Prior to the recent crypto market crash, most estimates put the cost of mining at around $8,000.
Case in point: the below chart from prominent trader Byzantine General showed that per data from March 8th, the BTC production cost and average miner cash flow had both trended towards $7,700.
Both the $BTC production cost and average miner cash flow arrive at the 7700 level.
This definitely isn't an important level or anything 😏 pic.twitter.com/5SF0V0LczA
— Byzantine General (@ByzGeneral) March 8, 2020
Unfortunately, BTC decisively broke through this level in last week’s crash, falling as low as $3,800 in a record drop.
This move convinced many that miners operating on tight margins would soon go bankrupt, turn off their machines, and send the Bitcoin network into a “death spiral” as they “capitulate.”
Although there is no evidence of a full-blown “death spiral,” there is evidence that the crash in the Bitcoin market has begun to adversely affect miners already.
Bitcoin Hash Rate Sharply Drops
According to the latest data from Blockchain.com, the hash rate of the Bitcoin network — how much computational power is being allocated to securing the network — has dropped some 40% from the all-time high established near the end of February.
More specifically, the hash rate dropped from the 136 terahashes per second high to 82 terahashes just the other day.
The drop in hash rate was further corroborated by the below tweet from Digitalik, a Bitcoin data scientist, who noted on Thursday that he noticed that a mere 40 blocks were mined in a 12-hour period, which is almost 50% fewer blocks than a normal period.
— digitalik.net (@digitalikNet) March 20, 2020
This means that when the network difficultly adjustment takes place in around 10 days, it should adjust lower to ensure that blocks are processed around every 10 minutes.
Miner Capitulations Mark Bottoms
Although there seem to be valid fears of a collapse in the mining ecosystem, these fears may be a sign that the value of Bitcoin is in the midst of bottoming before a bullish reversal.
Cryptocurrency investor Light remarked that the propagation of the “miner capitulation” narrative has convinced him of one thing: “make sure you’re long BTC.”
If I had to choose just one lesson to keep after years of trading crypto, it would be this:
When people start trotting out the miner capitulation narratives, make sure you're long BTC.
— light (@LightCrypto) March 17, 2020
Noted Bitcoin trader DonAlt, who predicted much of the recent decline, echoed Light’s sentiment to a T, writing:
“Now that the narrative has switched from “halving is going to be bullish” to “miner capitulation” it’s time to look for longs again.”
What’s interesting is Light’s and DonAlt’s half-joking sentiment actually holds its water, so to say; rampant discussion of “miner capitulation” and the similar “mining death spiral” is what marked the 2018 and 2019 price bottoms in the value of Bitcoin, suggesting it may do the same this time around.
At the start of December 2018, Santa Clara University professor Atulya Sarin released an infamous article to MarketWatch proposing Bitcoin was “close to becoming worthless.” She cited a “mining death spiral.” One week later, BTC found a bottom at $3,150.
Late last November, the miner capitulation and death spiral narrative appeared again as Bitcoin had fallen 50% from 2019’s highs of $14,000. Once again, it was all anyone could talk about. Three weeks later, BTC bounced off $6,400 to kickstart the next bull trend.
This historical accuracy of this “indicator,” so to say, would suggest that Bitcoin, while maybe not at an ultimate price bottom, is at least very near to one.