Bitcoin is a virtual currency created by Satoshi Nakamoto, a pseudonym for a person or persons. Unlike government-issued fiat currencies, Bitcoin is operated by a decentralized authority on the Blockchain platform and is essentially computer software.
Bitcoin Mining
Releasing Bitcoins into the Crypto ecosystem – called mining – is not as simple as printing money but an elaborate process requiring setting up expensive infrastructure and incurring massive operating costs. Bitcoins are produced through transactions on the Blockchain by people called miners, and they are rewarded with Bitcoins and transaction fees paid in Bitcoins. Miners own the computer power to mine Bitcoins and are considered a decentralized authority using the Blockchain network.
Bitcoin Production Cost
The production cost of a Bitcoin is the dollar cost considering the global average of producing one Bitcoin per day. Several parameters are considered, but the main input is the cost of electricity consumed for continually running high-power computers.
Roughly the production cost of Bitcoin rests on the calculation of the number of Bitcoins mined per day and the electric cost. This depends again on the cost per unit of electricity in different countries, and that is why an estimate of the worldwide average of “electricity to total cost ratio” is always taken into account for arriving at the production cost of Bitcoins.
There are other expenditures too that have to be considered. These include rent and insurance, wages, capital cost for hardware infrastructure, and cost of capital.
The prevailing costs of these parameters in different countries are a critical factor too. Countries like China with low recurring costs like rent and wages will have lesser production costs than the USA, where the wages and cost of capital are comparatively high. Miners flock to the low production cost centers, and it is one reason why in 2019, China accounted for over 60 percent of Bitcoins mined globally. On the whole, however, electricity accounts for about 60 percent of production costs.
Bitcoin Miner Price
Bitcoin Miners have a lot of work to do, and they are suitably rewarded for their efforts. Miners are awarded Bitcoins (and get transaction fees) whenever a new transaction block is added to the Blockchain. The number of new Bitcoins released after mining each block is called the “block reward.” Every four years or after every 210,000 blocks, this reward is halved as the total number of Bitcoins mined near the limit of 21 million coins that can be in existence. The reward was 50 in 2009, 25 in 2013, 12.5 in 2018, and in May of 2020, the reward has been further halved to 6.25. Currently, there are 3 million coins left to be mined.
This system will be active till 2140, after which miners will be eligible for processing transactions only, payable by the users of the network. It will ensure that the miners still have the motivation to mine and keep the Bitcoin network operational.
The more the miners’ price is lowered the lesser will be the number of Bitcoins produced. This will have far-reaching implications as the investors will face a drop in the supply of Bitcoins and will turn to other stable options like gold, leading to a spurt in prices of the precious metal. On the other hand, the continuous halving in Bitcoin production until it reaches its limit of 21 million will gradually reduce market supply, making it a valuable potential investment.
Are Miners Better Off Buying if Bitcoin Trades Below Production Cost?
This is now the million-dollar question. If the production cost of Bitcoins goes through the roof, will miners earn more by buying Bitcoins?
The scenario prevailing around four to five months back is a case in point. During the Covid-19 pandemic, the devastated economy had taken a toll on the crypto market, and the Bitcoin price had dropped to around $5,000. Around the same time, the production cost was $8,000 at the high end and $4,800 at the other. It was an indication that the miners were running their gigs at a loss.
The next blow was the halving in May 2020, which cut the miners’ reward down the middle. It immediately doubled the cost of production as rewards were halved. Therefore, production costs shoot up to $16,000 and $9,600 on the high and the low end, while Bitcoins are priced much lower on the exchanges.
Conclusion
Miners will have no option but to switch off their rigs and buy Bitcoins from the marketplace.The tussle in the miners’ minds on what to do if parameters keep changing this way has always been there and will continue to remain so in the future. Apart from this, If you are looking to make an investment in Bitcoin to make a good profit from Bitcoin, then you must check out the Bitcoin Robots. It is the most innovative platform which can make you earn a good chunk of money from Bitcoin trading. One such platform, Bitcoin Aussie System is one of the top Bitcoin Robots and trusted by many experts.