Bitcoin and cryptocurrency markets suddenly rebounded yesterday, with the bitcoin price climbing back above the psychological $7,000 per bitcoin mark after a sell-off earlier in the week.
The bitcoin price has been stuck in a downward trend for the past few months and previously dipped under $7,000 per bitcoin in November, only to jump back again.
But should we have seen bitcoin’s rebound coming? A report out earlier this month found the cost of creating new bitcoin, a process known as mining, now averages around $6,300 per bitcoin—something that could mean bitcoin is perhaps unlikely, but not guaranteed, to fall below this level.
“Among our findings is an estimate that the current market-average, all-in marginal cost of creation … is approximately $6,300,” analysts at CoinShares Research wrote in a report out last week. “If our estimates are correct, this suggests that, at [then] current bitcoin prices ($7,300), the average miner is profitable.”
The bitcoin price has fallen and rebounded since the report came out last week, with bitcoin yesterday finding support at a little over the $6,300 per bitcoin CoinShare researches found to be the current average cost of mining new bitcoin—what could be considered bitcoin’s ultimate price floor.
When the bitcoin price dropped below $4,000 late last year some miners were forced to turn off their machines while others rushed to reassure the market they were not about to shut down.
“Almost exactly a year ago, the price of bitcoin fell as low as $3,200, even though average bitcoin mining costs were about twice as high. How was that possible,” asked Glen Goodman, author of The Crypto Trader.
“Because what matters is not the average miners but the lowest cost miners, the ones who can do it most cheaply because they have access to cheap electricity and newer, more efficient mining equipment. Those miners can currently even scrape a profit at $3,900.
“If the bitcoin price fell below $3,900, then I expect we’d see fireworks. Most miners would probably have to shut down operations, and many would be forced to sell their stocks of bitcoin, which would push the price down further. But in that situation, the bitcoin system automatically adjusts to make mining easier until miners feel it’s profitable to start working again.”
Last year, Northern Bitcoin, which uses the Lefdal mine in Norway’s Sandane to house its bitcoin mining rigs, found China and Saudi Arabia have the lowest average bitcoin mining cost at $3,100. In Canada, the average cost of bitcoin mining is almost $4,000. At the other end of the scale, bitcoin mining can cost almost $10,000 per bitcoin in Australia.
“This is not the first time that the cost of mining has been the same, or above, the price of bitcoin,” said a market analyst at international payments and crypto service Wirex.
“On one hand it’s bad news for miners because it’s not a profitable enterprise anymore. However, miners tend to hold a few BTC in reserve – so the increase in the cost of mining just means they will hold onto the coins they already have before mining new ones.”
Meanwhile, bitcoin traders and investors are eagerly awaiting the scheduled May 2020 bitcoin halving event, which will see the number of bitcoin rewarded to miners cut by half.
“Going into the reward halving in the spring of 2020, older [mining hardware], which is still widely deployed in the network, will likely be approaching the end of its useful lifetime unless the price of bitcoin rises dramatically, or indeed if more operators gain access to electricity around or below ¢1/kWh,” the CoinShare report warned.
“Both [bitcoin’s halvening and increased regulation in China] are likely to trigger the end for a large proportion of active bitcoin miners, reducing the downward pressure on bitcoin’s value,” said the Wirex market analyst. “At the very least, a new price equilibrium will have to be established before May 2020 even if it’s not dictated by the supply side.”
Elsewhere, bitcoin’s huge energy costs have been a worry for the crypto industry for some time. This summer, researchers at Cambridge University found bitcoin consumes more energy than the whole of Switzerland.
The global bitcoin network was found to require more than seven gigawatts of electricity to keep it online, adding up to around 64 terawatt hours of energy consumption over a year.
However, CoinShare found that bitcoin mining is mainly located in regions where there are “ample supplies of renewable electricity available.”
“We calculate an estimate of the renewables penetration in the energy mix powering the bitcoin mining network at 73%, making bitcoin mining more renewables-driven than almost every other large-scale industry in the world,” the researchers found, adding the renewables estimate has marginally dropped since the last report, reflecting increased levels of mining in low-renewables regions such as Kazakhstan.
“Bitcoin is not an environmental hazard as a vast majority of the hashpower is generated using renewable energy,” added Mati Greenspan, the founder of research group Quantum Economics.
Meanwhile, the economics of bitcoin and crypto mining could be about to be radically changed.
Last month, a group of researchers announced they had come up with what they claim is a cheaper and more energy efficient way to mine bitcoin that could mean the previous bitcoin price floor moves far lower.