In May 2018, FundStrat proposed a new metric to estimate the fair value of Bitcoin known as Price / Miner’s Breakeven Cost or P/BE. Simply put, the theory is that the breakeven (BE) cost of Bitcoin acts as a price floor.
I remain unconvinced of the predictive value of this metric.
In the short-run, price is likely temporarily tethered to the BE cost of mining. If price falls below the BE, mining operations may continue to run, even at a short-term loss, due to the sunk cost of the infrastructure of mining machines etc or the expectations of the future price of BTC.
In the long-run however this will not provide a price floor at all. The breakeven cost will fall as miners leave the network, hashpower falls, difficulty falls, and therefore the breakeven. Mining operations gradually become more centralized in the hands of the most efficient. We’re seeing difficulty adjusting lower right now coming to the end of 2018, as miners throw in the towel.
The BE cost cannot be predicted ex ante and is therefore not a useful indicator. What we have is therefore a moving target, a lagging indicator of price. Mining activity lags price as it takes between 3–6 months for a new mining operation and new hashpower to come online.
Hashpower follows price, not the other way round.
That said, hashpower is still a relatively useful indicator of miner adoption, an important ecosystem player of any PoW-based cryptocurrency.