In this article, we will compare Gold and Bitcoin in terms of production costs and try to come up to some comparative conclusion.
GOLD
Gold AISC refers to all-in sustaining costs for gold. As per World Gold Council, this includes every cost item for producing gold except for future non-sustaining costs such as new expolaration.
As it stands AISC is a good measure of a fully reflective cash cost base for gold. Since 2013, this figure has gone down 15%-ish to around USD 850. Compare this to a cost base in a company that encompasses capital expenditures and capitalized expenses on top of operating costs.
So at USD 1330 market price, there is a USD 480 cash profit margin on gold (minus exchange fees and such) for the miners. Whether this is a great margin or an unsustainably high figure time will show. In the interim the relative value of the Dollar and risk perception seems to play a more prominent role.
..
BITCOIN
Now let's look at it from the point of Bitcoin..
First of all Bitcoin has digital scarcity with a maximum cap. In this regard, it can be compared to Gold. Over time, it's supply grows a lot less than Gold and that growth path is predictable. Both Bitcoin and Gold have production costs, the latter as described above and Bitcoin due to its Proof of Work algorithm that links physical expenses such as equipment and electricity in addition to labor and administrative costs.
Here's a table for electricity costs:
Now we can develop step by step the cost basis for Bitcoin..
A. Equipment
Amazon lists Antminer S9 for USD 1,700. With shipping, installation and additional hardware costs, we can assume at least USD 2,000 to have this set up.
https://www.amazon.com/AntMiner-S9-13-0TH-0-098W-Bitcoin/dp/B01HFXQ7AG
With this set up, one will get 13 TH (terra hashes) of power. Given the current difficulty, this power mines 0.0283 BTC per month. With a fairly conservative estimate of network power increasing annualy by 100% from this point on, this miner will produce around 0.021 BTC per month for the first year and then closer to 0.0105 BTC the next year and halving the other year as well.
So after 3 years, this rig will produce around 0.5 BTC. If we convert the cost to 1 BTC, then it would be USD 4,000 equipment costs and the equipment is pretty much obsolete with an assumption of no maintenance costs for these 3 years on any equipment. Also we will assign 0 scrap value for the equipment after this usage period.
https://alloscomp.com/bitcoin/calculator
B. Electricity
Huge variation from place to place but if we take the US as a reference, we can use USD 4,800 per 1 BTC which is actually understated because producing the same BTC over the horizon of mining would require more electicty per 0.xxx units of BTC. We shall not take this in to consideration for now.
C. Labor
Given this will not be a highly labor intensive business, let's assume all labor costs including managerial costs at 1/4 of electricty cost.
D. Administrative Costs
This is a broad topic from accounting, rental, legal, warehouse expenses and all. For the moment, let's assume it is same as Labor costs.
E. Others
A plug-in for other costs which will be assigned 0 for now.
..
CONCLUSION
Adding up all the costs gives USD 9,200 AISC cost for mining Bitcoin the US. Where electicty costs are 1/2 of the US average, this can go down to USD 5,600. For this example average of these two i.e. USD 7,400 will be used.
I believe that this analysis disregards organizational costs, risks and business continuity matters. To that end, an AISC comparable cost could be higher. However given significantly lower electricty costs, this will be mitigated. Yet again with network difficulty increasing as well as the total hashrate, these costs will pick up as well.
So with Gold, there is a USD 850 cost base and a price of USD 1,330.
And with Bitcoin, there is a USD 7,400 cost base and a price of USD 7,000 as of now.
Everything is not comparable in life but if these two assets are comparable to a degree then either Gold will have to decrease below USD 850 to be comparable or Bitcoin will have to increase to USD 11,500. Alternatively Gold can come down somewhat and Bitcoin can go up less than this.
Probably none will happen in the next couple of days but it is clear that Bitcoin does not benefit from the safety value attached to Gold at the moment. However the production costs and the investment community will pick on these details, elaborate on them and I would not be surprised for these factors to lead to reasonably higher prices in the not too distant future provided that the BTC network continues to function and innovate.
In reply to myself, what are the problems with the Gold cost analogy?
A. Cost can be manufactured arbitarily without any value attached to the final product.
Imagine yourself carrying a rock from point A to point B in a car. There is capital expenditure in the car, maintanance costs in the fuel and lobor costs in your involvement.
Would all that make the rock have a price or go up in price?
So the value attributed to Bitcoin is different from the cost argument. If that value attribution is made then the cost could be a metric to set a price. However there is no intrinsic reason for that value attribution.
Moreover, the same argument can be made for gold.
B. Gold and Bitcoin might not be similar.
Interestingly for Bitcoin holders, there are similarities more apparent than the holders of Gold. I think the first point is strong and this contention point is weak. Yet - Gold and Bitcoin correlation has been very weak historically.
C. All the calculations are absurd because production costs for each site is not known.
This makes sense to argue on a country or site specific costs but does not weaken the overall argument. It qualifies the argument to be more refined which indeed is necessary.
..
And obviously there could be other counter-arguments as well. Yet I believe the analogy is interesting without trying to be explanatory in a wholistic sense.