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

[d5000]

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]

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.  

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

“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.
 

[stompix]

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]

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]

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.

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.

- 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.

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]

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]

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.

[hatshepsut93]

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.

[avikz]

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.

That's not true! Majority of the miners are bullish on bitcoin and that's why they have invested heavily on mining hardware and related infrastructures. So if the bitcoin price drops below the mining cost, majority of them would not shut off their mining operations. However, they might be more interested in buying bitcoins from the open market if this happens!

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.

Miners are already selling freshly mined bitcoin at a premium. There is a concept called "virgin bitcoin". Since cryptos are being used for many illegal activities, investors with deep pocket, usually wants to buy bitcoins directly from miners which are freshly mined rather than buying from the market. Again, who are involving in such activities, are bullish on bitcoin. So there's a little chance that miners will shut off their operations. They may buy from the market but simultaneously the mining operation will continue. 

[Hydrogen]

The mining floor is the basic cost of electricity, cooling and storage space for mining rigs. Versus the current price of bitcoin. If electricity, cooling and storage is greater than mined coins, mining operations are running in the red and might shut down. Basic costs IMO are not the biggest hurdle in crypto mining. The biggest hurdle is the initial start up cost of mining rigs. Miners must recoup the cost of mining rigs (hardware) before they can turn a net profit. These are the basics everyone knows and loves.

I think its safe to say miners would never temporarily shut down in a bear market due to moore's law and the overall climbing trend of hash rate which would converge to make their mining equipment less effective over time. Mining rigs depreciate in value over time, the same way that GPUs and computer hardware does. Miners must remain in constant operation, as long as possible. To make the most of their initial investment.

The ideal arrangement for a crypto miner would be inheriting a hydroelectric dam and warehouse full of ASICs, to mine bitcoin with surplus free electricity. Then there are no floor or even fundamental costs aside from storage, cooling, basic upkeep and maintenance.

The $5,000 floor number could be the average monthly electricity cost for a decent size mining op. But that would represent an industrial scale which should be mining enough net BTC for even a $5k number to not be a significant liability.

[d5000]

I am glad that this thread was dug up out of the darkness because I find the topic still interesting, but for those "necroing" here please look at the date it was posted The number of $5000 was the number often mentioned in 2018 when also the Bitcoin price was hovering around that, but today that number would be much higher (I guess > $20K or even $30K).

The mining floor is the basic cost of electricity, cooling and storage space for mining rigs. Versus the current price of bitcoin. If electricity, cooling and storage is greater than mined coins, mining operations are running in the red and might shut down. Basic costs IMO are not the biggest hurdle in crypto mining. The biggest hurdle is the initial start up cost of mining rigs. Miners must recoup the cost of mining rigs (hardware) before they can turn a net profit.
[...]
The $5,000 floor number could be the average monthly electricity cost for a decent size mining op. But that would represent an industrial scale which should be mining enough net BTC for even a $5k number to not be a significant liability.

I think you understood the concept a little bit wrong, above all regarding your last two sentences; $5000 was referring to a price for 1 BTC, not to a cost the miner has to bear.

The "floor" I was talking about has to do with different price levels which could be described in several (slightly different) ways:

a) "the (minimum) Bitcoin price at which every miner which is currently mining will make a profit if he sells the coins regularly".
b) "the (minimum) Bitcoin price at which every miner which is currently mining will cover their costs if they sell the coins regularly".
c) "if the Bitcoin price fell below this price, then at least one miner will have to turn his equipment off"
d) "if the Bitcoin price fell below this price, then at least one miner will go bankrupt and leave mining forever"

These prices are slightly different in descending order from a) to d), it's possible the difference between price a) and d) is at least 20-30%, because miners can have some accumulated capital to continue operations before they shut equipment off or even go bankrupt.

The implications are also slightly different: a) to b) will probably not lead even to a drop in hashrate (but can "cap" the hashrate increase, like stompix wrote back in 2018); c) will lead to a temporary drop until the difficulty adjust, and d) maybe to a permanent drop.

But that doesn't matter that much. The point is that Bitcoin's difficulty mechanism is designed in a way that only an extremely fast price drop (let's say a sustainable 95% crash in a single day) could throw most of the miners out so a "death spiral" like it was mentioned above in the Coindesk article begins; even then "altruist" miners should sustain it. All these prices (a) to d)) are re-adjusted every 2 weeks when Bitcoin's difficulty changes again. They can also adjust due to other reasons, like the electricity price in major mining regions, price changes of mining equipment, etc..

Now again to the "price floor" - in the OP I described two variants which were mentioned in this forum; the first version makes reference to prices c) and d) (miners temporarily or pemanently shutting down, so less coins are "produced" for a while and supply goes down, which could have an effect on price), the second one to price a) (it could be more profitable to buy bitcoins than to mine them, so demand goes up). I dispute both, like I wrote in the OP.

So if the bitcoin price drops below the mining cost, majority of them would not shut off their mining operations. However, they might be more interested in buying bitcoins from the open market if this happens!

I dispute that, see OP.

Miners are already selling freshly mined bitcoin at a premium. There is a concept called "virgin bitcoin". Since cryptos are being used for many illegal activities, investors with deep pocket, usually wants to buy bitcoins directly from miners which are freshly mined rather than buying from the market.

The "virgin bitcoins" are indeed an interesting addition to the theory, although the premium the miners get isn't very high as far as I know. On a first glance, this could make it easier for miners to survive if price falls below their "profit threshold". However, if most or all miners sell virgin bitcoins for a premium, then this means that the hashrate is always slightly higher than it would be without that premium, so it levels out again - difficulty is then always a little bit higher, and it becomes more difficult to mine and get the premium. The price levels a) to d) would still stay intact.

[stompix]

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.

That's not true! Majority of the miners are bullish on bitcoin and that's why they have invested heavily on mining hardware and related infrastructures. So if the bitcoin price drops below the mining cost, majority of them would not shut off their mining operations. However, they might be more interested in buying bitcoins from the open market if this happens!

If that would not be true then we would not have difficulty drops at all, yet they do happen.
Remember the crash in 2020? Look at the difficulty adjustment  in that period:

624,960   2020-04-08 11:54:06   14,715,214,060,656 - 14.72 T   + 5.77 %   0x171320bc   09 min 28 s   105.21 EH/s
622,944   2020-03-26 04:51:46   13,912,524,048,945 - 13.91 T   - 15.95 %   0x17143b41   11 min 54 s   99.59 EH/s
620,928   2020-03-09 13:05:17   16,552,923,967,337 - 16.55 T   + 6.88 %   0x17110119   09 min 22 s   118.40 EH/s

What other factor would you have for this drop?
And no, before you even think of the Chinese mining accident and the ban happened in April and May 2021 not 2020.

The "floor" I was talking about has to do with different price levels which could be described in several (slightly different) ways:

a) "the (minimum) Bitcoin price at which every miner which is currently mining will make a profit if he sells the coins regularly".
b) "the (minimum) Bitcoin price at which every miner which is currently mining will cover their costs if they sell the coins regularly".
c) "if the Bitcoin price fell below this price, then at least one miner will have to turn his equipment off"
d) "if the Bitcoin price fell below this price, then at least one miner will go bankrupt and leave mining forever"

The floor thing is more like a ramp with a millimetric incline where every single miner is half a cent above the other but at the same time positioned in a different place in a 3d map. Of course, your classification makes sense, but there are a lot of guys who are not going to be caught in any of those, and here is just one example:

- miners who mine at a loss in terms of profitability for their operational cost but who would be losing more money if they would stop.
For example, if you have already paid for electricity and rent and you are currently paying 20 cents per each TH/s generated and your revenue is 16 cents TH/s you're mining at a loss, but since you've already paid and that is lost money every single block reward is decreasing your possible loses. These guys will be mining at 5$ per coin. 

Unfortunately (for us small miners) there is another category active right now, huge companies with millions of investors money throwing around millions at gear and datacenters and power sources, these guys can afford to lose millions since they don't play with their money, and with the increase hashrate at their control, the floor is becoming less and less defined.

The ideal arrangement for a crypto miner would be inheriting a hydroelectric dam and warehouse full of ASICs, to mine bitcoin with surplus free electricity. Then there are no floor or even fundamental costs aside from storage, cooling, basic upkeep and maintenance.

In the actual economy, there is still a floor for them too.
If you use the energy you could sell for 100$ and you generate 101$ of revenue with gear that is worth 1000$ of the market what would you do?
I would sell that gear on which I would make ROI in 1000 days and I would sell the energy directly to another consumer, cutting a lot of headaches, cutting costs with jobs and maintenance.

And no, when it comes to hydroelectricity there is no such thing as a surplus right now, that's the number one energy source everyone is keen on getting, far more interesting for huge consumers than even the virgin coins mentioned above, both economically and as publicity.

[el kaka22]

I have lived through 2017 and 2018 and can talk about why it is a myth. The floor can be moved, that is why it is a myth, it is a reality if you consider the fact that it will stand true after a fall under the floor, because it readjust the floor. So in this case, let's assume that the floor is 10k right now, which means it "can't" go under? No, it can go under it, like be 8k, because when that happens the floor will drop to 6k due to lower difficulty level, and if it goes to 5k after that, the floor will be 3k because of how little difficulty will become.

So, only for a short period of time it is under the floor. But reality is that the floor can be readjustable to lower level when the price falls, hence it is not really a "it can't go under it" price.

[d5000]

The floor thing is more like a ramp with a millimetric incline where every single miner is half a cent above the other but at the same time positioned in a different place in a 3d map.

Agree here, it's of course still a simplification.

We can also only talk of a real "floor" at a price which is well below the price where the first miner would give up, because (if the "mining cost price floor" theory was true) for it to have any effect there would have be a significant number of miners to shut down operations (I assume at least 20-30%), at least temporarily.

- miners who mine at a loss in terms of profitability for their operational cost but who would be losing more money if they would stop.
For example, if you have already paid for electricity and rent and you are currently paying 20 cents per each TH/s generated and your revenue is 16 cents TH/s you're mining at a loss, but since you've already paid and that is lost money every single block reward is decreasing your possible loses. These guys will be mining at 5$ per coin. 

This applies also for those miners who have paid for their own electricity generation, i.e. those mining with electricity coming from an own wind turbine or solar farm. So yes, you would have to add this miner group to the "altruist" miners which will ensure there's a significant hashrate even after a large price drop.

For miners improving their hardware with a significant investition it could also make sense to buy put options during this time, so they can ensure to sell their bitcoins for a certain price. These miners would also not be shutting down operations even if Bitcoin went to near zero.

I however don't know how widespread these models are in comparison with more traditional approaches (=paying for electricity after consumption, and without using options). I would love to see estimates, if someone knows.

Unfortunately (for us small miners) there is another category active right now, huge companies with millions of investors money throwing around millions at gear and datacenters and power sources, these guys can afford to lose millions since they don't play with their money, and with the increase hashrate at their control, the floor is becoming less and less defined.

Yep, agree too here, although if they behave in a too risky way (i.e. increasing hardware expenses in times where a bear market is likely) they may lose their income stream from investors. But these companies will of course have a bigger margin to operate before they'll have to shut down.

All those groups are invalidating the "price floor" theory even more as even in a large drop it would be extremely unlikely that the hashrate decrease is so big that there is an effect on Bitcoin supply/demand or even a "death spiral".

Agree also with your answer to @Hydrogen.

[paxmao]

I think is a bit simpler (or should I say complex?) than that. If the price of bitcoin goes below the floor, plenty of miners would stop and in the next halving the difficulty would decrease, along with the cost of mining going back to an equilibrium.

The floor is merely theoretical IMHO.

[odolvlobo]

It is very simple. The price of a bitcoin is determined by supply and demand. The cost of mining has no effect on supply or demand. Therefore, there is no mining cost price floor.

[kryptqnick]

I'm skeptical regarding the "floor" hypothesis. I've heard of the variant that basically says that mining must be covered, and the price can't be beyond its costs. But it's as if the assumption here is that mining can't be unprofitable. I find this assumption not based on anything because there are plenty of unprofitable businesses, and I don't see how mining can't hypothetically become one of them. The price isn't a sentient empathic being that will adjust itself to make sure miners aren't losing money, after all. And the variant with some miners leaving the market if mining gets unprofitable is based on the assumption of perfectly rational financial behavior, and it's not humanity's strong suit, to be honest. So of course, some will keep doing it despite losing money, just hoping that one day it'll all be worth it.

[d5000]

I think is a bit simpler (or should I say complex?) than that. If the price of bitcoin goes below the floor, plenty of miners would stop and in the next halving the difficulty would decrease, along with the cost of mining going back to an equilibrium.

Yes, this is the base I also part from in the OP, which leads to my disagreement with both variants of the "floor" theory. (I think you didn't mean "halving" but "difficulty adjustment").

Of course, there are situations where smaller miners are driven permanently out of the game, mainly in longer bear markets, because if they have to stop operations and then start again after a diff adjustment, their rentability is much lower than that of those who can stay inside the business, so they'll be slowly driven out.

This happened with CPU and GPU miners a long time ago (in the period 2011-2014). Once the difficulty has then adjusted, this leads probably to a higher market share for the more "optimized", bigger mining farms. There may be new entrants of the "smaller miner" class, but it's more difficult to enter a market than to stay inside, so I don't think it outweights those smaller miners leaving the business.

(This means that I'm now thinking a bit different than what I wrote in my second post in 2018. But this doesn't modify my thinking about the "floor" theory.)

However, such an event would even be more bearish for the price, because to cover costs from the shutdown of operations, and to rescue at least a part of the capital, the bankrupt miners will sell all their coins they could perhaps have hodled (speculating on a price increase which didn't come) as fast as possible. This should counter the effect of the "floor" theories mentioned in the OP adding more BTC to the supply.

@kryptqnick: The category you're mentioning would be also invalidate the floor, one could call them "hoping unsuccessful miners". However, some of these would have to shut down operations due to pressures (growing debt, diminishing investment funds, etc.).

Conclusion: As everybody and their mother basically agrees with me here that the "price floor" doesn't exist, I think we can bury this "mining cost price floor" theory as a strange piece of 2018 economic esotericism. Perhaps the theory was born out of frustration with the bear market of this year, to create at least a bit of hope. But ... as history told us from 2019 onwards, the theory wasn't needed.

[odolvlobo]

Conclusion: As everybody and their mother basically agrees with me here that the "price floor" doesn't exist, I think we can bury this "mining cost price floor" theory as a strange piece of 2018 economic esotericism. Perhaps the theory was born out of frustration with the bear market of this year, to create at least a bit of hope. But ... as history told us from 2019 onwards, the theory wasn't needed.

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.

The same process might be happening now, too. But, miners now are such a small portion of the market that they couldn't have any significant effect on prices.

[stompix]

Yep, agree too here, although if they behave in a too risky way (i.e. increasing hardware expenses in times where a bear market is likely) they may lose their income stream from investors. But these companies will of course have a bigger margin to operate before they'll have to shut down.

Looking at how Faraday Future found investors, went into financial troubles found more investors, went near bankruptcy, found another Chinese investor that went himself bankrupt only to be listed on Nasdaq, and maybe still manage to find a buyer these guys will have it easy, at least for them there is always the mantra BTC to the moon. Plus If we consider true the numbers they release in their PR statements they mine a 2.5-4 cents on average, keeping the boat at positive EBITDA  is easy.

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.

I don't think that it was due to the percentage of freshly minted coins but because of how mining was done then.
With a lot of home miners with no advanced payments, no wages to be paid for maintenance not rent the math for such a miner is pretty simple, if I spend more on electricity than what I'm getting in Bitcoin I rather shut down and buy bitcoins directly that day, at least that's how I would do it even now if I woudn't be tied to an annual electricity contract.