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Bitcoin Mining Sell Pressure Waning, Supply Shock To Drive Massive Price Increase

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The recent price action in Bitcoin has been particularly devastating to miners who had to turn off their expensive to operate machines after the price of the cryptocurrency fell below the cost of production. However, the rapid capitulation of the weakest miners in the market has in the past always led to sustained, steady, long-term growth in the value of Bitcoin, eventually peaking out at the top of each subsequent bull run. Is this latest round of miner capitulation the final shakeout before new all-time highs are set? Weakest Miners Fold as Bitcoin Price Plummets Below Cost of Production Earlier this month, as fears over the coronavirus and its impact on the economy spilled into markets, it caused a record-breaking collapse in Bitcoin price and the valuations of other cryptocurrencies. Even the stock market and safe-haven assets like gold suffered amidst the destruction. Related Reading | Bitcoin Trades Below Production Cost, Miners Are Better Off Buying  The price of Bitcoin fell so low, miners who typically operate expensive, specialized equipment in order to most efficiently generate BTC, were better off buying the first-ever cryptocurrency on spot exchanges rather than continuing to mine Bitcoin at a value below the cost of production. However, the cost of production is a factor that varies greatly among Bitcoin miners, due to a variety of external influences such as regional energy costs, size of the operation, etc. As with anything in life, only the strongest survive and can weather the greatest of storms. The recent storm across the crypto market was enough to flush out all the remaining weak miners. 2) Today we witnessed one of the largest Difficulty reductions in Bitcoin history. In the past, extreme difficulty reductions signal favorable probabilities for long-term capital deployment. pic.twitter.com/zV1zsqSmPV — Matt D'Souza (@mjdsouza2) March 26, 2020 The rapid increase in miners shutting down operations led to a sharp drop off of hash rate, which at one point was plummeting faster than Bitcoin’s price was. Only the Strong Survive: Well-Prepared Miners Weather the Storm To New All-Time Highs When hash rate plummets, Bitcoin’s mining difficult self-adjusts to bring the cost of production more in line with the actual value the asset is trading at. The cryptocurrency just experienced its second-largest decline in hash rate in the asset’s history, causing a massive, record-breaking adjustment to mining difficulty to compensate. Data shows that in the past, following each of the largest difficulty adjustments in history, on average Bitcoin’s price grew by over 1,000% in the 12 months following, over 160% in the six months following, and over 125% in the following three months. 6) After shutting off, Bitcoin they were receiving is allocated to the more efficient, experienced miners with excellent margins who are positioned to accumulate a larger percentage of the newly minted Bitcoin rather than having to sell it – significantly reducing sell pressure — Matt D'Souza (@mjdsouza2) March 26, 2020 The idea is based on the theory that as the weakest miners disappear from the market, the sell pressure they add to the supply and demand begins to wane, causing a supply shock and eventually, demand begins to take over, causing the asset’s value to spike. The strongest miners remain, holding the Bitcoin they mine to later sell when Bitcoin’s value appreciates. Related Reading | Miner Capitulation: Hash Rate is Dropping Faster Than Bitcoin Price With the weakest miners now shaken out, and big miners still holding strong, is it finally time for demand to outweigh supply once again, and drive Bitcoin prices to a new all-time high? Featured image from Shutterstock

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Tony Spilotro, Khareem Sudlow