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Miner Capitulation Catalyzing Healthier Bitcoin Market Dynamics

North American Bitcoin mining pool and ASIC hardware procurer Blockware Solutions release a research report highlighting how Bitcoin price bottoms are closely associated with points of miner capitulation. The Bitcoin price decline observed last week has likely forced many miners to shut down with the next difficulty adjustment estimated to drop by over 20%.

Quick take;

  • Bitcoin price declined over 40% within 24 hours last week, resulting in the price dropping below cost of production and electricity cost estimates
  • Blockware Solutions publicly share research presenting data and game theory analysis which highlights that Bitcoin bottoms are closely associated with points of miner capitulation
  • Price drops, difficulty increases, and the upcoming halving put pressure on inefficient miners who are selling large amounts of their generated supply and treasury reserves to meet costs
  • When inefficient miners go bankrupt, difficulty levels adjust downward and the rewards are distributed to efficient miners with healthier balance sheets, setting more favourable market dynamics 

Cost of production models were thrown upside down last week as the Bitcoin price declined over 40% in one day. The price decline brought Bitcoin below its estimated average cost of production per bitcoin mined and even briefly beneath the electricity cost per bitcoin mined. 

Bitcoin price superimposed with estimated cost of production per Bitcoin mined and estimated electricity cost per Bitcoin mined.

Estimates from a metric designed by Capriole Investments place the current cost of production at $7,330 and the current electricity cost at $4,402. This implies that the average Bitcoin miner is currently operating in the red. 

Cost of production models anticipates production cost to act as support for Bitcoin price drops. In this case, such models failed to accurately describe market dynamics.

Bitcoin Price Dictated by Miner Capitulation?

In light of the recent panic, Blockware Mining has publicly shared a research report which was initially distributed privately to their internal team and clients. The research presents data and game theory analysis relating to the impact of the Bitcoin mining industry on market dynamics.

The analysis presents data to make the case that bottoms in Bitcoin price are more closely associated with points of “miner capitulation” as opposed to cost of production figures. The 15-page research report presents several scenarios that highlight sell pressure from miners increasing as price declines.

As the Bitcoin price declines and approaches breakeven levels, miners are forced to sell a greater percentage of their overall supply. Miners with old-generation hardware or high electricity rates are particularly fragile to such price declines.

When the research was initially published, Blockware estimated that 61.38% of the network was represented by Antminer S17-generation Bitcoin ASIC hardware while 38.62% represents Antminer S9-generation ASIC hardware. Based  on their correspondence with industry professionals, they further estimate that hash rate is dispersed across the following average electricity rates.

Estimated dispersion of Bitcoin hash rate at different electricity price points

As price declines, inefficient miners drop below their breakeven mining levels. Oftentimes, contractual obligations means such miners may continue to operate at a loss beyond dropping below their breakeven level. This applies even greater downward pressure on Bitcoin as such miners sell in excess of what they produce, simultaneously selling their generated BTC and depleting their treasury reserves.

The upcoming halving exacerbates the pressure inefficient miners will feel to meet costs. As the rewards miners will receive will roughly halve, cost of production will effectively double. The combination of rising cost of production and potential price declines will set the playing field to bankrupt inefficient miners who are putting constant sell pressure on the market.

Inefficient Miners Cleansing Spawns Healthier Market Conditions

Post-miner capitulation, Blockware proposes that the likelihood that a Bitcoin bottom has been reached is increased. In this scenario, the hash rate is represented by the most efficient miners with healthy balance sheets. 

When inefficient miners eventually shut down their mining rigs, the rewards they previously received are now distributed to these more efficient miners. The overall percentage of bitcoin being sold on the market by miners significantly declines as these miners are operating at healthier margins with large balance sheets.

Blockware Solutions proposes that the combination of inefficient miners being removed from the market and the upcoming halving improve both the supply-side and demand-side economics of Bitcoin. Blockware foresees the halving being bullish for Bitcoin price.

“What is certain is that come mid-May, 50% of the potential sell pressure on the Bitcoin market will be removed as the newly issued mining rewards are halved… This is a positive catalyst for Bitcoin price… A run-up into the halving is on everyone’s mind and develops positive sentiment on the demand side. This psychological positive sentiment will have market participants anticipating and prepared to deploy cash positions towards upward momentum.”

Price Drop Sparks Survival of the Fittest in Bitcoin Mining

The Blockware research provides a strong framework for analysing recent developments in Bitcoin price and mining. Initially, hash rate estimates and difficulty adjustment estimates did not adjust as miners face several points of friction in shutting off rigs such as the contractual obligations to use a certain amount of power.

Luxor Mining noted in their latest newsletter on the 17th of March that “many miners started operating in the red”. However, data from Blockware currently estimates that difficulty is currently set to reduce by over 20% at its next adjustment in roughly five days indicating that several miners have since been forced to shut down their operations.

Seven-day moving average of Bitcoin network hash rate

The seven-day moving average of hash rate estimates from Bitinfocharts.com show hash rate declining from a high of 123 EH/s fourteen days ago to 96 EH/s at the time of writing. With less than two months until the Bitcoin 2020 halving and a corresponding doubling of the cost of production, inefficient miners are already feeling the pressure.

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