The number of Bitcoin (BTC) miners fluctuates with BTC production costs:
When mining costs are lower than BTC Price, more miners joins. When mining costs are higher than BTC Price, the number of miners decreases. That's what we call the "miner capitulation". According to Cole Garner (a cryptocurrency analyst):
Miner capitulation is when smaller, non-industrial mining operations “get backed into a corner” when the price of Bitcoin falls and their mining machines become technologically obsolete.
According to Coin Metrics, miners sold at least USD 500 million worth of Bitcoin in June, shrinking their stockpiles by almost a third:
This June sell-off can be explained by mining costs, which reached more than USD 30k on June 17, making BTC more expensive to mine than its price. It means that some miners turned off their machines as it started to cost more to run them than they can earn. However, when BTC hash rate decreases, the network is programmed to lower the mining difficulty. As difficulty adjustments happen approximately every two weeks, it takes a bit of time to reach equilibrium with miners again.
On July 18, the BTC average mining costs were USD 19,228, whereas BTC Price was USD 22k+. Although it looks profitable, it is a low margin business. Therefore, some miners continue to sell their reserves to cover their costs and remain solvent, which increases selling pressure on BTC and trap miners in a vicious selling cycle. Only a significant BTC bullish catalyst can break it free from its current depressed price range and get these miners out of the trap.
Has BTC price reached the bottom?
Some market observers suggest that production costs also can serve “as the lower bound of Bitcoin’s price range in a bear market.” As the production costs reached USD 13k one year ago, it would mean that the bottom would be around this price. However, these costs vary as per the electricity cost, labor cost and kind of rigs. According to some experts, the bottom would be close to USD 12k, but some facilities could go lower than this number...
What's next?
Ironically, the current Crypto market rebound from which BTC also benefits is mostly coming from the transition from Ethereum (ETH) Proof-of-Work to Proof-of-Stake consensus... At the same time, Samsung has announced the imminent launch of nanochips which could reduce the BTC production costs. Although it does not mean anything in the short term, these news are positive signals which could help miners get out of trap and make BTC break out...
Disclaimer: this article does not contain any financial advice. The information is provided for general informational and educational purposes only.
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