Copying the miners' "bottom": From the mining cost, when is it more cost-effective to buy BTC?

Murphy

24-07-09 16:31

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Original author: Murphy, Chain Data Analyst

Editor's note: Last week, the crypto market ushered in a new round of plunges, and Bitcoin once fell below $55,000. Mining costs are of great reference significance to the price trend of Bitcoin. As the price of Bitcoin fell, multiple series of mining machines reached the shutdown price, which may be a sign of a "local bottom". Chain Data Analyst Murphy used a computational model to make a more accurate deduction of BTC mining costs. BlockBeats reproduced the full text as follows:

How much does mining cost affect the lower limit of BTC prices?

Some friends 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, there is no doubt that mining costs have no effect on the "upper limit" of BTC prices; but it will greatly affect the "lower limit" of BTC prices. The logic here is not that miners will sell or not sell their chips at the cost price, but 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 mentality of "taking advantage", taking advantage of miners, thereby triggering more market demand. It's like when we buy something, 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, no cheating).

Secondly, when the price of BTC falls to a certain level, miners will choose to withdraw part of the computing power if they cannot cover the cost, thereby reducing the difficulty. The decrease in difficulty reduces the cost of mining, and the market demand for "no 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's price under certain conditions!

So how to correctly measure the cost of mining? 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 (labor, factory, maintenance, loans, etc.) operating costs. We assume that electricity costs account for 70%, other costs account for 30%, plus the cost of purchasing mining machines, which constitutes the main cost of miners.

Hash rate price refers to the amount of BTC (including block rewards and handling fee income) that can be generated per E hash rate (1E = 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 S19 XP Hyd is the main mining machine in the last cycle, T21 is the main mining machine in this cycle, and S21 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 Bitmain's official website.

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

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 will not be less than 43,000-44,000 in my article 《Based on the analysis of on-chain data, what is the limit value of BTC price retracement in this round of bull market?》 published on June 23.

When the BTC price is below $56,500, the payback period of T21 will take 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, or it will have to be sold by weight. Therefore, for the T21, which can only pay back the investment 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 their investment 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, especially suitable for those who like to invest regularly.

Update: Mining Pulse is an indicator to measure 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 indicates that the actual block time is faster than the target time, and a positive value indicates that the actual block time is slower than the target time.

2. Negative values indicate:

· Faster block time: If Mining Pulse shows a negative value, it means that blocks are mined faster than expected.

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

· Network expansion: Indicates that the network's hash power is expanding.

3. Positive values indicate:

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

· Hash rate decline: This usually happens when the network hash rate is decreasing faster than the difficulty is adjusted downward. That is, some miners may have turned off their equipment (computing power exited), resulting in longer block generation times.

· Miner offline: Indicates that some miners are going offline, reducing the total hash 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, resulting in a larger scope of miners' 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 1st and 2nd occurred on 2022.12.27 and 2022.12.4, when the bear market was at its bottom and the BTC price was around 16,000-16,500 US dollars. When the Mining Pulse reaches 0.1, it means that the speed at which blocks are mined is about 10% slower than expected, a large area of miners surrender, and the market enters a severe winter period; this is usually also a feature of the bottom that is about to appear.

The third time was after the ETF was passed in January 24, 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 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 getting BTC at a lower cost than the miners. From a medium- and long-term perspective, the certainty of gaining benefits is greater than the uncertainty of taking risks.

Note: The above calculation model is not an accurate mining cost statistic, and there is a certain degree of error, but it will be closer to the real 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!