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

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

Hypothetically, if people overcome 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?

An analysis by Bitcoin mining data firm Hashrate Index suggests that “buying bitcoin is preferable to mining it in most circumstances.”

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

Mining is a dynamic business where hardware usually gets outdated within five years due to the introduction of more efficient machines in the market.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 models were the most efficient miners. However, as more models entered the market, the S9s were phased out completely by the end of 2022, according to a recent finding by Coin Metrics analyst Karim Helmy.

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

The analysis used a constant cost of electricity of $0.07 per kWh and varied the price of Bitcoin and the network’s hash rate to estimate the profit margins of the machines.

In his report, Mellerud 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 that lock their costs for months, which may also entail a discount. Figures from a New York Times investigation revealed that Riot Platforms, a public Bitcoin miner, paid around $0.03 per kWh in Texas, while other industries paid around $0.07.

Mellerud said, “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 the Bitcoin price goes on to $500,000 per token by 2028 while the network’s hash rate grows 10% slower than its price.

Even in situations where Bitcoin reaches $250,000 by 2028 with a modest increase in its hash rate, 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’s 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 directly purchasing BTC. River Financial’s analysts found that in the last five years, owning miners was preferred 53.6% of the time.

The basis of the River Financial analysis is similar to that of Hashrate Index’s report — 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 hash rate, the miners may still incur a loss 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 mining Bitcoin only makes the most sense right before parabolic bullish periods, with direct Bitcoin purchases being more profitable at all other times.

This article does not contain investment advice or recommendations. Every investment and trading move involves risk, and readers should conduct their own research when making a decision.

This article is for general information purposes and is not intended to be and should not be taken as legal or investment advice. The views, thoughts, and opinions expressed here are the author’s alone and do not necessarily reflect or represent the views and opinions of Cointelegraph.