Happy Halving! Everyone! I wish you all happiness after bitcoin “halved”!
In view of my interest in the production cost of Bitcoin, I intend to express my opinion on a Bitcoin mining research report recently released by Blockware.
Let me briefly talk about my understanding that some assumptions used in the production cost calculation of Bitcoin still seem to be relatively accurate, but these assumptions may need to be modified in the near future.
Bitcoin mining is very common worldwide, so the “bottom-up” analysis method may have certain limitations, and information access will also be affected. Although Blockware’s customer base is indeed quite extensive, their research does not cover the vast majority of the mining industry (at least 80% failed to cover it, and they admitted to exploring only 20% of the market).
In addition, Blockware’s “bottom-up” analysis method has other limitations. Their analysis report only studied S9 and S17 mining machines. However, there are at least 90 mining machines based on the SHA256 mining algorithm. We You can find these mining equipment and the profit cycle of each equipment on the Cambridge Bitcoin Electricity Consumption Index (CBECI) website sha256.cbeci.org.
Of course, it is not just the “bottom-up” analysis method that has problems. The “top-down” analysis method also has certain limitations, including:
- The global electricity consumption data in the Cambridge Bitcoin Electricity Consumption Index itself has errors;
- Global electricity costs need to be aggregated (up to 4-5 cents / kWh).
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Key finding 1:
Blockware provides an electronic cost pie chart from its customers. Based on this data, the weighted average electricity price can be calculated as 5.2 cents / kWh. This is consistent with the electricity price benchmark of about 5 cents in the Cambridge Bitcoin Electricity Consumption Index, so this electricity price base can indeed further verify the Bitcoin Production Cost. Because of the global impact of the new coronavirus epidemic in 2020, people have more reason than ever to suspect large fluctuations and changes in energy costs (such as oil prices falling by more than 50% year-on-year). Of course, due to some oil futures contract requirements, the relevant data may take some time to be reviewed and verified.
Key finding 2:
There is a problem that we can all reach a consensus, namely: Bitcoin production cost does not represent the lowest price of Bitcoin. However, from the historical data, the cost of electricity has always been the bottom line of Bitcoin’s price-of course, the exception of the “Black Thursday” bitcoin price plunge on March 12th.
In the analysis of Blockware, there are indeed some parts that are very valuable, in particular, it is pointed out that miners have to continue operating under a loss in order to comply with the contract requirements. If this situation really exists, it means that we should be more cautious, because the bitcoin price may fall below the electricity cost price, and may even last a long time (it may be longer than the brief moment we saw in 2020 ). Nonetheless, this period of time is usually regarded as a period of value opportunities.
Key finding 3:
Blockware said that electricity costs account for up to 95% of Bitcoin mining operating costs. However, they did not analyze the total business cost, and according to the historical research data I have seen, as early as 2018, the proportion of electricity costs in the total cost of bitcoin mining operations has fallen to 80%.
In the analysis of Blockware, 95% may be completely correct, but the total business cost also needs to consider the hardware capital expenditure (CAPEX), bandwidth, salary, rent, insurance and capital cost, etc. When all of these are added together, you will find that business operating costs are actually very high. Therefore, the cost of bitcoin production (the “total” cost) should be calculated based on all the business operating costs required to mine a bitcoin.
Of course, this cost should not be regarded as the “minimum price” of Bitcoin.
However, if the bitcoin transaction price is lower than the total production cost, it will indeed affect the average profitability of the miners. If bitcoin mining profit margins are squeezed and falling prices are increasingly trending towards electricity costs, inefficient miners will either choose to shut down, mine other cryptocurrencies, or pursue other new business models. When these things happen, we will see one thing: the hashrate of the Bitcoin network has dropped.
Blockware believes that the current bitcoin production cost price is close to $ 8,000. And about six months ago, I also predicted that the cost of mining power in 2020 will come in the $ 8,000 range, and the price of Bitcoin is now around $ 9,500, so this price has not yet fallen.
In short, although Blockware and I used different methods in our analysis, they all seem to have the same results. However, considering the fundamentals of all cryptocurrencies, Blockware’s analysis may have an error band, and some issues have not been widely agreed in the industry. For example, they proposed the concept of so-called “surrender miners”, and for that matter, my thoughts can see links .
Now, let’s take a look at where Bitcoin miners are currently.
Although the possibility of lowering electricity bills is high, the current cost of electricity is basically maintained at around US $ 9,000 (this is the best estimate), so basically means that most bitcoin miners are unprofitable if they continue to operate , You will lose money.
In response to this situation, I have previously proposed the concept of “brutal halving”: the longer the bitcoin price stays below $ 9,000, the more likely the inefficient miners will be eliminated Big.
At the same time, as the bitcoin block reward is reduced to 6.25 BTC, the influence of current miners on the future bitcoin price is also gradually decreasing. So I expect that from now on, the market selling pressure of miners will continue to decrease over time, and this may cause the price of Bitcoin to rise (if other factors remain the same-although never like this).
Finally, let me briefly summarize:
- The current estimated production cost of Bitcoin is relatively accurate;
- The lower limit of the “elastic” price of electricity costs is about US $ 9,000;
- Reduced selling pressure for miners may help Bitcoin price rebound in the near future;
- If the price continues to maintain around 9000 US dollars, it is expected that some mining unions will be eliminated;
- The continued decline in prices is detrimental to Bitcoin’s energy value.
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