APPROACH 4: COST OF PRODUCTION VALUATION
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.
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.
Unlike previous approaches, this one is no longer flawed. I wouldn't call it challenge either, this is outright wrong.
The problem is that they are still thinking in terms of something like gold and the "production cost" which is completely unaffected by gold price. For example if gold is worth $1 it still costs the same to extract it from the ground, melt it, etc. as in case it were worth a $1,000,000,000 because the process is not affected by the price (the incentive to mine gold is).
But when it comes to Bitcoin because of how mining (Proof of Work and difficulty adjustment works) things are completely different. If bitcoin price were $1, the cost of mining would also be low and close to $1 and if bitcoin price goes up to $1,000,000,000 that means the cost of mining bitcoin would also go up to be close to $1,000,000,000.
Note that I say "close to" not equal because of being decentralized and the fact that cost of mining is wildly different in different parts of the world (eg. electricity price from $0.0012 to $0.54) and other factors.
if gold could be mined in everyones back yard for $1 an ounce. (eg someone can tea-spoon gold into a saucepan at a rate of 15 ounces an hour
the gold market spot rate would not be at $1800.. it would be at $1.80
if gold could be mined in an asteroid as earth reserves are gone meaning it cost $500m an ounce. the market would be $1,000,000,000
the gold market spot rate would not be at $1800.. it would be at $1.80
for a market to speculate above a 1.5x->1billionx of cost. then that fool paying 1b x is a moron if it only costs $1 to mine
as for the bitcoin the $0.0012 to $0.54 is the value-premium.. however the amount of hashpower able to get the $0.0012power rate is not much of the competition so not a big deciding factor on the value support.. its more of a healthy 0.04-$0.54 range of support(value) and resistance(premium)
and yes even gold has a world wide value premium window. which is ~ $1.3k->$2.5k which the spot market trades between