The traps and secrets of Bitcoin mining costs: The market bottom is not entirely determined by miners

Many analysts believe that the break-even price of Bitcoin miners’ mining costs is most likely the floor price of Bitcoin. This statement is inaccurate. In fact, as the price approaches the production cost of miners, the selling of Bitcoin tends to accelerate. There is a constant selling pressure on the price of Bitcoin from miners. Price support is actually established by the capitulation of miners and the net reduction in the amount of computing power in the entire network (favorable difficulty adjustment). It is crucial to understand the price game theory between miners and Bitcoin. Three main types of Bitcoin market participants Investment funds – hedge funds, venture capital funds, family businesses and other institutional investors. They almost exclusively adopt a “long only” strategy and rarely adopt a short strategy. They usually have a long-term bullish bias, but will walk away and exit their positions at any time if their beliefs are tested by the market. Hodlers (sometimes called Bitcoin whales) – long-term accumulators who seek to maximize their Bitcoin holdings. Bitcoin whales have a long-term bullish bias and are less sensitive to price fluctuations than investment funds. However, like investment funds, they can also exit their entire position at any time and leave. Miners – the backbone of the Bitcoin network. Miners have a stronger belief in Bitcoin than investment funds and whales. They have a long-term vision. They invest in assets with long life cycles that cannot be repurposed or quickly liquidated at fair market value. ASIC mining equipment has a life cycle of more than 3 years and can only be used to mine the Sha-256 algorithm (almost exclusively Bitcoin). Bitcoin mining facilities have a life cycle of more than 5 years and are usually reorganized power warehouses designed specifically for cooling mining equipment. On average, it takes miners 18 months to break even after investing money in mining equipment, facility expansion, and electricity expenses. Miners are the main driver of selling pressure on the Bitcoin network. They receive all newly minted Bitcoins and must sell Bitcoins to fund the capital and operating expenses of mining operations. Selling Pressure from Miners Currently, around 54,000 new Bitcoins are mined worldwide each month. If Bitcoin is trading at $10,000, this equates to $540,000,000 worth of new Bitcoin supply released to miners each month. Miners must sell a large portion of their 54,000 bitcoins to pay for electricity. Miners with higher electricity costs must sell more of their bitcoin revenue to pay for electricity. Most of the capital outflow in the Bitcoin market is driven by miners.

Classification of miners and the shutdown price of different mining machines. How will the next generation of mining machines balance the competitive environment?

Miners are divided into 8 levels according to the electricity price ranging from 0.02 to 0.06

As electricity costs increase, the opportunity cost of selling some of the Bitcoin reserves to invest capital in the purchase of next-generation mining equipment becomes increasingly favorable. In May 2019, forward-thinking miners began to foresee the risk of shutting down S9s due to the 2020 halving. As a result, over the past 8 months, tier 3 and tier 8 miners have actively led a hardware upgrade cycle for next-generation mining equipment, while tier 1 and tier 2 continue to use old S9s. The next-generation mining equipment upgrade cycle has increased the total network computing power (hash rate) by 80% and increased the proportion of the total network computing power (hash rate) dominated by tiers 3-8 - diluting the share of tier 1 and 2 miners in the total network hash rate.

The shutdown coin price of different models under different electricity prices shows that the current large-scale extreme shutdown coin price should be around US$3,800.

Understanding Bitcoin Miner Behavior — Reality vs. IdealMany people believe that miners can simply shut down when they reach breakeven and never lose money. This is a serious mistake. The obligations of hosting contracts and failed money management in actual mining operations often cause miners to operate at a loss. This forces miners to sell more Bitcoin than they mine. Depleting Bitcoin inventory and putting additional selling pressure on the market.Reality: Miners have negotiated contracts with utility companies to achieve lower electricity rates, but these rates are dependent on minimum electricity usage thresholds. Therefore, some miners will find themselves at a loss for a certain period of time because they must continue mining to meet minimum usage requirements; otherwise, they will lose long-term interest. They cannot simply shut down for a week or a month (when it is unprofitable) and wait for Bitcoin to rebound. Many miners send their mining equipment to hosting facilities. These hosting contracts lock miners in for a fixed monthly fee per mining equipment (determined by electricity costs) for a period of 1 to 2 years. If the miner does not make these monthly payments, the hosting facility can confiscate the Bitcoin mining equipment. As a result, many miners will lose months of mining time to avoid defaulting and risking losing their expensive Bitcoin mining equipment, which to some extent turns miners into speculators. Miners are also human, and therefore not completely immune to human psychology and emotions. Many miners try to implement guidelines on when and how much Bitcoin to sell. Many miners may sell all of their Bitcoin every week, month after receiving it, or may only sell enough to cover their electricity bills. Unfortunately, when Bitcoin is concentrated in the hands of miners, miners tend to turn into speculators in the hope of catching the rally. We shared analysis results with one of the largest OTC desks in the crypto space. In September 2019, we discussed how some of the mining customers of the OTC platform deviated from their scheduled fund liquidation plans and chose to hold the mined Bitcoin during July and August - believing that Bitcoin would continue to rise. Bitcoin peaked in late June, and these miners had to take profits in September and late October at much lower prices. Such a situation instead accelerated the sell-off of Bitcoin, because the additional selling pressure brought by the liquidation of Bitcoin debt was not limited to newly mined Bitcoin. Summary: When the Bitcoin price was $10,000, only 39.12% of the total monthly Bitcoins mined had to be sold to pay for electricity. Once Bitcoin fell to $7,500, the profit margins of all miners fell and caused S9 miners in tiers 6, 7, and 8 to operate at a loss. As a result, 53.18% of the total monthly Bitcoins that needed to be sold were sold to pay for electricity. Market elimination before the real breakthrough came - factors for the rise in coin prices 1. Halving - economic incentives to improve supply Many market participants speculate on the future of Bitcoin. It is certain that by mid-May, 50% of the potential selling pressure on Bitcoin will be eliminated as the newly issued mining rewards are halved. A 50% reduction in supply issuance will reduce the modest but continuously declining Bitcoin supply, which is entirely determined by the code of the Bitcoin protocol. This is a positive catalyst for Bitcoin prices. 2. Improved demand-side capital favorability due to positive sentiment after halving Economists can say that Bitcoin is worthless because it is currently too volatile to effectively store value and too slow to be an effective payment platform. Bitcoin maximalists can say Bitcoin is digital gold because of its scarcity. Ultimately, the market will determine the price of Bitcoin. Historically, Bitcoin has entered halvings and continued uptrends and bull cycles (always with multiple severe corrections along the way). Most market participants deeply understand these historical trends. One can claim that the halving is priced in, but this is unprovable unless you can confirm with the majority of market participants that they have deployed cash positions and hit price targets. In the case of mixed opinions on the halving, most market participants have a certain amount of cash positions. Everyone thinks about the halving and creates positive sentiment on the demand side. This psychological positive sentiment will make market participants anticipate and prepare to deploy cash positions towards the upside. Everyone saw the halving acceleration, and everyone missed a significant rally in Bitcoin at some point – this is why Bitcoin has more Hodlers than any other asset. Market participants refuse to get thrown off the bus again and miss out on an amazing upside rally. This is a market, and markets are driven by human psychology. Before the halving, the human psychology of Bitcoin market participants was biased towards bullishness. This created positive sentiment on the demand side of Bitcoin. 3. Taking advantage of the market’s opportunistic environment through debt acquisition After the Bitcoin network experiences a significant or sustained favorable difficulty adjustment, the probability of a bottom in Bitcoin prices increases (https://bitcoin.blockwarepool.com/mining-data). This is because newly mined Bitcoin is now being distributed and accumulated by the most efficient miners with healthy balance sheets. The amount of Bitcoin (in Bitcoin) received by the surviving miners is proportional to the amount of Bitcoin distributed to the closed miners. These rare, profitable opportunities allow the surviving miners to accumulate a large amount of Bitcoin. A new means of financial stimulus is rapidly gaining acceptance among many market participants. Through centralized lenders and decentralized lending platforms, miners can acquire debt by pledging their mined Bitcoin in exchange for cash or stablecoins. Now, miners can hold their Bitcoin instead of selling it, but still have the obligation to pay for electricity, configure contracts, purchase more mining equipment, or further expand infrastructure. This dynamic reduces the selling pressure from the network, which we believe will be an important catalyst for Bitcoin prices to rise. When more Bitcoin is accumulated by the “strong”, it is likely to be held for a long time, and the equivalence of removing supply from the network is established. These experienced miners have witnessed miner capitulation before, with a large amount of Bitcoin on their balance sheets. When many people believe that the price is lower, they choose to hold their Bitcoin. 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 to the market, how to control this mechanism still requires caution, because in the case of excessive speculation, debt often ends unexpectedly and risks occur. Combined with the above three forces, one can expect that this factor will have a strong multiplier effect as the economic conditions on the supply and demand sides of the Bitcoin price are fundamentally improved. This is why the halving is so bullish for Bitcoin. Finally, three possibilities for the halving market: $5,000 Bitcoin-Market Cleanup after Halving In this scenario, the price of Bitcoin is set at $5,000 by halving, and the Bitcoin network will undergo a healthy and brutal wash to allow Bitcoin to reach new highs again in the future (even a Bitcoin price of $8,000 will be a substantial cleanup of miners after the halving). The May 2020 halving will reduce the rewards issued to miners by 50%. Mining revenue denominated in Bitcoin will be reduced by 50%. In order to stabilize mining profits, the price of Bitcoin must rise so that miners receive the same mining revenue denominated in fiat currency. This is critical because miners need to finance their electricity costs. Since almost all S9 and below mining machines (Tiers 2-8) will be operating at a loss in this situation, and miners running S17 and above (Tiers 7 and 8 with higher electricity costs) will also be operating at a loss, miners will face huge losses - shutting down a large number of machines.

$7,500 Bitcoin – Post-Halving Miner Capitulation Will Hasten Market Bottom After miners shut down (capitulate), newly mined Bitcoin will be distributed to the most efficient miners, which will cause the least selling pressure in the Bitcoin market, as these miners shut down well below their breakeven price. Just as miners shut down when Bitcoin falls, so too will miners start running again when Bitcoin rebounds. Many miners on the brink of closure may be months behind on electricity, hosting fees, or land leases, and cannot restart without paying for multiple missed months. This makes it easier for prices to rise, and as prices rise, the newly mined Bitcoin that needs to be sold only accounts for a small portion of the electricity cost (which remains constant) because the surviving miners are highly profitable.

Bitcoin price at $10,000 – The price bounces back after a difficult mining difficulty adjustment after the halving. After a long enough rise in the price of Bitcoin, inefficient miners can switch back on. As more miners start competing for the same amount of Bitcoin, this causes an unfavorable mining difficulty adjustment on the Bitcoin network, causing the minimum selling pressure percentage of miners to increase from 23.33% to 51.49%.

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