As Bitcoin miners close up shop, one calculation suggests the market bottom may be in
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(Kitco News) – It’s been a tough year for Bitcoin miners as the strength of the Bitcoin network hit a new record high hash rate and reading difficulties amid a 75% drop in the price of BTC from its peak in November 2021.
The rising hashrate coupled with the falling price of Bitcoin means that profitability is on the decline while the level of competition in the mining industry has never been higher. As a result, miners have had to sell their earnings at the fastest rate since early 2021, when the bull market was just getting started.
Bitcoin miner net position change. Source: Glassnode
With Bitcoin continuing to struggle to gain momentum, trading near support at $17,000 at the time of writing, less profitable miners have increasingly had to shut down their machines in an attempt to save money.
Rising energy costs across the US and Europe have further exacerbated the situation, forcing previously profitable businesses to close up shop.
As a result of mining rigs being shut down, Bitcoin mining difficulty saw its biggest downward adjustment in over a year, dropping 7.32% on Tuesday at block height 766,080. This coincided with a drop in average hashrate from 264.18 EH/s to 245.10 EH/s, according to data from BTC.com.
The difficulty adjustment is an automatic feature coded into Bitcoin that changes how difficult it is to mine a block depending on changes in hashrate, helping the network maintain its 10-minute block time. Difficulty adjustments occur every two weeks, meaning miners will have an easier passage in mid-December after dealing with record difficulty throughout much of 2022.
To go along with a reduction in difficulty, resilient miners who have managed to survive the depths of the crypto winter so far are starting to take advantage of less profitable miners dropping out. Data from Glassnode shows that as some miners shut down their rigs, the profitability of remaining operations has started to climb higher.
Mine earnings momentum. Source: Glassnode
Since Bitcoin difficulty is a lagging indicator, with downward adjustments coming after a drop in hashrate, it is possible to see the effect of a decline in miners reflected in an increase in profitability for those who remain.
According to Glassnode, “Sustained bear markets are often accompanied by a significant decline in network activity, resulting in fairly weak fee revenues. This deadlock has historically broken in response to a large capitulation in price action, where significantly lower prices entice new demand for block space .”
The increase in fees suggests that the drop in the Bitcoin price has led to more activity on the network, leading to more demand for block space and “an increase in network congestion.” This will come as a welcome sight to struggling miners who are at risk of bankruptcy.
It also suggests the possibility that the market bottom may be in, as Bitcoin’s recent capitulation to a multi-year low of $15,599 has led to an increase in activity on the network and demand for blockspace, which has historically been followed by a rise in price, as shown in The miner earnings momentum chart above.
Only time will tell if this is the actual bottom, but the increase in miner income gives reason for hope. As Glassnode noted, “The most interesting thing is whether this upswing is fleeting, or whether it can be sustained, meaning a potential regime change is underway.”
In related news that could affect the larger Bitcoin mining ecosystem, Cryptonews has reported that lawmakers in Russia are moving closer to legalizing crypto mining in the country, potentially allowing industrial miners to operate as “entrepreneurs” by January 2023. And in Paraguay, government officials have voted down a bill that would have capped crypto mining electricity prices, according to a report from The Block.
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