On the issue of Bitcoin (BTC) supply

min read by
Thomas A.

We know that bitcoin (BTC) reacts long-term on breakeven levels. That is to say that a production cost that is too high compared to the price of bitcoin would not allow the latter to work. Therefore, the question of the study of supply is all the more decisive as it explains the behavior, and hopefully the future, of the cryptocurrency market.

The Role of Mining in the Bitcoin Market

In a previous article, we discussed the major role of the production cost of bitcoin (BTC). And indeed, the long-term supply behavior can explain that of bitcoin. Despite everything, the importance of mining in BTC continues its gradual decline.

Miners, revenue and profitability

Bitcoin mining involves solving complex mathematical problems using powerful computers. From then on, miners who manage to solve these problems are rewarded with a certain amount of newly created bitcoins and receive transaction fees. However, the mining process is very energy-intensive and requires significant investments in hardware and electricity. Therefore, the cost of producing bitcoin is related to these expenses.

Hence, the cost of producing BTC plays a major role in forming market lows. Furthermore, when the price of bitcoin drops below the average cost of production, miners are unable to continue their activity. They may try to reduce their cost of production, or they may try to reduce their mining activity or cease operations altogether. We will also specify that a reduction in “mining” activity would lead to a weakening of the network. Thus, a price of BTC below the cost of production for an extended period of time can lead to a significant reduction in the hashrate of the network.

Daily earnings of bitcoin miners (7-day moving average). Source: Bitcoin Miner Revenue (Daily, 7DMA) (theblock.co)

According to The Block, we see that the income received by miners has been rather stable in recent years. They logically climbed with the bull market of 2021, before reaching a low at the end of 2022. Keep in mind that miners now represent just 5% of the total bitcoin supply. Which is far from the 90% of the first years following the creation of Bitcoin.

Bitcoin Velocity Estimation

Estimating the velocity of Bitcoin

If bitcoin is a currency, then, like currency, it has both a quantity of money in circulation, but also a velocity. Velocity measures the speed of circulation of money. This is the number of times BTC has been traded in a year. The velocity of the dollar is thus 1.25 for the United States. Similarly, the velocity of the euro is approximately 1. A currency with a higher velocity, or at least a rising velocity, translates a favorable signal. We propose to estimate the velocity of Bitcoin.

We will therefore specify that approximately 330,000 bitcoins were mined in 2022. At the same time, an overall annual volume of $357.5 billion traded in bitcoins. With an average price in 2022 of $28,200, we deduce that the approximate number of bitcoins traded is 12.6 million. A bitcoin that can be traded multiple times. The velocity of bitcoin is all the more decisive as a high velocity will be the source of more transactions and higher transaction costs. We also note that the annual supply of miners was 2.6% of the total supply in 2022!

Time evolutions

Ultimately, we deduce that the velocity of bitcoin is therefore close to 0.66 in 2022! That is to say, the velocity of bitcoin is lower than that of traditional currencies. But it would also be interesting to study the evolution of this velocity. Over the long term, bitcoin’s velocity remains roughly constant. Its average value between 2010 and 2018 was around 1.4. From where it follows that a velocity lower than 1 is properly weak for the bitcoin.

Bitcoin velocity (low) and US dollar money supply velocity. Source: Bitcoin Velocity vs. USD Money Stock | scatter chart made by 1053r | plotly

In the long term, the stagnation in the supply of bitcoins should be, at constant prices, a factor in the increase in velocity. But if the price of BTC increases symmetrically, it will cause a reduction in velocity. So, it is logical to observe a constancy in the velocity of bitcoin. We observe that the velocity of bitcoin is often minimal during the phase of decline in the price of BTC. Velocity therefore largely explains the trends observed on BTC.

If the velocity of bitcoin is relatively lower than its average, it is because the price of bitcoin was higher than what the market wanted in 2022. Similarly, a reduction in velocity rather implies an increase in the price of bitcoin.

The stagnation in the number of active addresses

An interesting phenomenon has been emerging since 2018: that of the stagnation of active addresses. This number of active addresses varies between 750,000 and 1 million. But at the same time, the hash rate increases sharply.

Number of active addresses since bitcoin was created. Source: Number of Active Addresses on the Bitcoin Network (7DMA) (theblock.co)

The evolution of the velocity is therefore to be sought rather on the side of the intensity of the activity of the addresses.

The resumption of tensions on the cost of production

At the same time, the cost of production has recently been the subject of difficulties for miners. The production cost of BTC refers to the expenses incurred by miners to participate in the mining process. As a result, these costs include the purchase of specialized hardware, such as ASICs (application-specific integrated circuits), as well as the electricity costs needed to power these power-hungry machines. The cost of production varies depending on factors such as the geographical location of the miner (which affects electricity costs) and the efficiency of the equipment used. The chart below shows the ASIC price index by hash rate.

Indice de prix ASIC pour le bitcoin (BTC). Source : Bitcoin ASIC Price Index (theblock.co).

According to data provided by Cambridge University and Macromicro, the average BTC mining cost is currently close to $29,000. This (estimated) average production cost had even dropped to $15,000 at the end of December 2022. In the long term, we observe a good correlation between the production cost of bitcoin and its evolution support. But it is a priori for us a paradox.

The cost of production paradox

Indeed, how can the determining role of the cost of production be justified if the mining supply is just INFLUENCE ?

Indeed, there is an excellent correlation between the cost of production of bitcoin and its price. But the mining supply, unlike some precious metals such as gold (80% of the supply), does not seem to us sufficient to influence the price of BTC. We are dealing with a real paradox.

The explanation may be to be found on the side of velocity. That is, the new supply of BTC, also correlated to the long-term bitcoin price, shrinks with the influence of miners. Thus, the new quantities mined are increasingly reduced, which causes a phenomenon of bitcoin scarcity and upward pressure on velocity. The marginal demand for mining is also increasing. However, the latter, which is decisive, can only be satisfied at an increasing cost of production. The rising cost of production is a consequence of the limited supply of bitcoins. The market will seek to increase the supply of Bitcoin, and this, at a production cost that is always higher.

It is therefore not so much the miners who determine the market price through the cost of production. The cost of production is a kind of major support due to the fact that it is the minimum price at which the market can afford to sell. And it’s not just about selling bitcoins, it’s also about running an entire network!


Ultimately, we have seen that income from BTC miners tends to be rather channelized and stable over the long term. At the same time, the number of active addresses has stagnated since 2018. We then sought to estimate the velocity of bitcoin. The latter is close to 0.66 in 2022 for BTC. The evolution of the velocity of bitcoin, that is to say its speed of circulation, is pulled down by the rise in the price of bitcoin, and it is pulled up by the limitation of the quantity of bitcoin.

The velocity of bitcoin is often maximum during phases of bitcoin decline. This reflects the idea that the market is approaching the ” right price “, or in any case of the lowest price determined by the cost of production of the miners. Any sale below the production cost of BTC would cause difficulties on the network, and therefore ultimately a systematic return to this level. The now negligible influence of miners is therefore not the cause of the high cost of production.

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Thomas A.

Author of several books, economic and financial editor on several sites, for many years I have developed a real passion for the analysis and study of markets and the economy.

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