10/11/2023 0 Comments

1. Mining metrics suggest bullish sentiment for Bitcoin

Bitcoin’s hash rate represents the total computational power employed to mine and validate transactions on the network. Beyond merely representing the sheer computing prowess, the hash rate serves as a barometer for the network’s security and vitality.

A robust hash rate indicates not only a high participation of miners but also underscores the network’s resilience against potential attacks. Monitoring this metric is crucial, as fluctuations can offer insights into miner sentiment, potential network vulnerabilities, and the overall health and decentralization of the Bitcoin ecosystem. In essence, the hash rate is a multifaceted indicator, reflecting both the technical strength and the collective confidence in the Bitcoin network.

Bitcoin’s hash rate has been posting new all-time highs every week since December 2022, peaking at 501 EH/s on Sep. 15. As of Oct. 8, the hash rate stands at 418 EH/s.

However, merely looking at the hash rate fails to provide more context to market sentiment. To get a better understanding of miner health, we must analyze the convergence and divergence of the moving averages of the hash rate. Monitoring this metric is crucial, as fluctuations can offer insights into miner sentiment, potential network vulnerabilities, and the overall health and decentralization of the Bitcoin ecosystem. Hash ribbons are a multifaceted indicator, reflecting both the technical strength and the collective confidence in the Bitcoin network.

Since mid-August, the 30-day MA of Bitcoin’s hash rate has consistently outpaced the 60-day MA. Notably, the ribbons underwent compression in July and August, a phenomenon historically indicative of miner capitulation. However, the divergence between these two moving averages has been widening since the start of October 2023, coinciding with Bitcoin’s ascent to $28,000. This divergence suggests that miners are bullish, ramping up their operations in anticipation of higher prices.

Mining difficulty, another cornerstone metric, adjusts approximately every two weeks to ensure that blocks are added to the blockchain at a consistent interval. The Difficulty Ribbon Compression metric provides insights into miner selling pressure. Historically, high compression zones, marked by low values in this metric, have signaled lucrative buying opportunities for Bitcoin. Conversely, spikes in this metric have often been in tandem with Bitcoin’s price surges. As of June 30, the difficulty ribbon compression was below the 0.05 threshold, and as of October 8, it stood at 0.032, suggesting potential upward price momentum.

The rising hash rate underscores a robust and secure network, while the hash ribbons and difficulty ribbon compression hint at bullish miner sentiment and potential price appreciation.

2. Can China Still Affect Bitcoin Prices Before The Next Halving?

Bitcoin has been relatively flat this year, stuck between bull and bear rallies but trading within a range. While far off from COVID-19 highs, it is nowhere near the lows when bitcoin touched just above $16,000 USD per 1 BTC after the fallout of cryptocurrency exchange FTX failing.

The halving is traditionally a price-boosting event for bitcoin. Halving is when the reward for miners is reduced in half, so less bitcoin is available. This happens in programmed intervals based on the number of mined bitcoin blocks. The next bitcoin halving will happen around April 24th, 2024, when block number 840,000 is mined. It’s the living embodiment of bitcoin’s creed that the price for a scarce asset will increase as you decrease its supply.

Bitcoin’s programmed deflation is the opposite of the inflation that comes with growing fiat monetary supply, like with the US dollar. For example, one year after the 2020 halving, bitcoin’s price was up 533% at one point.

Will the same thing happen again? Or will this halving cycle be taken up with another cycle of bad news, such as the implementation in force of China’s proposed cryptocurrency mining ban that pushed prices down soon after in 2021? These are questions I’ve dealt with significantly as part of my research into China and bitcoin.

Perhaps no country has affected bitcoin’s price history more than China, but there are several reasons to believe China’s actions might be more neutral for the market until at least the next halving.

The Current State

China has cracked down on bitcoin mining through a State Council decree and banned most forms of transacting bitcoin on exchanges. The State Council is China’s highest state administrative organ. The American system and the Chinese system are hard to compare. Still, one way of thinking about the State Council is that it’s a “super-Executive Branch”, reporting to the Premier, who is the #2 in the Chinese power system behind the General Secretary (currently Xi Jinping), and generally seen as the head of the administrative state – and responsible for regulating and developing economic growth.

When the State Council speaks about a topic, other branches of the Chinese government fall quickly into line. Provinces like Sichuan and Inner Mongolia that had previously been dragging their feet and giving bitcoin miners more time to phase their operations out gradually – turned out stricter plans to end bitcoin mining within the province as soon as the State Council weighed in.

The Vice Premier who chaired the committee that implemented the effective bitcoin mining ban, Liu He retired from the Politburo. Though he still consults informally on economic matters, it’s unlikely that bitcoin will return to a Politburo-level event as Xi’s state administration and Liu He both focus on a battle of systems and investment flows and “trade and economic matters” with the West.

Bitcoin is also recognized as virtual property and a defensible virtual commodity by some Chinese courts – this has been the case in the Chinese court system for many years. China’s regulations on cryptocurrencies are known as the “Key Prohibition Rules”: it is illegal to act as a central counterparty for the exchange of cryptocurrencies for legal tender or each other, and it is unlawful to raise funding through ICOs.

Thus, no bitcoin exchange exists at scale headquartered in China. There is also a strict ban on using cryptocurrencies as legal tender or circulating currency. The right for Chinese citizens to hold bitcoin as a virtual commodity, though, has been affirmed by multiple courts.

It’s unlikely the Chinese party-state will go after people who hold bitcoin and are Chinese citizens due to the mix of virtual property protections and bans being focused on the use of bitcoin as legal tender but implemented on the application rather than network level. This means that centralized businesses like exchanges and bitcoin miners are targeted. But individuals who hold bitcoin, and maybe run a bitcoin node, are still not.

China, so far, hasn’t adopted the most extreme measures it could to stamp out bitcoin as a result. While those looking to do bitcoin mining should beware as there have been confiscation of bitcoin miners for power usage, there haven’t been widespread seizures of bitcoin from Chinese citizens or a Great Firewall level ban on the protocol ports.

While the Chinese state has made it difficult to buy bitcoin with Yuan, using Tether and buying bitcoin with it is still an open secret for OTC exchanges. The likely disruption here will come if more exchanges or a major stablecoin fails rather than the Chinese state’s actions. The Chinese party-state might have to react if that’s the case – but there are likely very few actions it’ll take proactively for the moment, as no announcements are on the horizon (while the Chinese party-state had warned of the bitcoin mining ban for years).

Hong Kong And Shanghai

Two pieces of “bullish” Chinese bitcoin news have come out recently.

First is the Shanghai court ruling, which, while being a bit more nuanced on Bitcoin being separate from cryptocurrencies, more or less follows the same trendline of Chinese courts recognizing that bitcoin and other digital assets are commodities and worthy of protection from seizure under China’s civil code.

In Hong Kong, there are signs a need for capital inflows has led to Hong Kong embracing cryptocurrency exchanges. It’s perhaps a way to push forward the idea that in Hong Kong, it’s “business as usual” after protests asking for universal suffrage froze the city.

However, there are early signs of trouble as Hong Kong-based JPEX failed. JPEX is an unlicensed cryptocurrency exchange and not one that went through the new proposed regulatory structure.

Nevertheless, it is probably a reason for Hong Kong’s executive branch to get involved – which probably doesn’t auger well for the licensing regime, which securities regulators and the central bank mostly pushed forward.

Exporting Philosophy

An underrated aspect of how China can affect bitcoin prices is the export of its ideology. China was one of the first state movers to try to clamp down on bitcoin, partly due to its sensitivity to capital controls in a closed system and also due to the large amount of bitcoin mining activity within its borders.

The same arguments about proof-of-work bitcoin being energy-wasteful are already popping up in individual states of the United States such as New York State’s temporary ban on certain bitcoin mining activities and European legislation. Other states may soon follow in China’s footsteps, which will have the effect of moving bitcoin’s price, as those differences will be newer than what China is likely to do now.

3. HUT 8 Mines and holds amid market and merger moves

Hut 8, a Bitcoin mining company based in Canada, has made headlines for its innovative strategy to protect its Bitcoin reserves. Hut 8 is defying market trends and setting an intriguing precedent by secretly collecting a considerable Bitcoin reserve as the company continues with its merger with industrial cryptocurrency miner US Bitcoin (USBTC).

In a recent report, Hut 8 stated that it mined 111 Bitcoin in September 2023, making it a remarkable month for Bitcoin accumulation. As of September 30th, it had amassed a whopping 9,366 Bitcoin through its mining efforts. It’s essential to put this into perspective, as this figure is less significant than some larger participants in the crypto mining sector.

The amount of ore mined in September by Hut 8 is up 8 percent over August. One month in May 2023 saw the business mine 147 BTC, it’s all-time high for monthly mining output. Hut 8’s monthly mining volumes have decreased steadily over the past year, falling roughly 60% from 277 BTC in September 2022. Despite these challenges, Hut 8 has differentiated in the crypto mining sector by adopting a novel strategy since they have opted to hodl rather than sell.

What sets Hut 8 apart from its competitors is its dedication to the hodl strategy. There is a lot of pressure on miners in the cryptocurrency mining sector to liquidate some of their Bitcoin holdings to pay for expenses or take advantage of market opportunities. However, Hut 8 has adopted a contrarian stance by not selling its Bitcoin despite the bear market.

To stress this policy, the corporation declared, “No Bitcoin was sold during the month.” Hut 8 is one of the leading publicly traded firms in this regard due to its large Bitcoin reserve and its unwavering dedication to hanging onto its Bitcoin assets despite market volatility. As of September 2022, Hut 8 has saved up almost 8,000 BTC, showcasing the company’s commitment to Bitcoin over the long run.

Hut 8 is continuing its hodl approach and taking other proactive steps to ensure its success in the bitcoin mining industry. Most notably, in February 2023, a merger with US Bitcoin (USBTC) was announced and is still in progress. A new Bitcoin mining company, Hut 8 Corp (or “New Hut” for short), is expected to emerge from this merger.

A major turning point in Hut 8 and USBTC’s history occurred in September 2023, when the Supreme Court of British Columbia gave its final permission to the merger arrangement. Hut 8 CEO Jaime Leverton thanked investors for their confidence, saying the green light now gives “New Hut” a chance to materialise.

A fascinating facet of the transaction is Hut 8’s focus on “highly diversified fiat revenue streams.” This innovative strategy hints that the corporation has bigger plans than mining and hoarding Bitcoin. Instead, it plans to investigate different revenue streams inside the cryptocurrency industry to protect itself from the market’s notorious volatility.

The path taken by Hut 8 indicates a novel cryptocurrency mining strategy, as seen by itself-mining Bitcoin reserves and its strategic merger with USBTC. Hut 8 is committed to hodling Bitcoin, even though some investors may sell due to market volatility. The company’s merger plans, and this strategy, set it up for success in the future of the cryptocurrency mining sector.

Hut 8’s experience is a reminder of the significance of strategy and long-term vision when dealing with the uncertainties and prospects of the bitcoin market. Still, one thing is certain: Hut 8 is set on finding its way in the crypto world, one Bitcoin at a time, regardless of whether “New Hut” succeeds in achieving widely diversified fiat revenue sources.

author avatar
Harvey CHEN

Leave a Comment