Have you ever wondered if you should buy bitcoin or mine it? Well, you’re not alone because I have found myself asking the same question. In recent months, I have seen increased talk surrounding small-scale mining operations as a means for plebs to stack sats privately rather than buying them from KYC Bitcoin exchanges. While there are obvious benefits to both buying and mining, I’ve decided to go into some detail to help more users to understand the trade offs between the two and whether or not you should buy bitcoin or mine it.

Buying Bitcoin Vs. Mining It

When people first hear about bitcoin, their obvious first response is “What is bitcoin?” and for good reason. It takes a while to understand what bitcoin is and the basics of how it all works. It takes even longer to understand the technicalities of Bitcoin mining. ASICs, mining rig, computational hash power, proof of work, kilowatt hours, and longest chain are just a few of the buzzwords that you’ve probably never heard before and they all require a good bit of research before you really begin to understand how they all work together.

To answer the question “Should I buy bitcoin or mine it?”, the answer is simple. Buying bitcoin is easy but you might be able to get more bitcoin if you mine it instead of buying it. The inconvenient truth about Bitcoin mining is that it’s not exactly easy to mine it for less than the cost of buying because mining is incredibly competitive.

Until you understand how mining works, it seems like all you need to do is turn on some computers in your basement and leave it alone for a while and it automatically “mines” some digital money called bitcoin that you can sell for “real money”. Well, the reality is that Bitcoin mining is not easy. In fact, it’s provably difficult but hopefully this article helps you to better understand the difference between buying bitcoin vs. mining it. If you want to understand a bit more about how Bitcoin mining works, you might enjoy my analogy where I explain how Bitcoin mining works using Rubik’s cubes.

Buying bitcoin is a simple trade. All you have to do is trade your local fiat currency for some bitcoin and that’s the end of it.

Bitcoin mining is also trading but it’s not just a single trade like buying bitcoin is. Bitcoin mining is actually a series of trades in an attempt to spend less money than trading a fiat currency for bitcoin. If you can make enough of these trades below your cost, then you should have more bitcoin than if you just bought it.

Deciding whether or not you should buy bitcoin or mine it is a decision with many things to consider but hopefully this article helps you to better understand all of the costs that are often overlooked by newer users who think they are just going to turn on a money printing machine in their basement and get rich.

Spoiler alert: If Bitcoin mining was easy, everyone in the world would be doing it.

Now let’s compare buying bitcoin vs. mining it.

Buying Bitcoin Is A Trade

Buying bitcoin is a relatively easy task. In the most simple terms, buying bitcoin is a trade. You just have to trade something for some bitcoin. Typically, you just trade some of your local fiat currency for come bitcoin but there are other things you can trade for as well like products or your labor.

When it comes to buying bitcoin, there is really only one thing that you need to be concerned with and that is the price that you buy at. Obviously we all want to be buying bitcoin at the lowest possible price and spending it at the highest possible price to capture all of that additional purchasing power. There are any number of different strategies to buy bitcoin.

• When the price is low, you might purchase more in hopes of waiting for the price to rise so you can spend or sell it off at a profit.
• Maybe you decide to only buy when the price is pumping because you think that the hysteria will drive the price even higher and you can sell it at the highest profit possible.
• Maybe you want to remove your emotions from all of your purchases so you simply set up a recurring fixed purchase via a dollar cost average buying strategy so that you end up buying more when the price is low and less when the price is high.

Mining bitcoin on the other hand is not as simple as trading fiat money for bitcoin. Mining bitcoin is a series of trades with the intention of accumulating more bitcoin than if you just bought it.

Mining Bitcoin Is Multiple Trades

Naturally, Bitcoin mining has an allure because it sounds like free money. To a new bitcoiner, they think all you have to do is plug in some computers, turn them on, and then get free money. Luckily, that’s not how that Bitcoin mining works at all and it actually requires a lot of work. While buying bitcoin is as simple as trading your local fiat currency for some bitcoin, mining bitcoin is a series of trades but there’s a catch. If you are good at making all of those trades, there’s a chance that you can get more bitcoin than if you just buy it.

Here are what the series of trades looks like it the most basic form. Some of these are absolutely necessary while other may be optional depending on your own particular circumstances and conviction.

• Trade fiat currency for mining hardware
• Trade fiat currency for electricity
• Trade electricity for hashes
• Trade hashes for bitcoin
• Trade bitcoin for fiat currency

If you are considering mining bitcoin, I would suggest taking the time to fully understand the game theory of Bitcoin mining and how everything works before you decide to invest in mining hardware. Keep in mind that bitcoiners who mine are some of the smartest people in bitcoin so they wouldn’t do it if it wasn’t worthwhile but it gets very competitive.

All of that being said, let’s take a closer look at all of these different trades to understand why each one is important and then you can decide if you should buy bitcoin or mine it.

The Mining Hardware Dilemma

If you’re serious about mining bitcoin, you’re going to need some mining hardware but there is a bit of a dilemma that you’re likely to encounter.

Due to a number of reasons such as operation chokepoint 2.0, and what I believe to be a globally coordinated covert war against bitcoin (purely my own speculation), some Bitcoin mining hardware vendors only accept bitcoin as payment because it’s simply easier to avoid high banking fees, prevent fraudulent payments, and not have their bank accounts shut down for selling Bitcoin-related products. So, if you want to buy some hardware to mine some bitcoin, you may need to get some bitcoin from somewhere else first so that you can buy your hardware so that you can mine some bitcoin. Seems like a bit of a chicken and egg problem.

You need to buy some bitcoin so that you can use it to buy machines that you use to get some bitcoin. If your end goal is to just get some bitcoin, then why not just buy some bitcoin and be done with it? Well, many have decided to do just that. If it’s all this work to mine bitcoin and you need to buy some bitcoin just to buy mining hardware, then why go through all the hassle?

If you end up having to buy mining hardware with bitcoin, then you have to make 2 trades. You have to trade your fiat currency for bitcoin with a fluctuating price and then trade that bitcoin for mining hardware which tends to fluctuate along with the price of bitcoin (because mining hardware tends to sell at price that is relative to how much bitcoin it can mine in a certain amount of time). If the hardware vendor can get more bitcoin from mining than they can from selling it, then they might just want to use it to mine. It also means that mining hardware can be sold for more when the price of bitcoin is higher but that also means that mining hardware tends to retain its resale value as long as the price continues to rise.

Hypothetically, if you spend $1,000 on mining hardware but you will only ever be able to mine $800 worth of bitcoin with it, then it might not make sense to buy it. On the other hand, if you can mine $1,500 with $1,000 mining hardware, then the seller has an incentive to sell it for as close to $1,500 as possible. There is a balance somewhere in there and understanding those costs and trade-offs is the first trade that will help you decide whether or not you should buy bitcoin or mine it.

You will have to do some calculations to figure out the projected profitability of mining bitcoin with particular hardware and your cost of electricity. You can use this Bitcoin mining profitability calculator which is one of the best in the industry (if not the best).

If you can purchase mining hardware with your local fiat currency, then this isn’t a dilemma that you’ll have to worry about but don’t be surprised if your bank account is abruptly shut down with no explanation.

Trading Fiat Currency For Electricity

After you have purchased some Bitcoin miners, now you need to actually run them which is going to require some electricity. If you purchased a lot of mining hardware, then you are going to need a LOT of electricity. You can think of Bitcoin miners like the machines that mine and electricity is like the fuel that runs the machines.

The mining hardware is expensive but the cost of electricity is probably an even greater cost over time. In order to keep costs as low as possible, you’ll want to locate them in a part of the world where electricity is abundant and cheap. In some parts of the world energy is stranded, curtailed, and wasted which essentially means that it has a market price of $0.00 per kilowatt hour. This kind of untapped energy is exactly the kind of energy that Bitcoin miners are constantly in search of.

Mining bitcoin with grid electricity is naturally more profitable in parts of the world where the demand is lower than supply and the price of electricity tends to be lower. For example, the cost of electricity is much cheaper in Iceland than it is in New York City because Iceland has lots of renewable energy and a population of ~300,000 whereas New York City has little to no renewable energy production and a population of ~8,000,000 with an estimated ~25,000,000 people in the city on any given weekday. Mining bitcoin in NYC would be incredibly expensive and probably a losing proposition considering that there are miners in other parts of the world who are mining with much cheaper electricity and can sustain their operations for much longer.

In parts of the world that are being disrupted by lots of new solar energy generation, the price of electricity can fluctuate all throughout the day since the sun is shining the brightest during the middle of the day. These bright days can actually generate so much electricity that solar energy production has to be curtailed (reduced or stopped) because it produces more than the grid can handle OR there is simply no buyer for it which results in negatively priced electricity (which is difficult to understand but more on that in another article). With surplus electricity popping up all around the globe from too much solar, wind, and even hydroelectric generation, Bitcoin mining is actually the solution to energy curtailment.

So, at this point, Bitcoin miners need to buy efficient mining hardware and electricity at the lowest price possible to increase the chances of getting a positive return on their investment as quickly as possible. Having access to cheap electricity is one of the most sought after strategies because it enables a miner to sustain operations for the longest amount of time. Miners who don’t have access to cheap electricity might be willing to mine at a loss but it’s possible that they might be doing more good simply buy buying bitcoin to help support the price and then turn their mining hardware back on after the price has increased to levels that enable them to mine profitably.

Based on just these 2 parameters, do you think it makes more sense to buy bitcoin or mine it? While you ponder that, let’s look at the next trade that you will need to make in order to keep your mining hardware running.

Trading Electricity For Hashes

As a miner, you essentially trade electricity for computational hashes. More precisely, you use electricity to systematically guess numbers called a nonce that is used to generate a hash. The more hashes a miner can compute per second, the higher the chances of finding the correct one and winning the block reward. By trading electricity for computational hashes at a cheap enough rate, miners can maximize their chances of earning bitcoin relative to their costs. This is where the cost of your mining hash power and the the cost of your electricity really come into play because the cheaper the price you pay for both, the sooner you are likely to recoup the cost of your mining hardware, electricity costs, and generate a profit.

If you have access to cheap electricity and/or highly efficient mining hardware, then it might make more sense for you to mine bitcoin instead of buying it. If you don’t have access to cheap electricity, then it probably makes more sense for you to stick to just buying bitcoin.

Any given Bitcoin miner is highly unlikely to find a hash that meets the requirements of the current difficulty of Bitcoin mining all on their own so it makes economic sense to join others in a mining pool to increase their odds and earn a percentage of revenue in relation to the amount of hash power that they contribute.

These mining pools also charge their own fees that can vary widely from one mining pool to another but they tend not to fluctuate very much. It’s important to do your own research when you are picking a mining pool to join because they will absolutely affect your profitability.

Trading Hashes For Bitcoin

The next trade that Bitcoin miners need to make is the most important one because this is where Bitcoin miners actually earn some bitcoin with all of their hashpower. Without getting too wrapped up in all of the technical details of how Bitcoin mining works, there are a few important things to understand.

• The block subsidy: How many brand new bitcoin are mined in each block (fixed)
• Transaction fees: Fees paid to miners to have their transactions confirmed and added to the blockchain (fluctuates)
• The difficulty adjustment: Mining difficulty adjusts up or down every 2016 blocks (fluctuates)
• The halving: The predictable 50% reduction of the supply of new bitcoin every 4 years (fixed)

Bitcoin miners are rewarded for each new block that they mine. The block subsidy is fixed and known ahead of time. The miner fees fluctuate based on how many people are sending on-chain transactions at any given point in time. The difficulty adjustment fluctuates up or down based on how many people are mining around world. The halving cuts the block subsidy in half every 4 years.

For example: If there are 100 equally efficient miners around the world, they are all competing to win the same block reward (block subsidy + transaction fees) with each new Bitcoin block. If 10 new equally efficient miners come online, there are now 110 Bitcoin miners which means that new blocks will be mined 10% faster. To compensate for this increase in new hash power, Bitcoin mining becomes more difficult to ensure that new bitcoin are not generated too quickly (inflation). If 10 miners decide to shut down because they are not mining profitably, then the difficulty adjusts downward by ~10%. To top everything else off, every 4 years the amount of bitcoin in the block subsidy is cut in half (to cut bitcoin’s rate of inflation in half).

So, in order to mine efficiently, you need to be able to calculate your costs in relation to the fixed block subsidy and fluctuating miner fees and the fluctuating mining difficulty and the predetermined halving every 4 years.

If all of this sounds way too complicated for you, then you’re probably better off just buying bitcoin instead of mining it. But if you enjoy crunching numbers and analyzing data, you might enjoy mining bitcoin more than buying it.

Trading Bitcoin For Fiat

After Bitcoin miners buy their hardware, deploy them where they have access to the cheapest electricity, then mine bitcoin with varying returns based on the fluctuating block reward and mining difficulty, the next thing many Bitcoin miners have to think about is the price of bitcoin because some Bitcoin miners naturally need to sell some of their bitcoin in order to pay their electric bill. This tends to be especially true for large facilities because they purchase electricity in bulk from various energy sources and energy produces don’t accept bitcoin as payment yet.

In the event that you mine some bitcoin and you need to sell some to pay for overhead costs, you’ll naturally want to sell at the highest price possible. You can sell to large centralized exchanges at the current spot price or you can attempt to sell at a premium through peer-to-peer marketplaces. You can even try some new tools that are being developed to enable miners to sell newly mined bitcoin (at a premium) for old bitcoin to bitcoiners who want some brand new bitcoin without any previous history.

You can also wait for the price to increase and attempt to sell at a greater profit but at that point you’re basically just speculating on the price of bitcoin but with multiple steps between buying your hardware, electricity, and actually mining. If you’re going this route, it might make the most sense to just buy bitcoin instead of mining it.

Other Varying Costs

As if everything I have already mentioned above isn’t enough too much to calculate already, there are also a number of other expenses that you need to be aware of depending on the size of your bitcoin mine, what mining firmware you use, what hardware you use, and where your mine is located. Here are all of the various fees that I can think of but there might be even more than what I have listed below.

• Miner pool fees
• Mining hardware maintenance costs and labor
• Hardware infrastructure costs
• Mining firmware fees
• Specialized cooling hardware & infrastructure
• Security hardware and labor
• Insurance in case of loss, damage, or theft
• Taxes, licenses, and other government fees
• Offsetting heating expenses with heat from Bitcoin miners

All of these costs don’t necessarily apply to all Bitcoin mines but it’s a good idea to be aware of them before you decide to buy any mining hardware.

Final Thoughts

Deciding whether or not you should buy bitcoin or mine it is a question that more people are likely to be asking themselves as the halving approaches every 4 years.

If you decide to buy bitcoin, all you have to worry about is the price that you buy at or an average cost of all of your cumulative costs. If you decide to spend or sell in the future, you just need to make sure that the price is higher than your purchase price otherwise you are losing purchasing power. It’s pretty straightforward.

If you decide to mine bitcoin, you need to buy hardware at the lowest possible price (which fluctuates), buy electricity at the lowest possible price (which fluctuates), mine bitcoin with a varying difficulty adjustment, potentially sell some of your bitcoin and then you need to mine enough bitcoin to cover all of your costs which can be difficult to predict and calculate since so many of them fluctuate so much and not all costs apply to all Bitcoin miners evenly.

Ultimately you will need to be the one that decides if whether or not it makes sense for you to buy bitcoin or mine it but hopefully this article has helped you to gain a basic understanding of some of the tradeoffs that you need to consider when you finally make your decision.

And of course, whether you buy or mine bitcoin, ensure that you are properly managing your seed phrase and taking advantage of the proper storage products to keep it safe.

If you think that you can make all of the above trades efficiently, then I think it is absolutely worth giving it a shot. If you think all of the above steps are a bit too much for you to balance or even comprehend, then buying bitcoin is probably the best way for you to accumulate bitcoin.

Thank You For Reading

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