Analysts at JPMorgan have estimated the Bitcoin “fair value” to be $2,400 using what the investment bank feels is the marginal cost of BTC mining. However, numerous stakeholders in the industry say the Wall Street bank missed the plot completing by trying to set a fair value for an asset like Bitcoin. Meanwhile, the recent price rally seen in the cryptocurrency appears to be stalling after multiple days of positive daily price growths.
Analysts at JPMorgan released a report back in January 2019 which contained an attempt to establish an intrinsic value for BTC. With no cash flow associated with BTC as an asset, the analysts decided to use the marginal cost of Bitcoin mining as a metric for determining fair value.
An excerpt from the report reads:
“Averaging hash rates throughout Q4 of 2018 and applying recent production shares, we estimate that the average cash cost of a low-cost Chinese miner was around $2,400 per Bitcoin in the fourth quarter of 2018.”
By using hash rate which is universal for the network as a whole, the Wall Street bank is trying to develop a baseline for BTC pricing based on the cost of production associated with “low-cost” miners in China. Low-cost mining among other things requires access to cheap electricity.
Miners and other stakeholders alike say the analysis by JPMorgan holds little importance as concepts like marginal cost and fair value do not apply to Bitcoin. Critics of the report say the network architecture and inner workings of Bitcoin’s token economy render those baseline concepts moot.
Bitcoin has a total fixed supply of 21 million as a finite daily supply of 1,800. Mining nodes across the globe compete to claim the reward attached to each block; currently, 12.5 BTC which will reduce by 50 percent during the next halving. Ben Gagnon of Bitcoin mining company, LuTech, speaking to South China Morning Post (SCMP), said:
“There could be no average cost, or break even point, for the entire market, because the way the Bitcoin blockchain functions means that there will always be miners seeking to create blocks and Bitcoin rewards so long as they can operate with power-efficient hardware at low electricity cost.”
Gagnon also pointed out the fact that the mining ecosystem is ever-changing, and reacts to the prevailing market conditions. In mid-November, 2018, BTC prices plummeted to almost below $3,000. This crash proved fatal for close to 800,000 miners who were forced to shutter their operations.
Consequently, network hashrate declined with fewer mining nodes around which in turn caused difficulty to reduce. Miners able to still operate profitably continued mining Bitcoin. According to SCMP, miners like LuTech and Bitfarms Technologies have mining costs significantly lower than JPMorgan’s “fair value” estimate for BTC.
JPMorgan isn’t the first to propose a BTC fair value. For most of 2018, while staunchly standing by the $25,000 price forecast, Tom Lee of Fundstrat also suggested a breakeven cost for Bitcoin. Lee’s break-even analysis put Bitcoin’s fair price at $14,800 back in mid-December 2018.
JPMorgan analysts aren’t renowned for positive sentiments concerning Bitcoin. At the start of the year, the company issued a report stating that BTC would have value in a dystopia. According to the report, cryptocurrencies were more hype than substance and didn’t fulfill the requirements necessary for being a haven asset.
Recently, the bank announced the launch of its cryptocurrency which many in the industry isn’t a real cryptocurrency. However, moving away from that debate, what would be the fair value of its cryptocurrency? Since there is no mining like is the case with Bitcoin, then, there is no marginal cost. If there is no marginal cost, then the fair value is zero.
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