Bitcoin (BTC): Significance Of The Two Production Costs And Key Levels

The price of Bitcoin would seem to have fallen quite aggressively from its all time high. However, those who have been following the entire bear market for long would know that the price of Bitcoin (BTC) settled around some levels more than others. For BTC/USD this level used to be the $5800 to $6000 range. The price has tested this level multiple times and has traded close to it for the most part. There is a reason why this level became such a critical support before it was broken. In every market, certain levels become more important than others because there is more to them than just good old technical analysis. For mineable assets, that level is usually the cost of production. The cost of production is further divided into two categories: (i) the capital cost of production (ii) the operational cost of production.

In our case, the asset under question is Bitcoin (BTC). If the price were to start falling from a certain level well above its capital cost of production and its operational cost of production, then those are the levels we will be watching for the price to settle around. When Bitcoin (BTC) topped out and started to fall, a lot of people could tell in advance that the price might settle around $6,000. The reason people were so sure about that was because $6,000 was the average capital cost of production for Bitcoin (BTC) back then. This cost is currently a bit higher according to some researchers but it is still in the $6000s. So, as expected, Bitcoin (BTC) did put up a serious fight whenever the price descended to this level.

Initially, there was a lot of focus on the capital cost of production for Bitcoin (BTC) but when Bitcoin (BTC) broke below that level, the focus shifted to the operational cost of production. As the price of Bitcoin (BTC) started to nosedive from $6,000s, a lot of people became worried as to what might possibly be the floor. Despite the RSI being under oversold conditions, the decline showed no signs of a slowdown. BTC/USD kept falling until it settled around $3,400. The reason BTC/USD settled around $3,400 was because it is the average operational cost of production per Bitcoin (BTC). This implies the cost of mining per Bitcoin (BTC) taking into account only the running expenses like rent, electricity bill, maintenance etc. It does not comprise of the cost of buying mining hardware or complementary infrastructure.

It is obvious to see why this cost might be lower than the capital cost of production. Now, a lot of miners that paid for the hardware as well as regularly pay the rent, electricity, maintenance etc are already operating at a big loss by now. Most of them have already stopped mining which means less supply in the market, hence more demand. However, some miners who had rented equipment and pay only operational costs are likely to keep mining. If the price were to fall below $3,400 they would have to stop mining as well. The average capital cost of production for Bitcoin (BTC) was around $6,000 but the price fell slightly below it to $5,800 because markets can be irrational. Similarly, the average operational cost of production for Bitcoin (BTC) is around $3,400 but we can expect the price to fall to $3,200 or even $3,000. That being said, the price does not have to fall back to these levels to confirm the bottom.