(Last Updated on April 29, 2021)
Bitcoin miners have set the price floor for the market traditionally.
Mining? How do you “mine” something out of thin air?!
I know..I know..
You’ll have to do some research to comprehend how and why millions of GPU’s and computers called, “ASICS” or application specific integrated components, are competing through solving proof-of-work algorithms to earn block rewards a.k.a. Bitcoins. The computation of Bitcoin’s proof-of-work algorithm is the entire strength behind the networks trustless, public ledger that benefits all users through validating transactions and mining new coins.
I’ve always calculated this as a combination of national energy rates where mining is most prevalent and mining equipment costs.
This has always given me confidence when buying during the bear market lows and helps give a foundation to prices historically. But now, we are seeing adoption of Bitcoin for the fundamental utilities such as a store of value against inflation, government corruption, and censorship. That is the unknown value added onto that mining floor price.
Before mass adoption occurs, energy costs and initial mining equipment expenses make up the bulk fundamentals for Bitcoin’s price due to the participants requiring an economic incentive of profitability to continue mining.
“Mining should not be too profitable (because nothing should be too profitable, the world doesn’t leave free money lying around). Therefore the price of Bitcoins can’t rise too much above the cost of mining (counting equipment depreciation among the costs of course).”– Hal Finney
Watching your fiat wealth go through rollercoasters as you dollar cost average can make you go crazy at first. It gets easier as you gain more time in the market and start holding stronger convictions for the future of Bitcoin as a financial monetary tool for the people. But, I always perceived the very bottom price floor of Bitcoin as being defined by miner costs (equipment + electricity).
So how would a longtime Bitcoiner define today’s Bitcoin price fundamentals?
Bitcoin Price = average miner costs + an individual or companies need for the fundamental utility of Bitcoin
Early on miner’s set the floor as the perceived utility for Bitcoin as a hedge against inflation and sovereign store of value was not as clear to many investors. Now, we are seeing that change quickly, but I always based my worst case price scenarios as BTC dumping down into miner capitulation territory.
Price floor = Miner costs to acquire 1 Bitcoin (global average based on % hashrate per country)
Price ceiling = All of the world’s fiat currency divided by 21 million a.k.a. infinity
Now, this needs to be a bit of an intelligent averaging of specific countries where Bitcoin mining is most prominent.
When price has dipped below these levels we see miner’s capitulate and turn off machines causing big downward price movements and hashrate rates fall off. This will create an interesting effect in Bitcoin’s difficulty though.
Even if miner’s capitulate and turn off machines due to a massive drop in price – hashrate will drop and Bitcoin’s algorithmic difficulty levels will adjust lower to help miners become profitable again
We saw this in 2018 and 2019 when Bitcoin’s price dipped below the $2,500- $5,000 average mining cost to produce 1 Bitcoin. Price crashed hard and we saw the network difficulty recover quickly to entice miners back into profitable returns.
How much electricity does it take to mine 1 Bitcoin today?
-> Calculations done below are based off GlobalPetrolPrices.com September 2020 stats.
-> Using NiceHash to mine ETH or another alt and sell instantly for Bitcoin (can outperform mining Bitcoin directly)
-> NiceHash can be used with GPU or ASIC miner setups and run massive farms of hashing power
There is limited data on 2021 electricity rates, but we can assume they are MORE expensive today than in September of 2020. So I have made a small adjustment and rounded up the numbers below to the nearest hundredth place. Hoping that gives a better idea of current costs facing miners. Plus, more ways for major energy companies to reuse and recapture wasted energy sources such as the flaring of natural gas or crude oil that is no longer being refined.
Do not forget – many places around the world have “free” energy at times such as excess hydropower during wet seasons in China where miners may capitalize on super cheap or nearly free electricity costs.
China at $0.09 kw/h with AntMiner S19 = $10,637.69 per BTC
It will take 48.8976992 months to mine 1 whole Bitcoin at the network difficulty and electricity prices listed above. The approximated current cost to mine a Bitcoin at current difficulty settings in China will be around $10,637.69.
About double the Chinese cost of $3.5k to $6k floor we saw during the 2018/2019 bear market.
United States at $0.16 kw/h with AntMiner S19 = $18,911.97 per BTC
It will take 48.8833097 months to mine 1 whole Bitcoin at the network difficulty and electricity prices listed above. The approximated current cost to mine a Bitcoin at current difficulty settings in the United States will be around $18,911.97.
Again, about double the U.S. cost of $7k to $9k floor we saw during the 2018/2019 bear market.
Growing alternative economic incentives to mine Bitcoin
Bitcoin is quickly gaining popularity throughout the globe’s energy producers as an alternative solution for reducing carbon waste. With the growing pressures of increasing environmental regulations including carbon taxes this is only the beginning of a digital revolution of the world’s energy industries. The past few years oil and natural gas producers have been the first to dive head first into the industry.
Across North America oil and gas companies are utilizing left over gas and oil wells, capturing would be wasted deposits or flared natural gas to help protect the environment and also increase profitability.
-> Reduce carbon credits by lowering pollution output through emission eliminating generators and cryptocurrency mining equipment
-> Create new digital assets that can be sold for fiat currency or utilized as a treasury asset and store of value
And how do we define fundamentals?
Fundamentals for Bitcoin has to be defined in a similar way to “goodwill” of a company. There is no exact calculation for the fundamentals and they are worth more to some than others. For many American’s pre-pandemic there was little perceived “need” of a hedge against inflation or Government corruption. Although many Americans were not necessarily happy with all of their politics, very few were concerned about the Federal Reserve or future monetary policies.
-> Store of value hard capped at 21 million coins
-> Government resistant
-> Censorship resistant
-> Decentralized, access and equality for all, no barriers to entry, no centralized ruling group or force
-> Proof of Work trustless public ledger blockchain
-> Extremely portable and divisible
-> Offers first incentive for energy recapture and utilization of waste for lowering carbon emissions while producing economic assets
These unique values are HIGHLY VALUABLE for some citizens in countries like Zimbabwe, Nigeria, Yugoslavia, Turkey, Venezuela, and others where they are heavily afflicted by Government corruption and monetary policies leading to insane inflation.
Americans didn’t seem to care much about inflation until the Fed started printing trillions of dollars out of thin air.
COVID-19 has greatly accelerated the realization that individuals need decentralized, financial self-sovereignty
COVID-19 stimulus bills quickly changed that – now millions of Americans are watching the Federal Reserve’s moves closely and are debating economic policy more than ever out of concern and fear of future repercussions.
Central Banks and Nation states have shown their hands in regard to currency debasement through money printing to solve problems and lower debt leverage. They do not care about the massive damage that is being done to the individual by destroying their savings and swamping them under a quickly rising cost of living. And it’s being done under a veil of moralism and virtueness in response to the pandemic.
Now that COVID-19 has exponentially accelerated the needs of corporations and individuals to own a decentralized, digital asset that acts as a hedge against central banks and governments, protection from censorship resistance and fiat debasing currency policies throughout the world.
-> Worldwide investors are increasingly recognizing a need to hedge against Central Banks and fiat debasement
-> Corporations are seeking assets that give them financial sovereignty away from a single nation’s monetary policies
-> Younger generations are flocking to cryptocurrency at a mind blowing rate since the pandemic only increased online and virtual engagement
Volatility is scary, what if it goes to zero?
All new investors to Bitcoin have a steep learning curve before comprehending the digital asset. It’s difficult to dive into and invest your hard earned money into something you do not understand. Many cannot wrap their heads around a “digital asset” holding value, are terrified of the perceived “volatility” on the 5min chart and scared of a fading 90 year old Warren Buffet screaming “Rat poison squared!”
When in doubt – zoom out!
For long term investors who are patient – it’s up only for this unique, scarce, digital store of value. Focus on the weekly and monthly charts, this is the type of asset that is worth being a low time preference, value investor.
Over a decade of history now winning every battle and proving unstoppable against any threat.
I think we were past that point very early on because you would have to shut down the internet. As I’ve said in the past, I don’t see how you could ban it … I think that it would be a foolish thing for the government to try to do that.– Hester Piece SEC Commissioner
Bitcoin has died over a thousand times if you listen to mainstream media.. We would need miners to fully capitulate and be unable to operate their mining equipment for due to costs and lack of profitability. This would take such a severe price drop that must be cause through a black swan event such as a failure in the blockchain or something to that level.
Change your mindset.
Bitcoin wealth is valued in Bitcoin, not fiat.
Grow your Bitcoin stack, ignore the noise, and focus on long term wealth creation.