JPMorgan estimates bitcoin’s fair value at US$2,400, to the dismay and disagreement of digital currency miners everywhere

Cryptocurrency miners have debated over a recent report by JPMorgan Chase, in which it estimates bitcoin’s “fair value” at US$2,400, with some arguing that the US investment bank is misplaced in its estimate of Chinese bitcoin miners’ production cost.

Based on the digital currency’s prevailing price at US$3,900, that would point to a further 38 per cent downside before the market reaches what JPMorgan calls “fair value”, defined by the estimated marginal cost of producing a bitcoin. Marginal cost is the change in total cost that comes from producing one additional output.

However, for bitcoin, miners can only increase its share in a market where there is only a finite supply of them, about 1,800 bitcoin per day. Hence, industry players said due to the bitcoin network design there could be no average “marginal cost” for mining – rendering such discussion on break-even “fair value” flawed.

In a January report titled Blockchain and Cryptocurrencies 2019: Adoption, Performance and Challenges, JPMorgan estimates an intrinsic value for bitcoin, a highly volatile virtual asset that has no asset or cash flow of its own, by treating it like a commodity and basing it on the marginal cost of producing bitcoin.

“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 fourth quarter 2018,” JPMorgan analysts wrote in the report.

Hash rate is a measure of the processing power of a cryptocurrency network. The rate has largely remained steady since November 2018, at around 40 EH per second, or one quintillion hashes per second. Hash rate has collapsed since the October 2018 peak of 60 EH per second, after some miners turned off their rigs and exited the market because of thinning margins from falling bitcoin prices.