The "mining cost price floor": Myth or reality?

[wheelz1200]

In several forum posts I've heard that the mining costs, which are (depending on technology, region, etc.) between $5000 and $6000 per BTC, constitute a "floor" for the Bitcoin price.

But I haven't read a convincing theory behind that claim.

One variant which is often mentioned:
When the Bitcoin price drops below the mining costs, many miners would power off their hardware. This would lead to a smaller supply of "mined coins" at the markets.

Even if that occurs (I guess the effect would be rather small) this "smaller supply" is only temporary: it's only smaller until the next difficulty adjustment. So if the hashrate drop was 50% (which would be extreme), that would mean a month of "smaller supply", at most. Would this really influence the price? Additionally, mined coins are only a small fraction of the coins available at the markets.

Variant 2 I read recently:
Some miners are mining BTC to sell them for a more expensive price. If Bitcoin dips below the "production cost", then these miners could buy Bitcoin instead of mining it, and speculate to sell them for a higher price later.

But a miner would only buy if he/she thinks that Bitcoin is undervalued. But in a bear market this is risky. So I don't expect many miners following that pattern.

So these two explanations do not convince me, at all. But the theory is so often mentioned that something may be behind it.

So if you know a better explanation of the "mining cost as price floor" theory, please post it!

I would think if prices get too low and people start turning off their miners it would start with the one man home miners versus farms which mine more efficiently typically.  Farms are more apt to flip their mined bitcoin in the markets to cover their expenses.  So I think the reverse happens as prices go lower there will be MORE mined bitcoin going immediately into the exchanges to sell.

[d5000]

I think that many years ago when mining was a significant way to obtain bitcoins, there may have been something close to a price floor determined by the cost of mining. That was because if mining became unprofitable for some miners, they would buy them instead. The increase in demand from these ex-miners would cause the price to rise toward the cost of mining.

This is basically version 2 of the theory I outlined in the OP.

Thinking a bit about it, I think this could have been worked - but mainly in bull markets or sideways markets. In these cases, the miners aren't driven out due to a price drop, but due to a disproportionate hashrate/difficulty increase (superior to the BTC/USD price increase) which makes mining unprofitable for them. If there's still positive sentiment, then they can hope for a short term price increase and thus the "miners become buyers" could make some sense even at a larger scale. This would, however, not constitute a "floor" for a bear market but even generate more FOMO for the bull market.

While this is obviously also possible in bear markets from ex-miners who believe that Bitcoin is undervalued, these ex-miners need deep pockets for that to have any positive effect that exceeds the (already present) effect of "Bitcoin believers" who buy BTC in bear markets but have never mined, because of the long periods they would have to hodl to make profit (e.g. between mid-2014 and mid-2016).

I think you may be right that there may have been a small "floor" effect let's say in the late 2011 bear market when CPU miners were still the norm, and those who mined in 2010 and early 2011 and sold in the bubble phase in mid-2011 were massively able to buy the $2 bitcoins of late 2011. But since mining is an optimized industry I don't believe this to be possible, at least not at a large scale. I believe at least in 2018 this should already have been the case, so I think my conclusion still is valid.

@stompix: Fair enough. I don't think they can permit themselves everything (and even less so in bear markets), but they may have a larger margin to operate than one could believe at a first glance.