$BTC - Bitcoin and the Cost of Production: The Fair Value Formula

Economist Adam Hayes developed a model that calculates the fair value of Bitcoin based on its marginal cost of production.

The reasoning is straightforward: if mining 1 BTC costs X dollars, the market — sooner or later — adjusts the price upwards to this X, because below this price mining becomes unviable and supply plummets.

Hayes' basic formula considers:

• W = Power consumption in Watts per GH/s (hardware efficiency)

• E = Cost of electricity per kWh

• D = Mining difficulty

• H = Total network hashrate

• C = Cost of producing 1 BTC

The cost of producing 1 BTC can be estimated as follows:

C ≈ (D × 2³²) × (W / 1,000,000,000) × (E / 1,000)

Explanation:

• The term (D × 2³²) represents the average number of hashes required to mine a block.

• W / 1,000,000,000 converts equipment efficiency to GigaHashes per second.

• E / 1,000 converts the cost of energy for each Watt-hour.

Simplified current example:

• Difficulty: 85 T

• Average efficiency of modern miners (such as S19 XP): 21.5 J/TH

• Electricity: $0.08 per kWh

Substituting into the formula:

• Approximate production cost = between $55,000 and $75,000 per BTC, depending on the region and type of machinery.

What Hayes showed:

Whenever the price of Bitcoin falls below the cost of production, miners shut down machines, the network adjusts and the price tends to rise again to levels above the cost.

Therefore: The cost of energy is the true “invisible floor” of Bitcoin and that is why miners protect this market with tooth and nail.