Bitcoin Production Cost Indicator Explained (How To Use It)
The Bitcoin Production Cost Indicator by Capriole Investments can help you decide whether bitcoin is “cheap” or “expensive” from a fundamental perspective. In this guide, I’ll explain how the indicator works and what it says about bitcoin’s value right now.
How miners produce bitcoin
Bitcoin miners are the backbone of the Bitcoin blockchain. They process bitcoin transactions and make sure everything runs like clockwork—earning newly produced bitcoins in return. Each bitcoin transaction is grouped into a transaction block (every ten minutes) with a few thousand other transactions. That block is locked by an extremely complex cryptographic puzzle that miners solve with bitcoin mining software, powerful computers, and lots of electricity. That all costs money—and typically makes up the bitcoin production cost for miners.
What is the Bitcoin Production Cost Indicator?
Capriole Investments developed the Bitcoin Production Cost Indicator to estimate the average cost to produce (mine) one bitcoin on a given day (chart below). The green line shows the average price miners sell their bitcoin for (to pay bills). The purple line is the total cost to produce one bitcoin. That includes daily electricity costs (red line) and other “up front” operational costs (e.g., mining equipment).
The dark-shaded red areas above mean miners sell bitcoin for less than the total production cost (purple line is above the green line). The lighter-shaded red areas mean miners sell bitcoin for more than their electricity costs (essentially covering their daily variable costs).
The red and purple lines recently went much higher (chart below). That’s because of the bitcoin halving in April 2024. The number of new bitcoins miners create (earn) per transaction block has now halved. So, miners must burn roughly twice as much electricity to get the same bitcoin reward. That’s why the red line (electricity cost) has doubled from about $30,000 to $60,000. Notice how the market price of bitcoin (red and green candles) is now sitting just above that $60,000 level. I’ll explain why that’s important in the next section.
Side note: The average electricity cost (red line) to mine bitcoin doubled a few weeks after the halving (April 19th). This delay could be because some cash-strapped miners switched off their machines straight after the halving. With less competition to mine bitcoin, the mining puzzle difficulty adjusted downwards temporarily. The remaining miners might’ve used the same amount of electricity in total. The indicator might’ve then calculated the average electricity cost with the pre-halving number of miners. Hence, the average electricity cost stayed flat for a while before doubling.
Is bitcoin trading at good value right now?
Bitcoin’s price hardly ever dips below the red line of the bitcoin production cost indicator. And when it does, it usually doesn’t stay there for long. There are many theories about why this happens, but that’s not so important. What is important is this: historically, buying bitcoin at or just below its average daily electricity cost would’ve been an exceptional long-term opportunity. You’d have bought bitcoin near the bottom of the 2018 and 2022 bear markets and the 2020 Covid crash.
You’d also have bought bitcoin a few weeks after each “post-halving” bitcoin drop, like the one we’re experiencing right now. Each drop preceded new highs for bitcoin over the next few months.
Will bitcoin go lower in the short term? I have no idea. But if you’re going strictly by the history of the Bitcoin Production Cost Indicator, bitcoin now could be in a long-term value zone.
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