Will miners really capitulate? Will it affect the price of Bitcoin?
text
Mining is an important and indispensable mechanism for introducing Bitcoin into the system. It is a process that ensures fairness while ensuring the stability and security of the Bitcoin network. Since the birth of Bitcoin, the main purpose of Bitcoin mining is to allow Bitcoin nodes to reach a secure, tamper-proof consensus.
Here's a guide: When mining bitcoins, blocks of verified transactions must be hashed before being added to the blockchain. Each block is created by completing a deliberately set mathematical puzzle, and the hash rate is a measure of how many times the network can attempt to complete this puzzle per second.
secondary title
Costs Associated with Bitcoin Mining
It is important to understand the full costs associated with Bitcoin mining in order to determine its current level of mining profitability. This includes:
Fixed costs - refers to all initial costs and equipment related to mining, such as mining equipment, hardware, processing units, racks, etc.
Operating Costs – Refers to all ongoing costs incurred due to the mining process such as wages, rent, and most importantly electricity.
The cost of mining a bitcoin varies widely around the world, depending on the efficiency of the miners.
image description
Note: Estimated cost of mining one bitcoin
As mentioned earlier, miners are rewarded for validating transactions, and in order for them to make money, the price of Bitcoin must exceed the cost of mining.
This suggests that while bitcoin mining is profitable for efficient miners at current prices, it could make it difficult for miners with older equipment and higher production costs to earn positive returns.
secondary title
Market Status and Impact on Miners
As of November 30, 2019, Bitcoin's hash rate is currently 81,257,785 transactions/s, a 98% year-on-year increase from a peak of 114,342,004 transactions/s. As of October 23, 2019, a year-on-year increase of 179%, higher than the 41,011,449 transactions per second in December 2018.
Year-to-date hash rate change (source: blockchain.info)
image description
"Mining Difficulty" is a measure of the amount of work required to solve a Bitcoin block equation and is regularly adjusted to accommodate current miner sentiment. The mining difficulty of Bitcoin has increased by about 95% from 6,653,303,141,405 in December 2018 to the current 12,973,235,968,799. In November, the difficulty dropped by 7%, the biggest drop in a year. But it has since risen another 2%. Not only does this show that the network has become more resilient and secure against 51% attacks, but it also shows that the lack of effective mining operations will severely impact mining profitability.
Year-to-date miner revenue: based on the total value of Coinbase block rewards and transaction fees paid to miners (source balckchain.info)
image description
BTC year-to-date market price (USD) (source: blackchain.info)
At the current price level of Bitcoin, if the price of Bitcoin continues to fall and tends to the estimated cost of mining ($5,600), then miners with inefficient mining machines and high electricity costs will likely be forced to " disconnected”, this is known as miner capitulation. When the market price is low and the generation of mining machines used by individual miners becomes "obsolete" and the individual miners are in trouble, they will be forced to shut down the mining machines and sell the bitcoins to minimize losses, resulting in market price Falling further, causing the market to crash in the process.
Large, efficient miners are then incentivized to keep prices low, forcing smaller miners to quit in the hope that the hash rate will drop, allowing them to mine more bitcoins.
It can also be argued that lower mining costs have set a new price floor, and miners will need to adapt to the changing environment to compete.
secondary title
Impact of Miner Capitulation on Bitcoin Price
Bitcoin hash rate generally responds to price drops faster than price increases. However, it’s worth noting that while Bitcoin’s price has fallen sharply in recent weeks, the hash rate has shown surprising resilience. When the price of Bitcoin fell below $7,000, the 10-day moving average of Bitcoin’s hash rate fell by only 4%.
During the 2018 bear market, when the price of Bitcoin fell to similar levels, the Bitcoin hash rate also dropped by more than 30% in a month.
We believe that miners are likely to expect a recovery in the price of Bitcoin, and some miners may choose not to sell Bitcoin at this time, but would rather use Bitcoin as collateral and borrow USDT or fiat currency (£/$/€) to pay utilities and operating costs.
image description
Current hash rate distribution (source: blockchain.info)
secondary title
in conclusion
in conclusion
Several media outlets have come up with hypotheses that mostly have to do with the knock-on effect of when miners sell, but ultimately it all depends on how well they operate. As the price of Bitcoin continues to fall and remain bearish, the hash rate will follow to reflect the overall market conditions. Low-efficiency and high-cost mining farms will be forced to exit before the price recovers, or they only need to buy cheaper electricity, install more efficient mining equipment, and cut costs to achieve profitability.
The current market sentiment is captivating many investors, and price volatility can be brutal for those who invest in the wrong direction. While investor patience is constantly being tested, we have seen that even after a 47% rally from its highs, BTC has still generated gains of over 100% and remains one of the best performing asset classes.
