Nowadays, however, many of them are unable to choose a comfortable selling point: rising mining difficulty makes BTC extraction more expensive, all while low BTC price cannot ensure enough profit to cover operational costs.
What will happen when miners won’t have enough reserves to continue mining and will be forced to capitulate? A common expectation is that such event will be a market bottom, after which a new growth cycle can begin.
Bitcoin difficulty and why it is important
Miners are key to Bitcoin functioning: they add new blocks to the blockchain and create new coins by executing the so-called Proof-of-Work – a computational task that requires significant hardware and electricity expenses. Collective computational effort of all network miners is called hashrate, and the bigger the Bitcoin’s hashrate, the more secure is the blockchain.
Bitcoin issuance is a steady and foreseeable process, ensured by an in-built mechanism that keeps the same rhythm – a block every 10 minutes – despite the number and the capacities of its miners. This mechanism is adjusting Bitcoin difficulty (the difficulty of the task needed to produce a Proof-of-Work) depending on the network’s hashrate: the difficulty increases when the hashrate grows, and vice versa.
Miners are in trouble
Bitcoin miners are having hard times. While BTC price has lost 76% since its all-time high last November, Bitcoin difficulty only went up, increasing from 22 to almost 37 terahash in the same period – for a total gain of 68%.
This crunch is forcing many miners to not only sell all BTC they extract, but also to dip into their reserves to be able to cover their operational cost.
Quarterly statements of public miner companies showed that the top 9 Bitcoin miners saw an 18% decrease in their BTC reserves from Q2 to Q3. This process has accelerated since : on-chain analytics firm Glassnode showed that miners’ reserves reached a 10-months low this week. However, unlike the profit-taking in December’21-January’22, this sell-off looked more like FTX-induced panic: 10k BTC liquidated at one go on November 8 was the fastest selling rate in 7 years.
This is clearly not a sustainable situation. As the electricity bill for an average mining company becomes greater than its income, some less efficient miners might consider turning off their rigs and waiting for a better time (or selling them to a competitor). This is known as miner capitulation and is often accompanied by an accrued selling pressure, which can send Bitcoin price to a local bottom.
While an unfortunate event for those who capitulate, there’s a good side to it too: more resistant miners will survive and even become profitable as the difficulty will decrease following their competitors’ exit.
Not capitulating yet
Current Bitcoin difficulty nearing all-time high, as well as the recent sell-off, have led crypto analysts to believe that miner capitulation was near. Indeed, everyone expected that this Sunday’s difficulty adjustment (which happens approximately every two weeks) would be downwards.
This did not happen.
The difficulty has slightly risen, showing that most miners were not ready to throw in the towel. While clearly in trouble (different industry specialists have indicated that BTC price below $17k was very problematic), many have decided to continue operating at loss hoping for a price rebound (and probably also competitors’ withdrawal).
Access to cheaper energy, as well as any power purchase agreements and hosting contracts, which would require miners to consume energy at risk of paying a fee, could also have influenced their behavior.
It is difficult to say how long will this resistance will last, but some most vulnerable miners have already started to drop out. On November 21, Australian miner Iris Energy revealed that it had unplugged its hardware. As many miners, it has borrowed money to buy mining rigs, which were also used as collateral, but in the current market conditions produced “insufficient cash flow to service their respective debt financing obligations”. The company was served a $103 million default notice earlier this month.
Bitcoin difficulty is a lagging indicator, and it may be that the miner capitulation process has already started. The next difficulty adjustment, expected on December 6, will show.
 
Written by D.Center

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