Bitcoin miners are now operating at a loss for the first time since 2019 as bitcoin’s price falls below its cost of production.
It currently costs an estimated $24,000 to mine a bitcoin, while its global price stands at $21,000.
Both are moving measures. Mining costs were at $30,000 in March, and at $26,000 in May while bitcoin’s price was at $30,000.
“Through observing consumption of electricity and daily issuance of bitcoin, provided by Cambridge University, we can find out the average mining costs of bitcoin,” says a data analytics company MacroMicro.
Making this a fairly inexact science, but production cost is one closely watched metric as once price falls below cost, supply is usually reduced.
In bitcoin, total supply is algorithmic, but complex mechanisms may nonetheless kick in that amount to a reduction of the available supply in price setting markets.
Miners may turn off older gear for example, reducing the global hashrate while reducing their own cost with the global hashrate down currently from 231 petahashes a second to 204.
Those miners that remain will then have to sell less bitcoin to cover their costs, and so less bitcoin enters the market.
They may even have to operate without selling at all, lest they lower price further and become bankrupt.
Those that avoid bankruptcy would be more efficient, and so again need to sell less in total than otherwise.
Most crucially perhaps, buying bitcoin directly, rather than mining it, becomes more cost effective as it would be cheaper. Thus price falling below cost should translate to a direct rise in demand for BTC.
That’s influences, they’re not rules. People may still choose to mine rather than buy – or do neither. Miners might still keep selling to bankruptcy. The hashrate may fall, but price might also keep falling without care.
Yet, where probabilities are concerned, it is probable that once price has fallen below cost, we have entered the stage where a new equilibrium is either here or is within sight.
Price can still fall, but logically it is more difficult for it to do so than previously, just because there isn’t any deadweight anymore.
On the other hand a complete loss of confidence might not care much about any of this, but in situations as we are where price falls just because it rose too much, then you’d also expect it at some point to rise just because it fell too much, and the cost of production is a decent point for such expectation.
Though where time-frames are concerned, bitcoin mining can be at a loss for months on end. So in absolute terms this isn’t necessarily a buy signal, but more an indication that we’re probably at the bottom range.
Yet hash follows price, and hash adjusts to price, rather than dictate it in absolute terms. So price can fall still because bear euphoria, just as bull euphoria, can detach from reality.
Reality eventually imposes itself however, so making this a key metric to provide some indication of price ranges.