Are You Ready For A Three Way Split?

A broad rally has emerged over the weekend across the Crypto markets. Be cautious of this one though.

The sudden excitement started with Bitcoin Cash, which made a leap on Friday after several major crypto exchanges announced they will support an upcoming hard fork that will take place on November 15th.

Bitcoin Cash has surged well into the weekend but does seem to be pulling back a bit this morning.

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The thing is, it's not entirely clear how this hard fork is going to play out. Several of the largest Bitcoin Cash supporters are apparently locked in a Mexican Standoff, each with their own views of how Satoshi's vision should be implemented. 

Prices are moving up now because the perception is that BCH holders might get an additional coin (or two) for their bravery in the event of a chain split. However, it's just as likely at this point that if things go sour the new coins could be worthless.

Today's Highlights

• Mixed Markets
• Australia Tonight
• Bitcoin is Below Mining Cost

Traditional Markets

Markets are mixed this morning. Stocks in Asia are mostly down but the European markets have managed to stay slightly positive so far. This comes as the US Dollar continues to venture higher this week.

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Focus in the United States is currently on the mid-term elections tomorrow. From the looks of it the odds of any change in leadership are fairly narrow at this point. The perception is that the Republicans might even increase their foothold in the Senate rather than lose it

What investors are even more concerned with for now is what the Fed will have to say during their interest rate meeting on Thursday. Will Jerome Powell move to a more dovish stance in order to support prices in the wake of Red October or will they continue with their current rate increase trajectory?

The answer will likely have a effect on the markets.

Down Under Overnight

The Reserve Bank of Australia isn't expected to make any changes to their interest rates this evening nor are the Reserve Bank of New Zealand on Wednesday night. Both central banks seem to be content offering interest rates that are slightly above the global standard until further notice.

I've noticed an increasing number of clients looking to trade the Australian and New Zealand Dollars lately. Due to the higher interest rates, some of these pairs particularly against the Swiss Franc (NZDCHF and the AUDCHF) are offering overnight refunds to buyers.

This is not investment advice but as you can see from the order window, instead of paying for these positions, you get paid for holding them.

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Bitcoin Mining Costs

One of the main metrics that tend to have an influence on market prices is production costs. This is true for all commodities and bitcoin mirrors this. It's interesting to note that at present time it does seem like the price to mine a single bitcoin is noticeably higher than 1 BTC.

However, bitcoin is slightly different in the way that production cost influences the current price. In the oil market for example, when the price to drill one barrel of oil is higher than the current market rate, oil producers are likely to reduce production until prices come back up.

In bitcoin, if miners shut down their rigs, it doesn't decrease production amount. It simply makes it cheaper for other miners to mine.

According to this estimate that was run back in June, the price to mine a single coin was around $6,900. Of course, the exact numbers are extremely difficult to pinpoint and other estimates may vary.

What we do know however is since this calculation was made, the hash rate of bitcoin has grown quite a bit....

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This means, that even though the price has come down since early June, mining activity has actually increased. 

Going by the above calculation, that would put current mining costs today closer to $8,000 or $9,000 depending on the operator. So it is now reasonable to assume that most mining outfits around the world are actually operating at a loss. 

This is a staunch display of confidence from the mining community who are more than likely willing to hodl their proceeds with the perception that prices will rise again.

But what does this mean for the price?

In the long term. We know that hashrate has a very close correlation to price. This graph from an analysis by CME group shows their close relationship.

One thing that's important to note is that in previous bear markets, hashrate actually stalled and waited for the price to catch up. However, during the current bear market, hashrate has continued to skyrocket. 

So, if the correlation holds we may be in for a wild ride when the price action does pick up again.