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May 9, 2020

Is Bitcoin’s Price a Function of Its Miners’ Costs?

With the Bitcoin Halving Event due next week and much discussion of how it will affect bitcoin’s price, it’s a great time to consider what factors actually determine the price.

There are many thoughts floating around:

  • Is it simply supply and demand?
  • Is it just market cycles playing out?
  • Is it fear and greed?
  • Is it media hype or indifference?
  • Or is it just the “Bitcoin Whales” manipulating the market to their advantage?

Certainly it is a bit of all of the above.

But for an underlying or baseline factor, we need to consider the breakeven cost to actually create (or “mine”) bitcoin.

The breakeven price, of course, is the basis of ALL production, be it oil, gold mining, farming, business, … you name it.

If price is above cost, you profit; if below cost for any significant length of time, you shut down temporarily or go out of business.

Thus, it is essential to have an idea of what bitcoin price the miners need to stay in business and keep the entire Bitcoin ecosystem afloat.

And it’s not just the mining of new bitcoin, it’s also the continuing support and validation (the “hash power“) of the entire global network.

Bitcoin (BTC), the token, is the reward system for the entire enterprise, so its price is all-important.

There are basically two main costs for a miner: the mining rig setup and the electricity cost to run it.

Most people believe that the miners with the lowest costs (especially electricity) will be the survivors and the ones who flourish.

But according to an article by Blockchain Solutions, the reality is different.That’s because the consistent improvements in mining rig technology allow those with higher electricity costs to stay in the game and compete with the lower-electricity-cost, but older-tech, miners.

Another important point made in the article is that the breakeven price is NOT the floor.

In reality, it is the miner capitulation and loss of hash power of the network that creates the price floor. In other words, the price floor will be LOWER than the breakeven price.

This creates another important dynamic: the fact that the bitcoin miners are almost always the main selling pressure on the bitcoin markets, because they HAVE to sell to cover their costs and make a profit to ensure survival.

Bitcoin holders (“HODLers“) and investment funds can hold or sell anytime, based on sentiment or market cycles.

Bitcoin mining rigs have a 3+ year life cycle.

Larger mining facilities have  5+ year life cycles, while small individual miners take approximately 18 months to break even on their capital costs.

As you can see, quite a financial commitment.

So, what happens when bitcoin’s price drops too low?

The inefficient miners eventually capitulate; they either shut down temporarily or close up shop forever.

Their rewards go to the efficient miners.

Therefore, only the most efficient miners keep running.

(As a side note, there are new lending platforms available to miners today that allow them to collateralize their bitcoin holdings and get cash or stablecoins to stay in the game longer. This can reduce or delay selling pressure on the markets.)

Now, what happens if the price of bitcoin drops further and stays low for an extended period, as it occasionally does?

The hash rate (or hash power) of the entire network drops. That is not good, as it weakens the security and integrity of the entire ecosystem.

What then occurs is that the Bitcoin algorithm for block mining automatically adjusts and becomes easier. In this way, the existing miners save energy and get rewarded easier so that they can stay in profit.

THIS IS THE MOST IMPORTANT CONCEPT TO UNDERSTAND!

This self-adjusting protocol is what allows bitcoin miners and the hash power to survive any and all price movements and ensure Bitcoin’s survivability.

Then when the price eventually recovers and the reward starts becoming more profitable, both the blockchain difficulty algorithm and the entrance of new and previously-shut miners create the impetus for the next up cycle.

Now if only the world’s central banks worked on a self-adjusting basis!

Well, wishful thinking can’t hurt.

Thankfully, we have Bitcoin – available for anyone, anywhere, anytime to utilize.

lf you would like to learn more about the tremendous potential of Bitcoin, Cryptoassets, and Blockchain Technology and keep abreast of the latest developments, sign up for our FREE Email Crypto Insights at www.cryptoinfoconsolidator.com.

If you’re ready to jump in to the world of Cryptoassets –

Go here to find out more about our incredible Annual Subscription to Crypto Info Consolidator and start investing in your future now!



Top 10 Cryptos by Market Cap (Updated Daily)

Name Price24H (%)
Bitcoin (BTC)
$60,461.00
-4.79%
Ethereum (ETH)
$3,989.55
-3.37%
Binance Coin (BNB)
$476.26
-3.58%
Tether (USDT)
$1.00
-0.66%
XRP (XRP)
$1.08
-1.95%
Litecoin (LTC)
$191.08
-3.91%
Bitcoin Cash (BCH)
$628.16
-0.56%
Tezos (XTZ)
$6.71
-2.06%
EOS (EOS)
$4.64
-2.52%
Bitcoin SV (BSV)
$170.57
-1.58%

Frequently Asked Questions

Where does Bitcoin and other cryptoassets get their value? Are they money?

Bitcoin was set up to be a decentralized, trustless, immutable source of value. It allows peer-to-peer transfer of value between anyone anywhere in the world. There is a finite amount of bitcoin that will ever be created, and as its usefulness increases, so will the value. As with all forms of “money”, it is based on the faith of those who use it. It has been invented as a better form of money than fiat currencies, since it can’t be controlled, manipulated, or printed out of thin air like government money can. The vast majority of “money” and transactions globally is digital;Bitcoin has been developed to be the ultimate digital currency and store of value.

Other cryptoassets (i.e.,”altcoins”) are often very different from Bitcoin, but most are set up as variations of blockchain technology and distributed ledger technology. Their value comes either from use as a utility (like fuel or electricity), security ( like stocks or real estate) or stability (tied to the value of a currency, precious metal, or commodity). There are now third-generation cryptoassets being developed with even more advanced capabilities.

Just as the Internet spawned huge companies and platforms, so to will cryptoassets utilizing the latest blockchain and associated technologies. There will almost certainly be new “ Googles” and ”Amazons” of the crypto asset market.

Can the U.S. or other country’s government shutdown or outlaw cryptocurrency ownership or trading?

Bitcoin is so decentralized throughout the world that it would be impossible for any government to shut it down. A government can certainly outlaw trading on crypto exchanges in its country, but crypto users would be able to trade on exchanges outside the country. Just like the Internet, people always find a way around restrictions. The other important thing to consider is that blockchain technology, the underlying platform of Bitcoin and other cryptocurrencies, is an enabling technology, just like the Internet. Any country that would outlaw use of cryptos would only be setting itself up for lagging the rest of the world, thus doing itself and its citizens irreparable harm.

How much time does it take to get up and running with Bitcoin and cryptoassets?

This subscription has been specifically developed with the intention of giving any individual the knowledge and guidance to understand cryptoassets and get started as quickly and safely as possible. Once you have receive the introductory information and portfolio details, you will be guided to the best places and methods for setting up accounts. To begin with, you will need to have at least three different exchange accounts, which will give you access to buying and trading the vast majority of our portfolio recommendations. Each account will usually take up to an hour to set up.

Why shouldn't I wait until a Bitcoin/cryptocurrency ETF or mutual fund is available, rather than the hassle of setting up several accounts for buying, trading, and storing cryptos?

First off, there is presently no available crypto ETF or mutual fund available for individual investors.

Secondly, as of this writing, there is no definite timetable as to when one will be available.

Thirdly, the initial crypto funds will invariably deal only with bitcoin and possibly a handful of the larger, more established cryptocurrencies. They will not give you access to the smaller, newer, more advanced cryptos, some of which will be the biggest winners.

However, the main reason for not waiting is that by the time one is approved and available, a significant profit potential may be gone. Just remember, the whole reason the crypto asset market is still small is because it is so strange and tedious for the individual to understand and maneuver, and the infrastructure and regulations are not yet fully set up for the “big money” (institutional investors, hedge funds, pension funds, private equity, etc.) to enter. We, as the “small guys”, for once have a distinct advantage – we can get in before the big boys can! There has probably never been that opportunity with such an important emerging technology before! It is up to you to take advantage, and this subscription service is designed to be the easiest, most focused, and most inexpensive means of getting in early.

How much should I invest in Bitcoin and/or altcoins, and which ones to buy?

Again, this subscription is specifically designed to address these issues at the outset. Even though I personally can’t give any individual advice or recommendations, you will get the benefit of all the experts’ recommendations. In addition, the various cryptoassets in the portfolio will be divided into several categories, from “blue chip” cryptos all the way to “speculative” small cap ones with the highest risk but highest reward potential. You will be able to design your own crypto portfolio from the most conservative to the most aggressive, depending on your investment goals and risk tolerance.

How do I know the best time to buy or sell a particular crypto asset?

One of the most valuable parts of this subscription is expert guidance on evaluating the crypto cycles, which has been very accurate and timely in ascertaining when they reach tops and bottoms. I have been amazed at how accurate these experts have been, and it has allowed me to avoid getting in or out at the wrong times. As a subscriber, you will have all this information presented to you in a timely manner for you to determine when you may want to buy, sell, or hold a given crypto asset. It has been invaluable to me, and allowed me to be patient when the crypto market gets extremely volatile.

How will I know if there is breaking news on Bitcoin or other cryptoassets I own?

You will be sent alerts on significant news or changes in the crypto market or on a specific portfolio holdings as they are made known. It is of course impossible to follow every piece of news on every crypto; what we will be looking for are the important items. You will be given website apps that allow you to track news on any individual crypto asset anytime you wish.

I understand that you get your crypto knowledge and advice from several different crypto research groups. Can you name them or tell me where you find them?

Since I have spent over two years and hundreds of hours researching the crypto space, I’ve come across many different research groups and subscriptions, some excellent and many not so good. I personally selected those with what I believe to have a unique insight based on their evaluation methods. Several were new additions to other investment groups to which I already subscribed. Since the crypto market and technology is so revolutionary and rapidly developing, I discovered that there was no one expert who had the ability to understand and evaluate the whole space. Therefore, one-by-one, I invested in these additional various subscriptions.

After spending so much time and effort doing this for myself, I realized how valuable this information would be to others like me looking to get some guidance in this confusing and complex asset class. Thus, this subscription service was born! To my knowledge (and i looked!) there is no other service of its kind in the marketplace.

For the above reasons, I consider this work proprietary, and cannot name the individual research groups to which I subscribe. I will never plagiarize or violate copyrights from their newsletters. I am a merely filtering and consolidating, always in my own words, the information and advice into one easy- to- use place.

Anyone can, of course, search for themselves and find a crypto subscription service. However, you will only get one insight into the market, and will almost assuredly pay more for that one insight than getting the benefit of 11 different insights with this subscription. I had to do it the long, hard way, and I wish I could have had a service like I am offering as a concise, actionable guide to crypto investing.

What are the tax consequences of buying and selling cryptos?

You must understand that “cryptocurrencies” are not one entity; there are several types. It is so confusing to the authorities that it has been classified variously as property, a security, or a commodity, each of which has a different tax treatment.In fact, some cryptos are one kind, others are a hybrid. Presently the IRS considers it “property”. This problem is an evolving issue, and this service will do its best to keep you informed as to the latest.

Can I hold cryptocurrencies in a retirement account?

Yes. There are several choices on the market today, each with its own pluses and minuses. Our subscription service will be able to list some of the best ones for your consideration.