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Happy Halving!
Given the interest in Bitcoins Production Cost, I will offer my thoughts on a more recent study into mining cost by @BlockwareTeam
TL; DR: assumptions used in Bitcoins Production Cost are still accurate today, but will likely need revision in near future.
Given the interest in Bitcoins Production Cost, I will offer my thoughts on a more recent study into mining cost by @BlockwareTeam
TL; DR: assumptions used in Bitcoins Production Cost are still accurate today, but will likely need revision in near future.
2/
The primary limitation of "bottom up" here is that Bitcoin mining is widespread globally and access to information can be challenging.
While Blockware has a wide customer base, their research does not consider 80% of the industry (they state to deal with 20% of the market).
The primary limitation of "bottom up" here is that Bitcoin mining is widespread globally and access to information can be challenging.
While Blockware has a wide customer base, their research does not consider 80% of the industry (they state to deal with 20% of the market).
3/
Further limitation of "bottom up":
Blockware's article is based on just 2 pieces of mining hardware (S9 & S17).
The CBECI data is based on 90 pieces of hardware, including the profitable lifespan of each here: http://sha256.cbeci.org .
Further limitation of "bottom up":
Blockware's article is based on just 2 pieces of mining hardware (S9 & S17).
The CBECI data is based on 90 pieces of hardware, including the profitable lifespan of each here: http://sha256.cbeci.org .
4/
Limitations of the "top down" approach include:
1. Error bands in CBECI global electrical consumption.
2. Requirement to aggregate global electrical cost (to 4-5c /kWh)
More info here: https://cbeci.org/cbeci/methodology
Limitations of the "top down" approach include:
1. Error bands in CBECI global electrical consumption.
2. Requirement to aggregate global electrical cost (to 4-5c /kWh)
More info here: https://cbeci.org/cbeci/methodology
5/ Key finding 1:
Blockware provides a pie chart of electrical costs from their clients.
The weighted average electrical price based of their data is: 5.2c / kWh.
This is in line with the CBECI findings of 5c, hence providing further validation to Bitcoin Production Cost.
Blockware provides a pie chart of electrical costs from their clients.
The weighted average electrical price based of their data is: 5.2c / kWh.
This is in line with the CBECI findings of 5c, hence providing further validation to Bitcoin Production Cost.
6/
... due to the volatility of 2020 generally, there are stronger grounds than ever before to suspect wide fluctuations & changes in energy costs (eg. oil down 50% yoy).
Due to contractual requirements, these will take time to play out but should be reviewed in the future.
... due to the volatility of 2020 generally, there are stronger grounds than ever before to suspect wide fluctuations & changes in energy costs (eg. oil down 50% yoy).
Due to contractual requirements, these will take time to play out but should be reviewed in the future.
7/ Key Finding 2:
We both agree that production cost is not a price floor.
Historically, Electrical cost has been Bitcoin's price floor, though this was tested on 12 March.
Blockware raise good points regarding miners operating at a loss to meet contractual requirements.
We both agree that production cost is not a price floor.
Historically, Electrical cost has been Bitcoin's price floor, though this was tested on 12 March.
Blockware raise good points regarding miners operating at a loss to meet contractual requirements.
8/
... if anything, this means we should be more cautious today and expect that price can drop below Electrical Cost, potentially for periods longer than the fleeting moments we have seen in 2020.
Nonetheless, these periods should generally be seen as value opportunities.
... if anything, this means we should be more cautious today and expect that price can drop below Electrical Cost, potentially for periods longer than the fleeting moments we have seen in 2020.
Nonetheless, these periods should generally be seen as value opportunities.
9/ Key Finding 3:
Blockware states 95% of mining operation cost is electrical.
They do not discuss total business cost. But of the historic research I have seen, all estimates from 2018 put that percentage below 80%.
Blockware states 95% of mining operation cost is electrical.
They do not discuss total business cost. But of the historic research I have seen, all estimates from 2018 put that percentage below 80%.
10/
... Blockware's 95% estimate may well be perfectly accurate, but the total cost of business should consider hardware CAPEX, bandwidth, wages, rent, insurance and cost of capital, etc.
All of these factors make running a business more expensive.
... Blockware's 95% estimate may well be perfectly accurate, but the total cost of business should consider hardware CAPEX, bandwidth, wages, rent, insurance and cost of capital, etc.
All of these factors make running a business more expensive.
11/
The Bitcoin Production Cost ("total") is an attempt to estimate the TOTAL cost of business to mine one coin.
It is not a price floor.
But when Bitcoin is trading below the Total Production Cost, it does affect the profitability of the AVERAGE miner.
The Bitcoin Production Cost ("total") is an attempt to estimate the TOTAL cost of business to mine one coin.
It is not a price floor.
But when Bitcoin is trading below the Total Production Cost, it does affect the profitability of the AVERAGE miner.
12/
... Profit margins get squeezed. The more price falls toward the electrical cost, the more likely inefficient miners are to turn off their rigs, mine another coin, or pursue a new business model altogether.
This is why every time it has happened before; Hash Rate has fallen.
... Profit margins get squeezed. The more price falls toward the electrical cost, the more likely inefficient miners are to turn off their rigs, mine another coin, or pursue a new business model altogether.
This is why every time it has happened before; Hash Rate has fallen.
13/
Blockware states the Production cost is closer to $8K today.
Also note 6 months ago I expected a mid 2020 pessimistic Electrical cost to be around $8K. At $9.5K today, it is yet to fall that low.
https://twitter.com/mjdsouza2/status/1259946786136997888
Blockware states the Production cost is closer to $8K today.
Also note 6 months ago I expected a mid 2020 pessimistic Electrical cost to be around $8K. At $9.5K today, it is yet to fall that low.
https://twitter.com/mjdsouza2/status/1259946786136997888
14/
While we have taken different approaches, we have arrived at similar outcomes.
As with all crypto fundamentals, there is an error band to results, and no industry wide agreed on terminology.
Such as "what is a miner capitulation?"
My thoughts here: https://medium.com/capriole/hash-ribbons-bitcoin-bottoms-60da13095836
While we have taken different approaches, we have arrived at similar outcomes.
As with all crypto fundamentals, there is an error band to results, and no industry wide agreed on terminology.
Such as "what is a miner capitulation?"
My thoughts here: https://medium.com/capriole/hash-ribbons-bitcoin-bottoms-60da13095836
15/
Where does that leave us now?
Given a good chance of lowered electrical prices, Electrical Cost is likely somewhere between $9K today. These are best estimates.
This suggests that the average Bitcoin miner is unprofitable.
They are losing money on to run their business.
Where does that leave us now?
Given a good chance of lowered electrical prices, Electrical Cost is likely somewhere between $9K today. These are best estimates.
This suggests that the average Bitcoin miner is unprofitable.
They are losing money on to run their business.
16/
Yesterday I stated this would be a "brutal Halving".
The longer prices remain below $9K, the greater the likelihood of inefficient miners leaving Bitcoin for greener pastures.
Yesterday I stated this would be a "brutal Halving".
The longer prices remain below $9K, the greater the likelihood of inefficient miners leaving Bitcoin for greener pastures.
18/
At the same time, Miners now have a smaller impact on Bitcoin price going forward, due to their reduced Block reward.
We can expect the market sell pressure from miners to reduce with time from today.
This may allow price to rise (all else equal, which it never is).
At the same time, Miners now have a smaller impact on Bitcoin price going forward, due to their reduced Block reward.
We can expect the market sell pressure from miners to reduce with time from today.
This may allow price to rise (all else equal, which it never is).
19/ Summary
- Bitcoin Production Cost accurate today
- Electrical cost is the "flexible" price floor (around $9K)
- Reduced sell pressure may help price recover in near- term
- Expect big drops in HR if price stays here
- Sustained drops in HR are bad for Bitcoin's Energy Value
- Bitcoin Production Cost accurate today
- Electrical cost is the "flexible" price floor (around $9K)
- Reduced sell pressure may help price recover in near- term
- Expect big drops in HR if price stays here
- Sustained drops in HR are bad for Bitcoin's Energy Value
