Why do people think mining is less risky than buying, anyway?

[Raize]

I was considering this today when I realized there are still people purchasing equipment to mine in larger and larger amounts, sometimes dropping tens of thousands of dollars on equipment to do so.

So today I considered what it would be like to purchase a batch of 30 Icarus boards, arguably one of the most efficient miners and hook them up to a router running DD-WRT and cgminer.

I went to this page:
http://bitcoinx.com/profit/index.php

I filled in the following fields with the following values:
Electricity rate: $0.10
Power consumption: 600 Watt (19w * 30 + a router)
Hash rate: 11400 (380 * 30)
Initial cost: $14250 ($469 * 30)

The time to pay it off was 2 years. (account for block reward halving)

Now, even assuming the difficulty does not increase *at all*, what would you rather rather do:
1) Buy BTC with ~$15,000 with the chance of say a 20% increase, or
2) Buy hardware with the idea of only breaking even only two years from now.

It would seem to me that you would only be "safe" buying hardware if you thought that advancements in FPGA/ASIC design were not going to eclipse or significantly change any time within the next year.

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[DeathAndTaxes]

The price of BTC doesn't need to rise for a miner to be profitable. 

There are risks to both methods but the risks are different. 

[P4man]

Neither is really what I would consider safe, but they are different. Mining profitability doesnt depend solely on difficulty or price. It depends on the ratio of both, and in theory they are linked. So as long as you invest in hardware that makes you more efficient than the average miner, prospects of earning back your investment are relatively good.

Buying bitcoin otoh.. is a pure gamble on its price and price only.

[frograven]

Both are risky, but mining is perhaps more "concrete". You set up your rig, work out your electricity costs, and instantly have a RELATIVELY predictable trickle of income.

There are heaps of "mining income" calculators out there.. but not so many "how much will I make buying and holding bitcoins" calculators.. maybe this is for a reason.

I think people should be buying bitcoins to use, not to sit on anyway 

[hazek]

The time to pay it off was 2 years. (account for block reward halving)

You do realize you don't need to pay your capital off before you can make a profit right? What you should be trying to figure out is how long it takes to mine so that selling your capital + mining profit = profit.

[majamalu]

Buying bitcoins is more like gambling (although it is an intelligent bet, IMHO). Mining is more like insurance (worst case scenario you can sell your hardware).

[eldentyrell]

Mining profitability doesnt depend solely on difficulty or price. It depends on the ratio of both

Actually three things: price (exchange rate), difficulty, and your own costs (capital+electricity).

You can hedge out price -- short the coins, which is just another way of selling them before you mine them.

Costs are something to compete on: it's the only one of these three axes where one miner is different from the next.  Unfortunately you can't compete without exposing yourself to difficulty risk -- it can't be hedged out.

Farmers have a similar problem: if you can grow corn more efficiently than your neighbor, you sell corn futures so you aren't exposed to sudden changes in the demand for corn.  Then you can just focus on being a good corn producer.

Blockchain difficulty futures would be really useful, especially as we get closer to the block reward halving -- let's be honest, nobody really knows how that's going to play out.  Or, if you think you know, you ought to be trading difficulty futures to make money off of your foresight.

I've contemplated setting up a blockchain difficulty futures market a couple of times now.  I think miners would use it, but I'm not sure there would be enough people taking the other side: effectively betting that a certain difficulty growth rate won't be exceeded.  The end result would be a uselessly-large bid/ask spread.

[FreeMoney]

Mining profitability doesnt depend solely on difficulty or price. It depends on the ratio of both

Actually three things: price (exchange rate), difficulty, and your own costs (capital+electricity).

You can hedge out price -- short the coins, which is just another way of selling them before you mine them.

Costs are something to compete on: it's the only one of these three axes where one miner is different from the next.  Unfortunately you can't compete without exposing yourself to difficulty risk -- it can't be hedged out.

Farmers have a similar problem: if you can grow corn more efficiently than your neighbor, you sell corn futures so you aren't exposed to sudden changes in the demand for corn.  Then you can just focus on being a good corn producer.

Blockchain difficulty futures would be really useful, especially as we get closer to the block reward halving -- let's be honest, nobody really knows how that's going to play out.  Or, if you think you know, you ought to be trading difficulty futures to make money off of your foresight.

I've contemplated setting up a blockchain difficulty futures market a couple of times now.  I think miners would use it, but I'm not sure there would be enough people taking the other side: effectively betting that a certain difficulty growth rate won't be exceeded.  The end result would be a uselessly-large bid/ask spread.

Do it! People will make market for profit for sure.

[realnowhereman]

I don't mine, but here's some comments..

If the goal is simply to obtain bitcoins, then buying is simpler.  I don't really think anyone considers mining less "risky".  On what scale of risk would we be judging it?  At the end of the process you have bitcoins in your wallet.  The risk is that they will fall in value relative to what you invested to obtain them.  That's true however you got them.

Perhaps the argument is that obtaining coins via mining is "cheaper".  Don't really see it.  As soon as that is true, there will be more miners.  For an individual, it's better to let comparative advantage do its work.  You earn your money in the most efficient way you can, and let those most efficient at mining create coins that you buy with your efficiently earned money.

If we're simply talking about profit making, then you might be cashing out instantly if you are a miner.  In that case, it's just a business and nothing to do with bitcoin's directly.  The same business analysis would be done if you were harvesting corn.  Capital, risk, and return.

There is one factor I can think of that might change the equation: the capital invested in mining equipment retains some value (although it is depreciating daily).  If you invest $1000 in an efficient mining rig to make $1000 worth of bitcoins, you still have the mining rig at the end (in other words, your rig only has to keep up with its own depreciation and running costs to be profitable, you'll get a portion of the capital back).  If you simply bought $1000 worth of bitcoins, all you have is bitcoins.  Of course, there is a risk that your mining rig will not generate enough coins to pay for itself -- so there are two sides to that situation as well.

[disclaimer201]

With GPUs (soon to be pushed out of the mining market) it went like this.

Buy GPUs. Convert electricity to Bitcoin. Own GPUs and Bitcoin. A flaw is found in the Bitcoin protocol. Bitcoin is now worthless. GPUs still have value.

This, of course, does not work with Bitcoin specific hardware (the FPGAs in your example).

Another point to consider. It's very easy to obtain 100% anonymous (even brand new, freshly minted) Bitcoins through mining. This involves a different type of risk.

Also, mining doesn't require a counter party. You don't need a seller to obtain Bitcoins, and you avoid any possible risk involved with that. Trusting exchanges, etc.

You'd have to deal with exchanges earlier or later anyway, unless you want to just pile up Bitcoins or keep buying socks with them. Maybe your power company will accept monthly installments in socks, too.

[majamalu]

If you simply bought $1000 worth of bitcoins, all you have is bitcoins.  Of course, there is a risk that your mining rig will not generate enough coins to pay for itself -- so there are two sides to that situation as well.

Exactly, but you'd be covering yourself from total depreciation of your bitcoins.

[dirtycat]

With GPUs (soon to be pushed out of the mining market) it went like this.

Buy GPUs. Convert electricity to Bitcoin. Own GPUs and Bitcoin. A flaw is found in the Bitcoin protocol. Bitcoin is now worthless. GPUs still have value.

This, of course, does not work with Bitcoin specific hardware (the FPGAs in your example).

Another point to consider. It's very easy to obtain 100% anonymous (even brand new, freshly minted) Bitcoins through mining. This involves a different type of risk.

Also, mining doesn't require a counter party. You don't need a seller to obtain Bitcoins, and you avoid any possible risk involved with that. Trusting exchanges, etc.

You'd have to deal with exchanges earlier or later anyway, unless you want to just pile up Bitcoins or keep buying socks with them. Maybe your power company will accept monthly installments in socks, too.

Actually you dont need to touch an exchange at all.. you can buy gold or silver with btc or get giftcards.. you can even buy gas with btc.. see: coinabul.com & spendbitcoins.com

[disclaimer201]

With GPUs (soon to be pushed out of the mining market) it went like this.

Buy GPUs. Convert electricity to Bitcoin. Own GPUs and Bitcoin. A flaw is found in the Bitcoin protocol. Bitcoin is now worthless. GPUs still have value.

This, of course, does not work with Bitcoin specific hardware (the FPGAs in your example).

Another point to consider. It's very easy to obtain 100% anonymous (even brand new, freshly minted) Bitcoins through mining. This involves a different type of risk.

Also, mining doesn't require a counter party. You don't need a seller to obtain Bitcoins, and you avoid any possible risk involved with that. Trusting exchanges, etc.

You'd have to deal with exchanges earlier or later anyway, unless you want to just pile up Bitcoins or keep buying socks with them. Maybe your power company will accept monthly installments in socks, too.

Actually you dont need to touch an exchange at all.. you can buy gold or silver with btc or get giftcards.. you can even buy gas with btc.. see: coinabul.com & spendbitcoins.com

Say you used giftcards all the time, would anybody even notice you earned a fortune in BTC, say from mining them? I don't get how the governments want to keep track whether you pay taxes for BTC income or not.

[DeathAndTaxes]

Say you used giftcards all the time, would anybody even notice you earned a fortune in BTC, say from mining them? I don't get how the governments want to keep track whether you pay taxes for BTC income or not.

Depends on what you mean by a "fortune"?
$1K? Nope 
$10K? Probably not unless you cheat/lie/misreport other income
$100K? Good chance of getting caught
$1M? Your going to get caught

IRS uses something called lifestyle analysis to catch tax evaders with "non traditional income".

If you live in a $300K house, drive a $80K card, and take 3 vacations a year on your $30K in reported income they will want to have a chat.

So "earned a fortune"?  You better declare your non-cash income.  A couple grand? Meh IRS has bigger fish to fry.

[Vanderbleek]

Don't forget that if you're only buying Bitcoins, you're relying on others to back the network. The security of bitcoin is in the power required to 51% the chain -- if I buy $1000 dollars of equipment and mine with it, I'm making bitcoin $1000 more secure (ish).

[adamstgBit]

Don't forget that if you're only buying Bitcoins, you're relying on others to back the network. The security of bitcoin is in the power required to 51% the chain -- if I buy $1000 dollars of equipment and mine with it, I'm making bitcoin $1000 more secure (ish).

good point

[Kettenmonster]

Well risky or not: No mining, no bitcoin; while no buying no value.
Thus mining is as vital to bitcoin as buying is, isn´t it?

[Shadow383]

Say you used giftcards all the time, would anybody even notice you earned a fortune in BTC, say from mining them? I don't get how the governments want to keep track whether you pay taxes for BTC income or not.

Depends on what you mean by a "fortune"?
$1K? Nope 
$10K? Probably not unless you cheat/lie/misreport other income
$100K? Good chance of getting caught
$1M? Your going to get caught

IRS uses something called lifestyle analysis to catch tax evaders with "non traditional income".

If you live in a $300K house, drive a $80K card, and take 3 vacations a year on your $30K in reported income they will want to have a chat.

So "earned a fortune"?  You better declare your non-cash income.  A couple grand? Meh IRS has bigger fish to fry.

To be honest I think they'd be more likely to notice your four-figure monthly power bills 

[N12]

In other words, some of us aren't acquiring Bitcoins with the intention of converting them into fiat profits in the future. 

You are clearly out of place here!

[disclaimer201]

As much as I would want to believe in Bitcoin, holding them for the distant future is much too risky imo. At least for people who cannot sacrifice their entire investment just for fun. Reading about all the dangers left and right you must be either naive, ignorant or very rich to possibly lose your investment and not care about it. Even if this becomes a success story in the midterm (let's hope so) its future is far from certain.

Read up on -51% attack, ASICs and 51% attack, and what would happen to the image of Bitcoin if there's a monopolist
                -tainted coins, lack of trust, over-complexity for new adopters
                -banks or other players buying bitcoins in large amounts (volatility)
                -MtGox as an indispensible exchange (and what happens if it gets shut down somehow)
                -governments declaring Bitcoin illegal to use, and...
                -failure to reach wide-spread adoption, (price decrease)

People may scream FUD again now but unless you know about these issues and calculate them in you must be in a state of denial. BTC is a high risk investment, even if it looks like it's here to stay.