Bitcoin: Will low volatility boost trader optimism? and more

08/10/2023 0 Comments

1. Bitcoin: Will low volatility boost trader optimism?

Bitcoin has not been averse to the recent turbulence of the cryptocurrency market. The once-unstoppable king coin faced a dip below $30,000, giving rise to speculation and a prevailing bearish sentiment.

Despite the interest displayed by institutional players in Bitcoin’s future, skepticism continued to cloud the overall outlook.

Calm before the storm?

As Bitcoin’s price took a tumble, there was a decline in volatility observed. The cryptocurrency, notorious for its rapid price swings, experienced a period of reduced volatility, causing ripples across the trading landscape.

Adding to this narrative was the rising Open Interest in Bitcoin, caused by reduced volatility. Notably, traders sought to capitalize on price movements that, although tamer, still presented profit potential.

This trend indicated a willingness among market participants to explore opportunities in a relatively stable market.

In it for the long haul

In a parallel development, Bitcoin’s long-term holder supply has also been on the rise. This shift in behavior among long-term holders could signify their belief in the cryptocurrency’s potential for recovery and growth.

The increasing supply held by long-term holders might help dampen selling pressure during price fluctuations, contributing to a more stable market environment.

Despite this, BTC’s price saw no improvement. The cryptocurrency’s price was trading at $29,062 at press time, a significant drop from previous highs. Moreover, Bitcoin’s velocity, which measures the rate at which the asset is traded, saw a decline.

Weighted sentiment, a gauge of public sentiment derived from social media, was also on the rise. The surge in positive sentiment, coupled with a decline in negative comments, could indicate that despite the recent setback, optimism is slowly seeping back into the Bitcoin community.

Examining Bitcoin’s Market Value to Realized Value (MVRV) ratio revealed a negative trend at the time of writing. This ratio, which compares the market value to the average realized value of Bitcoin, suggested that the currency may be slightly undervalued at press time.

Lastly, a closer look at Bitcoin miners provides additional insights. Miner revenue has been on a declining trajectory, indicating potential increased selling pressure from miners.

This could be attributed to various factors, including the price drop and the need for miners to cover operational expenses.

2. Bitcoin miners underwater as BTC mining difficulty surges

Difficulty adjustment on Bitcoin (BTC) mining is a protocol feature created by Satoshi Nakamoto that serves to keep an average interval of 10 minutes between every new block that is discovered by Bitcoin miners, filled with transactions, and then added to the blockchain. This adjustment directly impacts mining profitability, as increased difficulty also means increased costs for the activity.

With a sustained increase in mining difficulty over time, Bitcoin miners are working ‘underwater,’ as the average cost to mine one single BTC has been superior to the average price of 1 BTC in the spot market year-over-year since August 2022.

The average mining cost is calculated by Cambridge University and plotted in a chart by MacroMicro. On August 8, it registered an average cost of $34,835 per mined BTC, against a spot price of $29,902 on August 9 — accounting for a loss of $4,933 per unit of the leading cryptocurrency produced coins.

The highest average cost registered in the 1-year period was $49,415 on July 17, versus a price of $30,145/BTC on the same day, for a loss of around $19,270 per mined BTC.

Except for a few single-day deviations on the chart, Bitcoin miners were mostly mining underwater, according to the presented data. This makes mining businesses hedge their position with financial products such as energy futures contracts.

The entities that suffer the most are small and medium Bitcoin miners who can’t keep a profitable activity, losing market share and hashrate share for bigger miners — in a sort of economy of scale dynamic.

The most recent difficulty adjustment comes amid an energy crisis in Texas, one of the most prominent hubs for Bitcoin mining in the world, as reported by CBS News. Making energy even costier than before.

What is the mining difficulty and how does it work

Mining through the proof-of-work system was the method chosen to secure the Bitcoin network and distribute new BTC to entities providing work and resources to the activity.

To guarantee a programmed distribution up to the maximum limit of 21 million, guaranteeing a controlled inflation of the BTC circulating supply, the Bitcoin protocol uses algorithms that help to keep the creation of a new block (with the corresponding payment of its reward) every about 10 minutes.

This algorithm works by adjusting mining difficulty. Evaluating the frequency of discovering new blocks over the last 2,015 blocks — about two weeks, assuming 10 minutes per block.

If the last 2,015 blocks are being mined in an interval greater than the desired 10 minutes, the mining difficulty needs to decrease, making it easier to mine more blocks in a shorter amount of time. The reverse is also correct: increasing the mining difficulty if the last 2,015 blocks have been discovered in an interval of less than 10 minutes between each block.

Although the adjustment is proportional to the computational power being used in the network, it cannot exceed four times the previous value. In case, the mining difficulty adjustment always needs to be less than 300%, in a raise; or less than 75%, in a reduction.

The mining difficulty is affected by including or removing the number of “zeros” that must go to the left of the other random characters.

3. Bitcoin Mining: Understanding Miner Capitulation and Its Implications

Miner Capitulation: Implications for Bitcoin’s Stability and Market Dynamics

On the one hand, widespread miner capitulation could threaten the stability and security of the Bitcoin network in the short term. Bitcoin mining is an energy-intensive, hardware-driven business with tight margins. Miners need to cover not just energy costs but equipment, maintenance, and human resources. If revenue from mining consistently falls below these costs, miners will eventually capitulate by turning off machines and halting operations.

If a significant portion of the global Bitcoin mining power goes offline, it reduces the overall hash rate securing the network. This opens the door to potential attacks on the network and compromises the integrity of the Bitcoin ledger. However, the network hash rate has held up relatively well, suggesting that capitulation remains limited.

Yet proponents argue miner capitulation is a natural, even healthy market mechanism for Bitcoin. During bull markets, high profits incentivize new miners to enter, increasing competition and hash rate. Low profits in bear markets force inefficient miners to turn off, leaving only the most competitive operations intact. This weeds out overcapacity and sets the stage for the next growth cycle.

Major miner capitulation events have occurred, notably in late 2018 and 2022. In both instances, the network rapidly rebounded to new hash rate highs within 6-12 months. Capitulation wiped out excess capacity that built up during the prior boom. This may happen again after the recent slide below $20k.

Bitcoin Mining: Resilience, Profitability, and the Impact of Miner Capitulation

Mining is likely to remain profitable in the long term due to the technological improvements in cheap renewable energy sources like solar and wind energy. Bitcoin’s code is designed to dynamically adjust the mining difficulty to maintain an average block time of 10 minutes. So even with a lower hash rate, the network continues to function

Ultimately, widespread miner capitulation is unlikely to upend Bitcoin due to the network’s inherent resilience completely. However, it does raise short-term reliability concerns and centralization risks if a few major mining pools control the network. The situation warrants monitoring, but historically, Bitcoin has emerged from capitulation events just fine. For investors, miner capitulations may even present opportunities for exposure at reduced prices if history rhymes. As with most things, moderation and balance is key – neither exuberant optimism nor excessive pessimism is warranted.

In Conclusion, periodic miner capitulation is expected during Bitcoin’s volatile price cycles. While unlikely to irreparably damage the network, it raises temporary security and reliability issues. However, Bitcoin was specifically designed to handle such challenges. For now, cautious optimism rather than alarmism seems the appropriate perspective on the state of Bitcoin mining.

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