The main basis of any economic activity is the equilibrium between the demand and supply. The transparency in the design of Bitcoin enables us to analyse the mining scenario (supply) and make appropriate inferences. The market price changes helps in analyzing the demand.

Recently, with the catastrophic drop on 13th March 2020 due to Coronavirus panic across all asset classes in the world, the miners are undergoing ‘capitulation.’ It implies that contribution towards supply is reducing as the mining is no longer profitable for some entities.

Bitcoin Production Cost Band (TradingView, Indicator by Charles Edwards)

The production bank shown in the chart above shows that the lower limit of miners paying $0.04 -$0.05 per KWh is in the range of $3,500-$5000. Below this break-even cost the market expects severe miner capitulation.

However, an elaborate research of the industry reveals that this band represents only the tip of the ice-berg.

Why Miner Capitulation FUD is Over-Hyped

This report by Blockware suggests that more to the band than the ‘average’ representation. The factors that are causing the deviation are:

The statistics reveal that most of the miners (about 61.37%) are now running S17 50 Terra-hashes systems, that offer massive profitability than the older S9 systems. These new hardware systems are highly cost effective and powerful.

Moreover, about 27.5% of the miners are operating at a cost at or below $0.04 per KWh with some of their costs as low at $0.025.

One can notice that Bitcoin’s hash rate has increased linearly after June 2019 despite the bear market in the second half of 2019. This is contradictory to the usual correlation of ‘hashrate following price.’ It shows that in the long-run, innovation, preparedness and scale of things are important factors in determining hash rate trends.

Bitcoin Hash-Rate Increase

The report notes how the miners are shifting to the new generation of miners,

In May of 2019, forward thinking miners began to anticipate the risk of shut off for the S9 due to the 2020 Halving.

Moreover, the last 7-8 months is now seeing a massive shift as mining gets closer.

Bitcoin 2019 Price Top and Bear Market

Layer or Tiers of Miners

The research presents a very comprehensive report of the world-wide mining situation. In economics, there is a microeconomics principle called economies of scale. According to this principle, industries benefit from decreasing cost per unit of output as the scale of generation increases.

This involves a variety of factors, they are able to purchase items in bulk, hedge their large scale productions, take advantage of credit and other loan facilities and so on. In the Bitcoin mining business, one other leading factor of decreasing cost is geographical locations. In areas where generation of renewable energy is prominent, miners can benefit by eliminating cost of transmission.

Moreover, usually they enter into long-term contracts with the electricity providers for a discount.

Large efficient mining farms with cheap renewable electricity forms the first tier of miners or Layer 1. The cost of production of these farms are considerably lower. The consecutive layers accommodate the miners w.r.t. increasing production cost. Hence, Layer 8 miners are the small scale inefficient miners.

Layers of Bitcoin Miners Based on the Electricity Cost (Image Credits: https://www.blockwaresolutions.com/)

Moreover, these are further divided into two subtypes of new and old generation of miners. The Old Generation, S9 13.5T, uses 16nm Chips, while the S17 Pro 50T uses 7nm Chips.

Hence, this involves S9 miners paying costs as low as $0.025 Kwh as well.

Statistical Division of Miners Based on Production Cost and Hardware (Image Credits: https://www.blockwaresolutions.com/)

Hence, new age level Layer 7-8 miners are able to achieve the same/lower break-even cost on Bitcoin against Level 2 (large-scale) S9 miners. Moreover, the cheapest break-even cost for the 7nm chip miners is as low at $982.

What Happens After Halving?

Nonetheless, the current global environment is causing considerable shut-downs in the ecosystem. Moreover, the halving pressure is adding on to the capitulation fears among some miners. Layer 1 and 2 miners are the most likely to survive if price goes south of $5000.

According to the analysis, as the price decreases and starts affecting the less profitable layers of miners. The selling pressure in the market increases, as the miners are sometimes forced to mine at a loss. It states,

Many believe miners can simply shut off when they reach breakeven and will never operate at a loss. This is a misconception that is grossly misunderstood.

The miners are often hopeful of a reversal in price in due time. Hence, they continue their operations in hopes of a bullish reversal, when they eventually need to clear the bills. This accelerates the bottom in mining as the selling increases.

The analysis suggests that Miner Capitulations Accelerate Bottoms, and lead to bullish reversals in the long-run. This happens when a lot of miners have shut-down and only the efficient ones remain in business.

Expected Mining Statistic if Price Goes into Halving at $5000 (Image Credits: https://www.blockwaresolutions.com/)

If the price continues to range between $5k-$7k leading upto halving many lower layers of miners will capitulate. The Layers 2-8 of S9 machines are likely to shut-off, however, the new S17 miners operating with Layer 6 characteristics are expected to turn profitable with price even at $5000.

Inference from the Analysis Accommodating Difficulty Adjustment

Moreover, the difficulty adjustments in the next few weeks further increases the amount of Bitcoins they generate, with a lesser incentive to sell.

This reduces the sell pressure in the market tremendously, as the efficient miners HODL Bitcoins. Leading on-chain analyst, Willy Woo, explains this phenomenon in this tweet,

The weakest miners sell more of their coins to remain operational. When it becomes unsustainable, they capitulate, hashing power and network difficulty reduces (ribbon compression), leaving only the strong, who sell less leaving more room for more bullish price action.

Hence, investors must look for the compression in the ‘difficulty ribbon.’ It is an indicator which represents the changes in the difficulty of Bitcoin w.r.t. different time period moving averages. Remember, the difficulty decreases due to miner capitulation, hence we see short-term moving averages moving below the long-term difficulty average, causing a compression.

Difficulty Adjustments: How it Changes Everything

Bitcoin mining difficulty is a measure of labour/hash input must be provided by miners to validate a block. The design of Bitcoin accommodates a mining ecosystem that is highly dynamic.

The aim is to keep the average block time around 10 minutes. When there are a large number of miners, the difficulty increases and rewards are less.

On the contrary, when there are fewer miners, the difficulty decreases and the rewards for the individual miners increase. Hence, the relation is inversely proportional. Currently, we are expected to witness a sharp drop in the difficulty.

Miner Capitulation Roadmap

Then, after Bitcoin’s price rallies, new miners enter the system or old miners turn on their systems to benefit from the profitability.

Bitcoin’s difficulty is adjusted according to the network after every 2016 blocks; around every two weeks. Hence, the system is highly dynamic in the short term and stabilization across the industry could take weeks.

The break-even cost reduces as the mining difficulty decreases. This is a balancing system built in the system by design. Therefore, shunning the capitulation fears even more firmly.

Market Sentiments

The trends in mining reflect that while capitulation over some degree can be expected, it will be beneficial to the price in the long run.

In the past, the price has always witnessed a bullish run close to halving, followed by correction, miner capitulation, accumulation and then another bullish action.

Bitcoin Difficulty Ribbon and Price Reaction during Halving ( Source )

The price leading up to halving has always been bullish in the past, correcting only in the short term close to halving. However, the current ‘black swan’ event has thrown the market into tremendous fears of capitulation.

The tremendous volatility in the price moments and correlation with the stock markets is due to the sell-off across all markets to address the COVID-19 break-out crisis. The trade restrictions and lock-downs across the entire world are forcing entities to move to hold greater amounts of liquid cash positions.

The Governments and Central Banks or Federal Reserves are also resorting to extreme QE measures and printing heaps of money to maintain enough liquidity for the unfortunate sections of the society. The demand for FIAT is massive at the moment, as the world prepares to fight the deadly virus.

Last but not the least, the dips in price tend to accelerate the price towards the bottom as the sell pressure from miners increases. However, in the long run when even miners die, and their ecosystem reaches an accumulation period followed by a bullish move.



