Is Miner Capitulation A Real Thing? Does This Affect The Price of Bitcoin?

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Mining is an important and integral mechanism used to introduce Bitcoins into the system and a process that ensures fairness while keeping the Bitcoin network stable, safe and secure. Since the inception of Bitcoin, the primary purpose of mining has been to allow Bitcoin nodes to reach a secure, tamper-resistant consensus.

In exchange for running the verification to validate Bitcoin transactions, Bitcoin miners are rewarded in Bitcoin, which currently stands at 12.5 Bitcoin for every block mined. However, this reward halves after every 210,000 blocks, meaning the coin reward will decrease from 12.5 to 6.25 Bitcoin and expected to occur on Friday 15th May 2020. Miners, of course, can profit if the price of Bitcoins exceeds the cost to mine. However, with recent changes in technology and the creation of professional mining centres with enormous computing power, many individual miners are asking themselves, is bitcoin mining still profitable?

For your reference, as Bitcoins are mined, blocks of verified transactions have to be “hashed” before being added to the blockchain. Each of these hashes is created by completing an intentionally difficult mathematical puzzle. Hash Rate is a measure of how many times the network can attempt to complete this puzzle every second.

The Cost Associated with Bitcoin Mining

It’s important to understand the relevant all-in costs associated with the process of mining Bitcoin to determine its current level of profitability. We note that this consist of:

  1. Fixed Cost — This refers to all initial costs and equipment associated with mining such as mining gear, hardware, processing units, racks, etc.
  2. Operating Cost — This refers to all ongoing costs as a result of the process of mining such as wages, rent and most importantly, electricity cost.
  3. Other Costs — This refers to all other costs beyond the scope of operating such as anticipated length of time spent mining.

Depending on how efficient miners are, the cost of mining one Bitcoin varies significantly around the world.

Elite Fixtures: The Estimated Cost to Mine 1 Bitcoin

As highlighted earlier, the rewards miners receive for validating transactions, and to make it profitable for them, the price of Bitcoin would have to exceed the cost to mine.

According to the findings from June 2019, in CoinShares: The Bitcoin Mining Network Report, the market-average, all-in marginal cost of mining, at ¢5/KWh, and 18- month depreciation schedules is ~$5,600, down from $6,800 previously. This is mainly as a result of lower assumed cooling and overhead costs with Bitcoin mining being mainly located in global regions where there are ample supplies of renewable electricity available.

This suggests that, at current prices, mining Bitcoin is profitable for efficient miners, but it can make it difficult for miners with older equipment and high-cost producers to make a positive return.

The Current State of the Market and It’s Affect on Miners

Our researchers have been closely monitoring the health and security of the Bitcoin network as well as the mining difficulty.

As of 30-Nov-2019, Bitcoin’s Hash Rate is currently sitting at 81,257,785 TH/s, up 98% YTD whilst peaking at 114,342,004 TH/s, 179% YTD on 23-Oct-2019, from 41,011,449 TH/s in Dec-2018.

YTD Hash Rate, Source: blockchain.info
YTD Mining Difficulty, Source: blockchain.info

Mining Difficulty is a measure of the effort required to solve Bitcoin block equations and regularly adjusts to suit current miner sentiment. Bitcoin’s Mining Difficulty has increased ~95% YTD to 12,973,235,968,799 at present from 6,653,303,141,405 in Dec-2018. During November, difficulty saw its biggest drop of the year, falling 7% but has since then had a ~2% uptick. Not only does this show that the network has become more resilient, secure from a 51% attack, it highlights that the absence of efficient mining operations would significantly affect mining profitability.

YTD Miners Revenue: Based on Total Value of Coinbase Block Rewards and Transaction Fees Paid to Miners, Source: blockchain.info
YTD Market Price of BTC ($), Source: blockchain.info

At Bitcoin’s current price levels, if prices of Bitcoin continue to drop and converges closer to the estimated all-in cost of mining ($5,600), it would appear individual miners with inefficient mining gear and high-cost electricity, are likely to be forced off the network. This is referred to as Miner Capitulation. An event where the smaller individual miners get backed into a corner when the market price is low and the generation of mining hardware they use becomes obsolete, forcing them to close operations, effectively leading them to panic sell to minimise further losses, causing a market crash in the process.

Larger miners, with efficient operations, are then incentivised to keep the price low to force out smaller miners in the hope of the Hash Rate to drop allowing them to mine more.

The profitability of mining Bitcoin depends not only on Bitcoin’s price and electricity costs but more importantly on the mining difficulty and how many other people are competing against each other. When Bitcoin’s price goes up, it attracts more people to participate in mining, which results in an increasing level of Hash Rate and mining difficulty, a trend we have seen over the past 6 months. However, this is not seen immediately as we believe Hash Rate is a lagging indicator of price increases and a signal of network resilience.

It could also be said that the lower cost of mining has set a new price floor, where miners will need to adapt to the changing environment to compete.

Miner Capitulation Effect on The Price of Bitcoin

Bitcoin Hash Rate has typically responded quicker to price decreases than price increases. However, It’s important to note, whilst the price of BTC has sharply declined in recent weeks, Hash Rate has shown incredible resilience. The 10 Daily Moving Average of Bitcoin’s Hash Rate dropped by just 4% when BTC decreased to the sub $7,000 price levels.

During the 2018 bear market, when price declined of a similar level, in a single month Bitcoin’s Hash Rate also dropped by over 30% in a single month.

Our view is that the knock-on effect of decreasing prices is not likely to cause a significant market crash and there is a strong possibility that miners are becoming more efficient with new equipment now, ahead of the 50% reduction in miner rewards in May 2020.

We believe miners are likely expecting the price to recover leading them to run operations roughly at the same pace they have been running and that some may choose not to sell Bitcoin at this point but would rather pledge their Bitcoin as collateral to borrow USDT or Fiat (£/$/€) to pay for utility and operational costs.

Current Hashrate Distribution, Source: blockchain.info

With mining becoming increasing popular aided by high-speed devices compatible with home computers, the chances of realistically profiting from individual mining are diminishing.

The Hash Rate Distribution shows that 31.1% are from unknown mining pools, likely individual miners, which could point to the rationale that they command only a small proportion of selling power. As mining difficulty continues to increase, individual miners may look to other mining pools and join resources, to improve chances of mining a block than they would external from a pool.

Conclusion

There are a number of assumptions made by several publications relating to when miners sell, but ultimately it is entirely dependant on how well they run their operations. As price continues to fall, Hash Rate will follow suit and reflect overall market conditions. Inefficient and high-cost producers are out until the price recovers or will simply need to source cheaper electricity, installing more efficient mining equipment and generally cut costs to be profitable.

With the introduction of new services aiming to help miners become more efficient, we will continue to monitor closely the resulting effects on the Hash Rate and mining difficulty.

The current market sentiment is turning the stomachs of many investors, with the price movements being incredibly brutal to those on the wrong side of their investment. Whilst the patience of investors is being tested constantly, after the 47% retracement from the June highs, $BTC has increased over 100% YTD and one of the best-performing asset class by a wide margin.

It is important to note that investing in digital assets, whilst can be profitable, comes with a great degree of risk and by paying attention to important factors on the respective networks, will allow you to adjust your portfolio accordingly.

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