With Bitcoin Mining Capitulation Coming to an End, Will Halving Pump Begin?

Bitcoin [BTC] hash-rate recovery is underway and we can expect a buy signal post the miner capitulation soon. However, the initial drop was equivalent to capitulation in bear markets of 2018. In this article, we view the state of the mining network and its’ relevance in the past. 

Mining capitulation means the shut-down of relatively inefficient miners of the ecosystem due to a decrease in the profitability of mining. Capitulations are characteristics of bear markets. Nevertheless, are also brought on due once every fours year due to ‘halving’, when the reward to miners chops in half.

Before holding there was a lot of speculation around miner capitulation with the break-even cost jumping to over $10,000 for most miners. While there was a considerable drop in the beginning, the hash rate has risen back to pre-halving levels.

Profitability Threshold

The breakeven cost for miners post halving is somewhere around $4000-$6000. The cost most efficient and advanced miners like WhatsMiner M20s 65T is around $5,000 and for flagship models, M20S+ around ~$4000 per Bitcoin. Hence, at current prices the majority of miners are profitable.

The quick recovery in the hash-rate in the last couple of weeks is evidence of the profit ratio. The total hashrate has increased to pre-halving levels; currently, at 110 EH/s. The effect of the rise in difficulty will be tested this week. Nevertheless, it is expected to stay above 100 EH/s due to the presence of the rainy season in South China as well.

According to sources, the cost of electricity of 0.1-$0.06 is a gross overestimation, the actual cost is $0.04 per kWh or below. Nevertheless, the situation is still worrisome for the S9 systems which accounted for around 35-40% of the total hash-rate before halving.

Moreover, due to the increasing adoption of new-gen. miners, the difficulty rate further increases for old miners. Bitmain and WhatsMiner have launched many new models in 2020.

Furthermore, with the development of institutional-grade mining facilities by Fidelity and Blockstream, the network’s security is never at stake, only the profitability for medium and small scale miners. Countries like Iran and Russia has been investing in mining projects as well to strengthen the economic stand of their country. The increase of mining in Iran and China is particularly a big threat to the U.S. due to opposing interests. Hence, competition in the space is bound to favour the industry. 

The difference in Past Mining Capitulations

Bitcoin [BTC] Difficulty ribbon represents the moving average of the difficulty index in mining. The difficulty is proportional to the hash rates, nevertheless, fluctuates less as it changes only once around every two weeks.

There is a significant difference between the last Bitcoin [BTC] halving and the present w.r.t. to the mining capitulation. What is seemingly working normally is actually facing a difficult situation with the halving in rewards. The short-term mining capitulation is of greater scales than the previous capitulation in 2016.

Notice, the dotted lines (short-term difficulty) bottomed between August-September 2016 and never fell below the 128 and 200-Day Moving Average. However, currently, the short-term difficulty averages (9,14 and 25 Day) have fallen below the 200-Day Moving average.

This is reminiscent of the crash in 2018 when the bottoming and upward consolidation in the mining hash-rates took 2 months. Nevertheless, the previous drop in hash-rates occurred due to a drop in price and overall bearish sentiments. Currently, the drop in price seems equivalent to the drop in reward. Hence, in my opinion, we are still in the process of bottoming.

Moreover, the fact that Bitcoin [BTC] price is holding onto the $9k level despite the capitulation (which often accelerates bottoms) is positive. The consolidation is strengthening the price of BTC against a violent drop, making lower limits below $6,000 less and less probable. 

Recovery Has Begun?

As previously mentioned on itsBlockchain, Miner Capitulations tend to accelerate Bitcoin bottoms. 5 weeks post halving we’re witnessing the first recovery in difficulty and that too by 15% (largest by far in terms of increase in actual hash rate amount).

Bitcoin [BTC] mining difficulty increased by over 15%, marking an increase in the hash rates first time since halving. According to the data analytics firm, Coinmetrics,

The CMBI Bitcoin Hash Rate Index demonstrates that the hash-rate has now largely recovered to its pre-halving levels

There is reason to believe the capitulation might be coming to an end.  The rise is also significant as it is the largest since January 2018. Hence, higher than the recovery during the 2018 bear market (December 2018-January 2019). There is tremendous competition between the miners and new hardware is upping the game with advanced cost-efficient models.

Moreover, if the recovery has begun this fast, the accumulation band might be shorter leading to bullish waves similar to the period post halving in 2016. However, the confirmation of complete hash rate recovery is still pending on the hash ribbons and difficulty ribbon indicators. 

Furthermore, mining apart from accelerating bottoms, the capitulations also mark an end of bears as the selling pressure decrease with the exit of weak miners. With halving this effect is further amplified due to a decrease in reward and exit of weak miners. Willy Woo, leading on-chain analyst noted, 

Typically we see this (capitulations) at the end of bear cycles, after miners capitulate, the lack of miner selling pressure allows the price to stabilise and then climb; the classic accumulation bottom.

Other Factors Causing the Increase

The beginning of the rainy season in China could be another factor influencing the rise in the hash-rates. The Southern region of the country is witnessing extensive floods. The dams (particularly the massive Three Gorges structure on the Yangtze River) play an important role to reduce destruction. Moreover, there is ample energy for conversion into electricity.

Due to the availability of cheap hydropower, the cost of electricity drops drastically for the miners. However, some sites might also be getting affected due to the flooding situation. The period of bountiful rain is expected to last for a couple of months. Post which, another drop in the total hashrates is probable.

The new M30S+ mining hardware by MicroBT reportedly clocks in at 100TH/s with 34 J/TH of efficiency. These miners are expected to be priced in the range of $3,000-$4,000. The efficiency of the Bitmain models are competitive as well and the delivery/installation of new hardware is expected in June-July. This will help in increasing the hash-rate with minimal increase in the cost of electricity. 

The period during September and October this year will reflect the actual stable state of the ecosystem after halving and adoption of hardware.

When Buy Signal?

One of the leading indicators for Bitcoin has been the consolidation after miner capitulation. The Bitcoin Hash Ribbons indicator by Capriole.io by Charles Edwards measures the hash-rate over a 30 and 60-day average. The beginning of the second capitulation this year within three months was drastic. Nevertheless, it has been flashing recovery signals since the second week of June. 

On the difficulty ribbon chart mentioned above, the curve has started to turn positive on the lowest time frame D9. Comparing with the capitulation during the COVID-19 crash, buy signal can be expected within the next week.

Nevertheless, during the 2019 bear market, the price continued to consolidate at the bottom even after considerable recovery. While apprehensions of a second wave with a drop-in price are alive, the overall sentiment is positive, at the moment. If the price continues to hold $8,800 in the next couple of weeks, there are reasons to expect bullishness due to a decrease in the rate of supply, and organic beginning of the halving pump.