When Will the Price of Ether Rebound? Mining Offers Some CluesBy Yerui Zhang
The price of Ether seems to have finally stabilized at around USD$200 after its long fall. In a previous article, we predicted that the price of one ETH wasn’t likely to drop lower than $140. But now, the better question might not be how far down ETH will go, but when it’s likely to go back up. When will the price of ETH rebound to around $300?
According to basic economic theory, a drop in supply should lead to an increase in price. Ether is not an exception to this rule. When the amount of ETH available on the market decreases, a price rebound is likely to follow.
But recently, that’s not what we’ve been seeing. In fact, it’s been the opposite: mass sell-offs of ETH from ICOs have led to an increase in supply. According to a research report by Bitmex, most of the 220 ICO projects surveyed had sold Ether in the past couple months. Currently, ICO projects only hold 4% of the total ETH supply.
Of course, a significant proportion of the ETH that’s currently on the market for trading is produced by miners. But miners will only produce ETH as long as it remains profitable. When the cost of mining exceeds the income that can be generated from ETH sales, we are likely to see more miners abandon this task. That will lead to less ETH being produced, and a subsequent increase in ETH price.
(While it is possible that ETH miners leaving could also spook investors and cause a crash in price, we think the crash from $600 to $200 has likely already shaken out most of ETH’s “weak hands,” and the remaining token holders are likely mostly long-term believers in the technology who probably won’t be scared into selling that easily.)
So the question is: When will ETH miners decide that mining is no longer worth their time?
We did some cost calculations in an attempt to predict miners’ behavior.
Blockchain industry mining costs have four dimensions:
1. Mining machine power and price
2. Mining machine depreciation cost and hashing difficulty
3. Electricity costs
4. Mining policy
Mining machine power
Mining machine power is the speed at which a computer calculates the output of the hash function. Unlike Bitcoin ASIC mining machines, the Ethereum Ethash algorithm relies heavily on RAM bandwidth, which means that mining with ASIC mining machines doesn't improve performance enough relative to cost.
Ethereum mainly uses GPU mining machines. When the price of Ether rose in 2017, miners purchased a large number of high-quality consumer GPUs (previously popular mostly with video game enthusiasts and creative professionals), which pushed up the price of graphic cards in the consumer market.
Currently, popular equipment for Ethereum mining includes the ASIC mining machines developed by Bitland and traditional graphics-card-based GPU mining machines. According to data provided by cryptocompare.com, Antminer’s E3 stand-alone power 760w, 190MH/s machine, priced at $1262, is currently the most cost-effective prebuilt mining machine. A GPU miner that could hit the same hash rate would cost about $2,747 and require 920w (assuming six 1070Ti GPUs at 31MH/s and $449 each).
Those two prices may not seem comparable, but after nine months of GPU mining, the mine owner can sell the second-hand graphics cards at an average depreciation rate of 50%, while the mining life of the ASIC machine is about nine months with no chance of resale once it dies. Therefore, it is generally believed that the cost of the two is roughly equivalent (since the cost of the GPU miner is just $1,400 if you assume the GPUs can be resold at 50% of their original price).
Hereafter, we’ll calculate the mining costs using the specs and price of the E3 GPU mining machine just for the sake of clarity.
Mining machine cost
After 11 months, a mining machine’s income can no longer cover electricity prices due to the rise in mining difficulty. Plus, there are also additional costs of mining that aren’t factored into the core hardware costs, like the need for heat dissipation (mining machines overheat easily, and often fans or AC are needed), transportation (for example, moving to areas with cheaper electricity as prices fluctuate), and other factors. We believe that the service life of a mining machine is about nine months. If the mining machine’s income cannot cover mining costs after nine months, the mine owner will probably lose money.
Because mining requires a lot of electricity, miners migrate their equipment to different regions to reduce electricity costs. Take China, the center of crypto mining. The flood season in China’s southwestern region runs from May to October. During this period, Chinese mine operators move their mining machines to areas with developed hydropower such as Sichuan and Yunnan, and enjoy low-cost power at rates of roughly $0.04 per kWh via local hydropower stations.
After October, the surface water flow in the Sichuan Basin gradually dries up, gradually transitioning to the flat and dry seasons. The output of hydropower decreases and electricity prices rise. According to data disclosed by the Sichuan Provincial Development and Reform Commission, the electricity price rises by 24% in the flat water season, and by another 24.5% in the dry season. As the cost of hydropower mining increases, mine operators need to transfer to wind or thermal power generation, and move mines back to Inner Mongolia and Xinjiang. According to data provided by the industry, the electricity price in Erdos, Inner Mongolia is about $0.05 per kWh.
Ethereum mining policy
According to the preliminary setting in the EIP 1011 Hybrid Casper FFG draft and the Ethereum team voting, Ethereum’s block rewards are set to be reduced when the Ethereum technology upgrade is carried out. Right now, each block produces a reward of roughly 3 ETH, but that will be reduced to 2 ETH after the upgrade. If the ETH/USD price remains within the current range, the reduction in block rewards will greatly reduce the enthusiasm and the daily mining output of miners.
Here’s the state of things as of this writing: the ETH network difficulty is 3273TH, the block time is 13.878 seconds, block rewards are 2.91 ETH/block, the token price is $209, mining pool memberships cost 1%, the average mining machine is working at 190MH/s and consuming 760 watts/hour of electricity. The electricity price is around 5 cents/KWH, and the cost of our average mining machine is $1,260.
Crunch those numbers and we see that a miner’s monthly net income is 0.43 ETH. With ETH at $209, the estimated return time for a mining machine is about 18 months, and that’s without including external cost factors like room cooling, transportation costs chasing cheap energy, and so on. It is likely that currently, most ETH miners are losing money.
If we assume that the average mining machine can last nine months, the price of Ether would still need to reach around $445 in order for miners to break even.
So the current situation is pretty grim for miners. Some owners have already stopped mining Ethereum and started mining other cryptocurrencies instead. After Ethereum’s block rewards are reduced again in October, the enthusiasm of miners is likely to dip even lower.
When the enthusiasm of the miners becomes too low, the overall Ethereum output will decrease, and we think the price will rebound significantly. No one knows exactly when this will be, but if you want to make an informed estimate, keeping an eye on mining costs provides valuable clues.