Estimating Bitcoin Prices
Disclaimer: These are just my thoughts, don’t trade on my speculation.
When trying to set a bottom price in Bitcoin – the price I view as “the bottom” I like to look at Bitcoin mining (go here to learn about mining). The process of mining itself isn’t what matters for this topic – just the cost to mine Bitcoin. Miners run computers which complete complex calculations to earn bitcoin. Computing takes electricity which is the “cost” to produce Bitcoin. When the price is high enough then miners make money. If any of the following happen then mining could become unprofitable:
- Bitcoin price drops substantially
- The price of electricity increases dramatically
- The complexity of the calculation increases dramatically, requiring more computing power and therefore more electricity – aka Difficulty and Hashrate
- Dramatic increase in mining competition
In a very dramatic scenario if the cost of mining Bitcoin was way above the price, then Bitcoin Miners would stop mining and the Bitcoin network would shut down.I want to stress at this point its highly, highly, highly improbable.
Bitcoin Miners Run the Show
Cutting to the point – many sites like this one allow you to enter in a bunch of variables and calculate “mining profitability”. The variables are very important for actual miners. I like to use the Bitcoin Mining breakeven price as the “bottom” in Bitcoin prices. For this exercise I just try to get a baseline.
My view is that the miners are the guys with millions of dollars in hardware aka major skin in the game. Therefore their breakeven price should be “defended”, meaning the Bitcoin price should stay above that mining breakeven level. Looking at it a different way (I am generalizing here) – if you can buy something for less than it costs to produce – thats a good deal, right? This is assuming there is major demand for that product/asset.
If the Bitcoin price was to stay below this level for an extended period then I think Bitcoin prices could fall further.
Bitcoin Price Breakeven Math
Currently CryptoCompare shows a 15% per day profitability in Bitcoin mining. This indicates that the breakeven price for miners is around $3,600 USD with Bitcoin currently trading at ~$4,000 USD.
In the last bitcoin selloff we went below this $3,600 number but bounced back and hung around that price. Could just be coincidence, who is to say for certain..
There are obviously hundreds of other things to consider when determining the price of Bitcoin. Because its such a new market it can be tough to get a baseline value, and thats why I decided to post this outlining what I use.