BTC’s Total Production Cost Still 62% More than the Market Price
The price of bitcoin is surging, now back nearing $10,000 overnight to now be floating around $9,700.
This has been despite the hash rate tanking, down more than 40% since ATH on halving day reflecting that miners have already started shutting down their machines.
With miners’ revenue cut down by 50% with halving, inefficient and overleveraged miners are expected to be in loss.
However, in the next few days, the difficulty will be adjusted. This adjustment next week is expected to be less than 1%.
As we reported, this removal of inefficient miners means stronger hands get more coins which is bullish for bitcoin. Also, extreme miner capitulation can be expected only when bitcoin price trades sideways.
As we have been seeing, after losing 18% of its value over the weekend, bitcoin price is back in the green this week, currently trading above $9,700. The “real” volume has also started to catch up.
Wide fluctuations in energy cost
The rise in price is good for bitcoin because staying around $8,550 calls for “big drops” in hash rate.
However, still, the total production cost of mining a bitcoin is $15,816 which means the price has a long way ahead. The electrical cost, the “flexible” price floor meanwhile is currently around $9,500.
According to Charles Edwards of digital asset management firm Capriole, due to the volatility in 2020 generally, where we saw oil ETF going negative and oil price down 50% YoY, “there are stronger grounds than ever before to suspect wide fluctuations & changes in energy costs.”
Also, in the coming months, the rainy season in China would be able to offer miners some reprieve.
But all this will take time to play out, due to contractual requirements. Edwards said,
“This means we should be more cautious today and expect that price can drop below Electrical Cost, potentially for periods longer than the fleeting moments we have seen in 2020.”
When bitcoin trades below the total product cost, which is above $15,000, it affects the profitability of average miners. This has the profit margin squeeze and a further drop in BTC prices towards the electrical cost, which is currently at $9,500, the best estimates.
And “the more price falls toward the electrical cost, the more likely inefficient miners are to turn off their rigs, mine another coin, or pursue a new business model altogether.” Every time this happens, the hash rate falls.
Average miners are currently profitable and if bitcoin price falls back and remains below $9k, the longer it will be the greater the likelihood of inefficient miners leaving bitcoin for greener pastures.
“Nonetheless, these periods should generally be seen as value opportunities.”
This silver lining is, miners now have a small impact on bitcoin going forward, due to their reduced rewards by halving.
This reduced sell pressure from miners on the market may allow price to rise.