Wealth preservation is a goal of many higher net worth individuals. A strong wealth preservation strategy includes acquiring passive income generating assets. Currently, the most popular is real estate and rental properties. As the Federal Reserve shows no signs of slowing down economic stimulus via money printing, individual and institutional investors continue to dump their depreciating dollars and flood the real estate market. As a result, real estate’s barriers to entry and associated expenses keep increasing while profit margins tighten.
Bitcoin mining with its lower barriers to entry, small but resilient market and growth potential presents an alternative opportunity to earn passive income. This article discusses real estate investing and bitcoin mining by comparing their liquidity, market size, barriers to entry, industry growth, start-up and maintenance expenses, and profitability.
Costs and passive income characteristics
Substantial upfront costs and on-going maintenance are features of both rental properties and bitcoin mining. In October 2021, the median home sale price was $378,700 with 45.8% of homes sold above list price. The newest generation bitcoin mining machines (ASICs) range between $8,000-$15,000. These machines require temperature-controlled facilities to keep them running at optimal levels and may need parts replaced throughout its lifetime. Similar to real estate home warranty services, bitcoin mining maintenance can be outsourced to a third party. Hosted mining providers hold machines in facilities on their owner’s behalf and take on the burden of maintenance.
Both bitcoin mining and rental properties, as cash flow generating assets, naturally offer some protection against volatility. Bitcoin mining provides a consistent inflow of bitcoin at market value. While price volatility impacts overall portfolio value, the consistent and market-relative output from mining investments makes them an effective hedge against volatility. In addition to cash flow generation, both assets, property and bitcoin mining machines (ASICs), appreciate in value as demand in their respective marketplaces increases. Overall, bitcoin mining and real estate both share passive income producing properties. However, their markets are very different.
The ease of buying and selling, often referred to as liquidity, adds to an investment’s value. The markets for real estate and bitcoin mining are both highly liquid. Like Zillow and Realtor.com, ASIC marketplaces are rife with listings. Individuals who choose to host their ASICs can request that their hosting provider list and sell the machines on a marketplace for them when they decide to liquidate their investment. Any bitcoin mined can also easily be liquidated through a cryptocurrency exchange for fiat currency.
The most common metric to gauge market size is market capitalization, or market cap. At the time of writing, bitcoin’s market cap sits at $1.07 trillion. Meanwhile, the world’s real estate market cap is around a whopping $326.5 trillion.
The below data compares bitcoin and real estate’s respective market sizes to other popular asset classes. Bitcoin, and by extension bitcoin mining, has a lot of upside potential. Investors will seek to diversify their portfolios as real estate profit margins continue to get squeezed and interest rates stay near zero or negative while inflation continues to climb. Bitcoin and bitcoin mining will likely absorb much of this capital. Bitcoin’s scarcity and bitcoin mining’s superior ROI and lower start up costs versus real estate make it attractive.
Hashrate – the total amount of computational activity that bitcoin miners spend working to add new blocks to the network – is a way to gauge the size and growth rate of the bitcoin mining market. In other words, bitcoin’s hashrate measures the amount of bitcoin miners plugging into the network. The charts below depict the bitcoin network’s hashrate over five year and year-to-date (YTD) timeframes, respectively. The hashrate growth over the past five years shows that the demand for bitcoin mining is strong and resilient.
Hashrate decentralization lowers bitcoin mining’s risk profile. The hashrate year-to-date (YTD) chart shows that bitcoin’s hashrate only took four months to recover after dropping 33% in response to the Chinese government’s crackdown on bitcoin mining. This crackdown further decentralized the market with much of the Chinese hashrate relocating to North America, South America, and other Asian countries. Overall, hashrate decentralization combined with sustained hashrate growth makes bitcoin mining an attractive investment.
Barriers to entry
Bitcoin mining’s barriers to entry are limited to initial hardware/setup costs and electric power rates. However, real estate’s barriers to entry extend beyond financial limitations. Finding highly profitable real estate rental properties takes a lot of time and effort. The buyer must study different regions, each with different profitability levels, growth rates, market demand, taxes, regulations, and rent restrictions. Area selection is key because the majority of real estate investment profits come from property appreciation not from rental income produced. Buyers must also pay an agent and if they handle multiple rental units, a property manager. Standard property management fees range from 8-12%.
Many people falsely claim that bitcoin mining is expensive and unprofitable. The cost of individual miners fluctuates with the price of bitcoin, and tends to represent 9-12 months of revenue, cited by Jefferies. In mining, power rates are the key determinant for profitability and breakeven point. Hosted mining offers investors access to power rates as low as $0.05/kWh versus standard residential rates of $0.09-$0.15/kWh. In contrast, rental properties cost on average $200,000-$400,000 and collect $1500 per month in rental income leading to much longer breakeven points. The components of bitcoin mining and real estate profitability are broken down below.
Bitcoin mining profitability
- Profitability = Revenue - Costs
- Revenue: (Hashrate / network hashrate) X Bitcoin price X (6.25 BTC block reward + transaction fees) X 52,560 Blocks/Year
- Costs: Bitcoin miners + Electricity costs + hosting fees (if applicable) + pool fees
Bitcoin mining profitability can be estimated using this calculator. Simply plug in the applicable ASIC model specifications and power rate; ASIC model specifications can be found here. Once this is imputed, the calculator’s dashboard will display: monthly bitcoin revenue, total bitcoin mined over the selected time frame, monthly and cumulative profit/loss in fiat currency, and break-even electricity price.
Investors who want a more holistic picture of what their investment cash flow will look like can use the calculator’s advanced options and also input their expected capital expenditures.
Rental property profitability
- Profitability = Revenue + Property Value Appreciation - Costs
- Revenue: Rent payments collected
- Costs: Property Purchase Price + Property Taxes + Maintenance costs + Homeowners Association (HOA) fees
Compared to bitcoin mining, real estate investing, in addition to upfront costs, comes with many miscellaneous expenses that buyers often overlook when purchasing property.
Real estate expenses include:
- Cost of property
- Property taxes (federal, state, and/or local)
- Property insurance
- Homeowner’s Association (HOA) fees
- Property management fees
- Expenses related to property aesthetics (painting, landscaping, seasonal pest control etc.)
- Surprise maintenance costs (electrical and home appliance issues, A/C repairs , water and mold damage, etc.)
- Damages caused by bad tenants
- Property renovations to satisfy local building codes/standards
Unlike real estate, expenses associated with bitcoin mining are very predictable and typically limited. Also, bitcoin mining machines have fewer components and therefore carry less maintenance costs. While real estate profitability varies largely by region, a bitcoin mining machine will produce the same amount of bitcoin no matter where it is plugged in, holding power rates steady. Common mining setup and recurring costs are broken down below.
Bitcoin mining expenses:
- Purchasing ASICs and PSUs
- Cooling set up costs (immersion or air cooled)
- Mining pool fees
- Electricity costs
- Hosting fees
- ASIC replacement parts
Bitcoin mining, with its robust market growth and passive income properties is an attractive investment opportunity. Bitcoin mining’s initial start-up costs are standardized across all jurisdictions and operating costs are predictable. Because of this, bitcoin mining’s barriers to entry are significantly lower than real estate investing.
Bitcoin miners, like real estate investors, benefit from the appreciation of their assets. Bitcoin mining is also cash flow paid out in the most scarce asset in the world, bitcoin. Plugging in a bitcoin mining machine is equivalent to buying prime real estate on the blockchain.