A Miner Key

A Miner Key

Prices are going down, down, down. Are we witnessing the effects of miner capitulation?

The crypto markets have a way of making us feel foolish. A month ago we were soaring when China issued its blockchain mission directive and the price of bitcoin jumped almost 50% in a day. How could we not be hopeful? The bears had been liquidated. Clear skies beckoned. And then the price started dropping. And dropping. And dropping. Last week the price plunged below pre-China levels, at which point it figured, “well, why stop now?” and proceeded on to sub-US$7000, a figure we haven’t seen since May. The chart from the last four weeks looks less like a chart and more like a structure you might go BASE jumping off.

And so we say to the crypto gods: WHY IS THIS HAPPENING?

Mine all mine

If you’ve spent any time on Crypto Twitter over the last couple of weeks you might have come across the idea of miner capitulation. The short, short version of the story is this: as the bitcoin price descends towards mining breakeven point it starts pressuring smaller miners to firesale their bitcoin in order to try and stay afloat. As their supply enters the market it pushes the price down, triggering shorts, thus pushing the price even lower.

On the face of it, this seems like a paradoxical outcome. Wouldn’t the best situation for all miners be a higher bitcoin price? But with the bitcoin “halvening” coming next May, miners are facing up to their bitcoin supply literally halving overnight. This creates a perverse incentive for bigger players to push down the price to try and liquidate their competitors. As market analyst Cole Garner puts it: “One man’s capitulation is another man’s market share.”

A done deal?

While things are gloomy right now, there are a couple of things to remember. First, the price of bitcoin is still twice where it was at the start of the year. Unless you’re a day trader, these seemingly dramatic movements are no more than a blip on bitcoin’s overall arc.

Second, we’ve witnessed some form of miner capitulation almost every year since bitcoin’s inception – the November 2018 collapse from US$6000 to US$3000 is a classic example. Some last for a day, some for weeks. But they have, so far at least, all been followed by periods of strong and sustained uptrend.

At a basic level, it’s simply hard for the price to go too far below the cost of production. When that happens, miners will start holding onto their bitcoin so that they’re not selling at a loss. There’s plenty of conjecture as to what that price might be, but when the mining hash rate and difficulty level starts pushing up again it’s a fair suggestion that the miners are getting back into the business of mining – and that’s a good thing for all of us.

Ask CoinJar

Yeah, look, you’re going to have to explain this whole mining hash rate stuff a little more. Why does it matter so much?

Yeah, uh, sure. I can do that.

*frantically Googles ‘mining hash rate eli5’*

Alright. So, here’s how it works. Bitcoin blocks are “mined” by a network of computers that are all competing to solve a cryptographic problem. Solve the problem, get a bunch of bitcoin. But the problem can only be solved through brute force guesswork, meaning that the more guesses you make the greater your chance of solving the problem. The more processors you have the more guesses you can make, thus the giant bitcoin farms loaded with thousands upon thousands of high end CPUs frantically trying to crack the next block.

The number of guesses being made at any given time is known as the hash rate. For the last few months, this figure has oscillated between 80 and 100 quintillion hashes per second. (By way of comparison, the world’s fastest supercomputer is capable of 200 quadrillion calculations a second.)

As the price increased in the first half of the year, so did the hash rate. Now the price is declining while the hash rate stays roughly stable, meaning that mining is becoming less profitable – all those power hungry processors cost a lot to keep ticking over – with the result that miners need to sell all their freshly mined bitcoin just to keep their heads above water. If the hash rate starts dropping, it suggests that miners are ceasing operation entirely. We’re not at that level yet, but suffice it to say everyone is watching the hash rate with unhealthy interest right now.

Like what you see? Subscribe here and never miss out!

We are not affiliated, associated, endorsed by, or in any way officially connected with any business or person mentioned in articles published by CoinJar. All writers’ opinions are their own and do not constitute financial or legal advice in any way whatsoever. Nothing published by CoinJar constitutes an investment or legal recommendation, nor should any data or content published by CoinJar be relied upon for any investment activities. CoinJar strongly recommends that you perform your own independent research and/or seek professional advice before making any financial decisions.

Don’t invest unless you’re prepared to lose all the money you invest. This is a high‑risk investment and you should not expect to be protected if something goes wrong. Take 2 minutes to learn more: www.coinjar.com/uk/risk-summary.

Cryptoassets traded on CoinJar UK Limited are largely unregulated in the UK, and you are unable to access the Financial Service Compensation Scheme or the Financial Ombudsman Service. We use third party banking, safekeeping and payment providers, and the failure of any of these providers could also lead to a loss of your assets. We recommend you obtain financial advice before making a decision to use your credit card to purchase cryptoassets or to invest in cryptoassets. Capital Gains Tax may be payable on profits.​​

CoinJar’s digital currency exchange services are operated in Australia by CoinJar Australia Pty Ltd ACN 648 570 807, a registered digital currency exchange provider with AUSTRAC; and in the United Kingdom by CoinJar UK Limited (company number 8905988), registered by the Financial Conduct Authority as a Cryptoasset Exchange Provider and Custodian Wallet Provider in the United Kingdom under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, as amended (Firm Reference No. 928767).