Written by Brenda Nakalema

Bitcoin Might Drop to $13,000. Miners Could Be the Cause

Bitcoin Might Drop to $13,000. Miners Could Be the Cause Bitcoin (ticker: BTCUSD) miners have come under heavy pressure from …

Bitcoin Might Drop to $13,000. Miners Could Be the Cause

Bitcoin (ticker: BTCUSD) miners have come under heavy pressure from the double jeopardy of rising energy costs and falling token prices; however, they could be finally catching a break. The challenge is that it could come at the expense of Bitcoin prices.

At the heart of the Bitcoin universe, miners draw on vast amounts of energy to produce the currency, keeping blockchain transactions secure and running smoothly. In turn, they receive rewards in the form of tokens they can sell or hold.

It’s a potentially lucrative business in a bull market. For example, November 2021 found miners in high spirits when Bitcoin traded at a record high of $69,000. However, their fortunes changed when the crypto market crashed 8 months later. The currency fell below $20,000 on Thursday.

With soaring energy prices contributing to the highest inflation in four decades, Bitcoin mining suddenly doesn’t look so rosy after all. Many miners are now selling most, if not all, of their tokens to recoup operating costs or repay debt- a far cry from the usual strategy of hoarding Bitcoin on the balance sheet.

Shares of publicly traded crypto miners have all but collapsed. Argo Blockchain (ticker: ARB.U.K.) stock lost over 60% this year alone. Riot Blockchain (ticker: RIOT) and Marathon Digital (ticker: MARA) have both retreated almost 80%.

However, the ongoing situation shouldn’t fool anyone; if Bitcoin miners have proved anything from the past setbacks, it’s that they’re highly adaptable and are therefore seen to be getting more efficient as a result of this latest crisis.

“The fight for survival among Bitcoin miners has been inducing an increase in mining efficiency, and as a result, a reduction in Bitcoin’s production cost,” wrote analysts led by Nikolas Panigirtzoglou at JPMorgan.

According to analysts at the bank, the expectation is that the average production cost of Bitcoin- a key factor in miners’ profit margins and token prices- has dropped significantly over the past month. The expense of mining a single Bitcoin was roughly $20,000 at the onset of June and dropped to $15,000 by the end of last month. Currently, the price is sitting around $13,000.

The analysts say that the drop in production costs comes almost entirely from electricity usage. They cite the Cambridge Bitcoin Electricity Consumption Index, which illustrates a clear drop in network demand in the past month and a half.

According to Panigirtzoglou’s group, the dynamics of electricity demand and the Bitcoin’s hash rate- the computational power used in the mining process- are consistent with a “strong effort by miners to safeguard their profit margins by deploying more efficient mining rigs rather than a mass exodus by less efficient miners.”

However, it isn’t all as rosy as it seems.

“While clearly helping miners’ profitability and potentially reducing pressures on miners to sell Bitcoin holdings to raise liquidity or for deleveraging, the decline in the production cost might be perceived as negative for the bitcoin price outlook going forward,” said JP Morgan analysts.

The reason? A few market participants view the production cost of Bitcoin as the lower edge of Bitcoin’s price range in a bear market. And at the moment, Bitcoin is in deep bear market territory, especially after having just capped its worst quarter since 2011.

Despite the doom and gloom, there are reasons to believe the acute pressure exerted on digital assets might be nearing its end, even as crypto’s correlation to stocks may keep prices low.

The recent dive in prices has been worsened by challenges in the crypto industry itself, including the meltdown of stablecoin Terra and the failure of hedge fund Three Arrows Capital. On Wednesday, the crypto market also experienced shock waves when the major crypto lender Celsius Network announced its decision to file for chapter 11 bankruptcy.

“We believe the next 3-4 weeks is critical for the space as the unwinding in crypto markets has severely impacted borrow/ lending companies in the space,” said an analyst at Needham, John Todaro. “As the weeks progress, we believe the contagion risk declines considerably. Additionally, our analysis indicates that a large portion of leverage has come out of the crypto ecosystem.”