|Bitcoin 2-year "price" history|
longer-term holders sold at least $30 billion worth of bitcoin to new speculators over the December to April period, with half of this movement taking place in December alone.This dump drove the "price" down to the mid-$6K region by mid-June, where it stayed until mid-November. But in the last two weeks, things have become "dynamic". At 4pm yesterday on Coinbase the price of a bitcoin was $3718.96. It has lost more than 80% of its value this year. Below the fold, I look at why this might have happened.
“This was an exceptional transfer of wealth,” says Philip Gradwell, Chainalysis’ chief economist, who dubs the past six months as bitcoin’s “liquidity event”.
David Gerard's The Bitcoin hash rate for the last year, and the squeeze that crypto miners find themselves in is a great place to start looking. Economic analysis of cryptocurrencies starts from the observation that mining is a competitive business, so miners margins tend over time to be competed away, so the cost of mining one coin tends over time to be a bit less than one coin.
|Bitcoin 2-year hash rate|
|Bitcoin 2-year difficulty|
The price peak was December 2017 — but the hash rate was six times that by August 2018, at one-third of the price.Bitcoin is a commodity like oil or iron ore, so like other commodities the lead time on investments causes booms and busts. Six times the supply at one-third the price means that miners are being forced out:
Mining 1 BTC cost way less than 1 BTC during the bubble. So, to compete, miners built out big.
The hash rate changes approximately every two weeks. But capital expenditure — building and deploying single-purpose mining hardware — has a rather longer lead time.
The price just crashed, and the hash rate is now dropping off sharply. So everyone’s getting squeezed — the cost of mining 1 BTC is circling 1 BTC, like it was in the doldrums of 2014-2015.In other words, right now the reward for mining a Bitcoin is less than the electricity costs even if you're using the most efficient miner in the market on cheap Chinese power. Let alone the capital cost of the miner which has to be amortized over say a year, and the other costs such as space, cooling, staff, bandwidth, etc. Gerard writes:
F2Pool founder Mao Shixing estimates 600,000 Bitcoin mining machines shut down in the last two weeks — mostly older, less efficient machines.
The interview with Mao Shixing gives us numbers for how cheap Chinese power actually is. Summer prices are around 2.9 cents per kilowatt-hour. We’re coming into winter, and it’s more like 4.3 c/kWh.
The current worldwide hash rate is 45×1018 hashes per second. If everyone is running an Ebang E-10 (which they’re not — most mining is less efficient), at 0.092 joules per gigahash — then in summer, that’s about $2750 a bitcoin for the electricity alone.
Around now, it’s getting to … around $4000 to mine a bitcoin.
you can’t pay power bills with bitcoins, or Tethers. But this crash looks like selling pressure, with no matching buying pressure — all the suckers from the bubble have gone home now.This is one of the fundamental problems of cryptocurrencies. Miners need "fiat currency" to pay their bills, so they need to sell their mining rewards. On the other side of those trades there must be buyers, selling "fiat currency" for coins. The buyers have to believe that the "price" of the coins will go up over time. After nearly a year in which the coins have lost 80% of their value this belief is getting hard to sustain.
Until May 27, 2020 there is a constant flow of 75BTC/hour coming in to the market. For the price to average $4K over the next 18 months, speculators have to inject on average $300K/hour in real money into the market. That is almost $3.9B. Right now its hard to see why they would do that. If they don't, the price crash will continue, making it even harder to see why they would pump money in. This is starting to look like a death spiral.