Bitcoin miners may be turning off their machines, at least until the bitcoin price rebounds. It’s no secret the BTC price has been in a rut, which has dampened investor sentiment but now it’s also interfering with the plans of ambitious mining projects that have flooded the market since bitcoin’s peak at year-end.
The leading cryptocurrency has shed more than 50% of its value since its mid-December high of nearly $20,000 and is now hovering at about $8,495. Fundstrat Global Advisors’ data science team developed a bitcoin mining model that has determined the current price level for BTC is below the threshold to profitably create it. The Fundstrat report, which was obtained by CCN.com, revealed it’s basically a wash right to mine bitcoin currently.
“Bitcoin currently trades essentially at the break-even cost of mining a bitcoin, currently at $8,038 based on a mining model developed by our data science team,” according to Fundstrat’s Sam Doctor and Ken Xuan.
It’s an unusual situation for the cost of mining to supersede that of the asset itself, Fundstrat says, suggesting that the current multiple represents a “trough” and that now is not the time to sell. Incidentally, today’s BTC multiple is revisiting 2015 levels when it was at a “secular bear market low,” according to Fundstrat. At that time, the bitcoin price was just $176.50.
The Fundstrat model is three-pronged, taking into account machine expenses, energy and the cost of overhead such as the cooling systems that prevent computer servers from overheating during the energy-intensive process of mining. The current market dynamics could just be enough to cause the miners to flip the switch, at least for now.
“In some cases, the miners may simply turn off the machines until the price comes back a bit. It’s got to be getting to the point that some of them may be losing money,” noted Blockchain Intelligence Group’s Shone Anstey quoted in a CNBC article.
Miner profits have essentially been slashed by 50%. Adding insult to injury to miners, the price per transaction is also on the decline, all based on data cited by CNBC.
Risks and Rewards
When times are good, bitcoin mining pays off, with this China’s Bitmain alone have generated between USD 3 billion and USD 4 billion in profits last year. Fortune points out that mining pools tied to Bitmain and BTC.com control more than 40% of bitcoin mining.
The hardware to perform bitcoin mining can run you anywhere from a few hundred dollars to several thousand dollars. But once the equipment becomes obsolete, the equipment must be replaced in order to remain competitive with all of the other volunteers who are using their GPUs to solve puzzles to advance the blockchain and earn their reward.
And according to the Fundstrat report, equipment upgrades comprise more than 50% of mining costs. Meanwhile, Fundstrat quantamental strategist Sam Doctor based the calculation to arrive at the BTC floor price in part on energy costs of $0.06 per kilowatt hour.
There is, however, a glass-half-full scenario surrounding the price dynamics for bitcoin mining, for speculators at least. If bitcoin is anything like its non-correlated precious metal cousins, equalling its cost of production suggests a price bottom is near.
March is historically a weak month for bitcoin, but hold onto your hats. Fundstrat notes April is one of the best months for BTC trading.
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Last modified: March 4, 2021 5:05 PM