Simplistic Analysis:
Crypto Mining vs. Buy-and-Hold


Bottom Line Up Front

Mining is more profitable over the long run than a simple buy-and-hold strategy, but looses when short-term liquidity is required. If you have little time and little money, but can let it sit for a long period, mining is most likely to net you the greatest return.


Background

After many years of procrastination, I finally spent a few months digging into "crypto currencies". My motivations were more about learning and understanding the fundamentals of the domain rather than jumping on any get-rich-quick strategies. After a fair amount of reading I decided to start at the very beginning: mining.

Without the underlying blockchain, and the miners that maintain it, there is no system. No DeFi, "cryptocurrency", NFT, or whatever-other-concept can exist without a community building and validating a blockchain. That blockchain can work in different forms, from Proof-of-Work, to Proof-of-Stake, or Proof-of-Resource (my description).

My set of assertions going into this experiment were as follows:

So given the above, I decided to "mine" in my home office, and to leverage the spare resources in my home workstation as much as possible. I did have to invest a bit in some upgrades, but much of the hardware will be very useful for other data crunching experiments if the crypto thing goes completely bust (with the exception of the Helium hotspot).

I decided on a blend of Proof-of-Work and "Proof-of-Resource" mining. I should define my "Proof-of-Resource" term here. There are some exciting blockchains that are tied to crowd-sourcing of resources or capacity for general use. The Helium IoT network is one and the Chia storage network is another. So with an extra GPU, some extra external hard drives, and a Helium Hotspot I'd be able to "mine" three different crypto tokens with my home workstation.


Fiscal Strategy Analysis

A lot of my friends are just interested in the returns of "crypto". And I know a lot of people who have made very good returns just getting on one of the exchanges and trading it like any other commodity. And looking at the wild price fluctuations in the market one has to ask if mining is worth it?

My interests and motivations weren't driven by this question but I decided to do the analysis now with real-world data, after running for a few months. The assertion here is that I'm comparing mining to simple buy-hold strategy rather than an effective day-trading approach. It's more apples-to-apples comparison if keeping daily effort and capital investment close to zero.

I modeled four different scenarios that try to capture market timing, liquidity pressures, pricing over time, and mining yields on unchanging hardware. What happens if you have to sell early? What happens if market price drops? What happens if mining yields decrease? Here is the simplistic break-down:

Initial Capital Investment: $1,200

Scenario A
Buy when ETH price very low, ETH price rises consistently over 3yr period, mining yields stay flat.

1. BUY ETH @ $1800 == 0.66ETH position
2. BUY Miner GPU that yields 0.0223ETH per month

SELL at 4 Months, ETH @ $4500
1. 0.66ETH == $2,970
2. 0.0892ETH == $401

SELL at 36 Months ETH @ $5500
1. 0.66ETH == $3,630
2. 0.80ETH == $4,415


Scenario B
Buy when ETH price is higher, ETH price rises gradually over 3yr period, mining yields stay flat.

1. Buy ETH @ $4500 == 0.26ETH position
2. BUY Miner GPU that yields 0.0223ETH per month

SELL at 4 Months, ETH @ $5000
1. 0.66ETH == $3,300
2. 0.0892ETH == $446

SELL at 36 Months ETH @ $5500
1. 0.26ETH == $1,430
2. 0.80ETH == $4,415


Scenario C
Buy when ETH price is low, ETH price spikes, then drops over 3yr period, mining yields stay flat.

1. Buy ETH @ $1800 == 0.66ETH position
2. BUY Miner GPU that yields 0.0223ETH per month

SELL at 4 Months ETH @ $4500
1. 0.66ETH == $2,970
2. 0.0892ETH == $401

SELL at 36 Months ETH @ $1200
1. 0.66ETH == $792
2. 0.80ETH == $960 (wins at 44 months, if price holds)

Scenario D
Buy when ETH price is low. ETH price rises consistently over 3yr period. Mining yields drop over 3yr period
1. Buy ETH @ $1800 == 0.66ETH position
2. BUY Miner GPU that yields 0.0223ETH per month

SELL at 4 Months ETH @ $4500, mine yield drops 1%/mo
1. 0.66ETH == $2,970
2. 0.0878ETH == $395

SELL at 36 Months ETH @ $5500, mine yield drops 1%/mo
1. 0.66ETH == $3,630
2. 0.6546ETH == $3,600 (wins at 42 months and beyond)


Summary

Mining is a loosing strategy if you need short term liquidity and the market price stays flat or rises in that period. In most other scenarios, however, mining yields a better return over the long term. But that is only compared to purely passive investment. In the scenario where crypto goes completely bust, with mining, at least you end up with usable computing assets. For me, the other important quality of mining is anonymity. No bank or credit card transactions are needed, no social security number has changed hands, not even a personal email address. And with a VPN service even the IP traffic can be obfuscated.

One minor point in the above is cost of electricity. I haven't really noticed it in our bill but seasonality means we were running the AC less. On paper, however, 36 months of electricity for the miner would cost me roughly $380 (almost $11/mo). The indirect extra AC usage needed in summer months likely adds a bit to that (GPUs make office warmer). Another consideration is the impending change in ETH from proof-of-work (GPU) to proof-of-stake (deposit a lot of money), that will likely drive miners to other PoW chains and drive down yields.

Given all of the above, for me, mining at home is a good strategy. For those who are more serious about "crypto", and are willing to put in more capital and time, I'd advise that mining be a part of their overall portfolio. Something like 80% in trading, staking, and yield farming and 20% in mining across a few instruments.

Notes

Some notes, sources, and links:




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