Bitcoin short warning: Grayscale Capital and institutions are hungry for Bitcoin

Bitcoin has been on a roller coaster ride since the start of the coronavirus pandemic. After May 12, Bitcoin's block reward for miners was reduced from 12.5 BTC to 6.25 BTC. This puts a lot of pressure on miners with low profits and high costs. The halving occurred during the historic economic recession and the Bitcoin price crash on March 12. Despite Bitcoin's recent volatility, Grayscale Capital's Bitcoin Trust is still buying Bitcoin at a record rate.

Grayscale Capital is an investment vehicle approved by the U.S. Financial Industry Regulatory Authority (FINRA) that manages Bitcoin assets for high-net-worth clients. It held more than 300,000 BTC before the March 12 crash. The trust has purchased 19,000 Bitcoins since the halving. Since then, Bitcoin's price has rebounded, generating some of the best returns of all major assets in 2020. Here are the latest developments in the Bitcoin investment market and mining industry.

Important market competitors

There are two main players in the Bitcoin market. There are large players (crypto hedge funds, Bitcoin whales) on futures exchanges (such as CME, BitMEX, FTX, etc.) and trading service providers that are mainly retail customers. The second type of participants consists of Bitcoin retail portals such as Square, represented by Coinbase and Grayscale Capital.

In recent trends, Square’s Cash App has implemented the function of automatically buying Bitcoin. Bitmain spin-off Matrixport has also implemented traditional financial concepts such as dual-currency investment and financial management with open exposure to the Bitcoin and Ethereum markets. Innovative tools also include Dip Hunter, which allows you to automatically buy Bitcoin at the lowest price.

One of the most notable developments since the March 12 crash is the dominance of spot trading over Bitcoin prices over futures derivatives. This is a healthy development for Bitcoin. For example, the waterfall of liquidations on futures exchange BitMEX on March 12 drove Bitcoin’s price below $4,000. It washed out most of the open leveraged contracts for Bitcoin futures contracts.

The sharp drop on March 12 scared many crypto hedge funds and investors, and some have become more conservative. More negative funding rates on different perpetual contracts also mean that shorting is becoming more expensive.

A more efficient mining industry

Miner capitulation is an event where miners using low-end machines with high electricity costs shut down their machines due to a drop in the price of Bitcoin. These actions can create a negative feedback loop in the short term, lowering the price of Bitcoin. Recently, BlockWare Solutions published a report on how miner capitulation could develop. And why it will lead to a shift to a more efficient mining industry, which is beneficial to the long-term price increase of Bitcoin prices.

Blockware Miner Surrender Roadmap

The error in the death spiral theory is that it assumes that mining companies were not prepared to upgrade over the four-year development process. Miners had been preparing for the halving, they just weren’t prepared for the March 12 crash. Many miners actually capitulated two months before the halving.

CoinMetrics’ Total Hash Rate (THR) distribution analysis shows that a lot of older mining hardware, such as the Antminer S9, shut down after March 12, but turned back on after the difficulty adjusted downward as the Bitcoin price soared . After the halving, newer versions of mining hardware are likely to continue to absorb more hashrate with industrial-strength owners able to achieve economies of scale.

Grayscale and miner capitulation

Miner capitulation is actually a positive development as there are still more efficient miners in the market. This leads to a smaller percentage of miners selling Bitcoin to balance their balance sheets, thus reducing downward pressure on prices. Since March 12, the price of Bitcoin has rebounded by more than 250% . The mining market looks healthy and short sellers seem to be more conservative.

“With the recently celebrated Bitcoin halving event that reduced the Bitcoin block mining reward from 12.5 BTC to 6.25 BTC, the dreams of small miners vanished along with ICOs, and today’s Bitcoin miners have taken it to new heights comparable to Amazon AWS . Using surplus energy generated from renewable sources, massive data centers can scale economies around the world, gaining greater efficiency, providing a decentralized economy that will disrupt the entire financial industry.”

In the short term, some cryptocurrency traders expect miners to face a second capitulation after the halving, where unprofitable miners will continue to sell their Bitcoin. However, even if such an event occurs, it may have a relatively small impact on the price of Bitcoin due to strong institutional demand. One thing remains clear, Bitcoin bears are being warned that Grayscale and other institutions may continue to buy the remaining supply of Bitcoin at a record rate.