The Differences Between Digital and Physical Mining: A Comparison of Bitcoin and Gold Production Models

Gold and Bitcoin are often compared as scarce non-sovereign assets. While their investment cases as stores of value have been widely discussed, few have compared them from a production perspective. Both assets rely on mining to introduce new supply - one is physical, the other is digital. The industry characteristics of both are defined by cyclical economies, capital intensity, and a close relationship with energy markets.

However, the mechanisms and incentive models of Bitcoin mining differ in details from those of gold mining, and these differences ultimately have significant impacts on the economic structures and strategic layouts of industry participants. This article will explore some of their similarities, and more importantly, the substantive differences between them.

The Source of Asset Scarcity

Gold mining is an ancient craft that involves extracting and refining metals from underground. This requires finding suitable deposits, obtaining permits and land use rights, and using heavy machinery to extract ore from underground, followed by chemical processing to separate the metals for subsequent use.

In contrast, Bitcoin mining requires repeated computational processes to solve batches of Bitcoin transactions in a competitive manner, earning newly issued Bitcoins and transaction fees. This process, known as Proof of Work, requires the procurement of rack space, electricity, and specialized hardware (ASIC) to efficiently perform calculations, and then broadcasting the results to the Bitcoin network through a network connection.

In both systems, mining is an unavoidable high-cost process that supports the scarcity of each asset: the scarcity of Bitcoin is maintained by code and competition; the scarcity of gold is determined by physical and geological location. However, the methods of extracting scarcity, the economic models of producers, and their evolution over time have almost no similarities.

Characteristics of the Bitcoin Mining Economic Model

The economic model of gold mining is relatively predictable. Companies are usually able to reasonably and accurately predict reserves, ore grades, and mining schedules, although initial forecasts may have significant deviations: about one-fifth of gold mining projects can achieve profitability over their lifecycle. The main costs - labor, energy, equipment, compliance, and remediation work - can all be predicted with reasonable accuracy in advance. Depreciation is primarily due to normal wear and tear of equipment or depletion of reserves. The main uncertainty in the short to medium term is usually the stability of gold market prices, which experience minimal fluctuations. Additionally, almost all of these input costs can be effectively hedged.

In contrast, Bitcoin mining is more dynamic and unpredictable. Company revenue depends not only on the relative fluctuations of the Bitcoin market price but also on its share of the global hash rate (i.e., global competition). If other miners expand their operations more aggressively, even if your mining operations remain unchanged, your relative output may decline. This is a variable that miners need to continuously consider during their operations.

One of the most important costs for Bitcoin mining companies is depreciation, especially the depreciation of ASIC equipment. The chips in these Bitcoin miners are rapidly improving in efficiency, forcing companies to upgrade their equipment before it naturally wears out in order to remain competitive. This means that depreciation occurs on the timeline of technological advancement rather than the physical wear of the equipment. This is a major expense - although a non-cash expense - and starkly contrasts with gold mining, where mining equipment has a longer lifespan because it has already undergone most efficiency improvements.

Bitcoin production faces constant pressure due to changes in industry competition and short-term depreciation cycles, requiring miners to reinvest in new hardware to maintain production levels - this is commonly referred to by professionals as the "ASIC hamster wheel."

However, Bitcoin has a favorable fundamental distinction compared to gold in terms of its revenue structure. Gold miners profit solely by extracting and selling the unreleased supply in reserves. In contrast, Bitcoin miners profit both from extracting the unreleased supply and from transaction fees. Transaction fees provide miners with a source of income from the released supply, which fluctuates based on the demand for Bitcoin transfers. As Bitcoin approaches its supply cap of 21 million, transaction fees will become an increasingly important source of income - a dynamic that gold miners do not have.

Ultimately, a major long-term advantage of Bitcoin mining is the ability to reuse byproducts generated during operations - heat energy. When electricity passes through mining machines, a significant amount of heat energy is produced, which can be captured and redirected for other uses, such as industrial processes, greenhouse agriculture, or residential and district heating. This opens up new revenue streams for miners. As mining machines become commoditized and the depreciation cycle extends, the impact of heat energy reuse may further increase. Similarly, gold miners can benefit from selling byproducts such as silver or zinc, which are typically identified during project planning and serve as elements to offset gold production costs.

Environmental Impact of Bitcoin Mining

As we all know, gold mining is essentially resource extraction and leaves a lasting physical footprint: such as deforestation, water pollution, waste ponds, and ecosystem destruction. In many areas, it has also raised concerns about land rights and worker safety.

On the other hand, Bitcoin mining does not involve physical extraction, but relies entirely on electricity. This provides opportunities for integration with local infrastructure - rather than conflict. Due to the liquidity and interruptibility of mining tools, they can act as grid stabilizers and monetize energy resources that would otherwise be wasted or isolated (such as flared gas, excess hydropower, or constrained wind and solar energy).

Many people are unaware that Bitcoin mining also shows potential as a clean energy subsidy and can serve as a means of proving grid connection. By co-locating with renewable energy or nuclear power generation facilities, miners can improve the project's economics before grid connection - without relying on public funding subsidies.

Finally, although this point has been well documented, it is worth noting that, on average, Bitcoin's carbon emissions are lower and more transparent compared to traditional industries. It can be said that Bitcoin is even necessary in the smooth transition to a grid primarily powered by renewable energy.

Since the peak in energy consumption in 2024, we have seen almost no increase in energy consumption, attributed to the continuous improvement in the efficiency of new mining hardware, with the current average power consumption being only 20 watts per terahash (W/Th), which is five times more efficient compared to 2018.

Investment Characteristics of Bitcoin Mining

Both industries are cyclical and sensitive to the prices of their production assets. However, unlike gold miners who typically operate on a multi-year schedule, Bitcoin miners can scale their operations up or down more quickly based on market conditions. This makes Bitcoin mining more flexible but also more volatile.

Publicly traded Bitcoin mining companies often trade like high beta tech stocks, reflecting their sensitivity to Bitcoin prices and broader risk sentiment. In fact, some market data providers classify publicly listed Bitcoin miners as part of the technology sector rather than the traditional energy or materials sectors.

However, gold mining companies have a longer history and typically hedge their future production, which can reduce sensitivity to fluctuations in gold prices. They are usually classified within the materials sector and evaluated like traditional commodity producers.

The methods of capital formation also differ. Gold miners typically raise capital based on reserves estimates and long-term mine plans. In contrast, Bitcoin miners tend to be more opportunistic and have usually raised funds in recent years through direct or convertible equity offerings to support rapid hardware upgrades or data center expansions. As a result, Bitcoin miners are more reliant on market sentiment and cyclical timing, and often operate within shorter reinvestment cycles.

Bitcoin Mining: Investment Opportunities in the Future Financial Network

Gold and Bitcoin may tend to play similar macroeconomic roles in the long run, but their production ecosystems are structurally different. Gold mining develops slowly, belongs to physical extraction, and is harmful to the environment with high resource consumption. In contrast, Bitcoin mining is faster, modular, and may increasingly integrate with modern energy systems.

For investors, this means that Bitcoin miners are an imperfect digital analogy to gold miners. Instead, they represent a new class of capital-intensive infrastructure that merges investment opportunities from commodity cycles, energy markets, and technological disruption. Investors with a long-term investment horizon should view it as a unique, brand new asset class with its own fundamentals, especially in the context of increasingly important transaction fees and the evolving energy partnerships.

In our view, understanding these nuances is essential for making informed investment decisions in an increasingly evolving environment towards distributed financial systems.

As an investment, Bitcoin miners not only provide investment opportunities for scarcity but also involve the growth of data center infrastructure, energy markets, and the monetization of computing power - a fusion that traditional mining cannot achieve.

Bitcoin Mining Development Prospects

Overall, we believe that most potential macroeconomic scenarios remain favorable for Bitcoin. The introduction of reciprocal tariffs may drive the United States and its trading partners to push up inflation. America's trading partners may face rising inflation while also dealing with growth headwinds. This dynamic could force them to adopt more accommodative fiscal and monetary policies - measures that typically lead to currency depreciation, thereby enhancing Bitcoin's appeal as a non-sovereign, inflation-resistant asset.

In the United States, the outlook is becoming more uncertain. Both Trump and Besant have indicated a preference for lower long-term yields, particularly regarding the 10-year Treasury bonds. While the motivations behind this can be speculated - such as reducing the debt service burden or pushing asset markets - this stance is generally favorable for interest rate-sensitive assets like Bitcoin. However, the current situation is quite the opposite. The yield on the 10-year Treasury bond in the U.S. has fallen below 4% but then rose back up to 4.5%, currently around 4.3%, due to skepticism regarding the underlying trades being unwound, damage to the U.S. reputation, and the increasingly precarious status of the dollar as the global reserve currency, while Trump's uncompromising tariff policy may further drive inflation up. However, this crisis is man-made and can quickly be reversed through tariff concessions and agreements.

However, these signals may also reflect a decline in future earnings expectations for the stock market, raising concerns about an impending economic slowdown. This poses significant risks to the broader market, namely Bitcoin. If investors continue to view Bitcoin as a high-beta, risk-on asset, this sentiment may lead to Bitcoin moving in sync with the stock market during a global economic downturn.