Bitcoin “markets effectively priced in a 25% decline in the amount spent on energy per day,” says the “Global Markets Strategy: Flows & Liquidity” report by JPMorgan & Chase Co. published on March 22, 2020.
JPMorgan that treats Bitcoin as a commodity because mining consumes electricity said Bitcoin miners have responded swiftly to the collapse in the revenue following the halving.
After the block rewards were cut in half to 6.25 coins, it has been found that “the intrinsic value estimate effectively doubled,” wrote Nikolaos Panigirtzoglou, Managing Director at the bank.
In principle, if the market price of bitcoin is above its intrinsic cost miners should be induced to increase their resources to mine BTC, bringing the cost of mining higher until the marginal cost approaches the market price.
In contrast, if the price is below the intrinsic cost higher-cost producers must exit the market and lower the overall cost until it again approaches the marginal cost.
To find the intrinsic value of BTC, the estimated daily cost of production as a function of the computational power employed, cost of electricity and energy efficiency of hardware is calculated which is then divided by the expected number of bitcoins produced daily.
Since the halving, the hash rate has declined by 20%, such a drop was last seen when the BTC price collapsed 50%. This decline also happened against a backdrop of “an improvement in average efficiency of mining hardware, as energy consumption per GH/s has declined by more than 15%.”
This closed down the gap between the intrinsic value and market price.
Panigirtzoglou also covered the sharp increase in the open interest on both bitcoin futures and options. For CME contracts, it recovered faster than crypto exchanges and had a “steep” increase in both BTC and USD terms. Although CME’s OI has overtaken that of LedgerX, it’s way behind the nearly $1 bln OI on Deribit.
As for positioning in bitcoin futures, JP Morgan takes on cumulative weekly absolute changes in the open interest multiplied by the sign of the futures price change every week based on the rationale that when price increases so do the net long position of spec investors and magnitude of the increase and vice-a-versa.
The trends in both CME and BitMEX futures have been similar this year directionally, “with net longs being cut or net shorts being increased sharply amid the March sell-off, and a significant adding of net longs or decreases in net shorts ahead of the halving event.”
JPMorgan’s report however, doesn’t mention the decline in BitMEX’s market share and more than 40% drop in its web traffic.