JPMorgan says bitcoin crossing $85,000 production cost could ease miner selling pressure

Bitcoin's recent move above JPMorgan's estimated production cost of around $85,000 could give miners relief and reduce the risk of forced selling if sustained, the bank's analysts said.

Bitcoin had spent 280 days below the estimated average cost of producing one BTC before rising above it during this week's rally, the JPMorgan analysts led by Nikolaos Panigirtzoglou said in a report Wednesday. The bitcoin price has since slightly declined and is currently trading at around $84,100.

The analysts said bitcoin's production cost has historically acted as a "soft floor" for its price. When bitcoin trades below that level for a long period, miners with higher electricity and equipment costs can become unprofitable. They may then sell more bitcoin, shut down machines, or leave the market.

The analysts said bitcoin's rally despite the U.S. Senate's failure to advance the Clarity Act was consistent with investors closing bearish positions, as the analysts pointed out last week.

Relief for bitcoin miners

Bitcoin miners have managed the extended period of weak profitability by moving machines to regions with cheaper electricity, selling older rigs, and placing some equipment on standby, the analysts said, noting that they have also scrapped or recycled less efficient machines.

The last time bitcoin remained below its estimated production cost for a similar period was in 2018, when it stayed below that level for about 224 days, the analysts noted.

Falling prices pushed higher-cost miners to shut down, reducing the Bitcoin network's hash rate and mining difficulty. The bitcoin mining industry is now larger and more industrialized than it was in 2018, but the same adjustment mechanism still applies as higher-cost miners retreat, the analysts said.

"To the extent it is sustained, this new backdrop should provide relief to bitcoin miners, thus reducing the risk of forced selling by them," the analysts said.

Bitcoin miners shift toward AI as hash rate falls

Bitcoin mining is also undergoing a broader shift toward artificial intelligence, the analysts said. As miners move some or all of their operations toward AI computing, growth in the Bitcoin network's hash rate has slowed. Hash rate has fallen about 19% from its peak last October, while mining difficulty has declined roughly 15%, the analysts said.

Many publicly traded miners have lowered their hash rate growth forecasts as long-term AI contracts accelerate the shift away from bitcoin mining.

The analysts said AI companies are paying significant premiums for access to electricity and data centers that are already equipped for intensive computing. With bitcoin prices subdued for much of this year, miners have been attracted to AI revenue that is more predictable, more stable and higher per megawatt than income from mining.

Publicly listed miners are consequently losing share of bitcoin mining activity to privately owned and sovereign miners, the analysts said.

"From a bitcoin perspective, this can reduce excess hashrate growth and help prevent the network from becoming 'too crowded,' i.e., avoiding concentration risk. At the same time, by flattening the trend in the bitcoin hash rate, this structural shift by miners to AI implies that the bitcoin production cost would rise more slowly going forward, outside halving events," the analysts said.

The Funding newsletter:  Stay on top of the latest crypto VC funding and M&A deals, news, and trends with my free bi-monthly newsletter, The Funding. Sign up here!