The Hash War: Why Mining Is the New Frontier of Bitcoin Liquidity

The 2021 BTC bull run shows no signs of slowing down. BTC’s recent record high of $65,000 may be just the first of many highs to come in this cycle. Most analysts agree that Bitcoin’s price cycles tend to revolve around its halving event, which means that the block reward for participating in the Bitcoin network’s proof-of-work consensus will be halved. At the time of the 2016 halving, BTC’s price was around $650, and it reached nearly $20,000 in the subsequent bull run in 2017, an increase of more than 3,000%.

While this calculation is a bit rough, if we extrapolate these gains to the 2020 halving, then it is clear that the bull run still has a long way to go. The most recent halving occurred on May 11, 2020, when the price of BTC was $8,700, so if a similar expected percentage gain can occur, the price of BTC will exceed $250,000.

Some analysts are even more optimistic. Former institutional quantitative trader PlanB, who created Bitcoin’s “stock-to-flow” model, predicts that BTC could reach $500,000 during this bull cycle.

Multiple bullish forces are advancing

The halving is a fundamental driver of BTC prices because the Bitcoin protocol stipulates that only 21 million Bitcoins will ever be created. This fixed, predictable supply virtually eliminates inflationary forces that can dilute value.

But it is worth mentioning that the investor group driving this bull run is completely different from the investor group in 2017. Today, institutional interest is fully aroused. Companies such as MicroStrategy and Tesla have added BTC to their balance sheets, and even traditional financial institutions such as Deutsche Bank and Bank of New York Mellon have begun to provide cryptocurrency services to their customers. The sudden participation of institutions has brought about a snowball effect. Driven by FOMO sentiment, the market has created an unprecedented demand for BTC liquidity. Such a sharp rise in prices can easily lead to the bull run predicted by PlanB.

However, the shift is also happening quietly. Glassnode data shows that as BTC prices rise, miners have recently begun to "hoard" rather than sell for profit, which will cause a greater supply squeeze. As Glassnode CEO Rafael Schultze-Kraft said on Twitter: "Miners now have little incentive to cash out, and they have other means (such as borrowing) to pay for cost expenditures and operating costs."

Apparently, they expect continued institutional participation to push prices higher, believing that it is worth waiting before cashing in their rewards. As a result, some fundamental and unprecedented changes have occurred in the BTC mining space.

Institution: A new generation of miners

In recent years, China has taken the lead in mining, accounting for about 65% of the global total in BTC mining, while the United States accounts for just over 7%. China's electricity costs are relatively low globally, and mining activities in China are profitable even when BTC prices are low.

However, now that a lot of money is flowing into Bitcoin and a supply crunch is imminent, mining has suddenly become more attractive to Western institutions.

In March, Canadian company Neptune Digital Assets confirmed that it was planning to develop its own BTC mining facility in Alberta using sustainable energy. Apifiny, a US-based digital asset trading network, plans to go public this year and recently announced the purchase of 4,243 ASIC Bitcoin mining machines for Bitcoin mining. Coinshares Chief Strategy Officer Meltem Demirors, who recently invested in Compass Mining, calculated that more than $200 million has been spent on building mining capacity in the United States alone.

The increase in U.S. mining capacity will benefit U.S. digital asset companies and the entire cryptocurrency market. Mining will add new liquidity channels for U.S. traders and provide direct access to market-making services, ensuring better liquidity for the entire cryptocurrency market to meet growing institutional demand. Therefore, mining can also bring competitive advantages to liquidity providers.

Strengthening power: strengthening "decentralization"

Reducing reliance on Chinese BTC mining is a good thing. Bitcoin’s decentralization has long been questioned because mining is mainly concentrated in a few large mining pools in China. Spreading mining to other countries and more interested people will help improve the security of the entire network.

As demand continues to rise, a new solution is needed that can meet market demand. In addition, if the previous generation of miners intend to hold on as prices rise, this will create new incentives for institutions to enter the mining field and ensure that liquidity continues to flow.