Should One Opt for Bitcoin Investments or Bitcoin Mining Equipment?
In the world of digital assets, a fascinating debate arises between investing in Bitcoin itself and Bitcoin miners, publicly traded corporations that convert fiat currency into cryptocurrency. On one hand, Bitcoin's purity as a network exposure makes it the superior investment. On the other, successful miners can potentially outdo Bitcoin, earning abnormal returns. Let's delve into this discussion by examining potential returns and risks of a 2024 investment.
To start, let's analyze the danger and reward of investing in Bitcoin versus Bitcoin miners, using the purchase of January 1, 2024, and sale on December 31, 2024, as our benchmark. For risk, we'll consider annual volatility, which is the standard deviation of daily log returns over a rolling one-year period.
While Sharpe ratios might be a common approach to measuring risk and reward, my method provides separate measures of risk and return. This allows for a more visual representation on a graph. Moreover, the meaning remains intact by considering the full holding period, as opposed to averaging daily returns.
Upon scrutinizing the BTC-USD graph, no miner lies in the northwest region - the region characterized by higher returns and lower risk. Only a few offer greater returns, although with higher risk. Most publicly traded miners offer a less favorable return than Bitcoin with incremented risk.
So, why is Bitcoin performing better than miners?
The 2024 Bitcoin halving plays a significant role in Bitcoin's superiority. This mechanized, scheduled reduction in Bitcoin issuance every 4 years lowers future supply, thus boosting demand and subsequently price, resulting in increased returns.
For Bitcoin miners, the situation is less straightforward. The positive impact of higher demand post-halving coincides with a decrease in miner revenue, as the halving cuts the revenue per unit of hash power by half.
It's worth noting that the decision to invest in a commodity or a mining company that produces that commodity requires careful consideration. In light of gold as an example, a graph displayed shows no gold miners offering higher returns with lower risk. Instead, only one offers greater returns with more risk, while the majority offer less favorable returns with higher risk.
A broader sentiment likely factors into this discrepancy. In both gold and Bitcoin mining industries, the relentless competition causes returns in the corporate equities to fall short of the commodity's potential. However, successful miners like BTDR in Bitcoin and NVA in gold managed to skim better returns in 2024.
For the sake of long-term comparison, we will now delve into Bitcoin's Worst-Case Analysis, which measures the worst return from investing in Bitcoin versus Bitcoin miners for different holding periods.
As observed, Bitcoin's worst return remains superior to Bitcoin miners in the vast majority of cases. It's also noteworthy that the lowest return from all miners consistently escalates with the holding period, which ultimately confirms more substantial returns accruing from longer-term investments.
- In the debate between investing in Bitcoin itself and Bitcoin miners, some argue that Bitcoin's purity as a network exposure makes it the superior investment due to its higher returns.
- However, successful Bitcoin miners can potentially outdo Bitcoin, earning abnormal returns, particularly during periods of higher demand.
- Considering the risk and reward of a 2024 investment, we will examine the potential returns and volatility of both Bitcoin and Bitcoin miners.
- Upon analyzing the BTC-USD graph and considering the full holding period, it's evident that Bitcoin outperforms most publicly traded miners, offering greater returns with lower risk.
- The 2024 Bitcoin halving is a significant factor contributing to Bitcoin's superiority, as it lowers future supply, boosts demand, and increases returns.
- For Bitcoin miners, the halving may not result in the same favorable outcome, as the reduced revenue per unit of hash power compensates for the increased demand.
