Buy & Hold vs Mining Bitcoin – Which strategy will generate more profits in the long term?
I will look at 3 mining strategies and see how it compares to the buy and hold strategy:
- Buy and Hold Strategy: one buys Bitcoin and holds for the long-term
- Mine and Sell to Cash: a miner buys a mining rig and sells all bitcoins mined daily to cash for the life cycle of the machine
- Mine and Hold daily profits: a miner buys a mining rig and sells enough Bitcoin to cover operational expenses to cash daily and holds the remainder in Bitcoin
For this analysis, we will compare bitcoin mining throughout the life of an Antminer S9 vs buying & holding Bitcoin.
Buying Bitcoin vs. Mining Bitcoin ($0.07kWh electricity)
As seen above, over the long term, both Bitcoin mining strategies have historically outperformed the buy and hold strategy. True wealth is made over the long term with proper planning and strategy. Wealth that is generated by luck or through “get rich quick schemes” (hitting the lottery, price gouging medical supplies during a pandemic), generally doesn’t last very long. With the right setup, Bitcoin Mining will outperform the simple buy and hold investment strategies. Many traders and investors believe they can buy Bitcoin at the low and sell at the top. This is an improbable, lottery ticket strategy that will likely lose money over the long term.
During Bitcoin’s existence:
- Bitcoin was at $20,000 for only a few minutes
- Bitcoin closed above $17,000 only 9 days
- Bitcoin closed above $12,000 a total of 47 days over the past 10 years
Bitcoin is very volatile and may hit high prices, but it is impossible to time the top. There is a huge difference between paper and actual gains. You must sell an asset to realize the gains, but how do you know when to sell? Bitcoin is very volatile and may hit high prices, but it is impossible to time the top. It is difficult to control one’s emotions and real time excitement or fear when seeing the wild fluctuations of Bitcoin’s price – not even professional money managers can achieve this.
Evaluating the Professional Money Managers
Between 2017 and 2019, there were over 390 Crypto Hedge Funds launched, but at the end of 2019, PWC estimates that there are only 150 Active Crypto Hedge Funds remaining. The majority of Crypto Hedge Funds failed and lost their initial principal with an asset that is the best performing asset in the last decade! This shows that not even professional money managers can correctly time the market, so what is the probability that an average person will be able to time lows and highs?
In Sideways & Bear Markets – Mining still produces excellent returns
Mining Bitcoin still generates cash flow/Bitcoin even if Bitcoin declines in price. Mining is actually the most advantageous strategy in a sideways market as holding Bitcoin yields $0 returns but with mining, you still earn Bitcoin daily. In bear markets, other miners with higher electricity rates become unprofitable and stops their mining operations, which causes a downward adjustment in the Bitcoin mining difficulty level and increasing Bitcoin mining rewards for miners with more favorable electricity rates.
Dollar Cost Averaging and its Benefits
- Dollar Cost Averaging involves buying a fixed dollar amount of an asset in consistent time intervals. The purchases continue regardless of market conditions, which allows the following advantages:
- Allows for the capitalization of Bear Market low prices
- Removes the emotion from trading
- Helps you focus long term
Bitcoin’s extreme volatility is best managed with a Dollar Cost Average Strategy, which mining achieves. Dollar Cost Averaging is an excellent strategy applied to markets that has extreme volatility and an asset that you want to accumulate a large position over the long term. Investors take advantage of Bear Markets because they are purchasing the lows while most are too afraid to buy. Bitcoin is the perfect fit for such a strategy as it is still a technology and commodity in its infancy that is in price discovery mode. It will have several more boom and bust cycles as it matures into Digital Gold so investors should expect continued volatility and have long term views. With Bitcoin Mining you are receiving Bitcoin every day and therefore, Dollar Cost Averaging into a long-term position. Also, mining helps fight back the real time emotions of greed, fear, and FOMO which provides you with better odds of achieving higher returns.