Bitcoin price is trading lower today after forming another rounded wave top. Analysis considers mining production costs and the historical relationship of market price to this fundamental metric.
Bitcoin Price Analysis
Time of analysis: 13h00 UTC
Bitstamp 1-Day Candle Chart
From the analysis pages of xbt.social, earlier today:
Bitcoin price has continued rolling over a rounded top. As outlined in yesterday’s analysis post, downside support may be found at the local rising trendline near $440. If price bounces at this level then the market may resume the journey toward resistance at $470. Continuing decline below support opens up $400 and potentially $370, we’ll need to ascertain the degree of the next declining wave to better measure the decline’s depth.
The pivots for trade are $470 to the upside and short below $440.
Mining Production Cost
For better insight into long-term bitcoin price, and its relation to block reward halving events, we consider the cost of production of Bitcoin mining.
When calculating the cost of mining production, several variables come into play, namely, capital costs such as ASIC equipment expenditure and infrastructure, as well as, operational costs such as electricity, cooling, etc. Geographical location influences costs because different locations have differing rates for power, have different climates and variable internet connectivity.
The above costs are calculated alongside the mining operation’s hashrate and the protocol’s current mining difficulty in order to arrive at the miner’s effective cost to produce one bitcoin. Different methods for calculating production costs yield different average amounts, but for our purposes we’ll refer to Adam S. Hayes’s 2015 paper “A Cost of Production Model for Bitcoin“.
Block Reward Halving
Hayes finds the average cost of production to be around $247 per bitcoin, at the current block reward of 25 BTC. The next block reward halving event is expected to occur sometime between June and September 2016 (based on the hashrate and difficulty trends in March 2015).
Projecting the cost of production after the 2016 halving event, Hayes’s method calculates it to be approximately $494 per bitcoin.
Although there is no direct correlation between cost of production and the prevailing market price, we could reasonably assume that the market’s expectation of a decrease in supply will lead it to trade bitcoin price around this new production cost value of $494. The description “around” is used because we have witnessed, in the past, that the market will sometimes trade price below the actual cost of mining production. For example, during 2015 bitcoin price, on more than one occasion, spent several months below the $247 breakeven price for mining. This is true in other commodity markets like gold, where spot price had spent several years at levels below mining production cost.
And, of course, the market can also rally price and trade it well above the production price. This has been the case since mid-October 2015, after which bitcoin price has been trading on average $100 higher than the mining production minimum.
Conceivably, a raise in production cost to $494 should see the market trade price to a new support base around $500. It would not be surprise if the market rallies price several hundreds of dollars above this price level and then returns to $500 support during a subsequent market correction.
As for when the expected reward halving rally will begin, there are no guarantees. The block reward has not yet halved and the expectation of a rally does not make it a foregone conclusion during May or June. The 2012 reward halving event happened in late November 2012 but the market only began a rally several weeks after the fact.
Bitcoin price is declining after reaching toward resistance following a tumultuous week. The decline may be short-term or the price chart may be correcting several months of unsuccessful attempts at advance. We watch price’s reaction around $440 for signs of reversal or potential downward continuation to $400.
Bitfinex Depth Chart and Buy/Sell Volume
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Bitcoin price charts from TradingView.
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