Bitcoin has been on a roller coaster ride since the pandemic began. On May 11, block rewards for miners were reduced from 12.5 BTC to 6.25 BTC. This has put much pressure on low margin miners. The halving took place amid a historic recession and a BTC price plummet on March 12. Despite the digital currency’s recent volatility, Grayscale’s GBTC Bitcoin Trust has been buying the digital coin at a record pace.
Grayscale is a FINRA-approved investment vehicle that has bitcoin assets under management. Prior to the March 12 crash, it held more than 300,000 BTC. The trust has purchased 19,000 bitcoins since the halving. Bitcoin’s price has since rebounded to produce some of the best returns of all major assets in 2020. Here are developments in the mining sector and price.
Two competing participants
There are two competing participants in the bitcoin market. There are large players (crypto hedge funds, bitcoin whales) and retail traders on futures exchanges such as CME, BitMEX, FTX and others. The second group is composed of retail on-ramp trading at BTC spots like Square
In a recent trend, automatic bitcoin purchase features have been implemented on Square’s Cash App. Bitmain spinoff Matrixport also implemented traditional finance concepts such as dual currency investment with exposure to the bitcoin and ethereum markets. There’s also Dip Hunter, a tool that allows for automatic purchasing of bitcoin at the lowest pricing.
One of the most salient developments since March 12 has been the dominance of spot leading the BTC price action compared to derivatives. It’s a healthy development for bitcoin. For example, the waterfall of cascading liquidations on the futures exchange BitMEX on March 12 drove bitcoin’s price down to below $4,000. It washed out the majority of open interest on bitcoin futures contracts.
The massive drawdown on March 12 spooked many crypto hedge funds, and some have become more conservative. This is represented by general Skew expensiveness and a flatter forwards curve. More negative funding rates on various perpetual swap instruments also means shorting is getting more expensive. Negative funding means shorts pay longs as a method of mimicking the expiry of futures contracts without having an expiration so that the futures price doesn’t deviate too far from the index price of the underlying asset.
A more efficient mining sector
Miner capitulation is when miners with older machines turn off operations due to low prices. These actions create a negative feedback loop that lowers the currency’s price. Recently, BlockWare Solutions conducted a report on how miner capitulation develops; and why it will lead to a more efficient mining sector that is conducive to bitcoin’s long-term price growth.
The error with the “death spiral” theory is found in the notion that an industrializing mining sector was unprepared for an event four years in the making. Miners were prepared for the halving, just not the events on March 12. Many miners actually capitulated two months before the halving. The conclusion is represented by a similar downward adjustment in the difficulty and lower hash rate on both March 12 and the halving event.
Total Hash Rate ( THR) distribution analysis by CoinMetrics indicates that many of the older mining hardware (like the S9 AntMiner) were turned off following March 12, only for some to be turned back on following the downward difficulty adjustment when bitcoin’s prices skyrocketed. Following the halving, it’s likely that newer versions of mining hardware will continue to absorb more of the hash rate, alongside their industrial-strength owners. The latter have balance sheets flush with BTC and can operate with economies of scale.
Grayscale and miner capitulation
Miner capitulation is actually a positive development because more efficient miners remain in the market. That leads to a smaller proportion of miners offloading their BTC balance sheets, which reduces downward pressure on price. Bitcoin’s price has rebounded more than 250% since March 12. The mining market looks healthy and short-sellers appear to be more conservative.
“With the bitcoin halving event recently celebrated causing bitcoin block mining rewards to reduce from 12.5 BTC to 6.25 BTC, the dream of independent mining has died along with ICOs,” details Rui Shi, CMO of mining firm BitDeer. “Today’s Bitcoin miners have taken it to new heights that rival Amazon’s
In the short-term, some crypto traders are anticipating a second post-halving miner capitulation, whereby unprofitable miner’s will sell off their bitcoins. However, even if such an event were to unfold—then, it is likely to have a relatively small impact on bitcoin’s price—due to strong institutional demand. One thing remains clear, Greyscale is likely to continue buying up bitcoin’s supply at a record pace, bitcoin bears, be warned.
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