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Jim Durrell | 1/24/19 | jad6404@psu.edu
Enforced scarcity is a key component of Bitcoin, artificially limiting its amount to 21 million. Since January, 2009, when the Bitcoin ledger was created, roughly 17.5 million coins have been mined, leaving around 3.5 million unmined. When successfully mined, miners receive a block reward, which is a set number of Bitcoins for each new block mined on the blockchain network. Over time, the block reward is designed to decrease each time a certain number of coins enter existence. When first created, anyone could mine Bitcoin from their home computer, and it didn’t even need to be that powerful because so many Bitcoin were left undiscovered. In early years, the price of Bitcoin was barely a cent so few people were concerned with mining the blockchain. As the price of Bitcoin rose to around $100 in March 2013, people started to believe that Bitcoin was essentially free money as their computers could mine new coins. The number of miners increased and interest surrounding Bitcoin grew.
By 2017, people were mining coins at a much higher rate than before, using expensive graphics cards and setting up cloud services to mine Bitcoin. The unprecedented growth in Bitcoin mining and surging public interest resulted in volatile speculative trading and claims of price manipulation, sending the price of Bitcoin soaring by nearly 2000% from the start of 2017 to it’s all time high of $19,783.06 on December 17, 2017. After its ridiculous run, Bitcoin crashed in 2018 just as quickly as it had risen the year before, declining by more than 80% and falling to a present day $3500 per coin.
Where the price of Bitcoin will ultimately rest is a contentious debate. Some analysts, such as Jeff Schumacher, argue it will crash to zero because they believe it has no intrinsic value. Others like Thomas Lee claim it will become digital gold, and will make another massive rally upwards of $15,000 per coin. As for the price of Bitcoin falling to zero, this highly unlikely. Since people are actively engaged in the mining and trading of this cryptocurrency, they clearly believe it has a value. Another reason it will not fall to zero is it would only do this if virtually everyone sold their coins, which is not possible. It is estimated that half of the Bitcoins in existence are inaccessible by their owners. This can happen in some cases if owners lost their hard drives, or are otherwise unable to access their Bitcoin wallets. With respect to Thomas Lee’s argument that Bitcoin should be priced at $15,000, I disagree. The price of Bitcoin should instead rest much closer to the mining cost.
Currently the variable cost of electricity to mine a single Bitcoin in the U.S. is approximately $4750. Since it is significantly harder to mine the remaining 3.5 million Bitcoin, there is also now a high fixed cost for computer hardware and high-end graphics cards, which can easily cost between $1000-$2000. In addition, the variable cost of electricity will continue to increase as more Bitcoin are mined, requiring more electricity for each subsequent coin. At its current price of $3500, Bitcoin miners are taking a significant loss, causing many miners to cease mining the cryptocurrency. Although some miners will exit this industry, those with enough capital will certainly continue. Once more coins are mined, it will be harder to mine new ones, causing the price of current coins to increase. It would be reasonable that the price of Bitcoin will rest close to the cost to mine with room for miners to still take a profit. I believe this would be at roughly $6000 per coin. The historic price of Bitcoin has been extremely volatile and subject to speculative trading and price manipulation schemes, which has prevented Bitcoin from reaching a reasonable market price based off its cost to mine. As these practices subside and Bitcoin’s price evens out, it would be reasonable to expect the price of Bitcoin to rest around $6000 per coin.
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