Robert Steinadler, 9 months ago
Over the last couple of weeks, the miner capitulation has been discussed on several blogs and podcasts. The term is very popular and it describes a scenario where miners are forced to sell their Bitcoins to keep up with the production costs and eventually have to face bankruptcy if they run out of cash. In every bear market, the miner capitulation comes into play since many mining businesses are founded under the impression of the last bull market.
This time it’s different, one of the biggest mining companies had to sell 3.000 BTC. Why did this happen and is this the capitulation?
Miners usually guard all their business data as a well-kept secret. One reason is that they don’t like to share too much info with competitors and another is security concerns since most of the equipment is often situated in remote areas.
This makes it difficult to give a forecast of how the mining industry will develop. Of course, a few things are obvious and others are available through public information. This allows to calculate an average price for the production of a single Bitcoin and at the current price miners are might end up losing money if they keep operating.
Another indicator that is important is the difficulty adjustment. It is recalculated every two weeks and increases if hash power is increased. Should the hash power decrease, the difficulty is also decreasing. This keeps block production at the same pace no matter how many miners are participating.
When looking out for the miner capitulation many analysts believe that the difficulty will decrease over time, build a bottom formation, and then start to increase again. Needles to say, the difficulty is thoroughly analyzed along with the hash rate for clues if the bottom has commenced or if more miners will power down their rigs.
Bitfarms is one of the bigger players in the industry that mostly operates in Canada and is situated in Argentina. The company recently revealed that it had to adjust its strategy. No more hodling, but selling Bitcoin is what’s on the management’s mind. According to a statement, the company sold 3.000 BTC for a price of $63 million which increased its liquidity to $100 million.
The company bought 1.000 BTC in January for a price of $43 million and sold them at a loss. Bitfarms still holds 3.349 BTC and produced 14 BTC per day which is a quarterly production of 1.260 BTC.
That being said, the company is far from capitulating or going out of business. It simply means that holding Bitcoin is only a sustainable strategy if the market is bullish. With the recent volatility and the bearish trend, Bitfarms cannot risk burning a hole in its pocket by facing another decline in Bitcoins price. With the additional liquidity and the constant rate of 14 BTC per day the company will continue to operate and is creating a high yield with Bitcoin mining.
It is true that many companies had to adjust their strategy. Bitfarms is not the only one reacting to the current situation with lay-offs and selling crypto assets. It is highly likely that more companies have to shut down parts of their businesses and sell more assets if they are unable to secure liquidity otherwise.
In conclusion, the miner capitulation has started in June in terms of selling pressure but it is hard to predict when it is going to be over. Interpreting Bitcoins mining difficulty as an indicator of the status of the ongoing capitulation has proven somewhat useful in the past. But make no mistake, this is not exactly science and there is no guarantee that we will see a bottom at a certain point.
The good news is that most businesses have some sort of plan on how to mitigate market volatility and especially bigger and older players are well aware that a bear market can be long and harsh. Adjusting their hodl strategy is a vital part which is why they are selling, but not necessarily going out of business.
Bitcoin’s total hash rate has seen a drop of more than 10% between June 12th and June 22nd. However, this drop isn’t unusual and similar drops have occurred in the past few months while the overall hash rate was increasing throughout the year. The difficulty seems also to be unaffected so far. This suggests that miner capitulation either won’t create any more pressure since companies are already prepared for the duration of the bear market or that more miners might be affected in the months to come.
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