Bitcoin Miner Capitulation May Set Price Bottom – Bitcoin Magazine
This is an opinion editorial by Zack Voell, a bitcoin mining and market researcher.
Bitcoin miners often suffer from bear market woes thanks to some of the industry’s highest capital expenditures, smallest margins, and most unreliable infrastructure. Although the current bearish phase has been one of Bitcoins shallowest miners have suffered more than ever.
Layoffs, bankruptcies, lawsuits and other negative press have hit one of Bitcoin’s most prominent sectors. But every bear market eventually finds a bottom – the pain climaxes and things slowly start to recover. A number of data suggest that mining has reached this point in the market cycle, which may offer some optimism heading into the new year.
This article is not intended to offer financial or investment advice of any kind. On the contrary, its intended purpose is data-driven analysis of the current state of the bitcoin mining sector in the context of some exogenous and endogenous influences that may shape its near future.
Understand surrender
Before diving into the data, it helps to understand what “capitulation” is. The term is often used in the financial markets to refer to an acute and often dramatic crescendo of fear or widespread surrender by investors or companies during depressed market conditions. Basically, everyone says, “It’s over. We can’t take this anymore.” For mining, capitulation basically means that the economy got so bad and the operating margins are so thin that miners chose to quit or simply can’t operate anymore and are forced out of the market.
Wall Street analysts are turning bearish
One of the telltale signs of miner capitulation (in this writer’s opinion) at the current stage of the ongoing bear market is the full pivot from financial analysts reporting on publicly traded mining companies. For the past 12 months, these analysts have been preaching about the upside potential of bitcoin mining stocks. But now they are “pulling the plug”. This language was used by Chris Brendler of DA Davidson to describe his views on the mining sector. Since July, Brendler has said the current market conditions were a good time to buy mining stocks, as reported by CoinDesk.
In December 2021, JPMorgan analyst Reginald Smith also wrote a note saying that one particular mining company – Iris Energy – has “more than 100% upside.” He also suggested that the current share price was at a “deep discount.” Shares of the company were trading around $14 at the time of the note. No, they retail under $2…an even deeper discount!
If Wall Street giving up mining isn’t capitulation, what is?
Bitcoin Hash Rate is starting to drop
For the entire bear market to date, the Bitcoin hash rate has steadily grown larger, forcing the difficulty level to increase after increase for struggling miners. But that trend may be changing. At the beginning of December, the next adjustment is due almost 11% at the time of writing. This drop will be caused by the falling hash rate, which is notably lower than recent records and is currently close to 240 exahashes per second (EH/s).
Normally, a drop in hashrate and difficulty won’t be too significant. But seven of the last nine difficulty adjustments have been positive. And in the context of the incessant hash rate growth and subsequent hash price collapse, the apparent hash rate trend reversal is remarkable. Some miners seem to be throwing in the metaphorical towel and taking their machines offline. Discussed hash rate and difficulty on Twitter in the context of whether miners capitulated, and Foundry Senior Vice President Kevin Zhang simply black“Yes.”
Bitcoin miners are re-accumulating
Generating fear, uncertainty and doubt (FUD) about on-chain movements of bitcoin from miner addresses is a popular pastime for Twitter influencers. And observing miner balances can be useful. Current data shows significantly larger balances compared to just a month ago. In short, net selling activity by miners seems to have slowed down and their stocks of bitcoin are on the rise again.
Bitcoin mining address balances have seen small decreases over the past year. But the line chart below shows data that indicates a trend reversal is beginning. One-hop miner balances have increased by over 3%, or about 85,000 BTC since the beginning of October. Maybe miners decided it’s time to HODL again.
Bitcoin miners may have decided it’s time to HODL again.
Miner outflows waxed and waned
Another part of chain data that drives mining FUD is outflows – the activity of miner addresses that move coins from those addresses to another location. In mid-November, these flow out spiked to its highest level since June, which could indicate that fear and panic in the market has affected at least a few miners. Not surprisingly, the rise in outflows occurred at the same time as the collapse of FTX and its subsequent fallout made headlines.
It should be noted that any inferences from chain data flowing out are informed guesses at best. Bitcoin network data is a useful tool for contextualizing certain market events, but it is far from infallible or unmanipulatable. But miners are notoriously bad at timing markets, and the timing of this sudden spike in coin movement could reasonably suggest someone is panicking. In the following week, however, outflows fell back to normal levels and have remained there at the time of writing.
Did miners panic near the market bottom? Very possible.
Bitcoin Mining in 2023
Assuming the above analysis is correct and capitulation has taken place, the market will not immediately recover. As the dust settles and survivors emerge, the process of building and scaling more mining infrastructure will be as slow, expensive and tedious as ever. Winners are built in the bear market, and after some of the biggest mining companies have sold their bitcoin balances down to almost zero and even sold significant amounts of mining hardware in desperate attempts to stay operational, the only thing left is survival or bankruptcy.
Of course, things can always get worse overnight. But this article suggests that the weak and panicked have been pushed out, and the time for recovery is here. Now is the time to be optimistic, not bearish.
This is a guest post by Zack Voell. Opinions expressed are entirely their own and do not necessarily reflect the opinions of BTC Inc or Bitcoin Magazine.
