Bitcoin: Two roads diverged in a wood..
By: Hulki Okan Tabak
Tags: Investing, Investment, Cryptocurrency, Cryptocurrency Investment, Bitcoin

Referencing to Fundstrat, Bitcoin has an expected mining cost of around USD 8,000 at the end of 2018. This is not an all-in cash cost as it excludes capital expenditure and management costs. While these secondary costs might have come down over time, it’d be fair to allocate 25% on the variable cost to arrive at 10,000 global average all-in cash cost for producing Bitcoin. Then how the hell does Bitcoin trade below that cost?

First, let’s go back to what had happened before: As per Fundstat’s chart below, since mid 2013 — there has been only a slight breach of the 1.0x cost boundary following mid 2016 in the run up to USD 1,000. If today’s prices hold as it is then, the breach down would be higher by the year end. What might be causing the problem? After all the price is up significantly over a year, so how did the costs increase so much?

Fundstat’s Mining Model Chart

The answer probably lies below. It is a droplet approach we can take. Even though in 2010–2011 and in 2013–2014 there has been steeper increases in the hashrate, the total hashrate was a lot lower. 2011 hashrate rally ended weith 10 TH/s, 2014 with 300,000 TH/s. Now we’re at 37,000,000 TH/s. Simply put even comparatively (as can be seen in a log graph) the increase is milder, the nominal size of the increase (due to the larger base) is very substantial. And it could be the last drop that makes the teacup overflow.

Blockchain.com 1 Yr Bitcoin Hashrate

Would it be possible to focus on transactional metrics instead of hashrate to explain the situation? Could we say that BTC usage is increasing so much that the growth of the hashrate can be justified? While there are different calculations on this, I’ll ignore whether the net value is correct or now and instead focus on comparing the trend.

As you could see from below, usage is around 60% of 1 year ago. Hold on now — hashrate is 700% of 1 year ago. So 11.5x more hash for every BTC transacted (again disregarding speculative purposes or not). The cost side has decoupled from the usage. This is the main reason Bitcoin price and mining cost relationship has broken down. So should this be good news for Robert Frost?

Estimated Transaction Value in BTC from Blockchain.com

I believe the answer will come in around 6 months and the road taken will reveal itself after the fact. It seems unlikely that a substantial spike in Bitcoin usage will happen soon. Consequently, the good news could be a reduction akin to destruction in the hashrate will miners stepping out en masse. This will produce a more balanced ecosystem that can grow slowly with either usage or main market financial adaptation. Note that if hashrate reduction postpones with the current transaction figures, there could be a period of violent price and network quality swings up ahead.

The rather worse option is that Bitcoing price relative to mining cost breakdown might signal an extended reversal. It is likely that the USD value of 6 billion sent per day (as per Bitinfochart.com) is at least 75%+ exchange related transactions. I don’t have proof but enough observation that this could be even higher. So with around USD 1.5 billion in non-speculative transactions including money transfer functions — how big a network value does Bitcoin need? Some multiple of this — perhaps USD 10 billion? This is the price risk scenario where for whatever reason the huge speculative hold position starts to unravel to a level where the price can fall to USD 600 — USD 1,000 range. Putting fuel on on fire would be the huge overcapacity of the mining pool during this move.

I think a choice of which road to take is coming. Six months to a year down the line, I’d be very surprised to see Bitcoin around the current prices. It will be either testing a new high or returning to 2016.