Bitcoin And The Break-Even Conundrum

Profits in cryptos: Easy come, maybe; easy go, certainly.

News came this week that bitcoin mining just ain’t what it used to be. More to the point:  Like any commodity, there’s a break-even point in production, measured in dollars and cents, even when it comes to commodities made out of bits and bytes.

Morgan Stanley analysts have estimated that bitcoin miners lose money when the price of the once high-flying digital currency is below $8,600. The break-even point may even be a bit generous, as analyst Charlie Chan and his research team assume a cost of electricity that comes in at just a few pennies per kilowatt hour.

The price of bitcoin at the time the Thursday note was released stood at a bit above $8,200. The implication, then, is that miners are losing money — which brings to mind a question for the miners: How long will they keep it up? It makes no economic sense to make something that keeps losing money.

So, might mining slow for the marquee name in cryptocurrency? There’s a ripple effect already at work here, too.

The Morgan Stanley team believes “the bitcoin mining hardware demand and price will decline further.” A dip in demand for the nuts and bolts of crypto mining (OK, picks and shovels?) would have, and seems to be having, an impact on none other than Taiwan Semiconductor Manufacturing Company, which makes chips that are, among other things, used in cryptocurrency mining, which relies on powerful computers to produce bitcoin. The company trimmed its growth estimates earlier this week in part on the vagaries of the crypto market.

Eventually, at a price of $5,000, some chip firms may break even over two years, stated Morgan Stanley. That’s a long way away.

There’s also a bit of conundrum here. As CNBC noted, miners, based mainly in China, pool efforts to produce bitcoin in an efficient manner. The more miners, the more difficult the process. The more difficult the process, the less profitable that process may be. That leads to a shakeup — or rather a shakeout. If smaller players desert the market, then bigger players remain.

Bloomberg gave some illumination to at least some market concentration, citing analysis from Lucas Nuzzi, a senior analyst of Digital Asset Research, who estimated that as much as 30 percent of bitcoins are held by miners. On the one hand, if they need to sell bitcoin to continue mining, then the price continues to fall. If they gather pricing power due to a shakeout, then the price recovers or even shoots up…

But does that eventually set the stage for speculation yet again? Talk about perpetuating a cycle.