With Bitcoin halving, now only two months away, the current price of Bitcoin threatens the break-even cost for miners. This presents a scenario for large scale exits from miners. Nevertheless, according to leading analyst, mining is a large scale business and ‘respectfully disagrees’ with any FUD around miner capitulation.
Bitcoin around $8000 is at the confluence of production cost for miners paying $0.06 per KWh. Moreover, post halving, effectively the production cost will double which will put a lot of pressure on miners causing capitulation.
Matteo Leibowitz, a research analyst at The Block notes,
If prices fail to double within the next 2 months, miners will find their revenues cut in half. Mining operations will close en masse, network security will dive & Bitcoin’s value proposition will objectively be worse off than it is today.
Miners are Far Better off
However, this is a rudimentary view of the industry which has better developed financial and technical infrastructure. Arjun Balaji, leading crypto analyst and founder of crypto assets management firm, Paradigm tweeted on the Leibowitz’s observation,
Respectfully disagree. An alt. view:
(1) Industrial miners have healthy margins > revenue drop off and constraints (eg. PPAs) forcing activity.
(2) 7nm ASIC lifetimes are now >3-4y, amortizes over a longer period.
(3) Legit growth in structured product sales shows miners hedging.
The mining industry has seen tremendous growth in the last few years. The lower limit of the production cost band (at $0.04 KWh) shows that the break-even cost goes to as low as $4800. Hence, they are unlikely to capitulate due to paying bills of the Power Purchase Agreement. Moreover, they usually look for discounted prices on electricity in drafting these agreements which spans over a long time.
The launch of new age cost-efficient miners is further reducing the cost of production. Leading manufacturers of mining hardware, MicroBT and Bitmain recently announced the launch of new Whatsminer S30 and Antimer S19/S20, respectively. While the older models deployed in small-to- medium scale will suffer losses, the overall industry has a positive trajectory.
Furthermore, mining is a dynamic business, if the miners begin to shut down, the decrease in supply would favor the rest of the miners. Balaji also mentions that the competition is bringing the effective electricity cost down to $0.02 KWh. He adds,
To me, the interesting question is: with longer ASIC lifetimes + increasingly mature competition (<$0.02/kWh) can we meet some “threshold security” level?
The growth of the futures and now options market is also providing ample opportunities for miners to hedge their losses.
Despite the fluctuations, the previous design of miners had an effective life of 3-4 years with impressive profitability. These will probably run out after halving. However, abrupt increase in hash rate during times of volatility have shown that old miners return when the price increases.
The actual estimation of the price levels that could drive inactivity on the block-chain causing FUD around Bitcoin’s value proposition involves many variables. Balaji notes,
This requires an industry-wide analysis of hardware costs over time, balance sheet mgmt, financing, etc. I’d love to see it!
How do you think the mining rhetoric is affecting price at the moment? Please share your views with us.