How to identify Bitcoin bottom and top with miners

The Halving event and miner activity are one of the important indicators for Bitcoin investors.

The Bitcoin Halving event not only affects the supply and demand of Bitcoin but also affects miners. To balance costs and profits, miners can make large Bitcoin sales when necessary, or incur losses for certain periods of time. These actions partly help us determine the bottom and top prices of Bitcoin.

Factors affecting the cost of mining Bitcoin

The cost of mining Bitcoin mainly depends on the cost of electricity and the cost of investing in mining machines. In particular, electricity costs are directly affected by hashrate (hash rate) and the strength of the miner.

·      Hashrate: Increasing hashrate causes Bitcoin mining costs to increase, because miners spend more time mining a Bitcoin block, thereby spending more electricity.

·      Excavator: The more powerful the excavator, the higher the computational and algorithmic ability, and the cheaper the cost of mining Bitcoin. Owning a powerful mining machine helps miners mine Bitcoin faster, using less electricity.

In addition, electricity costs are also affected by weather and geographical location. For example, electricity is cheaper in the rainy season because more electricity is exploited, and more expensive in the dry season because less electricity is exploited. Some countries have much lower electricity costs than others.

Basically, the cost of mining Bitcoin is made up of 2 factors:

·      Bitcoin mining cost = Electricity cost + Operating cost (labor cost, investment and mining machine wear and tear.

·      Correlation between Bitcoin price and mining costs

Below is a correlation chart between Bitcoin price and average Bitcoin mining costs, provided by MacroMicro. Some data to pay attention to are:

·      Yellow line: Bitcoin price (in USD).

·      Blue line: Average Bitcoin mining cost.

·      Light green line: Ratio of average Bitcoin mining cost to Bitcoin price.

·      Dark green line: Ratio of average Bitcoin mining cost to Bitcoin price, averaged over 30 days.

Based on these data, we can filter out some statistics as follows:

When the ratio of the average cost of mining Bitcoin to the price of Bitcoin is greater than 1: The average cost of mining 1 Bitcoin is greater than the price of buying 1 Bitcoin on the market, miners are making a loss. Bitcoin price is often at the bottom of the cycle.

When the ratio of average Bitcoin mining cost to Bitcoin price is less than 1: The average cost of mining 1 Bitcoin is less than the buying price of 1 Bitcoin on the market, miners are making a profit. Bitcoin price moves around the peak of the cycle.

Let's dive into the times when BTC prices peaked and bottomed to compare the correlation with mining costs.

·      Taking peak price milestones, the average Bitcoin mining cost to Bitcoin price ratio is usually in the range of 0.4 to 0.5.

·      Taking the bottom price milestones, the average Bitcoin mining cost to Bitcoin price ratio is usually in the range of 1.4 to 1.8.

Thus, when the ratio of average Bitcoin mining cost to Bitcoin price is between 1.4 and 1.8, Bitcoin is around the bottom zone, this is also the area where miners lose the most.

When the ratio of average Bitcoin mining cost to Bitcoin price is between 0.4 and 0.5, Bitcoin is around the peak zone, which is also the most profitable zone for miners.

Bitcoin peaks, miners are most profitable and vice versa

Also based on the correlation graph between Bitcoin price and average Bitcoin mining cost (MacroMicro), we look at some special milestones.

·      June 2019: Bitcoin broke out, peaking at 13,000 USD, double Bitcoin's production price at 6,200 USD. The ratio of Bitcoin mining cost/Bitcoin price is currently 0.48. Bitcoin miners profit double.

·      April 2021: Bitcoin continues to reach a new peak when it hits 63,100 USD, the cost of producing 1 Bitcoin is 27,700 USD. The ratio of Bitcoin mining cost/Bitcoin price is currently 0.44. Bitcoin miners are very profitable.

Based on historical data (blue markers below), we see that miners are most profitable around Bitcoin's peak price.

Consider the times when Bitcoin price dropped sharply, the price period was at the bottom:

·      November 2018: Bitcoin price hits 3,800 USD, Bitcoin production cost is 5,500 USD. The ratio of Bitcoin mining cost/Bitcoin price is 1.45, Bitcoin miners lose money.

·      March 2020: Bitcoin price hits 5,000 USD, Bitcoin production cost is 9,000 USD. The Bitcoin mining cost/Bitcoin price ratio is 1.81. Bitcoin miners lose money.

·      September 2022: Bitcoin price touches 15,800 USD, the cost of producing 1 Bitcoin is 24,500 USD. The Bitcoin mining cost/Bitcoin price ratio is 1.54. The hole diggers.

Thus, Bitcoin usually bottoms when the ratio of Bitcoin mining cost/Bitcoin price is in the range of 1.4 - 1.8.

The figure above also shows that most of the time miners involved in mining activities will suffer losses. This is similar to the 4-year cycle of Bitcoin, every 3 years of a downtrend, the price of Bitcoin will decrease or go sideways, 1 year of an uptrend, the price of Bitcoin will grow strongly, helping them make enough profit to compensate for previous years of losses.

Why do new miners often suffer more losses than old miners?

New miners often suffer losses due to not understanding the level of competition and operating costs of the Bitcoin mining industry, including:

Does not take into account the reduced profits when the block reward is halved after the halving.

Invest in used excavators from old miners. When the hashrate continues to increase, they need to upgrade new mining machines, or buy electricity at a cheaper price if they do not want to suffer losses.

Old miners suffer fewer losses than new miners and are more likely to continue operating thanks to:

Continuously upgrade new miners with higher computing power to increase the ability to mine more Bitcoins.

There have been accumulated profits to maintain operations from previous cycles.

To maximize profits, both new and old miners try to find cheap electricity. Even buy electricity directly from hydroelectric plants to optimize costs.

The table below lists some areas with the cheapest mining costs for 1 BTC. In particular, miners in Lebanon only spend about 266 USD to mine one Bitcoin (783 times cheaper than Italy - according to CoinGecko in 2022). Iran is the next country with 532 USD.

Despite its low cost, Bitcoin mining in some of these countries is not feasible because most of these countries face electricity shortages and have to shut down heavy industries during the dry season or during business hours. Peak.

Thus, most of the time miners will lose money. New miners often lose more when investing in old miners when Bitcoin prices increase, rewards are reduced after Bitcoin Halving and hashrate increases cause electricity costs to increase. In addition, the market going into a downtrend also makes many miners unprofitable and forced to leave mining activities.

summary

Understanding the influence of production costs and market sentiment on Bitcoin prices is essential for investors. However, production costs and market psychology are just one of many factors affecting the price of Bitcoin, besides investor demand, macroeconomic trends...

Countries with cheap electricity are often favored by Bitcoin miners due to lower operating costs. However, geopolitical factors and regulatory uncertainty in these regions can also impact the profitability and sustainability of mining operations.