Why the cost of production of Bitcoin is very likely to be a minimum
The price of bitcoin is barely above $20,000 per coin, a shock to most new and old holders of the cryptocurrency. The liquidation returned the cryptocurrency to its cost of production, which has acted as a floor in the past.
In this article, we will take a closer look at the cost of producing each BTC and its relationship to price action. We will also examine why the rare digital asset could likely find a bottom at such levels.
Bitcoin Drops in Cost of Production, Lines Up With Old ATH Test
Bitcoin is unlike any other asset before it, and from its inception, the entire industry was created in hopes of emulating the success of its network. Investors are hoarding altcoins in hopes of finding the next bitcoin and profiting from it.
Cryptocurrency relies on a power-intensive proof-of-work process to generate new coins. Mining is not cheap, otherwise everyone would be doing it. In fact, according to the cost of production indicator devised by Bitcoin expert Charles Edwards, it costs around $20,260 per BTC on the low end.
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It doesn’t take a mathematician with Satoshi’s skills to know that they are only a few hundred dollars less than current prices. Interestingly, the sale fell directly on the cost of production. In hindsight, important lows such as December 2018 and March 2020 reached the lower bound.
The upper end of the metric is around $33,766, which when it crosses over could be a sign that the drop is over. Similar to Black Thursday, the new test is even more bullish.
BTC cost of production gauge could bottom out | Source: BTCUSD on TradingView.com
How Satoshi called the bottom 12 years ago
Considering a bottom after such a strong sell-off and in the context of the most bearish macro environment Bitcoin has ever seen, it may seem hard to believe or even too good to be true. But there is a reason for this kind of base building behavior in rare assets.
Scarce assets like raw materials tend to bottom out and bottom out around the cost of production. Even Satoshi has talked about it in the past, going back to 2010. He mysterious founder is quoted as saying that “the price of any product tends to gravitate towards the cost of production. If the price is lower than the cost, production slows down. If the price is higher than the cost, a profit can be made by generating and selling more.
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What Satoshi describes is the revenue model followed by BTC miners. They produce new coins at as profitable a rate as possible and sell them when the price deviates more than the cost of production. Returning to such levels often clears the market of less efficient trades, leaving only the fittest.
BTC miners capitulate | Source: BTCUSD on TradingView.com
Is this what is currently happening with Bitcoin? And what happens when only the strongest survive? Could Satoshi really have predicted the bottom so far in advance?
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Featured Image from iStockPhoto, Charts from TradingView.com
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