Bitcoin mining cost has been a good but cliched indicator for crypto market trends. However, the costs are based on a plethora of internal and external factors that may make them less reliable. Could there then be a way in which mining costs become the most reliable method of determining crypto prices? Medium user BarclayJames makes an interesting case in the mining cost-Bitcoin price conundrum.
Making Generalized Assumptions for Costs
The current hashrate Bitcoin mining remains at 35 million TH/s. An Antminer S9, which is the most popular mining device, can provide a hashing rate of 13,500 GH/s, with 93 percent efficiency at 25 degree Celsius. About 2.8 million S9 units can be deployed to achieve the current global hashrate.
In the article he assumes that the price of electricity remains similar to that of the Sichuan region, i.e., approx. $0.006 per kWh. Note that 70 percent of the world’s hashing power resides in China, a country where electricity and operating costs are comparatively low. To run a mining unit consistently for a year, a miner has to pay $680. One power supply unit per mining unit usually costs $100, while cooling will probably take away another $40.
In such a situation, if 2.8 million units are running at the same temperature and under the same conditions, then the probability of one unit solving the next block is 3.67e-7. Given that one block is solved every 10 minutes, there could only be 144 blocks per day, which makes the probability of one random block solving the next block to 5.2e-5. This means that a random unit will take at least 52 years to solve a block. Now, block reward is currently 12.5 Bitcoins, which means 0.24 BTC per unit.
He also suggests that a basic break-even (BE) cost for one unit is therefore given by setting the difference between income and electricity and acquisition costs to zero such that “0.24 BTC * BE -USD 680 -USD 780 -USD 50 -USD 40 -USD 100= 0,” which means that “BE = USD 6900.”
The Essence of the Math
It is difficult to wrap your head around the mathematics and assumptions that come into play when calculating this number. The entirety of the article suggests that even if the price of Bitcoin remained at $6,900, a crypto mining unit would break even. In a real-world scenario, we can add $1,350 per person per month for personnel and operating costs and other costs, which drives the figure to $7,350.
We must understand that the assumptions are based on very cheap electricity and overhead prices. Keeping the mining units cool and operating them at temperatures above or below the recommended level could also affect the efficiency. However, the calculations do suggest that prices will bottom near the breakeven, and the suppressed prices will drive out some miners from the market.