Miners refute JPMorgan Chase: Bitcoin's average cost is only $2,400? NO, Bitcoin has no average cost at all

Bitcoin miners have expressed displeasure over a recent report from JPMorgan Chase that estimated the “fair value” of Bitcoin at $2,400, with some arguing that the US investment bank’s estimate of production costs for Chinese Bitcoin miners was wrong.

(Image source: Bloomberg)

Based on bitcoin’s current price of around $4,000, that means the cryptocurrency has a further 38% drop before the market reaches what JPMorgan calls “fair value,” the estimated marginal cost of producing one bitcoin. Marginal cost is the change in total costs of producing one additional output.

However, with Bitcoin, miners can only grow their share of a market with a finite supply (about 1,800 Bitcoins per day). Therefore, industry insiders say there can be no average “marginal cost” for Bitcoin mining activity due to the design of the Bitcoin network — making this discussion of breakeven “fair value” inherently flawed.

JPMorgan estimated Bitcoin’s intrinsic value in a report published in January titled “Blockchain and Cryptocurrency 2019: Adoption, Performance and Challenges.”

Analysts at JPMorgan wrote in a note:

“We estimate that the average cash cost for a low-cost Chinese miner was approximately $2,400 per Bitcoin in the fourth quarter of 2018.”

The Bitcoin cost measurement is flawed

Regardless, miners argue that Bitcoin’s design means that the concept of an average “marginal cost” is inherently flawed. Ben Gagnon, co-founder of mining hardware developer LuTech, explained that there can be no “average cost” or “break-even point” for Bitcoin.

“There can be no average cost, and no breakeven point, for the market as a whole, because the way the Bitcoin blockchain works means there will always be miners seeking to create Bitcoin blocks and earn Bitcoin rewards, as long as they can use energy-efficient hardware at low electricity costs… When the price of Bitcoin falls, the cost of mining Bitcoin will also fall, and miners with higher costs will exit the market first. This leaves room for low-cost miners to expand their market share and profitability.”

The hash rate, a measure of the processing power of a cryptocurrency network, has fallen sharply since reaching a peak of 60 exahashes per second in October 2018. Previously, some miners shut down their mining rigs and exited the market due to falling profit margins caused by falling bitcoin prices.

Citi also released a report in April 2018 that the breakeven point for Bitcoin was $5,500, when Bitcoin was trading around $6,800.

However, there is a bright side to the future. Most industry insiders expect Bitcoin to rebound in 2020 as miners’ block rewards (currently 12.5 bitcoins per block) undergo a “halving” event every four years. In the next halving, scheduled for May 2020, miners’ rewards will be halved to 6.25 bitcoins.

During the previous two “halving” events in 2012 and 2016, Bitcoin rallied in response to supply reductions.

JPMorgan’s Motivation for Bitcoin Cost Estimates

JPMorgan Chase holds 200 times more customer deposits than the top five cryptocurrency exchanges combined, and the investment bank doesn’t seem satisfied with that number.

If the price of Bitcoin is $2,400, then 200x becomes 300x, even if the coins held by these exchanges are evenly distributed across all available tokens. The fact that most of the tokens held by exchanges are Bitcoin will make this gap between JPMorgan and the exchanges even wider.

And now some are wondering how JPMorgan Chase will value its recently launched JPM Coin, which will likely be centralized and not require mining, so the “marginal cost” of each coin will be… 0?

Do you think Bitcoin has marginal costs?