APPROACH 4: COST OF PRODUCTION VALUATION
The “cost of production” valuation thesis was first proposed by Adam Hayes in 2015 and has been expanded upon by multiple researchers since. The theory holds that crypto, just like any commodity, is subject to traditional pricing challenges on the supply side. Crypto miners the computers that process transactions and are rewarded with the underlying cryptoasset spend fiat money to produce each marginal cryptoasset, through both energy and hardware expenditures.
Hayes and others suggest that, viewing bitcoin as a commodity and according to traditional microeconomic theory, the cost of producing each marginal bitcoin should align with the price of that bitcoin. After all, if bitcoin mining were to become unprofitable, miners could simply turn their attention to another cryptoasset or exit the market altogether. As a result, the value of each bitcoin can be estimated by examining the marginal cost of mining (specifically, the electricity burned in running the computations as part of mining) versus the expected yield of new bitcoin.Empirical backtesting shows a relatively strong alignment between bitcoin’s price and the marginal cost of production, lending some credence (thought no directional causality) to this approach.
The “cost of production” analysis, however, involves some significant challenges. For one, it is circular in its reasoning because the decision made by miners to enter or exit the market is driven by the cryptoasset’s price. Using two necessarily cointegrated variables to value one another has very little predictive or explanatory power. The model also fails to account for or explain the massive short-term volatility of bitcoin’s price or the fact that bitcoin’s mining difficulty is programmatically adjusted on a biweekly
basis depending on the level of effort miners have focused on it.
Beyond that, many cryptoassets use a consensus mechanism different from that of bitcoin, one that does not lend itself to this kind of analysis. In proof-of-stake systems, for instance, little or no energy is consumed in mining; instead, miners lock up assets in escrow in exchange for securing the network. For these markets, no direct concept of the cost of production exists.In the end, although cost of production has aligned roughly with prices for some cryptoassets in the past, the cause-and-effect relationship is not clear and its predictive value for the future is very much in question.
the cost of production is not circular. its simply based on asic hardware + electricity
the VALUE as oppose to premium explains that taking the cheapest mining cost on planet becomes the value bottom line...
the market price is an after effect not the primer
value sits below the market price so once you calculate the value and then look at the market price that sits above the value. you can see how inflated the speculation is..
compare that with the cost of minting PoS which is negligible compared to its inflated speculated price. and you soon see why bitcoin is a better store of value