DEEP DIVE: bitcoin mining side hustle

Yo Hustla’

This week I went down a rabbit hole. I got curious about Bitcoin mining. Is it a good side hustle?

Let’s dive in.

First thing I did was email my friend Anthony who bought a mining operation and asked him about it. His reply is exactly why I spend so much time building a network.

“Don’t build your own, just do this: https://simplemining.io/”

Turns out this company has a huge mining operation in Iowa, and will simply sell you the miners, host them, repair them as needed, and charge you for the electricity they use. You connect your wallet to the miners, the hosting company never touches your coins.

That’s what I’m talking about. The idea of renting space and building out a facility made my head hurt. This is easy, we love easy.

So I asked about the economics. Basically Simple Mining (SM) produces Bitcoins for about $42k each. Which is killer considering the price of BTC is ~$66k. What’s not to love?

(Btw Anthony’s own mining operation produces coins for $65k each, so SM has a clear advantage.)

So what’s the catch? The catch is the capex needed to buy the miners (which are basically small computers that solve math problems that the blockchain then rewards with Bitcoin). You with me?

These miners cost about $6k each after they are installed. So how does the math work…

(Hey- you miners out there, feel free to tell me where this is wrong and I will happily update these numbers in a future post)

Investment: $6,000

Now there’s a tax break for these miners with bonus depreciation, which means you can depreciate a big chunk the first year. So if you take bonus depreciation and your tax rate is 40%, bonus depreciation is 60%, your tax savings is $1440, which means you’re actually spending $4,560 on a miner.

Each miner produces about .000189 BTC a day, and SM says they have 98% up time. That seems aggressive, let’s make it 95%.

So each miner will produce: .000189×365x.95×66,000 (~price of bitcoin today) = $4,325 every year.

But, we have to pay for electricity for that miner. The company says they’re producing BTC for $42k, with BTC at $66k, that means the operating margin is (66-42)/66= .36

So the actual profit on the BTC every year would be .36 x $4,325 = $1557 in profit.

OF COURSE THAT IS ASSUMING THE PRICE OF BTC STAYS THE SAME.

It will not.

At $1557 profit/year and $4,560 in capex, you’ll pay off your initial investment in 35 months or just about 3 years. After that, everything the miner makes is profit, assuming you’re producing coins for less than market value.

Worth it? Hard to say.

But here’s how I’ve come to look at it. With any investment, I want to know when I am going to get my initial investment back. And for high-risk investments (I can’t imagine an investment with much more risk than this) I want it back in a year or less.

So at what point does this pay off in a year or less? Let’s reverse engineer it.

The miner will produce .000189 × 365 x .95 = .065 BTC a year no matter what the price is.

The electricity costs $42,000/BTC to produce, so .065 x $42,000 = $2730/yr in electricity.

If we want to make $4560 in profit to pay for the miner the revenue has to be $2730 + $4560 = $7290

Which means the price of bitcoin needs to be $7290/.065 = $112,513 to pay off this machine in 1 year. That’s about double the price now.

But here’s the rub, if the bitcoin price spikes, the price of miners spikes too! During the last bull market the price of miners tripled to $15k each. This would also happen to the value of your miners if you bought them now.

Shew. This is complicated, fraught with risk, and incredibly hard to model.

So you could do all this, or you could just do the easy thing and buy Bitcoin.

I think you know what I’m going to do. BUT I do think I will revisit this come end of year tax season. The beauty of this model is that it is incredibly flexible. You can buy 5 machines and 500 machines and get a tax benefit. You can’t really do that with real estate or most other depreciable assets.

What do you think? Where did I screw this up?

Kriss Berg