23 July 2019
Bitcoin mining, which currently costs around US$8,000, is close to being unprofitable as the price of the virtual currency continues to decline. Photo: Reuters
Bitcoin mining, which currently costs around US$8,000, is close to being unprofitable as the price of the virtual currency continues to decline. Photo: Reuters

At US$8k, bitcoin now trading near break-even point: analyst

Bitcoin is currently trading near the break-even cost of mining the cryptocurrency, research firm Fundstrat said in a recent report.

It now costs US$8,039 to mine a bitcoin, “based on a mining model developed by our data science team”, Fundstrat’s Tom Lee said in a report released on March 15.

And according to Coindesk’s bitcoin price index, which tracks prices from four major global exchanges, the cryptocurrency was trading at US$9,080, as of 1:12 p.m. on March 21, Hong Kong time, after hitting a low of US$7,377 on Sunday.

Fundstrat’s report suggests that bitcoin, which has dropped over 60 percent from its high of almost US$20,000 in December, will only show signs of bottoming closer to US$5,873, Bloomberg reported.

“When sentiment is this weak, the market is increasingly ‘fire, ready, aim’ – meaning, any headline today is likely to trigger selling,” the Fundstrat report said.

Bitcoin is created through a “mining” process, in which “miners” around the world use the power of computers to verify and complete the transactions on the blockchain network. Miners are then effectively rewarded for successfully completing the transaction by getting bitcoins in return.

Based on a model by Fundstrat’s data scientists Sam Doctor and Ken Xuan, bitcoin was trading at the break-even cost of mining, or US$8,038, at the time the report was published.

So with the recent declines in the bitcoin’s price, mining for the cryptocurrency has become less profitable.

The model incorporates the cost of equipment, electricity, assumed to be 6 US cents per kilowatt, and other overhead costs including cooling apparatuses.

Amid a surge of interest and competition in bitcoin mining, the report suggests that the cost of replacing equipment accounts for more than half of the overall cost of mining.

Miners also have another source of revenue: transaction fees. However, the median transaction fee has drastically fallen from over US$34 in December to around 21 cents as of March 15, according to data from crypto data website BitInfoCharts.

CNBC noted that the cost of bitcoin mining varies widely around the world due to differing electricity costs. In China, a hub of bitcoin mining, electricity rates are quite cheap, thus enabling miners to realize a profit.

While Fundstrat assumes an average of six cents globally in its model, an expert suggests Chinese miners apparently only pay four cents or less, the business channel said.

Despite the declining profitability, Chinese miners continue their business as it allows them to transfer the money overseas to evade the government’s capital controls.

According to Fundstrat’s report, most miners would start turning off their operations when the bitcoin price falls to around US$3,000 to US$4,000.

The firm’s data scientist Sam Doctor recalled that bitcoin mining was breaking even back in January 2015, when the virtual current was trading between US$200 and US$300.

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