Last updated October, 2019
If you missed part 1 of this series, check it out here where we look at profitability of mining vs investing if the price of the coin increases, decreases, or stays flat.
What is the risk of investing in a cryptocoin, or the risk of investing in mining equipment?
In order to conclude whether investing or mining is the right choice for you, consider some of the risks.
If you invest a specific amount of money in a coin and the price increases, great! You can sell and profit whenever you choose. However, if the cryptocurrency declines in price, then you’ll lose money if you sell your position. If you don’t need the money, it’s best to wait until the price rises again – but that could be months, or even years – or possibly never? If you’re confident and sure that your chosen coin will increase in value, then investing and buying the coin is a quick and simple, no hassle way to profit from the cryptocurrency revolution.
What about if you invested in mining equipment? Well then when the coin price increases, you make more per day in theory. However, if only one of the GPU-minable coins increases in price, miners move their equipment over to mine that coin until the profitability matches the other GPU-minable coins. If all the coins increase in price, then you can make more per day, but as profitability increases, more GPU mining rigs will come online increasing difficult and decreasing profit.
The real benefit of mining over just purchasing coins is that even if the coin price stays flat, you will continue to mine coins and make some return on investment from your mining rigs. In fact, if the coin decreases in value, you can still make some profit. This makes your overall investment risk lower than purely investing in the coin.
100% Sure Your Chosen Coin will Increase in Value?
You don’t have to be a computer engineer to know that there are Bitcoin skeptics everywhere. In fact, many people still don’t know anything about bitcoin – they’ve just ‘heard’ about it. And many of the wall street skeptics are calling it a bubble, or a ponzi scheme. Truth be told, no one knows if Bitcoin or other cryptocurrencies have the staying power that we want them to. However, that doesn’t mean they’re a bad investment. If we were truly in a bubble, everyone would be talking about them – we’re not there yet!
From an investment standpoint, BTC is a pretty safe bet – it’s the USD of cryptos. But what about the other ones? There’s huge potential for profits in some of the penny-stock type cryptos that are trading for pennies per coin.
If you do choose to invest in smaller blockchain projects, how sure are you of the projects? If you aren’t 100% sure they will rise (ok, can you ever really be 100% anything? How about 95% sure?) maybe you should consider mining – it’s a way to lower your risk as you’ll be able to make some return on your investment even if the coin goes down. And, worst case scenario, if your chosen coin disappears, you could switch your mining rig over to a different coin.
If you don’t want to get into mining and deal with the hassle of setting up and monitoring mining rigs, then investing in BTC is a relatively safe bet, and much less risky than the smaller cryptos.
What if your chosen cryptocurrency decreases in value?
Similar to the comments above, mining compared to investing lowers your risk in situations when your coin decreases in value.
Check out this chart, which uses Ethereum pricing from 90 days ago as a baseline for the investment, and my mining rig return for comparison.
|Mining Rig ROI (.849 mined ether)
||Investing in Ethereum ROI (5.27 purchased)
|Ethereum at $310 (real life)||22.2%||37%|
|Ethereum at $300||21.4%||33%|
|Ethereum at $250||17.8%||11%|
|Ethereum at $200||14%||11% loss|
|Ethereum at $150||10.7%||33% loss|
As you can clearly see, the more the price of Ethereum goes down from the entry point at $225 per coin, the more you can lose in a pure investment scenario. Yet, with mining the coin, you are still mining .849 ether for that time period and still making some profit even if the price had gone down a bunch.
At the same time, as the price of Ethereum goes up, so does your profit ROI. And with a pure investment, you can make more ROI on your initial cost then with a mining rig.
Now let’s take a look at what the chart looks like if you include being able to resell your mining equipment after the test period is over. We’ll assume we can sell our mining rig for 50% of the purchase value. Hopefully the GPUs will still be worth more than that after only 3 months, but this is sort of a worst case scenario look at buying and building a mining rig.
|Mining Rig Total Value (.849 mined ether) and selling rig for 50%
||Investing in Ethereum Total Value (5.27 purchased)
|Ethereum at $310 (real life)||$856||$1633|
|Ethereum at $300||$847||$1581|
|Ethereum at $250||$805||$1317|
|Ethereum at $200||$762||$1054|
|Ethereum at $150||$720||$790|
If we were to run our rig for 90 days and then have the price of Ethereum crash, and of course we decided to call it quits and sell our rig, we would be looking at losing money unless the price dropped below around $150. But, as you can see, compared to a straight investment, getting into mining hedges your bets and helps protect your money if the coin does crash.
What about long term mining? What sort of profits can be expected?
Let’s look at this chart again, but let’s assume, that instead of the 90 day mining time period, we’ve been mining for a year. My rig has only been running for 90 days, and I’ve already seen the difficulty increase. If the price goes up, then the difficulty will increase faster – but it’s really hard to judge what the difficulty will do if the price stays flat. Let’s assume that difficulty keeps doubling. Here’s what mining fore a year could look like:
90 days: .849 eth
180 days: .849 + .7 = 1.549 eth
270 days: .849 + .7 + .5 = 2.049 eth
360 days: .849 + .7 + .5 + .25 = 2.299 eth
Now if we use our comparison chart again, and sell our mining rig after a year, our profits can look like this:
|Mining Rig Total Value (2.299 mined ether) and selling rig for 50%
||Investing in Ethereum Total Value (5.27 purchased)
|Ethereum at $310||$1305||$1633|
|Ethereum at $300||$1282||$1581|
|Ethereum at $250||$1167||$1317|
|Ethereum at $200||$1052||$1054|
|Ethereum at $150||$937||$790|
These are very conservative numbers. If you consider that you may be able to mine more, or if you consider that you can sell your GPUs for more than 50% of the price you purchased them for, then you can really see how much profit potential there is in building a GPU mining rig.
What is your exit strategy?
Exit strategies are rarely talked about in the investment world, or in the business world for that matter. It’s all too common that people wait until they have someone interested in purchasing a company before they figure out how it would look to try and sell the company.
With a cryptocurrency mining business you also need to consider what happens at the end. Obviously, if you are simply purchasing the cryptos as a long term investment, your only concern is with how liquid those coins are. If you need to sell, is there enough volume that you can sell your coins today?
With mining equipment, as we’ve shown above, it does decrease your overall risk since you have some equity in the machines to sell at the end, and you also can still make profits even if the coin cost decreases. Also, if one coin goes to zero, you can always change your mining rigs to mine a new coin to maintain profitability.
But once it’s all over, will you be able to actually sell your mining rigs?
ASIC mining rigs will not be worth anything if the whole crypto-world collapses. In fact, as the next generation of ASIC machines comes out, the current generation are often sold for pennies on the dollar – they’re simply not profitable unless you have free electricity.
If you have GPU mining rigs, then the GPUs will still be worth something to computer gamers, so long as the cards are in decent shape.
What to do now?
To be perfectly honest, I don’t know. I was hoping to come to an easy conclusion after all of this, but with so many variables including coin price, mining rig hashrates, future mining difficulty etc, it is hard to say with certainty what the future will look like.
For now, I will continue on the path I started on. I will keep investing in mining, and I will keep buying coins that I think have a bright future.
What about you? Share your comments below: