The bitcoin farmer
Life as a farmer is hard: the machinery required to harvest crops is expensive and highly specialized, unpredictable natural forces are a constant threat, and the price of what you plant today may be completely different by the time you harvest.
Fortunately, farming has been around for a little while, and in that time we have figured out what the risks are and how to manage them. Machines can be financed, crops can be insured, and futures contracts can be written to lock in a price for product not yet produced. Additionally, farm subsidies serve to establish a price floor.
Strangely, not once has a person at a party told me about how they just read an article about farming and how awful it is that they missed the boat.
The financial pitfalls associated with bitcoin mining and farming are not so different, however.
Mining enough bitcoin to really feel the money you’re earning takes significant capital. Gizmodo has a good article about the kinds of machines people are running these days.
To really get into it as more than a hobby, I could easily expect to spend 7-10k on a rig plus the costs of electricity. The Verge has published an article in which they interview a man who has spent 40k on a setup that generated $2000 every month.
In the article he implies that he financed his setup with credit card debt. If my shoddy math skills are to be believed, it will take him 23 months to pay off his rig (at 13% apr) and start generating profit.
This same article mentions that many bitcoin insiders think that rigs will have to start being updated every year to remain competitive.
How much will he be able to sell today’s equipment for in a year?
If a miner’s video cards burns up, will insurance cover it?
If the equipment can be insured, how would one hedge against the associated loss in productivity?
What about a government crackdown on bitcoin?
Bitcoin, to the best of my knowledge as of this writing, does not have a futures market that is popular enough to exert downward pressure on coin exchange rates.
Icbit allows derivatives trading, but the volume is low and funding an account with dollars is not straightforward.
For mining to be viable as a serious money making venture, miners must be able to reliably lock in prices for coins before they produce them.
Risk and Reward
Of course, bitcoin mining is potentially a lot more lucrative than farming when you consider how much work/capital each require. This may make it seem like a much better idea.
What’s important to remember is the incredible amount of risk a bitcoin miner takes on and, even more importantly, their inability to hedge against those risks effectively.
Your maximum loss is everything you put in.