How Crypto Mining Outperforms Buying Crypto
Looking in from the outside, cryptocurrency mining can be opaque and confusing. It is intimidating to learn about, to say nothing of trying to determine whether it makes sense to actually participate in. In fact, this is exactly why we started Arkonix?—?— to make crypto and powering crypto easy. To date, one consistent motivation for mining is?the ability to secure a sovereign future for yourself and others by participating in the creation of new, non-fiat monies.
In addition to the previously mentioned worthwhile motivation for mining, from an economic perspective, mining can be a much better option for accumulating cryptocurrency than buying.
In this article, we seek to expand thinking around profitability, investment and return on investment in cryptocurrency mining. We hope to clear up confusion, and in the process open up mining to new audiences. We believe that understanding other ways for calculating the ROI of mining will empower people to make the best choices about how to accumulate and support the cryptocurrencies they believe in.
1) The Problem With ‘Today’ Based Mining ROI Models
Overall, today’s models for helping people determine the likely ROI of their mining are too simple. For example, they tend to assume constant price, when prices have been anything but constant. They’re implicitly using a formula that fixes the variables for network hashrate. This doesn’t account for the fact that both price and hashrate are constantly changing. Inferring future ROI on the basis of today’s numbers seems impossible.
Another challenge is that many models use the US Dollar as the unit of account. While this is fine in the short term as a hedge against the current volatility in the crypto markets, the point of cryptocurrency is not always to exit back to the world of fiat currency. Many crypto-enthusiasts are interested in accumulating as much of a given coin as possible, and have a very long time horizon. We consider the economics of mining coins different than simply buying and selling the underlying assets. These differences allow those with a longer term view of the cryptocurrency landscape to benefit significantly.
Profits for mining and selling (blue), and mining and holding (red)
Mining and Selling vs. Mining and Holding
First, we compared the profits from two different mining tactics: 1) mining and selling daily (the blue line in the graph above), and 2) mining and holding profits in coins (the red line in the graph above). The red line above represents the profits that a miner would have made on any given day if they sold on that day after holding. For example, if a miner had spent 365 days mining Zcash and sold on their one year anniversary, they would have achieved a profit of $5236.86 outperforming mining and selling daily. For miners who are willing to hold for some duration of time, it is clear that there is more money to be made than from selling every day. We believe that the vast majority of miners have a longer time horizon than daily selling. It doesn’t make sense to apply the daily or even weekly selling model!!!
Mining vs. Buying to accumulate coins
So far, we’ve discussed mining and ROI with the USD as the unit of account. Many are interested in accumulating as much of a given coin as possible, and have a very long time horizon. The ROI for mining starts negative, rather than at 0 for purchasing coins. This means that miners must have a longer timeframe than a day-trader. Let’s explore the accumulation possible with mining in our first example, mining a new coin, and how mining’s long-termism can act as a hedge against suffering crypto prices.
Now we will look at coin accumulation with 1) mining (red line below) 2) buying at equivalent times as mining (green line below) and 3) bulk purchasing?—?all CapEx and eventual operating expenses (blue line below). So in this example we used Zcash to check how many coins we would have from buying all at once, and buying incrementally, and mining and holding.
From this experiment, we can see that over the long term the Zcash coins accumulated from mining are better than buying incrementally.
Review & Conclusions
Upon review, a few conclusions stand out:
1. When one actually measures ROI from mining over time, it becomes clear that, with the right holding period, mining can not only be more profitable, but can also outperform buying directly as a method of accumulating coins.
2. Applying existing ROI models, focused on static price and hashrate expectations?—?or assuming immediate selling rather than any duration of holding?—?tend to underestimate the real ROI of mining
3. What’s more, those models fail to understand the potential upside from the optionality that comes from investing in mining. If mining one coin becomes unprofitable, due to a variety of different factors, Arkonix always offers you the way to SWAP and continue mining another cryptocurrency.
There is still the inherent risk of investment in any speculative asset like cryptocurrencies. And even with easier, more consumer friendly mining rigs coming to market, they still represent an up-front investment.
All of that said, crypto needs your hash power as much or more than your order to buy and sell it. The more people powering crypto, the more secure and valuable crypto becomes and the more liberty, independence and self-sovereignty we achieve. These numbers show that the liberty motivation is actually complemented by a powerful economic incentive as well.