An Honest Explanation of Price, Hashrate & Bitcoin Mining Network Dynamics

Bitcoin mining update — Part 1 of 2

Yes — Bitcoin miners are shutting down hardware and exiting the network.

No — this is not going to cause a “death spiral.”

Since the start of 2018, the price of bitcoin has declined from a peak of nearly $20,000 to approximately $4,000 — an 80% fall. Miners receive their income in bitcoin and thus depend on exchanges — and exchange prices — to cover their expenses and (hopefully) turn a profit.

Mining capex, opex and ROI for non-MBAs

For those unfamiliar with the lingo I am about to employ, when I use the term capex I am referring to capital expenditures, and when I use the term opex I am referring to operational expenditures. Briefly explained:

  1. The second is their cash-cost breakeven level, above which they are cash-flow positive but still potentially loss-making (ROI can still be negative if they never make enough cash to cover what they paid for their mining gear); and below which they are cash-flow negative and thus — depending on their industry view, risk appetite and capital levels — are likely to shut off mining gear entirely.
Photo by Marko Ahtisaari, used with permission under Creative Commons 2.0 license.

Now, the results…The Cost to Mine One Bitcoin:

Average ‘all-in’ cost: $6,800/btc | Average cash cost: $3,400/btc

In our June report we estimated a market-average all-in cost of creation of approximately $6,500 per bitcoin. We arrived at this number by assuming a market-average capex based on all available pricing information, electricity cost of ¢5/kWh and an 18-month depreciation schedule (for a full treatment of the methodology and all assumptions we direct readers to the appendix of our June report).

So what does that mean?

Essentially one of two things:

  1. Many miners are currently feeling the squeeze, with inefficient mining gear and high-cost electricity miners likely to be forced off the network.

What does the data say?

Interestingly, the data suggests that the truth lies somewhere between the two — cliché, I know. But let’s unpack that a little.

An Important Note: Price and Hashrate Dynamics

Bitcoin is structured such that the hashrate follows price, slightly modulated by increases in gear efficiency. When the price increases, the hashrate increases, and when the price decreases the hashrate decreases.

“But I thought price follows hashrate?”

It doesn’t. And moreover, how could that possibly be the case?

So is the mining industry collapsing now?

No. There is nothing dramatic about what is currently happening. The net effect is that the highest marginal cost producers are booted off the market while the most efficient miners remain.

So what happens next?

As price does its thing, hashrate will follow and settle into whatever new market conditions are in stall. Old, inefficient gear and high-cost producers are out; and until price increases again, the hashrate can only increase by miners lowering their opex. They can do this by sourcing cheaper electricity, installing more efficient mining equipment or generally cutting costs.

There is no such risk of mining collapse or any other click-bait nonsense you might read out there.

The dynamic difficulty adjustment takes care of that by regularly resetting the difficulty so mining costs fall in tune with bitcoin’s price.


CoinShares Blog

Christopher Bendiksen

Written by

Head of Research at CoinShares


CoinShares Blog