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Author Topic: The "mining cost price floor": Myth or reality?  (Read 99 times)
d5000
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November 14, 2018, 11:42:33 PM
 #1

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!

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Zin-Zang
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November 15, 2018, 04:07:38 AM
 #2

Miners may turn off their electricity to save fiat, however rental costs for the warehouse and any loans to cover the original purchase are still an ongoing expense.
What will happen is the smaller players will fall out of mining and the larger players with the bigger pockets further centralize their control of btc.

In Truth, their is no price floor as holders of btc may just need to cash out to fiat.
If the miners had unlimited fiat to purchase the excess bitcoins, they would not need to turn off their ASICS to save money to start with.  Tongue

If the price drop is very severe and too long even the big players will fall , and then the bitcoin network hash drops so low that the network dies in a death spiral.
https://cointelegraph.com/news/how-close-did-bitcoin-get-to-disastrous-chain-death-spiral
Quote
“Transactions get backlogged to a point where the coin becomes basically useless,”

That is the danger when the inputs costs to maintain a PoW network exceed the purchase price per coin for any extended period of time.
 

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November 15, 2018, 11:10:37 AM
 #3

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.


Let me start with variant 2

It makes no sense and it does not cover the full picture.
If the costs outgrow the revenue, the miner suddenly become traders or holders? They could have done this even without mining, and what happens to the gear and their operation?

Variant 1

Yup, it's the same as oil and it is the real picture any miner will have to face in a bear market
If your overall costs are exceeding the revenue you might have to consider shutting down the operation.

But, it has a lot of factors in this
- you might still end up with costs for the building, employers and so on, that might be bigger than the loss you would be made by mining, so you could still mine to have smaller losses or quit completely if you can't afford to prop your business.
At this point is just like oil mining, the costs to shut the well and get rid of the employees added on the costs of reopening it later might make you consider to keep running till...you can't do it anymore.
- some miners have already ROI on their gears some not, and again a big factor when taking a decision
- some have long-lasting contracts with power plants, even if they would want to shut down their operation it would prove more costly to denounce their former arrangements


One thing is certain when prices go down
New gear is not added at the same level as before
https://bitcoinwisdom.com/bitcoin/difficulty

Nov 01 2018   7,184,404,942,701
Aug 11 2018   6,389,316,883,511
3 months - 795088059190

Aug 11 2018   6,389,316,883,511
May 24 2018   4,306,949,573,981
3 months 2082367309530
3x time more!!!

So slowly and slowly we're reaching the point where it's no longer such an attractive business


mikejohns166
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November 15, 2018, 11:47:37 AM
 #4

in most of time the corelation between difficulty and price is sth like 90% in bitcoin. In normal situation when the price goes under minimal cost to mine, the miners should buy bitcoins from market because it is more profitable than mining. If there was no bubble like in dec 2013 or this bubble in dec 2017 mining profit was sth like 10-15% over mining cost and it is a healthy level for bitcoin market.
But: there appeared banksters like Goldmann Sachs and others who knows how to cheat people, have lot of cash and can make bear market themself. The market could changed
d5000
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November 15, 2018, 08:38:13 PM
 #5

Miners may turn off their electricity to save fiat, however rental costs for the warehouse and any loans to cover the original purchase are still an ongoing expense.
What will happen is the smaller players will fall out of mining and the larger players with the bigger pockets further centralize their control of btc.
That may be a possible effect, it depends however on the grade of dominance of the bigger miners. For example, if smaller miners make up 50% of the hashrate and thus, if they're switching their miners off, hashrate fell to 50% too, then after the next difficulty adjustment they could re-enter the market if the price has not fallen to less than 50% of the original price.

In short: if centralization is already very dominant, it will dominate more in bear markets, but if there is some grade of decentralization, then difficulty adjustments should allow small miners to stay in the game. But I agree that I don't see a "floor" effect here.

Quote
If the price drop is very severe and too long even the big players will fall , and then the bitcoin network hash drops so low that the network dies in a death spiral.
https://cointelegraph.com/news/how-close-did-bitcoin-get-to-disastrous-chain-death-spiral
[...]
That is the danger when the inputs costs to maintain a PoW network exceed the purchase price per coin for any extended period of time.
I guess this is a very extreme scenario, and the hashrate drop in that moment occurred only because of the BCH hard fork which was the first of its kind and had some big miners sympathizing with it. I don't expect that to happen again - with one exception: if a really severe bug is found and exploited (e.g. if the bug discovered ~a month ago was used to create additional coins).

Let me start with variant 2
It makes no sense and it does not cover the full picture.
If the costs outgrow the revenue, the miner suddenly become traders or holders? They could have done this even without mining, and what happens to the gear and their operation?
Agree, the scenario doesn't convince me at all.

Quote
- you might still end up with costs for the building, employers and so on, that might be bigger than the loss you would be made by mining, so you could still mine to have smaller losses or quit completely if you can't afford to prop your business.
Right. I think this is one of the reasons why we'll never see an extreme hashrate drop which could really affect block times and coin supply. It should be a gradual process - smaller miners may switch their hardware off until difficulty allows them to re-enter (see answer to Zin-Zang), but bigger ones will try to stay in the game as long as possible.

Quote
One thing is certain when prices go down
New gear is not added at the same level as before
https://bitcoinwisdom.com/bitcoin/difficulty
[...]
So slowly and slowly we're reaching the point where it's no longer such an attractive business
I guess, however, that after a re-accommodation of the market on the lower price level, it will become attractive again (e.g. by new hardware/technology). The crucial indicator should be the relation between difficulty and mining costs.


cynical
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November 15, 2018, 09:20:18 PM
 #6

I dont get it, take January 2017 when the value of bitcoin was $1000 it was surely economical to mine,
When the value was $4000 it was economical to mine so why not now when the value drops back to
$5500 from $6500?
What about the 4 or 5 month run up to $20000 and then back to todays value?
I think every miner has a personal floor and all the floors are at different levels.
d5000
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November 16, 2018, 12:31:40 AM
 #7

I dont get it, take January 2017 when the value of bitcoin was $1000 it was surely economical to mine,
When the value was $4000 it was economical to mine so why not now when the value drops back to
$5500 from $6500?
What about the 4 or 5 month run up to $20000 and then back to todays value?
I think every miner has a personal floor and all the floors are at different levels.
Difficulty increases when the price increases. What we saw in the first half year of 2018 (roughly until September/October) is a difficulty increase even when the price was already decreasing. so a pre-bubble $5500 BTC was much easier to achieve for miners than a post-bubble $5500 BTC. That may be related to hardware updates, but I guess that also the profit margins are thinner now.

Since October, difficulty is stagnant to decreasing, so there seem to be miners that are shutting down their operations, at least temporary. However, it isn't clear if that's not related to the closure of mining farms in China due to regulatory problems.

And even if more miners were shutting down operations from now on, I expect that to stay a gradual process, with no more than a 20% decrease in a difficulty period. So the effect on supply would be small, as I already wrote.

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November 16, 2018, 01:21:57 AM
 #8

There are too many unknown variables here, we don't known the costs of mining so we don't know the profitability, we also don't know what exactly are miners doing with their rewards - are they selling them immediately or do they wait for price spikes?  Also, there were reports that sometimes miners are mining at a loss because in the long run it's an optimal strategy. Until someone publishes a proper research, with mathematical models that take into account all the important factors, I wouldn't believe in this theory.

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