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Bitcoin has dropped to a point in the unfavorable to produce, according to some estimates.
"Bitcoin is currently being traded on a break-even fee for bitcoin mining, at $ 8,038 based on the mining model developed by our team," Thomas Lee, Fundstrat said in a report on Thursday.
The Fundstrat model incorporates three factors, namely the cost of equipment, electricity and other overheads such as maintaining cooling facilities.
Cryptocurrency traded slightly lower, approaching $ 8,000 Thursday, according to the CoinDesk bitcoin price index, which tracks prices from four major global bourses. Earlier, bitcoin hit a low of $ 7,676.52, the lowest since Feb. 8, according to CoinDesk data.
Bitcoin is created through an energy-intensive "mining" process that uses high computational power to solve complex mathematical equations, proving that an anonymous miner uses an agreed-upon process of networking to build a record of blockchain transactions. Then, miners get bitcoin as a reward for successfully completing the equation.
"In some cases, miners might just shut down the engine until the price goes back a bit," said Shone Anstey, co-founder and president of Blockchain Intelligence Group. "Keep in mind that some of them may lose money."
Currently, Bitcoin miners need specialized hardware whose price can reach several hundred to several thousand dollars, because it requires a lot of technology, and more efficient equipment.
In fact, the need to replace equipment accounts for more than half the cost of mining, according to the Fundstrat model, said Sam Doctor, head of quantitative data science. He assumes electricity costs of 6 cents per kilowatt hour and other costs to a break-even forecast of $ 8,038.
Roughly speaking, the miner's income over the past two months was due to a surge of interest in bitcoin mining, as measured by hashrate, according to Charlie Hayter, CEO of CryptoCompare's industry data site. Average transaction costs from other sources of income for miners also fell below 50 cents from as high as $ 34 by the end of December, according to bitinflowarts.
For traditional commodities such as gold, when the price is equal to the cost of production, some speculators take it as a hint, perhaps near the bottom because supply subsides.
But bitcoin may be more complex because the cost of mining is still very varied worldwide due to different electricity costs.
In China's main bitcoin mining market, miners can access the very cheap electricity produced by hydropower. The rule of thumb for competing with Chinese miners is to have electricity costs of 4 cents or less per kilowatt hour, Anstey said. The Breakstill Fundstrat model assumes an average of 6 cents worldwide.
Chinese miners also have an incentive to produce bitcoins at no cost because they allow them to send money abroad and avoid control of government capital. Four of the five largest bitcoin "mining pools" in the world are Chinese, according to data from Blockchain.
The price at which most miners will actually shut down operations is around $ 3,000 to $ 4,000 per bitcoin, says Doctor Fundstrat. He pointed out that bitcoin was also traded at the break-even cost of mining in January 2015, when cryptocurrency was trading near $ 200.
It slowly began to climb before accelerating the gains in its last rally, which peaked late last year above $ 19,000. Bitcoin has lost more than half its value ever since.