An influx of new interest in Bitcoin is shedding light on what was formerly a rather opaque industry.
One new area of understanding includes miner financial modeling, which once proved difficult not only because of the cyclical nature of the underlying asset, but also the various inputs of mining itself. A comparison of an investment in the Real Estate (RE) market versus Bitcoin mining can be instructive. In fact, some real estate investors are taking notice, as CNBC recently examined.
Both Bitcoin mining and RE have an asset and cash flow. When purchasing a home, the asset (home) holds value over time while also producing cash flow from renters. The same can be said for Bitcoin mining, albeit in a different currency. The miner (ASIC) is the asset; while plugged in, it creates cash flows denominated in Bitcoin that can be swapped for dollars.
Of course, any financial comparison bears ample warning – things are not as simple on paper as they may seem. For argument's sake, however, we take into consideration a hosted mining solution versus a typical real estate rental investment.
Comparing two similar cashflow models reveals how much of a difference one’s earnings can make when put into a different vehicle. Both are a way to generate cash flows. But as we will see, one can dramatically outpace the other if conditions are met.
The main calculation used in this article is “Return on Investment” (ROI).
ROI = Net Return on Investment / Cost of Investment.
In the case of RE, US Existing Home Median Sales Price and US Median Asking Rent are used, as sourced from YCharts. Costs are defined as the Net Return on Investment and an averaged US property tax of 1%, plus 1% of the total home value as a stand-in for yearly maintenance costs. While there are many more overhead fees to purchasing a home and renting, a conservative estimate was used to keep the calculations simple.
For Bitcoin mining, Hashrate Index data was used to calculate the initial cost of an S17+ at $1800 in January 2020. The Braiins calculator was used for a historical view over the course of two-and-a-half years from January 2020 to June 2022. Our inputs include 73 TH/s of hashrate at 2,920 Watts of power with an electricity cost of $0.05 plus a 2% pool fee. At the end of each month, the Bitcoin mined was converted directly to USD.
The cost of a facility can average between $100,000 and $300,000 per megawatt (MW), depending on the number of ASICs used. Construction, employee salaries, insurance, legal protections and other factors generally increase the cost of mining substantially. Luckily some hosting options allow miners to share the cost among all miners hosted at the facility. For simplicity, we model hosting fees into the operational costs.
Comparison, ROI and context
According to the above calculation, over a span of three years from 2020 to 2022, an initial investment of a $311,000 home would have shown an average 3% ROI. A full ROI would therefore take about 30 years.
With Bitcoin mining, making some generous assumptions for simplicity, it would have taken less than 380 days, or just over a year, to see a full ROI. In three years the S17+ would ROI six times over assuming at the end of each month you are liquidating your Bitcoin to USD.
Of course, some assumptions need to be included for context. For one, the S17 series of ASICs has a high failure rate of about 20-30%. While newer ASICs like the S19 series have only about a 2% failure rate, machines do fail and can severely change ROI periods.
Moreover, facilities can experience downtime due to a litany of issues that are worth keeping in mind. In terms of uptime, 95% is considered the industry's “gold standard.”
Lastly – and perhaps most importantly – Bitcoin mining cashflows are settled in Bitcoin. While obvious, it's important to note the boom-bust cycle of Bitcoin mining, which can alter modeling severely. While we know what the last two years look like, no one knows what the future of Bitcoin mining has in store.
One positive to close out: mining cash flows give the ability to scale up or down in the initial investment. One can often invest as little as $5,000 or all the way up to as much as the hosting facility grants, allowing for cashflows to multiply by machine number.
Conversely, the ability to put in either a tiny allocation or a large allocation for an initial investment means someone can scale into mining with less risk and fewer dollars. Not only are the returns different in magnitude; an investor's control over the operation is as well.
Disclaimer: This material is not intended to be relied upon as a forecast, research or investment advice, and is not a recommendation, offer or solicitation to buy or sell any investment or to adopt any investment strategy. This information is for educational purposes only and is as of the date of that particular presentation. Compass does not guarantee profits from mining activity. Past performance is not a reliable indicator of current or future results and should not be the sole factor of consideration when selecting a mining product, service or strategy. Changes in the rates of exchange of cryptocurrencies, hashrate, difficulty, network transaction fees, hosting and other fees may cause the efficiency and returns of mining to diminish or increase. Individuals are responsible for their own decisions regarding cryptocurrency mining, including all financial and operational risks.