It now costs more than 1BTC to mine 1 BTC in many places around the world. Below is a price chart indicating the current prices per country based on an average cost of electricity:
Quantative analysts at Fundstrat, a price analysis firm known to be bullish on Bitcoin, have released data demonstrating that the Price/Break Even indicator on Bitcoin is a proven line of support for the price.
For those of you who diidn’t go to trading school, this is technical analysis based on past history of the currency’s performance – when Bitcoin mining prices rise, the cost of the currency tends to rise accordingly, creating an upwards trend. Soooo much money is being spent on Bitcoin mining now (with Bitcoin consuming more electricity than the island of Ireland) that they believe the price is, according to Fundstrat, due to rise again, despite regulatory scares and market manipulation keeping it down.
Why so expensive?
Miners run powerful computers that try to crack algorithms designed to be increasingly more difficult and thus, increasingly more expensive to break – all the processing power required to solve the cryptographic puzzles runs up a hefty electricity bill, but for cracking the algorithms results in transactions being verified, blocks of transaction data being mined and added to the blockchain, and BTC rewards for the miners for keeping the network running.
As mining setups become more advanced and competition increases along with the difficulty of the algorithms, the price rises ever higher. It’s estimated that by the end of the year, Bitcoin mining will consume 0.5% of the world’s electricity.Ethereum miners haven’t fared much better – after seeing a 20x increase in value, people flocked to mining the number 2 cryptocurrency, but falling prices and increased competition have reduced rewards there as well. Tom’s Hardware released a graph showing the decline in mining profitability from December to March when prices fell from $871 to under $500 where they remain today, resulting in a 10x reduction in mining profitability.
What happens when it’s not profitable to mine Bitcoin?
Depends on who you ask. The only real incentive for miners to do what they do is the financial rewards they receive, and for that, they perform the vital service of verifying network transactions. It’s likely that many miners will quit or take a break.
“In some cases the miners may simply turn off the machines until the price comes back a bit,” said Shone Anstey, co-founder and president of Blockchain Intelligence Group. “It’s got to be getting to the point that some of them may be losing money.”
If all the miners were to quit, we’d have no Bitcoin – transactions wouldn’t get verified and the network would grind to a halt. However, as more miners quit, the competition becomes less intense for those who stick it out – larger operations can probably even afford to run at a loss for a while and accumulate in the hopes that it will pay off if and when Bitcoin’s price recovers.
This essentially results in more centralization of the network, putting control of the transaction verification process of an increasingly smaller and more powerful group, something the network was actually designed to avoid by allowing anyone to run a node.
However, it may simply be the case that large mining pools operating huge rig farms will be the only ones able to compete in future.
What if miners just stop altogether?
Here’s why that seems unlikely – Fundstrat’s Sam Doctor also pointed out that the increasingly more effective ASIC mining technology may well hold the answer, making Bitcoin mining cheaper even as competition grows. While Funstrat estimates the breakeven price for Bitcoin miners using the current gen Antminer S7 models is $6,00, the Antminer S9 has a far lower breakeven price of $2,368 USD.
“The release of the next generation of rig hardware should trigger a new round of capex as well as hash power growth, which could accelerate if BTC price appreciates.”
A sudden reduction in mining costs could trigger new market growth and lead to yet another upsurge in the price of Bitcoin.
Fundstrat’s Tom Lee had this to say on Twitter:
CRYPTO: Our quant/data scientist @fundstratQuant publishing #bitcoin mining white paper. Crypto mining economics lead/explain $BTC price—suggests $39,000 per bitcoin by YE19. key takeaways below… pic.twitter.com/f5ZQ4py3jS
— Thomas (Tom) Lee (not the drummer) FSInsight (@fundstrat) May 10, 2018
While it can seem easy to disregard the predictions of a high-profile investor as someone just trying to inflate the value of their holdings, it’s equally notable that a Wall Street investor like Lee believes in Bitcoin enough to invest in the first place.
In fact, Lee predicted in July last year that Bitcoin could reach $20,000 to $55,000 by 2022 – that was back when it was trading at under $3,000! Bitcoin did indeed, for a brief moment Sunday December 17 of last year the price did indeed reach $20,000, even earlier than Lee predicted, before plummeting down to the current price.
But is Bitcoin finally ‘dead’, as has been said so often over the years?
Or is it just resting its eyes? Fundstrat’s Tom Lee stands by his predictions – so keep an eye on those charts.
Interested in other cool crypto posts….check out A look at Historical Crypto Corrections and The Top Secret Hedge Fund That Everyone Knows About.
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