Learn about Bitcoin market participants-the vulnerability of miners to push Bitcoin prices

Original source: Blockware

Compilation: Share Finance Neo

Editor's Note: The original title was "Understanding Bitcoin Market Participants-The Vulnerability of Miners to Push Bitcoin Prices"

Many analysts believe that there is a price bottom for bitcoin, which is created by the break-even point of the production cost of bitcoin miners. This assertion is inaccurate. In fact, as bitcoin prices get closer to the production costs of miners, bitcoin selling tends to accelerate. The price of Bitcoin has been under selling pressure, and this pressure has come from miners. Price support is actually built on the surrender of miners and the net reduction of hash power on the network-a favorable adjustment of difficulty. Understanding game theory for miners is crucial.

The cost of miners producing bitcoin is determined by their electricity bills, because 95% of the miners' operating expenses are electricity bills. Miners need bitcoin to reach a certain price, so that their bitcoin income will exceed the electricity bill. Mining tools with the lowest electricity prices have significant comparative advantages.

We will analyze the following:
  • Bitcoin Network: Who are the market participants and how do they affect the price of Bitcoin? Stripping all layers of the mining network
  • How the new generation of mining equipment leveled the playing field-allowing miners to maintain high electricity prices during the game
  • Breaking the myth that the miner's break-even point price is a lower price limit
  • Impact of halving in 2020 on the bitcoin industry-a three-pronged approach
  • Difficult point: Satoshi Nakamoto's ingenious network stability mechanism-understanding its gravity
  • How miners' surrender hastened the bottom of Bitcoin

Three main types of Bitcoin market participants

1. Investment funds: Hedge funds, venture capital funds, family finance and other institutional investors. They almost exclusively use the "just go long" strategy and rarely go short. They usually have a long-term tendency to bullish, but if their beliefs are tested, they have the ability to exit their positions at any time and then leave.
2. Holders: long-term accumulators seeking to maximize Bitcoin holdings. Holders have a long-term bullish tendency and are less sensitive to price fluctuations than investment funds. However, like investment funds, currency holders can exit their entire positions and leave at any time.
3. Miners: The backbone of the Bitcoin network. Miners have higher confidence in Bitcoin than investment funds and currency holders. They have long-term vision. The assets they invest in have a long life cycle and can neither be reused nor 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 protocol (almost entirely Bitcoin). Bitcoin mining facilities have a life cycle of more than 5 years and are usually restructured warehouses designed specifically to cool mining equipment. On average, it takes 18 months for miners to break even after spending money on mining equipment, facilities and electricity. Miners are the main driver of selling pressure on the Bitcoin network. They receive all newly issued bitcoins, and they must sell bitcoins to fund capital and operating expenses for the mining business.
Selling pressure from miners
About 54,000 new Bitcoins are mined every month. If the transaction price of Bitcoin is $ 10,000, it is equivalent to providing $ 540 million in new bitcoin supply to miners every month. A significant portion of the 54,000 bitcoins must be sold by miners to pay for electricity. Miners with higher electricity prices must sell a larger percentage of Bitcoin to pay for electricity. Most capital outflows on the Bitcoin network are driven by miners.

How the new generation of mining equipment can compete fairly

Due to the release of a new generation of mining equipment, dynamic changes have occurred in the past 8 months. Bitmain's S17 Pro 50T consumes 50% more energy than the S9 13.5T, but generates 300% of hash power. The hash power of each S17 Pro 50T deployment is equivalent to the hash power of four S9 13.5T mining equipment.
Tier 1 and Tier 2 miners used to account for a large percentage of the network hash rate, but due to their low electricity prices, they have little incentive to upgrade to next-generation mining equipment. The older generation S9 13.5T uses a 16nm chip, while the S17 Pro 50T uses a 7nm chip. The innovation of the chip makes the importance of power less, because the computing power consumes less power.
The new generation of mining equipment reduces the financial impact of high electricity prices. In contrast, low electricity prices reduce the impact of the relative disadvantages of inefficient older generation mining equipment. For tiers 1 and 2, the opportunity cost of bitcoin / balance sheet loss is not conducive to lowering production costs by upgrading its mining equipment. Based on the current ratio, the old mining equipment is still on the network.
As long as the other layers use the old mining equipment, the 1st and 2nd floors will remain competitive with the old mining equipment. And because the future hash derived from the next-generation mining equipment is close to 100% in the layers 3-8, the layers 1-2 will be forced to upgrade. The halving of Bitcoin is likely to be the trigger for this incident.
As your electricity price rises, the opportunity cost of depleting Bitcoin reserves / balance sheets to deploy funds for the next generation of mining equipment quickly becomes more favorable. In May 2019, forward-thinking miners began to predict that due to halving in 2020, S9 will face the risk of discontinuing production. Therefore, over the past 8 months, layers 3-8 have actively guided a hardware upgrade cycle to the next generation of mining equipment, while layers 1 and 2 continue to run their older generation S9. The next-generation mining machine upgrade cycle has increased the network hash rate by 80% and increased the proportion of the network hash rate represented by layers 3-8-dilutes the layer 1 and layer 2 across the entire network In the share.
As a result, this overturned environmentalists' predictions of the Bitcoin network. Many predict that as the energy consumption of the Bitcoin network exceeds a certain hash rate, the energy consumption of the Bitcoin network will be excessive.

Understanding the behavior of Bitcoin miners

The following analysis illustrates the selling pressure of miners operating at different electricity prices due to compression, and once unprofitable miners cease production (difficult impact), the selling pressure will be eased. We provide a simulation based on game theory to illustrate the behavior and decision of miners in different scenarios. These are not Bitcoin's price targets, but the impact of Bitcoin at a certain price level on the mining network before and after the price is halved.
In this simulation, all miners in a "miner layer" use a single average kWh rate. This simplification integrates the number of mining platforms that are "closed" at each Bitcoin break-even point price threshold. When a miner goes out of business, this creates a waterfall-amplifying the subsequent adjustments of surviving miners in terms of network difficulty and profitability. Because of these assumptions, this model creates a "step diagram", an illustration that helps conceptualize reality, but smoother, more linear changes will better reflect actual applications.
For consistency, this analysis makes the following assertions:
S17 represents the new generation of mining equipment, and S9 represents the old generation of mining equipment. The ratio of the new generation hash to the old generation hash is currently 61.38% and 38.63%, respectively.
The electricity price of each miner in the first layer is uniform, based on the average kilowatt-hour electricity price of all the miners in the first layer. Therefore, in this analysis, each miner's breakeven production cost in each layer is equal. When this price is violated, all miners will stop production.
During the analysis, no new miners joined the network.
According to the distribution in the table below, the proportion of S17 and S9 miners in each layer is different:
Why do we have confidence in these assertions:
Blockware Solutions, LLC is one of the largest Bitcoin mining platform distributors in North America. Our customers and partners include: United States, Canada, Mexico, Venezuela, Paraguay, South Africa, Iceland, Sweden, Norway, British Columbia, Germany, Eastern Europe, Kazakhstan, Russia, United Arab Emirates, Iran, Mongolia, China, Japan and Australia. Our extensive coverage: customer base, strategic partners, business partners and network representatives account for more than 20% of the total network hash rate.
We have conducted working meetings and peer reviews with top mining pools and the largest ASIC manufacturers to gain an in-depth understanding of the distribution of computing power percentages, electricity prices and mining machine models in each region.
We visited more than 30 megawatt mines in Chengdu, China, as well as water-rich areas in upstate New York and the Pacific Northwest.
Customers and partners in China's Sichuan Province, Venezuela, Kazakhstan, West Texas, upstate New York, and Pacific Northwest have electricity below 3c, but most are mining almost entirely older generation mining equipment . They have little incentive to upgrade to next-generation mining equipment because their low electricity prices reduce the benefits of more efficient mining equipment, nor can they justify the huge cost of upgrading to next-generation mining equipment.

$ 10,000 bitcoin: considerable profit margins on each tier

When the Bitcoin transaction price is $ 10,000, every miner level enjoys a considerable profit margin, especially the S17 miner platform. However, for the Tier 8 miners, the price of the S9 miner is close to the shutdown price. Even if Bitcoin is worth $ 10,000, 96.3% of the Bitcoin generated by S9 on the 8th floor needs to be sold to pay for electricity.
Based on the above assumptions, miners must sell at least 39.12% of bitcoin (equivalent to $ 211,225,815) per month in order to pay for electricity. This means that the newly deployed cash of investment funds and currency holders must reach US $ 211,225,815 per month to match the legal outflows generated by mining companies funding their operations. The selling pressure of miners is consistent, and the new funds raised by investment funds and currency holders are driven by market sentiment and vary according to different stages of the market cycle.

$ 7,500 Bitcoin : Breaking the Myth of "Miners' Breakeven Price is the Price Bottom Line"

As bitcoin prices fall, miners' profit margins are squeezed. As a result, they are forced to sell a larger percentage of block rewards to pay for electricity bills (income is decreasing, but fees remain the same).
Let's take a look at the miners operating S9 on the 6th, 7th, and 8th levels: As the price of bitcoin approaches and penetrates the miner's breakeven price, miners are now at a loss. They must sell all mined bitcoins and also sell bitcoin reserves to pay for electricity. In addition to newly mined Bitcoin, this puts additional selling pressure on the market, which is the exact opposite of support.

Understand the actual operation results and paper operation results

Many people believe that when miners reach a breakeven point, they can simply shut down and never lose money. This is a misunderstanding that is seriously misunderstood. Contractual obligations and failed financial management often result in miners operating at a loss. This has forced miners to sell more Bitcoins than they have mined; running out of Bitcoin's inventory has put additional pressure on the market:
1. Miners have negotiated contracts with utility companies to reduce electricity prices, but these prices depend on the minimum electricity threshold. As a result, some miners find themselves losing money for a certain period of time because they must continue mining to meet minimum usage requirements; otherwise they will lose long-term interest rates. They cannot simply shut down for a week or a month (when not profitable) and wait for Bitcoin to rebound.
2. Many miners send their mining equipment to hosting facilities. These escrow contracts lock miners on a fixed mining platform for one or two years and charge a fixed monthly fee (determined by electricity prices). If miners default on these monthly payments, the hosting facility can confiscate the mining equipment. As a result, many miners will be mining at a loss for months to avoid defaults and risk losing expensive mining equipment
4. Miners have become speculators. Miners are people, so they have an impact on people's psychology. Many miners are trying to implement guidelines for the timing and quantity of Bitcoin sales. Many miners may sell all bitcoins after receiving them, weekly, monthly, or just sell enough money to pay for electricity. Unfortunately, when Bitcoin rises, miners often turn into speculators, hoping to seize the opportunity to rise.
We share analytics with one of the largest OTC counters in the crypto space. In September 2019, we discussed how some of the over-the-counter mining customers deviated from their clearing plans and chose to hold mined bitcoin in July and August-thinking that bitcoin will continue to operate. Bitcoin peaked at the end of June and these miners had to sell Bitcoin at much lower prices in late September and October. This situation has accelerated the sell-off of bitcoin, because in addition to newly mined bitcoin, clearing the bitcoin vault will create more selling pressure.
In short: when the price of bitcoin is $ 10,000, only 39.12% of the bitcoins mined each month need to be sold to pay for electricity. Once Bitcoin dropped to $ 7,500, the profit margins of all miners dropped, causing S9 miners to lose money on levels 6, 7, and 8. As a result, 53.18% of the Bitcoins mined each month need to be sold to pay for electricity.

Miner Surrender Roadmap


Bitcoin price at $ 7,500- before halving

There are many inefficient, older generation mining platforms that are mining Bitcoin (3-9 layers running S9). These miners are under the most pressure to sell bitcoins because most of the bitcoins they mine need to be sold to pay for electricity. For miners with layers 3-8, miners running S9 also have the highest breakeven prices. They represent pressure points in the current mining network that are putting downward pressure on Bitcoin prices.

Bitcoin worth $ 5,000- before halving

With Bitcoin continuing to fall to $ 5,000, the S9 miners on the 6th, 7th, and 8th levels will be forced to shut down. This led to a favorable difficulty adjustment, which raised the break-even price for all surviving miners. However, despite the benefits of difficult adjustments, with Bitcoin valued at $ 5,000, the 4th and 5th tier miners operating S9 will be at a loss. S9 in layers 4 and 5 represent a new pressure point in the mining network, which makes the price of Bitcoin more vulnerable. These S9s will follow the miners' surrender roadmap discussed earlier: they will start running out of bitcoin funds to pay for electricity costs until they go bankrupt and are forced to shut down-which will increase pressure on bitcoin sales until they close.

Bitcoin worth $ 5,000-after inefficient miners go out of business

After the loss-making operation was long enough, the miners in the fourth and fifth layers closed S9, which brought favorable adjustments to the surviving miners. Shutdown S9 in layers 4 and 5 accounts for 14.5% of the entire network hash rate. This means that after the shutdown, 14.5% of the newly mined Bitcoins previously collected by Layers 4 and 5 S9 will be redistributed to the surviving miners. This redistribution will increase the break-even price of surviving miners and reduce pressure on bitcoin sales, as surviving miners' profit margins will increase. Newly mined bitcoins are now being accumulated by powerful people (more efficient miners). Miner's minimum sales pressure dropped from 69.60% to 51.49%

Bitcoin at $ 5,000 after halving

In the case that Bitcoin is halved to reach $ 5,000, the network will perform a healthy cleanup, allowing Bitcoin to reach the best position of a new high again (even the $ 8,000 Bitcoin price will bring substantial cleanup) .
Bitcoin-denominated mining revenue will decrease by 50%. In order to stabilize mining profit margins, the price of Bitcoin must be raised so that miners can earn the same dollar-denominated mining income. This is crucial so that miners can finance their electricity expenses. As all S9 above 2.5c (layers 2-8) will be operating at a loss, and miners running S17 at 6.5c and above (layers 7-8) will be operating at a loss-forcing them to shut down, there will be extreme miner surrender .

Bitcoin drops to $ 5,000 after inefficient miner failure-after halving

Satoshi Nakamoto's ingenious network stabilization mechanism: the difficulty of understanding the attractiveness of miners' profit margins
If Bitcoin remains at a lower price level within 2-4 months after halving, many loss-making miners will be forced to close. After all the loss-making miners are closed, the margins of the surviving miners will drop sharply. We will see a network in turmoil in the short term, but once inefficient miners shut down, difficult adjustments will return to stability.
Difficulties: The Bitcoin protocol has a self-correcting mechanism that can stabilize the profitability of the mining network and ensure that enough incentives are provided to miners to continue to ensure the security of the network. Miners are the backbone and security layer of the Bitcoin blockchain. Difficult mechanisms ensure that efficient miners are motivated to function. This is one of the most underrated and difficult to understand phenomena in Bitcoin mining.
If the mining network experiences marginal compression, the least efficient miners will be eliminated layer by layer. Due to the inefficient miners being shut down, the network now needs more time to mine a block, as fewer hashes of blocks on the network can be resolved in time. If the network does not resolve the block within 10 minutes, there will be a good difficulty adjustment. The share of rewards received by miners who were once closed down the network is now allocated to miners still on the network. This is considered a favorable and difficult adjustment. This process will continue until the profit margins return to normal and even become very profitable for the surviving / most efficient miners. Mining is for survival. Difficulty adjustments will reduce the impact of Bitcoin price adjustments on effectively operating miners.

Pre-break shock
1. Economic conditions on the supply side have improved by half
Many market participants are speculating about the future of Bitcoin. To be sure, by mid-May, with the newly issued block reward halved, the selling pressure that Bitcoin may face will be reduced by 50%. A 50% reduction in supply will reduce the moderate but continuous downward trend in bitcoin supply, which is entirely dependent on the bitcoin protocol code. This is a positive catalyst for the price of Bitcoin.
2. Improved demand-side economic conditions (due to halving demand) trigger positive sentiment
Economists may say that Bitcoin is worthless because it is currently too unstable to be an effective means of value storage, and too slow to be an effective payment platform. The maximizer of Bitcoin can say that Bitcoin is digital gold because it is scarce. Ultimately, the market determines the price of Bitcoin.
Historically, Bitcoin will fall to half and continue the uptrend / bull cycle (in this process, there will always be several serious callbacks). Most market participants have a deep understanding of these historical trends. One can claim that the halving is priced, but this cannot be proven unless you can confirm with most market participants that they have deployed a cash position and reached the price target.
Views differ. Most market participants hold a certain amount of cash positions. Everyone is thinking about halving and developing positive emotions on the demand side. This psychologically positive sentiment will enable market participants to anticipate and prepare to allocate cash positions to upward momentum. Everyone sees the trend of halving Bitcoin, and at some point, everyone misses a significant rebound in Bitcoin-which is why Bitcoin is more attractive than any other asset. This is a market, and the market is driven by human psychology. The psychology of Bitcoin market participants is that they tend to be bullish before halving. This has created positive sentiment for the demand side of Bitcoin.
Opportunistic environment for obtaining capital through debt
After the Bitcoin network has undergone significant or continuous adjustments to favorable difficulties, the possibility of Bitcoin price bottoming out has increased. This is because newly mined bitcoins are now being distributed and accumulated by the most efficient miners with good assets. The number of bitcoins (in bitcoin price) obtained by surviving miners is directly proportional to the number of bitcoins obtained by closed miners. These rare money-making opportunities have allowed surviving miners to accumulate large amounts of Bitcoin.
Many market participants are rapidly gaining a new stimulus. Through centralized lending institutions and decentralized lending platforms, miners can use the mined bitcoin as collateral in exchange for cash or stable bitcoin to obtain debt. Now, miners can hold bitcoins instead of selling them, but still bear 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, and we believe it will be an important catalyst for the rise in Bitcoin price.
As more bitcoin accumulates through strong hands, it is likely to be held for a long time and the equivalent of eliminating supply from the network will be established. These experienced miners have previously witnessed the surrender of miners, who have a large amount of Bitcoin on their balance sheets. Many people think that when Bitcoin is cheap, they choose to hold it. For miners holding a large amount of bitcoin, obtaining debt in the market will be another tool for them to hold bitcoin during a price correction, which will reduce selling pressure and accelerate bottoming during the correction. Although this may be a source of stimulus for the network, it is worth cautious how it will end, as debt usually ends in an unfavourable way with excessive speculation.
Combining the above three forces, it can be expected that with the rapid improvement of the supply-side and demand-side economies of the Bitcoin price, there will be a strong multiplier effect. This is why the price of Bitcoin is bullish after halving.

Bitcoin rebounds to $ 7,500- after halving -miner surrender-style selling accelerates bottom

After the miners close (capitulation), the newly mined bitcoins are allocated to the most efficient miners, which will minimize the selling pressure in the bitcoin market, because the prices of these miners are far above the break-even point. Just like when bitcoin was sold off, mining companies would close friction with it, and when bitcoin rose, mining companies would reopen friction with it.
Many miners may default on electricity, hosting, or land lease fees for several months, and cannot start again without paying multiple months of rent. This makes the price of bitcoin more likely to rise. As the price rises, the proportion of newly mined bitcoins that need to be sold will decrease to cover the cost of electricity (the cost of electricity remains the same), because the surviving miners have healthy profits rate.
The closed miners cannot start mining at the same time as the price of Bitcoin rises. This is similar to the friction experienced by miners with falling prices and loss-making operations who cannot immediately stop production. When the price of Bitcoin rebounded after experiencing major difficulty adjustments, it created a favorable environment for efficient miners who do not need to shut down to accumulate larger cakes.

Bitcoin price rebounds to $ 10,000- after halving -miners' capitulation has accelerated Bitcoin price decline

Friction prevents inefficient miners from resuming production in a timely manner. Therefore, newly mined Bitcoin rewards are accumulated by efficient miners, so the minimum selling pressure for newly mined Bitcoin continues to decrease. With the Bitcoin price at $ 10,000, the minimum proportion of selling pressure for miners has dropped to 23.33%.
The comparison below illustrates how healthy it is to clean up by removing inefficient miners and reducing potential selling pressure on the network:

This cycle reappears : Bitcoin rises to $ 10,000- after halving -rebound after difficult adjustment

After bitcoin prices have risen long enough, inefficient miners are finally able to return. This leads to an unfavorable difficult adjustment as more miners compete for the same amount of Bitcoin. This caused the minimum selling pressure from miners to rise from 23.33% to 51.49%.
This is a good example, illustrating the gravitational effect of difficulty, but what we have seen is that profits have been compressed due to adverse adjustments made to the difficulty by miners joining the network. Difficulties stabilize the mining network and provide sufficient incentives to maintain the security layer of Bitcoin. Over time, despite fluctuations in the price of bitcoin, its profit margins are still sufficient for stable and efficient miners to remain profitable. In the end, difficulties will wipe out those companies with inefficient operations, but when bitcoin prices rise sharply in the short term, even inefficient miners can enjoy healthy profit margins.
Many people are afraid of halving, but if you understand the psychology of miners and how game theory will drive behavior, efficient miners should welcome it before and after halving. Miners (6.3c) with the most efficient mining equipment will be in pain, but they will survive. Bitcoin will naturally face selling pressure from miners, which have depressed the price of Bitcoin. After halving, the new fiat currency will be required to offset selling pressure from miners. Therefore, by injecting enough fiat currency into the financial system to achieve long-term price increases, investment funds and currency holders will be more able to stabilize downward pressure.

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