Price and Production Cost

When it comes to commodities, price is always related to production cost in such a way that the production cost tend to be only a little bit lower than the price of the commodity.

If the price of a commodity goes up, supply is increased to satisfy the demand. If prices fall, production capacity is taken off line.

In the case of mining and other capital intensive industries, the lead time to go online and offline can be substantial, which means that production can at times be very profitable and at times at a loss, depending on the direction of the price move.

However, for crypto-currencies, lead time is very short. It does not require much in terms of investment to set up a crypto generating computer. The main hurdle is motivation and some technical skills.

This means that as long as crypto-currencies are trading at huge margins relative to production cost, crypto generating computers are coming online at a tremendous rate. The only thing that will bring down the number of these computers is a re-pricing of either crypto or energy.

Only when the price of crypto "mining" becomes roughly equal to the price of crypto generated will the "miners" take computers off line.

The fact that there is only a limited number of tokens to be found for each crypto currency will not alter this fact. As long as new crypto-currencies can be invented, miners will continue to mine, and there is no reason to believe that crypto-currencies will not evolve and move on indefinitely if demand for this type of currency persists.

This means that we are headed for some sort of crisis. Energy prices must either go up by a lot, or the price of crypto-currencies must come down by a lot.

Cryptocurrency mining farm

By Marco Krohn - Own work, CC BY-SA 4.0, Link