The price to mine a single Bitcoin varies widely from miner to miner. First-time miners plugging in their new rig from eBay are paying a very different price than seasoned miners who have contracts with Bitmain and run massive operations.
There are levels to this game.
A JPMorgan analyst presented a report recently stating that the average price to mine Bitcoin dropped to $13,000 in the month of July, from $24,000 in June.
Two things to note: first is that I will assume these numbers are imperfect, but that they are roughly correct. The report said they were calculated “using daily price data, hash rate, and difficulty from bitinfocharts.com to infer an implied efficiency estimate of mining hardware.” The second important point (which I touched on above) is that this production cost probably does NOT reflect the average miner, who has been unable to sink millions of dollars into R&D for the most cost-efficient setup. This figure applies to the major miners like Marathon, Hut8, and Riot. Not Craig down the street.
Although I’m excited that Craig is into mining.
Anyway.
“The decline of the production cost estimate has been driven almost entirely by the decline in electricity use as proxied by the Cambridge Bitcoin Electricity Consumption Index (CBECI).” In other words, more efficient technology has drastically lowered the price to mine a single coin.
So is this bad?
Well if you read the report, you might be inclined to believe so. Here’s some bearish analysis included in the report: “while clearly helping miners’ profitability and potentially reducing pressures on miners to sell Bitcoin holdings to raise liquidity or for deleveraging, the decline in the production cost might be perceived as negative for the Bitcoin price outlook going forward. The production cost is perceived by some market participants as the lower bound of Bitcoin’s price range in a bear market.”
In short, if the cost of mining a Bitcoin drops drastically, there’s reason to believe that the spot price will follow. And this is exactly where the controversy lies.
According to basic market theory, efficient markets should naturally arbitrage out major discrepancies. But we are not just talking about the price of Bitcoin and it’s varying price on multiple exchanges. We are also talking about mining, an arguably separate entity. Both the spot and mining markets must be accessible, competitive, and available to be efficient. They are separate, but intertwined.
If you believe that they are so deeply intertwined that one has to act based on the other in an absolute manner, the following logic applies.
If the market is efficient and if the price to mine a single coin is much cheaper, then, in theory, Bitcoin’s price should decrease or the price to mine a Bitcoin should increase. Logic suggests that if the profit margins are currently very high, miners will buy more rigs, open up more shops, and squeeze the gap. To achieve this, miners may sell their Bitcoin now more aggressively to buy more rigs in order to capitalize on the opportunity. Furthermore, they may also sell their coins to pad their books with cash because the past few quarters have been rough. Many may still capitulate.
This would shorten the gap.
And on the other side, there’s also the fact that the hash rate can quickly rise because of the incentive, thus bringing up the difficulty, and lowering the profitability per rig. Mining would become far more expensive.
This would also shorten the gap.
These are all ideas, basic ways in which the market will naturally arbitrage its inefficiencies out. If I had a definitive conclusion I would gladly have written it here, but there is none. The one point worth making about Bitcoin is that nothing necessitates a specific price except buy and sell orders. The network is a deeply intertwined system in which no single variable is pulling all of the strings. The inefficiency won’t last forever, as is the case with all opportunities. Something likely has to give.
