Bitcoin Miner Capitulation Has Been ‘Completely Different’ This Cycle: CoinShares

A cycle of miner capitulation can be observed throughout Bitcoinits history.

When times are good, miners hoard their Bitcoin, limiting the supply of new coins during high demand and acting as an additional multiplier to the overall upward price trend.

When times are bad, as in recent months, miners sell their Bitcoin treasure chests – usually to cover operating expenses when mining is less profitable, such as when Bitcoin’s price is low, or to pay off over-leveraged positions.

Back in June 2022, for example, a report from cryptoanalysts at Arcane Research revealed that during the month of May, publicly traded Bitcoin miners such as Marathon Digital and Riot Blockchain sold more Bitcoin than they mined — a stark reversal of fortunes from the first four months of the year when the same miners sold less than a third of their earnings.

However, this cycle has been different, CoinShares Bitcoin Research Lead Christopher Bendiksen told me Decrypt.

“When you had a much less efficient capital market, it was probably much less orderly, and we used to see it as these big withdrawals in trouble,” he said, comparing the current network to when the industry was less established. “It just hasn’t happened this time, even though we’ve had spectacular bankruptcies and a bunch of struggling operations.”

During capitulation cycles, miners running inefficient or excessive operations drop the network – usually this has resulted in them shutting down their machines.

This could lead to the “big pullbacks” that Bendikson mentioned, when it briefly becomes easier for mining hardware to mine Bitcoin, before a rebalancing period where more mining hardware is deployed, raising mining difficulty.

This time, except for a short period due to bad weather in the United States, companies have not turned off their machines.

This had made the last capitulation cycle unique, shedding more light on how the mining market is evolving rapidly.

Chapter 11 makes markets different

The recent bankruptcies have not had a significant effect on mining difficulties, because the majority of miners on the network this time were based in the United States, Bendiksen said.

Before China’s attack on crypto in 2021, the bulk of the network’s hashrate (computing power) was located outside the US, mainly in medium-sized, at least by today’s standards, private mining farms in China.

These farms dropped out of the network when the government cut the power, causing a sudden 17% drop in the network’s hash rate.

This attack was far more disorderly for miners, with physical locations shutting down abruptly, taking down a number of mining equipment with it.

That just hasn’t been the case for the more orderly bankruptcy proceedings.

“Either the shutdowns that have occurred have outgrown new hashrate, more contracted machines are coming on, or the machines have not been shut down,” the CoinShares researcher told Decrypt. “It looks completely different from other cycles.”

Consider, for example, Core Scientific. In December, the firm officially filed for bankruptcy, citing the current market conditions.

Critical, but the miner said operations would continue. The firm has also written several financing agreements to do so, further highlighting the differences between swift regulatory action and the slow-moving bankruptcy process.

All eyes on Bitcoin’s halving

Bitcoin prices are still 66% below the record set back in 2021, and there could well be more financial difficulties down the road. According to Bendikson, the market may have to wait until next year for more green shoots.

In a research note, Bendiksen pointed to the halving event in 2024, which he said has historically been linked to bull markets. The Bitcoin halving is when the network halves the amount of rewards that miners receive for their work.

“Historically, there has been a recurring tendency for halvings to be closely followed by bull markets, leading to the now famous four-year bull/bear cycles in bitcoin price,” he wrote in a research note.

Data from Coinwarz estimates the event to be approximately April 26, 2024.

Whatever the price, if the industry has learned anything from this latest spiral, it’s that the mining industry has matured by leaps and bounds in recent years.