JPMorgan Chase, a U.S. based investment bank in January released a report, “Blockchain and Cryptocurrencies 2019: Adoption, Performance and Challenges” which sets bitcoin’s fair value to $2,400. The bank’s estimate is based on the marginal cost of mining bitcoin by low-cost miners in China, reports a media outlet on February 22.
JPMorgan Estimates Bitcoin’s Fair Value
Per the report, JPMorgan in its publication estimated that bitcoin’s fair value is $2,400 which is 39.76 percent less than the current market price of the digital asset. Bitcoin which is trading around $3,984 as at price time, in JPMorgan’s opinion, is influenced by the operations of low-cost miners in China.
According to the Wall Street bank:
“Averaging hash rates throughout Q4 of 2018 and applying recent production shares, we estimate that … the average cash cost of a low-cost Chinese miner was around US$2,400 per bitcoin in the fourth quarter of 2018.”
JPMorgan also highlighted that the estimated fair value is based on the marginal cost of producing bitcoin by miners. In this case, the marginal cost is the increase or decrease in the total cost of producing one more unit of bitcoin.
Cryptocurrency Miners Opinion Vary from JPMorgan’s
Cryptocurrency miners, on the other hand, have not been quick to agree with the investment bank. They are of the opinion that there cannot be an average marginal cost when it comes to bitcoin and as such, the fair value is flawed. The latter has been attributed to the fact that there will always be a finite supply of bitcoin given that there is a daily supply of 1,800 coins.
Ben Gagnon, co-founder of LuTech, a bitcoin mining company revealed that of late, the amount of bitcoin that can be mined is fixed given that 12.5 bitcoin is rewarded every 10 minutes for finding a block. Moreover, a miner stands to gain a larger share of that fixed amount in relation to other miners who are also competition.
Impossible to Set an Average Cost Due to Miners’ Competition
Therefore, it is impossible to set an average cost because miners will always compete to be the first to earn a reward as long as they get cheap electricity and mining equipment that are power-efficient. Gagnon also pointed out that bitcoin’s production cost is affected if the digital asset devalues.
That being the case, a decline in price will also lead to a decline in production cost which will affect high-cost miners who may be more likely to exit the market. It, therefore, leaves the competition to low-cost miners who will stand to have a more market share and profit.