Bitcoin’s production cost falls to $13k and that could be bad for the price, says JPMorgan

(Kitco News) The production cost for Bitcoin dropped by $7,000 to $13,000, which could lead to lower prices, according to a report by JPMorgan Chase.

It is estimated that Bitcoin’s cost of production fell from $20,00 at the beginning of June to $15,000 at the end of the month and then to $13,000 as of this Wednesday, the bank’s analysts wrote. The drop was explained by the decline in electricity use.

“Decline of the production cost estimate has been driven almost entirely by the decline in electricity use as proxied by the Cambridge Bitcoin Electricity Consumption Index (CBECI),” the note said.

Given the recent price drop in Bitcoin, miners are working to improve their profitability by using more energy-efficient mining rigs, the report pointed out.

However, this drop could negatively impact the price of Bitcoin.

JPMorgan Chase explained: “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,” the analysts wrote. “The production cost is perceived by some market participants as the lower bound of the Bitcoin’s price range in a bear market.”

To calculate production cost, JPMorgan viewed Bitcoin as a commodity and estimated marginal costs of production by incorporating price data, hash rate, and difficulty from, the bank said.

The massive crypto selloff wiped out $2 trillion off the overall market cap since last year’s all-time highs. Bitcoin also plunged significantly, with the world’s largest cryptocurrency seeing the worst quarter in 11 years, down 56% in Q2. At the time of writing, Bitcoin was trading at $20,543.22, up 4.5% on the day.

The dramatic price drop began with the Terra blockchain collapse in May and accelerated with the contagion risk that spread via the crypto lending platforms.

Meanwhile, the macro environment remains unsupportive of risk-on assets, which Bitcoin has closely mirrored this year. Inflation continues to surprise on the upside, and recession fears are growing, with markets now pricing in a 100-basis-point rate hike by the Federal Reserve in less than two weeks.

Bank of America said in a report this week that the impact of inflation on U.S. consumers will lead to a recession in 2022.

The bank’s economists are projecting negative real GDP growth for 2022. “We now forecast a mild recession in the U.S. economy this year and expect 4Q/4Q real GDP in 2022 to decline 1.4%, followed by an increase of 1.0% in 2023. In terms of labor markets, the combination of a moderate downturn this year and below-trend growth for much of next year pushes the unemployment rate 1pp higher from 3.6% currently to 4.6%,” they said in a note.

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