This Time Isn’t Different: Miners Are Biggest Risk Facing Bitcoin Market In Repeat of 2018 Cycle
The Bitcoin mining industry faces intense pressure as hash price reaches new lows and the difficulty adjustment continues rising. We compare today’s mining situation to parallels from 2018.
Relevant Past Articles:
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As Hash Rate Soars, Parallels to 2018 Arise
Over the weekend, bitcoin mining difficulty saw an upwards adjustment of 3.44% (after the previous adjustment of 13.55%), pushing mining difficulty to yet another all-time high as hash rate continues to soar. With the price of bitcoin stagnating at $20,000 give or take for the last few months, we have noticed some parallels between the market cycle of 2018 and the one in front of us today.
Meme Source: Braiins Mining
First off, we will link to some of our previous issues on the mining industry above, and reintroduce our bitcoin mining investment framework - which is a simple yet elegant tool for investors to evaluate whether bitcoin mining equities/infrastructure or bitcoin itself is (potentially) the better investment at any one point in time.
When is the optimal time to invest in publicly-traded bitcoin miners?
An extremely simply framework for investors is:
Hash price bull market = Bitcoin miners outperform bitcoin
Hash price bear market = Bitcoin miners underperform bitcoin
Hash price divides miner revenue by hash rate (daily miner revenue per 1 TH/s, as first coined by the team at Luxor).
With that in mind, the rising hash rate dynamic seen throughout 2022 while the bitcoin price has fallen has put a lot of pressure on both public and private mining operations. Throughout the year, we have seen public miners capitulate on their bitcoin holdings, as diminishing revenue and treasury values have placed increasing pressure on balance sheets.
At their peak, public miners' bitcoin holdings reached over 46,000 BTC but have since fallen 26% as bitcoin treasuries were sold out of necessity to access more capital, pay down debt and fund operations and expansion plans. Although estimated and rough numbers, the top public miners make up over 20% of all Bitcoin’s network hash rate. Moves from public miners to not only sell bitcoin holdings but also to expand and contract their hash rate have a significant impact on the market.
As hash price continues to trend to all time lows, the probability of a miner capitulation/liquidation event probabilistically increases until a drawdown in hash rate, as certain entities cease mining and liquidate their assets (in the form of both bitcoin and ASICs).
Barring the China mining ban during 2021, the largest peak-to-trough drop in hash rate (7d MA) in the history of bitcoin was approximately 35%. In our opinion, this bear market cycle won’t end until a flush of the weakest miner participants has occurred, which will be observable by a temporary yet meaningful fall in hash rate and will subsequently decrease mining difficulty, easing conditions for the surviving participants.
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While there was already a “capitulation” per se earlier this summer during the initial cryptocurrency market deleveraging in June, hash rate has since gone vertical, with new fleets of the newest Bitmain Antminer S19 XP, an industry-leading miner, just now being deployed en masse by the largest miners.
Shown below are two of our favorite indicators for the state of the bitcoin mining market, hash ribbons and difficulty ribbons. Both indicators build on similar concepts: using basic moving averages of hash rate and difficulty to visualize when the hash rate trend is turning over (i.e., miners are capitulating).
Given the current state of hash rate and difficulty, we believe that the pressure is indeed building, but the figurative burst has yet to occur.
The Mechanics Of A Race To The Bottom
As new fleets of the industry’s most efficient miners get deployed, a twofold impact on industry participants is being realized: