Cryptocurrency market crash: How much does mining cost affect the price floor of BTC?

Author: Murphy, On-chain Data Analyst

Editor's Note: Last week, the crypto market experienced a new round of plummeting, with Bitcoin dropping below $55,000 at one point. The mining cost is an important reference for Bitcoin's price trend. As Bitcoin's price declines, multiple series of mining machines reach shutdown prices, which may signal a "local bottom." On-chain data analyst Murphy has conducted a more precise deduction of BTC mining costs using a computational model:

How Much Does Mining Cost Affect BTC's Price Floor?

Some friends have a misunderstanding about whether "mining costs affect BTC prices." They believe that in the current capital era, the BTC held by miners accounts for a very small proportion of the entire circulating market, so whether miners sell or not does not affect BTC's price trend.

Here, I would like to share my personal view. Firstly, mining costs do not affect the "upper limit" of BTC prices, which is beyond doubt; however, they can significantly influence the "lower limit" of BTC prices. The logic here is not that miners will sell or not sell their chips when they reach cost price, but rather it lies in the psychological factors on the market demand side.

When BTC's price falls below the mining cost, investors will think that buying BTC in the secondary market is much more cost-effective than spending millions of dollars and time to mine BTC. This is similar to a "bargain" mentality, taking advantage of miners, which triggers more demand in the market. Just like when we buy things, when we find that the production cost of an item is equal to or even higher than its price, we feel more "at ease" buying it, thinking we got a good deal (you can't lose by buying).

Secondly, when BTC's price drops to a certain extent, miners unable to cover costs will choose to withdraw some hash power, leading to a decrease in difficulty. The decrease in difficulty lowers mining costs, reducing the "bargain" effect and thus weakening market demand, causing prices to continue to fall and hash power to continue to exit… This leads to a death spiral. Strong hash power is an important guarantee for BTC's decentralization and system security. In extreme cases, if no one is packaging, mining farms close, mining machines can't be sold, or even asset safety is threatened, this does not align with anyone's interests.

Therefore, mining costs will definitely influence the lower limit of BTC prices under certain conditions!

So how do we correctly measure mining costs? We can use a simple computational model for deduction:

Mining costs mainly include 2 aspects: purchasing mining machines and subsequent operational maintenance. Among them, the operational maintenance costs mainly include electricity costs and others (labor, factory, maintenance, loans, etc.). We assume that electricity costs account for 70%, and other costs account for 30%, combined with the cost of purchasing mining machines, forming the main costs for miners.

Hash power price refers to the amount of BTC generated per day per E hash power (1E = 100w T), currently at 0.809;

Unit electricity price at $0.053, I selected 5 mining machines currently available in the market as samples, where S19 XP Hyd is the main mining machine of the last cycle, T21 is the main mining machine of this cycle, while S21 is currently sold as futures on the official website and has not yet been widely deployed. All mining machine parameters and prices are collected from Bitmain's official website.

The above table shows the results calculated based on the model mentioned. It can be seen that when the BTC price is at $42,000, the profit margin for the main mining machine T21 is negative. This means that at this time, buying BTC in the secondary market is more cost-effective than mining.

Coincidentally, this limit value of $42,000 is very close to the viewpoint I expressed in my article published on June 23, “From On-chain Data Analysis, What is the Limit Value for BTC Price Retracement in This Bull Market?”, where I calculated the retracement limit value using STH-MVRV and TMMP to be no less than $43,000-$44,000.

When BTC's price falls below $56,500, the payback period for T21 is 48 months. Generally speaking, the maximum lifespan of a mining machine is about 3-4 years. Even if the mining machine does not malfunction after 3 years, it will be replaced by newer models due to outdated energy efficiency. At that time, the remaining value of old mining machines will be almost zero, only able to continue operating for miners with extremely low or even free electricity costs, or they will have to be sold as scrap metal. Therefore, for T21, which takes 48 months to break even, this price is very unfriendly. Assuming that the future BTC price does not rise, it means that miners who have just broken even after 3 years will face elimination again. Who would want to engage in such a business?

Therefore, from this perspective, BTC below $56,500 also has a certain cost-performance ratio, especially suitable for friends who like dollar-cost averaging.

Update: Mining Pulse is an indicator that measures the speed at which miners mine. It mainly reflects the deviation of the 14-day average block interval time from the target time (10 minutes). Specifically, Mining Pulse can help us understand the following points:

1. Deviation Indicates Speed Differences:

A negative value indicates that the actual block time is faster than the target time, while a positive value indicates that the actual block time is slower than the target time.

2. Negative Value Indicates:

• Faster Block Time: If Mining Pulse shows a negative value, it means blocks are being mined faster than expected.
• Hash Rate Growth: This usually occurs when the network hash rate grows faster than the difficulty adjustment speed. In other words, more hash power (miners) are joining, leading to shorter block generation times.
• Network Expansion: Indicates that the network's hash power is expanding.

3. Positive Value Indicates:

• Slower Block Time: If Mining Pulse shows a positive value, it means blocks are being mined slower than expected.
• Hash Rate Decline: This usually occurs when the network hash rate declines faster than the difficulty adjustment speed. Some miners may have shut down their equipment (hash power exits), leading to longer block generation times.
• Miners Going Offline: Indicates that some miners are going offline, reducing the total hash power of the network.

As shown in the figure above, a larger positive value indicates that the current BTC price is closer to the mining cost line, leading to a wider range of miner capitulation. In this cycle, from the bottom of the bear market to the present, there have been 5 instances where Mining Pulse exceeded +0.05.

The 1st and 2nd instances occurred on December 27, 2022, and December 4, 2022, when the bear market was at its lowest, with BTC prices around $16,000-$16,500. Mining Pulse reached 0.1, meaning blocks were being mined about 10% slower than expected, leading to widespread miner capitulation, and the market entered a severe winter; this is usually a characteristic of an impending bottom.

The 3rd instance was after the ETF approval in January 2024, when BTC's price retraced to $39,450; the 4th instance was after BTC broke through the $70,000 mark, when a large number of short- and medium-term chips took profits, and the price retraced to $58,200; the 5th instance is now, with Mining Pulse already reaching 0.072;

Looking back at historical data, if one had bought BTC near the mining cost line each time, it would be equivalent to acquiring BTC at a cost lower than that of miners, making the certainty of obtaining returns from a medium- to long-term perspective greater than the uncertainty of bearing risks.

Note: The above computational model is not an accurate statistical measure of mining costs and has a certain degree of error, but it is closer to the real cost than the "shutdown price" seen online (the shutdown price usually only calculates electricity costs). If there are any omissions, professional miners are welcome to provide corrections!