Despite recent ups and downs in price, bitcoin remains a solid investment. While investing in cryptocurrency might not quite be at the level of a good quality credit card for putting your finances in a safe place, the price remains above $7,500 per coin, or over £5,000. This is despite the recent news of Google restricting bitcoin adverts on their network. Although speculative trading on cryptocurrency might reap rewards, there are other ways of making a profit from the rise of bitcoin over the past few years. One way is through looking more closely at bitcoin mining, the process by which bitcoins are created.
Mining bitcoin yourself
If you’re an individual investor looking to get started in the process of bitcoin mining, there’s only really one way to compete against the big players which dominate the industry, the top three of which owned about 51% of the total market in 2016. This is through investing in a cloud mining operation like Genesis Mining, which has a customer base of over two million. Cloud mining is where you pay for time using someone else’s computer which is producing bitcoin. However, such companies often charge high fees for the privilege of access to their operations. In addition, many might also lock you into relatively long-term contracts. This means that if the price of bitcoin goes down, you might get back significantly less cash than you initially put in.
Buying the stock of bitcoin miners going public
With some bitcoin operations likely to list on a stock exchange in the coming year, it’s a safer bet to buy shares in these often already successful businesses. For instance, Bitmain, the secretive Chinese startup specialising in bitcoin mining, may have made as much as $4 billion in operating profit last year. However, it’s necessary to learn how to value bitcoin miners before making this investment, particularly if as an investor you’re unfamiliar with the cryptocurrency space. Like before taking out a loan, it’s important to do the right calculations to determine how profitable the company may be in the future, and therefore, how big its payouts to shareholders are likely to be.
Firstly, look at the price of bitcoin and the hash difficulty rate. Hash difficulty rate shows how easily new bitcoin can be produced, so a higher rate could mean an existing company might find it more difficult to produce bitcoin. On the other hand, new entrants may decline as a result. Secondly, the efficiency of the companies operations needs to be taken into account. Key metrics which make this include the cost of electricity where the firm is mining, the cost of buying and maintaining the computers which produce bitcoin and the hash rate of the computers used. A higher hash rate means a bitcoin is produced a whole lot quicker.
Becoming a Minesweeper
Bitcoin mining is not quite like mining gold: even once you receive a bitcoin, you can’t be sure it was worth the amount you initially put in, in both money and time. However, with the industry now maturing, large companies showing a good track record of profitability are now looking to increase their cash flow through an IPO. A smart investor would be wise to take advantage of this.
Lucy Williamson contributed to this article.