Accounting

[Steve]

I wanted to better track the profitability of my mining and bitcoin investment operations, so I started to think a bit about how best to do that.  I decided that I needed to clearly separate the mining business from speculation in the appreciation of bitcoins.  The approach I took was to calculate the revenue to the mining operation as if I sold every bitcoin generated as it was generated (I did it on a daily basis).  So, if my miners generate 1 bitcoin on a particular day and the closing price that day was $5, I would book $5 of revenue for the mining operation.  That revenue comes from the bitcoin investment operation buying bitcoins from the mining operation at the market price each day (after all, if I weren't generating bitcoins, the investment operation could have bought them on the open market for that price).

Separating things like this has been quite illuminating...if I include the estimated resale value of my hardware in the assets of the mining operation, I'm right around a 21% return (over ~3 mon).  If I don't include the resale value, I'm still not yet profitable.  The investment operation however has returned about 413% over that same period of time!  But, it gets better...

I then took a look at what kind of return I would have had if I'd invested all of the money I put into mining equipment in bitcoins.  The dollar cost average of bitcoins that I've purchased (including those purchased from my mining operation) over the past 3 months is $2.11.  Using that price (which is more realistic than if I'd picked the price when I started in Feb (which was less than $1)), if I'd forgone mining and just invested all of that capital into bitcoins directly, my return would be identical in percentage terms, but I would have a 3.3x greater absolute profit.

I feel like this is a good way to analyze a mining operation vs price speculation.  If you hold the bitcoins you generate, then any gains you realize from that point forward have nothing to do with mining (because as I mentioned above, you could have simply bought those coins on the open market).  There is less risk in mining (due to hardware resale), but to date, far smaller returns.  I wonder if most people aren't doing this kind of analysis and are conflating their returns from mining with their returns from price speculation (which may lead to sub-optimal poor decisions regarding mining vs buying).

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[SgtSpike]

You should look at my spreadsheet.  It calculates returns on all three scenarios (mining and holding, mining and selling, investing in bitcoins directly).  Link is in my sig.

I think the key bit that people are missing is that the recent 5x increase in bitcoin value isn't normal, and I personally don't expect to see such returns ever again.

[Steve]

Nice spreadsheet...yours is projecting forward, whereas mine is looking at actual returns.  The key point I was trying to make was that mining profitability should always be calculated based on selling 100% of everything you generate.  If you include holding some of those bitcoins for some period of time, it's bogus when evaluating mining profitability.  That's because you could just forgo the mining and buy the bitcoins you would have mined each day.

As for the price moves in the future, who knows.  It's easy to imagine catalysts that will continue to propel the price higher...it's also easy to imagine events that could severely impair the price.

[SgtSpike]

Completely agree with you.  Most of the value in mining is when you have a high price/difficulty ratio.  Otherwise, investing in bitcoins directly usually takes the cake, unless you just hardly have any increase in value at all.

The advantage in investing in mining equipment is that you are partially hedging yourself against a bitcoin crash - the hardware can be resold to recover some of the losses.