advantage of a bitcoin bull market.
To learn more I’d recommend checking out this awesome piece by Lyn Alden.
