Written before the third halving: Ten thousand words to interpret the Bitcoin price mechanism driven by miners

This article is from blockwaresolutions, original author: Matt D'Souza

Odaily Planet Daily Translator | Moni

Editor's note: Matt D'Souza is the CEO of Blockware Solutions. He began investing in the cryptocurrency industry in 2015 and 2016 and launched the digital currency hedge fund Blockchain Opportunity Fund. He previously focused on Ethereum and Web 3.0, and currently focuses on Bitcoin mining.

Many analysts believe that the basis of Bitcoin price comes from the balance of income and expenditure of miners' production, but this statement is not accurate, because sometimes as Bitcoin is sold, the price will accelerate to approach the production cost of miners, so Bitcoin has always been under continuous selling pressure, and this selling pressure mainly comes from miners. In fact, Bitcoin price support is mainly based on miner capitulation and a net reduction in network computing power (favorable difficulty adjustment), so it is crucial to understand the price game related to Bitcoin miners.

The cost of producing Bitcoin for miners mainly comes from electricity bills, because 95% of miners' operating costs are electricity consumption. Miners need Bitcoin to be at a certain price (or above) so that the income they earn will be greater than the electricity bill they pay. In this case, Bitcoin miners who pay the lowest electricity bills can make more money, and this is the comparative advantage.

In this article we will mainly analyze the following issues:

1. Bitcoin Network

• Who are the market participants and how do they affect the price of Bitcoin?

• Peeling back the layers of the Bitcoin mining network.

2. How will the next generation of Bitcoin mining machines balance the competitive environment? How can miners always get the most cost-effective electricity bills in the mining game?

3. Breaking the myth – “Miners’ price bottom line is the price basis of Bitcoin”.

4. The impact of the 2020 Bitcoin block reward halving on the crypto industry - a three-hit combo.

5. Mining difficulty: Satoshi Nakamoto’s original network stabilization mechanism - understand its competitiveness.

6. How miners’ capitulation accelerates Bitcoin’s bottoming out.

Three main types of Bitcoin market participants

1. Investment funds - including hedge funds, venture capital funds, family investment institutions and other institutional investors. For investment funds, they almost exclusively adopt a "long-only" investment strategy and rarely adopt a short-selling strategy. Institutional investors tend to have a long-term bullish "bias". However, they have the ability to exit their positions at any time, and can fully assess the market and leave before they find that the situation is not right.

2. HODLers - These participants are long-term accumulators who seek to maximize their Bitcoin holdings. Retail investors tend to have a long-term bullish "bias" and are less sensitive to price fluctuations than investment funds. However, like investment funds, HODLers can exit all positions at any time and exit directly.

3. Miners - This group of participants is the backbone of the Bitcoin network. Compared to investment funds and Hodlers, miners have a stronger belief in Bitcoin and they have a longer-term view of the industry. For miners, they invest in assets with long life cycles that cannot be redistributed or quickly liquidated at a fair market price. For example, ASIC mining equipment has a life cycle of more than 3 years, but can only be used to mine cryptocurrencies based on the SHA-256 protocol (basically, only Bitcoin). Generally speaking, Bitcoin mining equipment has a life cycle of more than 5 years, and the inventory of mining machines needs to be reorganized, and sometimes the cooling equipment of mining machines is also designed. On average, it takes miners 18 months to break even after investing funds in Bitcoin mining equipment, facility expansion, and electricity expenses. Miners are the main driving force of selling pressure on the Bitcoin network. As long as the newly issued Bitcoins must come from miners, they must sell Bitcoins to fund the cost and operating expenses of the mining business.

Selling pressure from miners

As shown in the figure above, at this stage:

• With approximately 1,800 new Bitcoins mined every day, if Bitcoin is trading at $10,000, the newly released Bitcoin supply would provide miners with $18,000,000 per day.

• Approximately 54,000 new Bitcoins are mined each month, and if Bitcoin is trading at $10,000, that equates to $540,000,000 in newly released Bitcoin supply each month for miners.

• Roughly 657,000 new Bitcoins are mined each year, which, if Bitcoin trades at $10,000, equates to $6,570,000,000 in newly released Bitcoin supply per month for miners.

However, Bitcoin miners must sell a large portion of Bitcoin to pay for electricity bills. For those miners with higher electricity bills, they must sell more Bitcoin to pay for electricity costs, so a large portion of capital outflows on the Bitcoin network are driven by miners.

How the next generation of Bitcoin mining machines will level the playing field

As shown in the figure above, in order to better illustrate the different types of miners on the Bitcoin network, we will divide Bitcoin miners into 8 different tiers according to the electricity price, as follows:

Tier 1: Electricity costs less than $0.025/kWh, accounting for 5% of the number of miners in the Bitcoin mining network;

Tier 2: The electricity cost is $0.03/kWh, accounting for 7.5% of the number of miners in the Bitcoin mining network;

Tier 3: The electricity cost is $0.04/kWh, accounting for 15% of the number of miners in the Bitcoin mining network;

Tier 4: The electricity cost is $0.05/kWh, accounting for 15% of the number of miners in the Bitcoin mining network;

Tier 5: Electricity costs $0.055/kWh, accounting for 20% of the number of miners in the Bitcoin mining network;

Tier 6: Electricity costs $0.06/kWh, accounting for 15% of the number of miners in the Bitcoin mining network;

Layer 7: The electricity cost is $0.065/kWh, accounting for 12.5% ​​of the number of miners in the Bitcoin mining network;

Tier 8: Electricity costs are higher than $0.065/kWh, accounting for 10% of the number of miners in the Bitcoin mining network.

Over the past eight months, the industry has seen a lot of changes as the next generation of Bitcoin miners have been released. Compared to the Bitmain S9 13.5T, the Bitmain S17 Pro 50T consumes 50% more energy, but has 300% more mining power. The computing power of deploying one S17 Pro 50T miner is equivalent to deploying four S9 13.5T miners. In the past, first- and second-tier miners accounted for a higher proportion of the network computing power, and the electricity bills they needed to pay were actually not high, so these miners did not have much desire to upgrade to the new generation of miners. The old generation S9 13.5 T miner used a 16nm chip, while the new S17 Pro 50 T uses a 7nm chip. The chip innovation upgrade has greatly reduced power consumption, and the number of watts consumed per TH of mining power has been reduced. The next generation of miners has reduced mining electricity costs, which will have a huge financial impact on miners. On the other hand, with the same electricity bill, the disadvantages of inefficient old miners will become apparent. For miners in Tier 1 and Tier 2, upgrading old mining machines in exchange for opportunity costs does not seem to be cost-effective, because for miners in these two levels, they only need to remain competitive with old mining machines, because mining and "survival" are obviously more important than competing with peers. However, if miners in Tiers 3-8 upgrade to the next generation of mining equipment, miners in Tiers 1 and 2 will be forced to upgrade at this time - the upcoming Bitcoin "halving" will trigger this.

As shown in the figure below, a miner at layer 8 (with electricity costs of $0.075/kWh) can afford a lower shutdown price if running an S17 miner than a miner at layer 2 using an S9 miner (with electricity costs of only $0.03/kWh). Therefore, a miner at layer 8 using an S17 miner can "live longer" than a miner at layer 2 using an S9 miner.

On the other hand, as electricity costs increase, miners will sell their reserve bitcoins to obtain funds for the purchase of next-generation mining equipment in order to obtain more favorable opportunity costs. In May 2019, some visionary miners had already foreseen the risk of S9 shutdown caused by the halving of block rewards in 2020. Therefore, in the past eight months, miners in layers 3-8 have actively led the upgrade of next-generation mining equipment hardware, while miners in layers 1-2 continue to use old S9 mining machines. In the next-generation mining equipment upgrade cycle, the computing power of the Bitcoin network can be increased by 80%, and the proportion of computing power owned by miners in layers 3-8 will be further improved (because with the deployment of new mining machines, the computing power share of miners in layers 1-2 will be diluted).

What’s “interesting” is that the current situation of the Bitcoin network does not seem to be as bad as environmentalists predicted (as shown in the figure above). Those environmentalists once claimed that when the Bitcoin network computing power exceeds a certain value, energy will be over-consumed. However, as mining equipment becomes more and more efficient, the energy consumed by the Bitcoin network computing power has dropped significantly.

Understanding Bitcoin Miner Behavior

The following analysis will show how the profits from operating mining under different electricity prices drive miners to sell. Under the influence of mining difficulty, some unprofitable miners may choose to shut down their machines reluctantly.

We provide a game theory-based simulation analysis that illustrates the behavior and decision-making of miners in various scenarios. It should be noted that our analysis is only intended to illustrate the impact of specific price levels on the Bitcoin mining network before and after the Bitcoin block reward halving, and is not an investment recommendation.

For this simulation, we assume that all Bitcoin miners in each tier use a single, average kWh electricity rate. This is a simple analysis that estimates the number of “shutdowns” that occur when the Bitcoin breakeven price threshold is reached for each tier. Once miners shut down, a cascade effect is created, further amplifying the subsequent network difficulty adjustments and the profitability of surviving miners. Based on these assumptions, the model creates a “step diagram” that conceptually explains the situation and more smoothly and linearly reflects actual applications.

For the sake of consistency, this article intends to make a few statements before the formal analysis:

1. Bitmain S17 tokens are next-generation mining machines, and Bitmain S9 tokens are old-generation mining machines. At present, the network computing power of the next-generation mining machines and the network computing power of the old-generation mining machines account for 61.38% and 38.63% of the total Bitcoin network computing power respectively.

2. For miners in each layer, the electricity cost is assumed to be uniform, and all miners in each layer are given an average electricity rate. Therefore, in this analysis, the break-even cost of miners in each layer is equal, and it is assumed that all mining machines will be shut down when the Bitcoin price reaches the "shutdown price".

3. During the analysis, no new miners joined the network.

4. The percentage of S17 and S9 mining machines in each tier will vary according to the distribution in the following table:

Among miners at all levels, we found that the network proportions of S17 and S9 miners are as follows:

Layer 1: S17 mining machine network accounts for 4.50%, S9 mining machine network accounts for 0.50%;

Layer 2: S17 mining machine network accounts for 5.63%, S9 mining machine network accounts for 1.88%;

Layer 3: S17 mining machine network accounts for 9.75%, S9 mining machine network accounts for 5.25%;

Layer 4: S17 mining machine network accounts for 7.50%, S9 mining machine network accounts for 7.50%;

Layer 5: S17 mining machine network accounts for 6.00%, S9 mining machine network accounts for 14.00%;

Layer 6: S17 mining machine network accounts for 3.00%, S9 mining machine network accounts for 12.00%;

Layer 7: S17 mining machine network accounts for 1.25%, S9 mining machine network accounts for 11.25%;

Layer 8: S17 mining machine network accounts for 1.00%, S9 mining machine network accounts for 9.00%;

Overall, the usage ratio of S17 mining machines (computing power of 50 TH, energy consumption of 2100 Watts) is 38.63%, and the usage ratio of S9 mining machines (computing power of 13.5 TH, energy consumption of 1400 Watts) is 61.38%.

Why are we confident in the results of this analysis? There are four main reasons:

1. Blockware Solutions, LLC (the company where the author works) is one of the largest Bitcoin mining machine distributors in North America, and has customers and partners in the following regions: the United States, Canada, Mexico, Venezuela, Paraguay, South Africa, Iceland, Sweden, Norway, British Columbia, Germany, Eastern Europe, Kazakhstan, Russia, the United Arab Emirates, Iran, Mongolia, China, Japan and Australia. The company can reach a wide range of user groups, including: customer base, strategic partners, business partners, and their computing power accounts for more than 20% of the total Bitcoin network computing power.

2. We held meetings and conducted peer reviews with top mining pools and the world’s largest ASIC miner manufacturers to gain in-depth insights into the percentage of hashrate, electricity prices, and mining equipment model distribution in each region.

3. We visited a Bitcoin mining farm with over 30 MW in Chengdu, China, as well as Bitcoin mining operations in water-rich areas of upstate New York and the Pacific Northwest.

4. Our customers and partners in Sichuan Province, China, Venezuela, Kazakhstan, West Texas, northern New York, and the Pacific Northwest all have sub 3c electricity, but most of them use old mining machines to mine Bitcoin. Due to the low local electricity prices, they have no motivation to upgrade to the next generation of mining machines. Upgrading to more efficient mining machines may not bring expected benefits in a short period of time, and it seems that there is no percentage to prove that upgrading to the next generation of mining machines is reasonably cost-effective.

Bitcoin hits $10,000: Miners at every level are making “healthy” profits

When Bitcoin is trading at $10,000, every miner layer can enjoy considerable profits, especially S17 miners. However, for miners in the eighth layer, $10,000 may be close to the shutdown price of S9 miners. Because even if the Bitcoin price reaches $10,000, miners in the eighth layer need to sell 96.3% of the mined Bitcoin to pay for electricity.

Based on the above, in general, Bitcoin miners must sell at least 39.12% of all mined Bitcoins (equivalent to $211,225,815) per month to pay for electricity. This means that the monthly inflow of funds from investment funds and Hodlers into the Bitcoin market must reach $211,225,815, so that fiat currency can be injected into the Bitcoin market to match the operating costs of miners. The selling pressure from miners is consistent, while the investment funds and HODLers' investment of new funds into the cryptocurrency market is driven by emotions and will change according to the different stages of the market cycle.

Bitcoin hits $7,500: busting the myth of “miners’ acceptable price floor”

As the price of Bitcoin falls, miners’ profits will also be squeezed, which will force them to sell a larger proportion of Bitcoin for fiat currency to pay for electricity costs (miners’ income is decreasing, but operating costs remain the same).

What will happen to miners in layers 6, 7, and 8 if they use S9 mining machines? As the price of Bitcoin approaches and breaks through the break-even price for miners, miners will be at a loss and they must sell all the mined Bitcoins, and even need to sell reserve Bitcoins to pay for electricity, which means that in addition to the newly mined Bitcoins being sold, there will be additional selling pressure in the market - the opposite of price support.

Understand actual operating results versus “paper” operating results

Many people believe that when the price of Bitcoin hits the break-even point for miners, they can simply shut down their machines and ensure that they will never lose money - this is a serious misconception. Contractual obligations and poor money management often cause miners to operate at a loss, and these other factors will also force miners to sell more Bitcoin instead of just selling the Bitcoin they have mined, and these additional Bitcoin sales will also bring additional selling pressure to the market:

1. It is possible for miners to negotiate contracts with utility companies to reduce electricity costs, but these preferential electricity costs depend on the minimum electricity consumption threshold agreed upon by both parties, which means that miners must meet a certain electricity consumption to get cheaper electricity costs. In this case, some miners will find themselves in a loss-making state for a period of time, but they have to continue mining Bitcoin to meet the minimum electricity consumption requirements, otherwise they will not be able to obtain long-term price discounts due to breach of contract. Therefore, miners cannot simply shut down for a week or a month when it is unprofitable and wait for Bitcoin to rebound. They must continue to operate their equipment according to the contracts signed by the utility companies on a monthly basis.

2. Many miners will ship their mining equipment to a hosting facility and sign a contract with a mining hosting service provider. These hosting contracts will be based on a fixed monthly fee for each mining equipment (determined by the electricity cost), and the general lock-in period will be 1 to 2 years. If the miner does not pay these monthly payments, the mining hosting service provider will confiscate the mining equipment in accordance with the contract. In this case, many miners would rather choose to continue mining during a few months of loss period rather than risk the huge risk of losing expensive mining equipment and choose to default.

3. Miners become speculators. Miners are also human beings, so they are also affected by human psychology. Many miners try to regulate the time and amount of selling Bitcoin and implement some constraints. They may want to sell all Bitcoin every week or month after mining Bitcoin, or only sell enough Bitcoin to pay for electricity. But unfortunately, some Bitcoin miners may be more inclined to become speculators. We shared the results of the analysis with one of the largest over-the-counter service providers in the cryptocurrency industry. In September 2019, some miner customers of over-the-counter service providers deviated from their scheduled selling and liquidation plans, and chose to continue holding their mined Bitcoin during July and August-because they believed that the Bitcoin market might continue to improve. However, the price of Bitcoin in late June 2019 was actually the peak of the year. After that, these miners had to sell Bitcoin at a much lower price in September and late October. This situation accelerated the Bitcoin sell-off because the liquidated Bitcoin was not limited to newly mined Bitcoin, but also inventory, resulting in additional selling pressure.

Summary: When the Bitcoin price is $10,000, miners only need to sell 39.12% of the total amount of newly mined Bitcoins per month to meet their electricity expenses. Once the Bitcoin price drops to $7,500, all miners' profit margins will decrease, especially miners using S9 mining machines in layers 6, 7, and 8 will have to operate at a loss. As a result, miners must sell 53.18% of the total amount of newly mined Bitcoins per month to meet their electricity expenses.

Miner surrender roadmap

The miner capitulation cycle may go through the following six stages:

1. The price of Bitcoin hits the shutdown price of mining machines, and miners' profits are squeezed because they have to sell most of the Bitcoin they have mined, which will bring more selling pressure to the entire network.

2. The price of Bitcoin falls below the shutdown price of mining machines, and miners are forced to operate at a loss.

3. Miners must sell all the Bitcoin they mine, while also selling off their own inventory, in order to pay for electricity, which means that in addition to the newly mined Bitcoin, additional selling pressure is created.

4. This additional selling pressure will accelerate the sell-off of Bitcoin and will continue until miners surrender. Inefficient miners will sell all their Bitcoin and go bankrupt (which may take months).

5. Once they go bankrupt/surrender, those miners with inefficient operations will have to shut down their machines, and the computing power of the Bitcoin network will decrease, which will trigger the adjustment of the difficulty of Bitcoin mining.

6. The Bitcoin network will redeploy a favorable difficulty adjustment, and the Bitcoin mined by those inefficient miners will be distributed to the surviving miners. For the surviving miners, they have obtained healthier profits, the selling pressure has also been reduced, and a healthier Bitcoin market price environment has been created.

Bitcoin price at $7,500 – before the halving

Many inefficient old miners are still mining Bitcoin (such as miners running S9 miners on layers 3-8), and these miners exert the greatest selling pressure on Bitcoin because they have to sell most of the mined Bitcoin to cover electricity costs. In addition, the break-even price of S9 miners running on layers 3-8 is also the highest, and these miners also represent the pressure point in the current mining network, which is likely to put downward pressure on Bitcoin prices.

Bitcoin price at $5,000 – before the halving

In the event that Bitcoin continues to fall to $5,000, miners operating S9s on layers 6, 7, and 8 will have to shut down. This scenario could lead to a favorable Bitcoin mining difficulty adjustment, which would improve the breakeven price for all surviving miners. However, despite the benefits of Bitcoin mining difficulty adjustments to surviving miners, miners using S9s on layers 4 and 5 will still lose money when Bitcoin prices fall to $5,000. Miners using S9s on layers 4 and 5 represent a new pressure point in the Bitcoin mining network, which creates greater vulnerability for Bitcoin prices. These miners using S9s will follow the previously discussed Miner Capitulation Roadmap: they will have to sell their Bitcoin inventory to pay for electricity until they go bankrupt and are forced to shut down their operations - which will lead to further Bitcoin selling pressure, which will only be relieved if these miners shut down.

Bitcoin at $5,000 – after inefficient miners shut down

After the losses continue long enough, miners running S9s on layers 4 and 5 will have to shut down - this time the difficulty of Bitcoin mining will adjust in a way that will be favorable to those miners who survive. At a Bitcoin price of $5,000, the S9s that were shut down in layers 4 and 5 accounted for 14.5% of the total hashrate of the network. This means that after those inefficient miners shut down, 14.5% of the total Bitcoin that was previously mined by S9s on layers 4 and 5 will be redistributed to the surviving miners - this redistribution will increase the break-even price and profit margins of the surviving miners and reduce Bitcoin selling pressure. At this point, the newly mined Bitcoin will be obtained and accumulated by more efficient miners, and the minimum percentage of selling pressure from these miners will also be reduced from 69.60% to 51.49%.

Bitcoin price at $5,000 – after the halving

In this scenario, we assume a post-halving Bitcoin price of $5,000, at which point the Bitcoin network will undergo a healthy cleanup, allowing Bitcoin’s optimal position to reach new highs again (even a Bitcoin price of $8,000 would provide substantial cleanup).

In May 2020, the Bitcoin block reward will be halved, which means that the Bitcoin reward issued to miners will be reduced by 50%, and the miners' income in Bitcoin will also be reduced by 50%. In order to stabilize mining profits, the Bitcoin price must rise so that miners can get the same mining income (in USD) as before - the rise in Bitcoin price is very important for miners, otherwise miners may not be able to provide enough funds to pay for electricity bills. Since all S9 miners running above 2.5c layer (layer 2 to layer 8) will run at a loss, and all S17 miners running above 6.5c (on layers 7 and 8) will also be at a loss, miners will face huge losses until they shut down.

Bitcoin price at $5,000 – after halving – after inefficient miners shut down

Want to learn more about why mining difficulty based on miners’ profit margins can play such a huge role? You may have to admire the Bitcoin network stability mechanism designed by Satoshi Nakamoto:

If Bitcoin remains at a low price for 2-4 months after the block reward halving, many loss-making miners will be forced to shut down their operations. After all the loss-making miners shut down, the surviving miners will make a significant profit and the selling pressure will be reduced. During this period, we may witness short-term network chaos, but once the inefficient miners shut down operations, the Bitcoin mining difficulty adjustment will be adjusted and the network will gradually return to stability.

Bitcoin Mining Difficulty: The Bitcoin protocol has a self-correcting mechanism that stabilizes the profitability of the mining network to ensure that miners are incentivized to continue to secure the network. Miners are the backbone and security layer of the Bitcoin blockchain. The mining difficulty mechanism ensures that efficient miners are incentivized and perform their duties - one of the most underestimated and little-known phenomena when it comes to Bitcoin mining. If the Bitcoin mining network experiences profit compression, the least efficient miners will be eliminated layer by layer. As inefficient miners shut down operations, the Bitcoin network will take more time to mine blocks because the network has less computing power, and the surviving miners will take longer to process calculations on the network, verify transactions, and produce blocks. If the Bitcoin network does not complete calculations and verify transactions within 10 minutes, there will be a favorable mining difficulty adjustment. The share of block rewards previously obtained by the miners who shut down operations will now be distributed to the miners who remain mining on the Bitcoin network. Mining difficulty adjustment is a very beneficial mechanism for the Bitcoin network, and this process will continue until mining profitability returns to normal (of course, for those surviving/most efficient miners, they can also make a lot of money under this mechanism). For miners, mining is closely related to survival. Bitcoin mining difficulty adjustment will reduce the impact of Bitcoin price corrections on miners, allowing miners to continue to operate efficiently and ensure their survival.

The impact of the 2020 Bitcoin block reward halving on the crypto industry - a "triple hit"

1. Block Reward Halving - Improving Supply-Side Economic Mechanisms

Many market participants are now speculating on the future of Bitcoin, and it is almost certain that by mid-May 2020, 50% of the potential selling pressure on Bitcoin will be eliminated due to the halving of the newly issued block reward. A 50% supply reduction will moderately reduce the Bitcoin supply (it is important to note that the Bitcoin supply will continue to decline) because it is completely determined by the Bitcoin protocol code and is also a positive catalyst for Bitcoin price.

2. The demand-side economy will improve as the Bitcoin block reward halving brings positive sentiment to the market

Economists may say that Bitcoin is worthless because its price is too volatile to be an effective store of value and its transactions are too slow to be an effective payment platform. Bitcoin maximalists may argue that Bitcoin is digital gold because of its scarcity. But in the end, only the market can determine the price of Bitcoin.

Historically, as long as Bitcoin enters a block reward halving cycle, it will always continue to rise/bull market trend (although there will always be multiple severe corrections during this cycle). For most cryptocurrency market participants, they can deeply understand this historical trend. However, some people believe that Bitcoin halving is already priced in, but this statement cannot be proven unless you can confirm with most market participants that they have deployed cash positions and reached the target price. In fact, most market participants may disagree. They all hold a certain amount of cash positions. Everyone will think of the market reaction brought about by the Bitcoin block reward halving, and it will also generate positive emotions on the demand side. This psychological positive emotion will further enhance the psychological expectations of market participants and prepare to deploy more cash positions, further driving the market upward trend. Everyone sees that the Bitcoin block halving is coming, and everyone is worried that they will miss a big rebound in Bitcoin prices at some point - and this is actually why Bitcoin has more HODLers than any other asset. HODLers would rather be "destroyed" again than miss an opportunity to "get rich". Bitcoin is also a market, and the market is driven by human psychology. Before the Bitcoin block reward halving, the human psychology of market participants tends to be bullish, so it will generate positive bullish sentiment in terms of Bitcoin demand.

3. Seize the “money-making” opportunity brought by the halving of Bitcoin block rewards through debt

After the Bitcoin network has experienced a significant or sustained but favorable mining difficulty adjustment, Bitcoin, whose price has bottomed out, may rebound (see: https://bitcoin.blockwarepool.com/mining-data) because the newly mined Bitcoin is now held, distributed, and accumulated by the most efficient miners with healthy balance sheets. The number of Bitcoins (in physical Bitcoin plans) received by the surviving miners is proportional to the number of Bitcoins allocated to the closed miners, and this rare and profitable opportunity allows the surviving miners to accumulate a large number of Bitcoins.

A new stimulus is rapidly gaining acceptance among many market participants: through centralized lenders and decentralized lending platforms, miners can obtain debt by pledging their mined Bitcoin in exchange for cash or stablecoins. Now, miners can hold their Bitcoin without having to sell it, but still get cash to pay electricity bills, match contracts, buy more mining equipment, or further expand mining infrastructure. This stimulus also reduces the selling pressure from the Bitcoin network itself, which we believe will be an important catalyst for Bitcoin prices to rise.

As more Bitcoin is accumulated by the "strong hand", more Bitcoin may be held for the long term, which can offset the impact of the supply reduction from the network. Experienced miners have witnessed miner capitulation before, resulting in a large amount of Bitcoin on the balance sheet because many people chose to continue to hold Bitcoin when they believed the price was lower. Debt in the market will become another tool for miners with a large amount of Bitcoin to hold their Bitcoin during price adjustments, which will alleviate selling pressure and accelerate bottom corrections. Although this may be a source of stimulus for Bitcoin prices, how to end this mechanism still needs to be cautious, because debt is usually terminated under adverse conditions in the case of excessive speculation.

Combining these three forces, one can expect a strong multiplier effect as the economics of Bitcoin’s supply and demand fundamentally improve, which is why people feel that the block reward halving will lead to a rise in Bitcoin’s price.

Bitcoin Rise to $7,500 – Post-Halving – How Miner Capitulation Could Accelerate Price Bottom

After miners shut down (surrender), newly mined Bitcoin will be distributed to the most efficient miners, which will minimize the selling pressure in the Bitcoin market, because the price of Bitcoin will be much higher than the break-even price of miners. Just as when Bitcoin sells off, miners will restart when the price of Bitcoin rebounds. Some miners may start up a few months later due to factors such as electricity costs, hosting fees, or land lease fees, which will also make it easier for Bitcoin prices to rise, which will lead to more lucrative profits for surviving miners. They only need to sell a small portion of the mined Bitcoin to pay for electricity costs (assuming the electricity cost remains unchanged).

As shown in the above figure, when the Bitcoin price reaches $7,500, the minimum percentage of selling pressure from Bitcoin miners will be reduced from 46.67% to 31.11%. In fact, the miners who shut down cannot be turned on synchronously when the Bitcoin price rises, which is similar to the miners who cannot shut down immediately when the price falls and operate at a loss. When the Bitcoin mining difficulty is significantly adjusted, the Bitcoin price will rise. The adjusted mining difficulty can create a more favorable market environment for those efficient miners, who can accumulate a larger share of Bitcoin without shutting down.

Bitcoin’s Rise to $10,000 – Post-Halving – How Miner Capitulation Could Accelerate Price Bottom

Inefficient miners are unable to restart their mining machines in time, which will result in the newly mined Bitcoin rewards being taken away by efficient miners, so the selling pressure of newly mined Bitcoin will be continuously reduced to a minimum. Taking the Bitcoin price at $10,000 as an example, the minimum percentage of miners' selling pressure will drop to 23.33%.

In the chart below, you can see a comparison of Bitcoin before and after the halving when the price of Bitcoin was $10,000. You can see that before the halving, miners needed to sell 21,123 BTC to cover electricity costs, while after the halving, the number of Bitcoins that needed to be sold was 6,300 BTC, which is a good example of a healthier Bitcoin mining environment that can be achieved by removing inefficient miners and reducing potential selling pressure on the Bitcoin network.

The cycle repeats: Bitcoin price at $10,000 – post-halving – rebound after mining difficulty adjustment

After the Bitcoin price has risen for a long enough time, inefficient miners can finally turn on the miners again. As the number of miners competing for the same number of Bitcoin becomes more and more, the difficulty of Bitcoin mining will be adjusted again and to a difficult difficulty that is unfavorable to miners, which will also increase the minimum percentage of selling pressure for miners from 23.33% to 51.49%. In addition, you can also see from the figure below that as the Bitcoin mining difficulty is readjusted, miners using S9 miners from layers 4 to 8 will be forced to shut down.

This is a good example of the “traction” of Bitcoin mining difficulty. In addition to the profit compression caused by adverse adjustments to mining difficulty due to miners joining the network, Bitcoin mining difficulty actually stabilizes the entire mining network and provides enough motivation to maintain Bitcoin security. Over time, despite the sharp fluctuations in Bitcoin prices, profit margins can still keep loyal and efficient miners profitable. Ultimately, Bitcoin mining difficulty will "eliminate" those inefficient mining entities, but when the price of Bitcoin appreciates significantly again, even inefficient miners can enjoy the benefits of profits.

Some people will be worried about the upcoming Bitcoin halving, but if you understand the psychology of miners and how the game between miners and mining difficulty drives mining behavior, efficient miners should welcome halving whether before or after the halving. Even miners below the 6.3c level can survive by using the most efficient mining equipment. Bitcoin itself will be under the selling pressure of miners, and the price will also fall. After the halving, the amount of fiat currency needed to offset the selling pressure of miners will become smaller. In this case, just injecting enough fiat into the Bitcoin system can achieve long-term appreciation of Bitcoin prices, and investment funds and HODLers are more capable of coping with downward pressure on prices.