Research on the impact of POW mechanism token miners' behavior on prices

Preface

The factors affecting the price of digital currencies are complex. This article attempts to find the relationship between the miner behavior, computing power, and price of POW-type tokens. The samples selected in this article are BTC, LTC, ETH, DASH, ZEC, XMR, and BTM. This article also proposes a new concept to assist in analyzing the factors affecting the price: Miner Madness Index   .

TokenGazer’s opinion

Token prices affect miners’ behavior, miners’ behavior affects changes in the computing power of the entire network, and changes in computing power affect miners’ income. This series of chain changes may eventually be transmitted to the market, affecting market sentiment, and in turn affecting prices.

1. For most POW tokens, rising token prices prompt miners to increase computing power, while falling prices prompt miners to reduce computing power. However, the computing power curve has a certain lag relative to the price curve. Overall, there is a high correlation between computing power and price.

2. There is a certain mutual prompt relationship between the miner madness index of POW-type tokens and the vertex of the market value share curve. However, the prompt strength of different projects varies. Generally, the larger the absolute value of the madness index, the stronger the possibility of a reversal in the market value share.

3. In the stage of rising BTC market value share, the large positive value of the Miner Madness Index indicates that miners collectively show blind investment in fixed assets (mining machines); the large negative value of the Miner Madness Index indicates that miners collectively believe that the market value share is about to decline. In the stage of falling BTC market value share, the large positive value of the Miner Madness Index indicates that miners collectively show blind escape from fixed assets (mining machines); the large negative value of the Miner Madness Index indicates that miners collectively believe that the market value share is about to rise.

4. Currently, the miner madness index of LTC, ETH, and XMR has reached a relatively high positive value, indicating that miners have begun to blindly flee fixed assets (mining machines), which may cause short-term computing power to be too cold and thus cause the market value share to reverse upward, which should arouse vigilance.

1. Relationship between computing power and price

Image source: TokenGazer Research Group

The shutdown price in the figure is calculated based on the time when the new mainstream mining equipment appeared at that time, and represents the average shutdown price of the mines that updated the mining equipment in a timely manner. Due to the influence of the procurement cycle and the financial capacity of the mines, the mining equipment of ordinary mines may not be updated immediately, so the actual shutdown price (cost line) is higher than the value in the figure. As can be seen from the figure, for BTC, when the price continues to rise, the computing power follows the rapid increase; when the price continues to fall, the computing power increases at a slower rate, and even the computing power decreases. In general, there is a high correlation between computing power and price.

Table 1 Computing power/price correlation data of several typical POW tokens

As can be seen from the table, the computing power and price of most old tokens show a high positive correlation. The reason why ZEC performs specially is that the mining cost of ZEC is relatively low compared to the shutdown cost, so the computing power continues to grow regardless of price changes, which shows that the computing power and price are almost completely unrelated. After 2016, very few POW mechanism projects were launched on the main network, and only BTM has about half a year of historical data, which is difficult to reflect long-term correlation.

Therefore, for most POW tokens, rising token prices prompt miners to increase computing power, while falling prices prompt miners to reduce computing power. There is a high correlation between computing power and price, but the computing power curve has a certain lag relative to the price curve.

2 Premises and Assumptions

2.1 Select “Market capitalization share” instead of “Price”

This article chooses the parameter "market capitalization ratio" instead of "price" for analysis because: ① It filters the mutual influence of other token price changes in the market; ② Token price fluctuations are very drastic, and the price curve needs to use logarithmic coordinates in the chart to be readable. When logarithmic coordinates are used, the fluctuations reflected on the chart are very small, which is not conducive to analysis. Therefore, this article uses "market capitalization ratio" instead of "price" for analysis.

2.2 Sliding correlation of computing power/market value ratio

The 90-day sliding correlation of computing power/market value ratio that appears in this article (referred to as the "miner madness index", "madness index" or "90-day miner madness index" in this article, and similarly when using other periods) refers to the average value of the correlation between computing power and market value ratio 90 days before the calculation date (including the calculation date). Therefore, when the miner madness index reaches its peak, it means that the high positive correlation between computing power and market value ratio has actually continued for some time; when the miner madness index reaches the bottom, it means that the high negative correlation between computing power and market value ratio has actually continued for some time.

2.3 Investor Behavior Hypothesis

Investors in the market are irrational and prone to collective blindness. When everyone is long or short, it often indicates the arrival of a turning point; when everyone expects the market to reverse, it ultimately accelerates the market reversal. TokenGazer applies this phenomenon to the mining market. For example, when most miners continue to be optimistic about future mining income and invest in computing power, it means that the market is about to reverse. The external manifestation of this reversal is not necessarily a mining loss, but a decrease in the market value share of the currency, and a decrease in mining income relative to the entire market; when most miners expect the market to reverse and increase or decrease computing power in advance, it ultimately leads to an accelerated market reversal.

2.4 Miner Madness Index

In order to better explain the blind phenomenon of the market, this article defines a concept: the Miner Madness Index. The Miner Madness Index is used to measure the degree to which miners have collective blind behavior due to the continuous stimulation of token prices. Positive values ​​indicate the emergence of emotions similar to "chasing up" or "selling down", and negative values ​​indicate the emergence of emotions similar to "bottom-picking" or "touching the top". In this article, the Miner Madness Index refers to the sliding correlation of computing power/price.

3 Typical Token Analysis

3.1 BTC Detailed Explanation

Image source: TokenGazer Research Group

It can be seen that there is a certain mutual prompt relationship between the market capitalization share curve of BTC and certain key points of the 90-day miner madness index curve. The larger the absolute value of the miner madness index, the more obvious this prompt relationship is. The following table summarizes the time difference between the peak of the market capitalization share and the peak of the miner madness index curve at key points.

Table 2 Analysis of BTC key time points

From the table, we can find that when the Miner's Crazy Index Curve shows a large peak (close to 1), the market value share often begins to decline sharply, and the decline cycle is often more than half a year. When the Miner's Crazy Index Curve shows a small trough (close to -1), it means that the market value share will rise sharply, or has entered a rising cycle. Since the rising cycle is often more than half a year, and the time difference between the peak of the market value and the peak of the Miner's Crazy Index Curve is no more than 1 month, the prompting effect of the trough point is not affected.

Table 3 Classification of positive and negative vertices of the miner's madness index curve

For the case where the miner's madness index curve has a large peak point (close to 1), there are two situations. One is that the market value share and computing power have been rising for a period of time, and a large number of miners also believe that the rising trend of the market value share will continue, so they blindly invest in new computing power, resulting in a short-term overheating of the market computing power, which eventually manifests as a reversal of the market value share. The other is that the market value share and computing power have been declining for a period of time, and a large number of miners also believe that the downward trend of the market value share will continue, so they blindly reduce their computing power investment, resulting in a short-term overcooling of the market computing power, which eventually manifests as a reversal of the market value share. From the figure, when the miner's madness index takes a 90-day cycle and is positive, the first situation usually occurs at the peak when the madness index is close to 1; the second situation usually occurs at the peak when the index is smaller.

For the situation where the miner's madness index curve has a smaller trough point (close to -1), there are two situations. One is that the market value share is declining and the computing power is rising, which has been going on for a while, but a large number of miners also believe that the downward trend of the market value share will not continue, so they deploy computing power in advance, and finally the change in computing power is transmitted to the market, resulting in a reversal of the market value share. The other is that the market value share is rising and the computing power is declining, which has been going on for a while, but a large number of miners also believe that the upward trend of the market value share will not continue, so they withdraw the computing power in advance, and finally the change in computing power is transmitted to the market, resulting in a reversal of the market value share. From the figure, when the miner's madness index takes a 90-day cycle and is at a negative value, the first situation usually occurs at the peak when the madness index is close to -1.

Summary: When the 90-day Miner Madness Index is higher than 0.6 or lower than -0.6, we should enter the alert period, the market value share enters a period of drastic changes, and the market value share is likely to reverse. The larger the absolute value of the Miner Madness Index, the more obvious the peak prompt effect. The current BTC Miner Madness Index is -0.36.

3.2 Extending to other tokens

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The basic situation is similar to BTC. When LTC's 90-day miner madness index is higher than 0.6 or lower than -0.7, it should enter a warning period, the market value share enters a drastic change range, and the market value share is likely to reverse. The larger the absolute value of the miner madness index, the more obvious the peak prompt effect. The current LTC miner madness index is 0.7. The basic situation is similar to BTC. When ETH's 60-day miner madness index is higher than 0.7 or lower than -0.7, it should enter a warning period, the market value share enters a drastic change range, and the market value share is likely to reverse. The larger the absolute value of the miner madness index, the more obvious the peak prompt effect. The current ETH miner madness index is 0.84.

Image source: TokenGazer Research Group

The basic situation is similar to BTC. When DASH's 90-day miner madness index is higher than 0.6 or lower than -0.7, it should enter a warning period, the market value share enters a drastic change range, and the market value share is likely to reverse. The larger the absolute value of the miner madness index, the more obvious the peak prompt effect. The current DASH miner madness index is -0.069.

Image source: TokenGazer Research Group

The basic situation is similar to BTC. When ZEC's 60-day miner madness index is higher than 0.7 or lower than -0.7, it should enter a warning period, the market value share enters a drastic change range, and the market value share is likely to reverse. The larger the absolute value of the miner madness index, the more obvious the peak prompt effect. The current ZEC miner madness index is 0.17.

Image source: TokenGazer Research Group

The basic situation is similar to BTC. When the 60-day miner madness index of XMR is higher than 0.8 or lower than -0.5, it should enter the alert period, the market value share enters a drastic change range, and the market value share is likely to reverse. The larger the absolute value of the miner madness index, the more obvious the peak prompt effect. The current XMR miner madness index is 0.73.

Image source: TokenGazer Research Group

The BTM mainnet was launched in April. As it has only been online for a short time and has relatively little data, the vertex prompt effect is not yet obvious.

4 Overview

For POW tokens with sufficient historical data, the above analysis leads to the conjecture that token prices affect miners’ behavior, miners’ behavior affects changes in the computing power of the entire network, and changes in computing power affect miners’ income. This series of chain changes may eventually be transmitted to the market, affecting market sentiment, and in turn affecting prices.

1. For most POW tokens, rising token prices prompt miners to increase computing power, while falling prices prompt miners to reduce computing power. However, the computing power curve has a certain lag relative to the price curve. Overall, there is a high correlation between computing power and price.

2. There is a certain mutual prompt relationship between the miner madness index of POW-type tokens and the vertex of the market value share curve. However, the prompt strength of different projects varies. Generally, the larger the absolute value of the madness index, the stronger the possibility of a reversal in the market value share.

3. In the stage of rising BTC market value share, the large positive value of the Miner Madness Index indicates that miners collectively show blind investment in fixed assets (mining machines); the large negative value of the Miner Madness Index indicates that miners collectively believe that the market value share is about to decline. In the stage of falling BTC market value share, the large positive value of the Miner Madness Index indicates that miners collectively show blind escape from fixed assets (mining machines); the large negative value of the Miner Madness Index indicates that miners collectively believe that the market value share is about to rise.

4. Currently, the miner madness index of LTC, ETH, and XMR has reached a relatively high positive value, indicating that miners have begun to blindly flee fixed assets (mining machines), which may cause short-term computing power to be too cold and thus cause the market value share to reverse upward, which should arouse vigilance.

Disclaimer

This report is based on publicly available data or information.

The views, data, charts and other information in the report are for reference only.

There are risks in the market, so be cautious when investing.

Editor: TokenGazer

This article is original content from TokenGazer