Bitcoin price plummets as investors flee the currency


Bitcoin prices have been taking a beating since the new year, but today the bottom fell out of the market altogether. After debuting at $314.59 on Friday, January 2, the currency fell to $267 by Monday, Jan 12. Then, in the past 36 hours, prices fell completely off a cliff, with the currency currently priced at $178.67 at CoinDesk.

Currently, there’s no explanation for the enormous price drop over this short period of time, but the ripple effects are already hitting miners. Mining hash rates dropped precipitously initially, and while they’ve since risen again, they’re still well below early January rates. The problem, for Bitcoin, is simple: there are prices at which the majority of mining operations are not possible.

In the beginning, it was GPUs that drastically increased BTC mining capability and kept the operation profitable, followed by FPGA and ASICS. As more and more people bought ASIC miners, operations began to shift further, from private residential complexes to huge cloud networks. These large-scale mining operations managed to further reduce costs by centralizing operations and paying lower utility rates.



When we published the results of our major Bitcoin study last year, we noted that BTC tended to be deflationary and that prices should generally rise when mining rates increased. One of the assumptions of the underlying model, however, was that the intrinsic costs of mining BTC would establish a consistent price floor. The advent of new business models, like cloud mining, allowed companies to dodge this bullet in the short term by shifting to business schemes where the marginal cost of operation was lower and profitability was greater, even at a constant price per BTC.

With the price in free-fall, however, several cloud-based BTC operations have already announced they intend to suspend operations for at least some period of time. This will reduce the rate at which difficulty increases, since fewer miners = smaller difficulty hikes, but it won’t automatically solve the problem. The same cloud mining installations that have leveraged the lower cost of commercial power and taken advantage of aggregation are going to face monthly rents and fixed costs that need to be met. That means these facilities may have to continue mining, even at a loss, in order to cover some portion of their costs.

Unfortunately, this continued mining could now actively work against a BTC recovery. As sell volumes spike relative to buy orders, continuing to push more coins into the market risks triggering further sell-offs as demand has yet to stabilize relative to supply.

What this means for Bitcoin long-term is unclear. There are undoubtedly some operations that will continue mining, even at a loss, for some period of time, but the currency cannot continue to be mined long-term if the costs of doing so do not rise above the marginal cost of power. While this isn’t the first significant course correction for the currency, the fall off since January 2 now puts BTC nearly 50% off its opening volume — and it’s been over a year since we saw a hit that large.