In-depth analysis: How much impact does mining cost have on the lower limit of BTC price?

Original author: Murphy, on-chain data analyst (X: @Murphychen 888)

How much impact does mining cost have on the lower limit of BTC price?

Some people have misunderstandings about whether mining costs affect BTC prices. They believe that in the current capital era, the proportion of BTC in the hands of miners in the entire circulation market is very small, so whether miners sell or not does not affect the price trend of BTC.

Here I can talk about my personal opinion. First of all, the mining cost has no effect on the upper limit of BTCs price, which is beyond doubt; but it will greatly affect the lower limit of BTCs price . The logic behind this is not that miners will sell or not sell their chips when the cost price reaches it, but it lies in the psychological factors on the market demand side.

When the price of BTC is lower than the mining cost, investors will think that buying BTC in the secondary market at this time is much more cost-effective than investing tens of millions of funds and spending time and effort to obtain BTC through mining. It is similar to a taking advantage mentality, taking advantage of miners, thereby triggering more market demand. It is like when we buy things, when we find that the production cost of the item is the same as or even higher than the price, we will buy it with more peace of mind, that is, we feel that we have taken advantage (no loss or deception).

Secondly, when the price of BTC drops to a certain level, miners will choose to withdraw some of their computing power if they cannot cover their costs, thus reducing the difficulty. The reduction in difficulty reduces the cost of mining, and the market demand for not getting a bargain weakens, so the price continues to fall, and the computing power continues to withdraw... This enters a death spiral. Strong computing power is an important guarantee for BTC decentralization and system security. In extreme cases, no one packs, the mine closes, the mining machine cannot be sold, and even the asset security is threatened, which is not in the interests of everyone.
Therefore, the mining cost will definitely affect the lower limit of BTC price under certain conditions!

So how do we correctly measure the mining cost? We can use a simple calculation model to deduce:

Mining costs mainly include two aspects: purchasing mining machines and later operation and maintenance. The later operation and maintenance costs mainly include electricity costs and other operating costs (labor, plant, maintenance, loans, etc.). We assume that electricity costs account for 70% and other costs account for 30%, plus the cost of purchasing mining machines, which constitutes the main cost of miners.

The hash rate price refers to the amount of BTC (including block rewards and handling fee income) that can be generated per E hash rate (1 E = 100w T) per day, which is currently 0.809;

The unit electricity price is $0.053 . I selected 5 mining machines currently on the market as samples, among which S 19 XP Hyd is the main mining machine in the last cycle, T 21 is the main mining machine in this cycle, and S 21 is currently sold on the official website as futures, which theoretically has not been deployed in large quantities. All mining machine parameters and prices are collected from the Bitmain official website.

The above table is the result of the calculation based on the above model. It can be seen that when the BTC price is 42,000 US dollars, the profit margin of the main mining machine T21 is negative. This means that buying BTC in the secondary market is more cost-effective than mining.

Coincidentally, the limit value of 42,000 is very close to the view that the limit value of retracement calculated by STH-MVRV and TMMP in my article Based on the on-chain data analysis, what is the limit value of BTC price retracement in this bull market? published on June 23 will not be less than 43,000-44,000.

When the BTC price is below $56,500, the payback period of T21 is 48 months. Generally speaking, the maximum service life of a mining machine is about 3-4 years. After 3 years, even if the mining machine does not break down, it will be replaced by a new mining machine due to its backward energy efficiency. By then, the residual value of the old mining machine will be almost zero, and it can only continue to shine and heat for miners with extremely low or even free electricity costs, or it will have to be sold by weight. Therefore, for T21, which can only pay back in 48 months, this price is too unfriendly. Assuming that the price of BTC does not rise in the future, it is equivalent to the miners who have just paid back after 3 years of hard work facing elimination again. Who is willing to do such a business?

Therefore, from this perspective, BTC below 56,500 also has a certain cost-effectiveness, and is especially suitable for those who like to make regular investments.
Update: Mining Pulse is an indicator that measures the mining speed of miners. It mainly reflects the deviation of the average block interval time of 14 days from the target time (10 minutes). Specifically, Mining Pulse can help us understand the following points:

1. Deviation indicates speed difference:

A negative value means the actual block time is faster than the target time, and a positive value means the actual block time is slower than the target time.

2. Negative value means:

Faster block times: If Mining Pulse shows negative values, it means blocks are being mined faster than expected.

Hash rate growth: This usually happens when the network hash rate is growing faster than the difficulty is increasing. That is, more computing power (miners) are joining, resulting in shorter block generation times.

Network expansion: Indicates that the network’s hashing power is expanding.

3. Positive value means:

Slower block times: If Mining Pulse shows a positive value, it means blocks are being mined slower than expected.

Hash rate drop: This usually happens when the network hash rate drops faster than the difficulty adjustment rate. That is, some miners may turn off their equipment (computing power withdrawal), resulting in longer block generation time.

Miners Offline: This indicates that some miners are going offline, reducing the total hashing power of the network.

As shown in the figure above, the larger the positive value, the closer the current BTC price is to the mining cost line of miners, which leads to a larger scope for miners to surrender. In this cycle, from the bottom of the bear market to the present, there have been 5 cases where the Mining Pulse exceeded + 0.05.

The first and second times occurred on December 27, 2022 and December 4, 2022, when the bear market was at its bottom and the BTC price was around $16,000-16,500. The Mining Pulse reached 0.1, which means that the speed at which blocks were mined was about 10% slower than expected. A large number of miners surrendered, and the market entered a severe winter period; this is usually a sign that the bottom is about to appear.

The third time was after the ETF was approved in January 2024, when the BTC price fell back to $39,450; the fourth time was after BTC broke through the $70,000 mark, when a large number of short- and medium-term chips took profits and the price fell back to $58,200; the fifth time is now, when the Mining Pulse has reached 0.072;

Looking back at historical data, if you buy BTC near the mining cost line every time, it is equivalent to obtaining BTC at a lower cost than the miners. From a medium- to long-term perspective, the certainty of obtaining profits is greater than the uncertainty of taking risks.

Note: The above calculation model is not an accurate statistical model of mining costs, and there is a certain degree of error, but it is closer to the actual cost than the shutdown price you see on the Internet (the shutdown price usually only calculates the electricity cost). If there are any omissions, professional miners are welcome to correct them!

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