In-depth Analysis of Miner Capitulation

1. What is miner capitulation?

Miner capitulation typically occurs when Bitcoin falls below the shutdown price and small miners with weak risk resistance capacity seek to pull out of the market to stop losses. When these miners withdraw, they tend to liquidate their Bitcoin holdings and at the same time sell mining machines at a low price, causing a further price plunge.

One theory is that miner capitulation is a useful tool for identifying market bottoms. The rationale behind is that once small and medium-sized miners are out of the picture, the remaining major miners who cope with risks will choose to avoid selling bitcoins at low prices, thus the plunge of Bitcoin price caused by the previous selling-off will stop. These remaining miners choose to hold Bitcoins rather than sell at a loss. Since miners are important Bitcoin sellers, Bitcoin supply in the market will decrease, and Bitcoin price will rebound.

2. Basic factors: Hash Rate, Bitcoin Price, and Miners

Hash rate refers to the total computational power on the Bitcoin blockchain. As shown in the chart below, hash rate moves roughly in line with Bitcoin price. The earnings of a certain individual miner are proportional to Bitcoin price and inversely proportional to hash rate. Miners’ net income is calculated as earnings minus expenses, mainly electricity fees. Therefore, the hash rate and Bitcoin price together affect miners’ income, which determines new miners’ entry into the market and the withdrawal of original miners, thus in turn affecting affects hash rate and Bitcoin price.

Bitcoin: Hash Rate — Glassnode Studio

Shutdown Price: At a given hash rate and electricity price, shutdown price refers to the break-even point where mining rewards equal the costs of mining. If Bitcoin price falls below the shutdown price, mining is no longer profitable.

After receiving bitcoins, miners have two choices: hold or sell. Since miners are important sellers of Bitcoin, their choices affect supply and demand in the market, thus affecting Bitcoin price.

The impact of Bitcoin price increase on miners and hash rate: When Bitcoin price rises up, mining rewards increase, attracting new miners into the market and rising hash rate.

The impact of hash rate increase on miners in turn: As new miners enter the market, hash rate goes up, and rewards miners get gradually decline. When the hash rate rises to a saturation level where mining is not especially profitable, it is less desirable for new miners to enter the market, and a final equilibrium can be reached if Bitcoin price remains unchanged.

The impact of Bitcoin price decline on miners and hash rate: Bitcoin price decline will cause mining reward to decrease. If Bitcoin price is still much higher than the shutdown price, the price decline will not lead to the withdrawal of miners or hash rate drop. It will only slow down the momentum of hash rate increase and new miners entering the market.

If Bitcoin price falls to a slightly profitable level and then remains unchanged, hash rate becomes more balanced, reaching the same status where hash rate rises and Bitcoin price remains unchanged.

If Bitcoin price falls below the shutdown price and remains stable, some miners running at a loss have to shut down, resulting in a decline in hash rate. Rewards for remaining miners will rebound and the new shutdown price will then drop below Bitcoin price, achieving a new balance.

Hash rate change affects miners’ behavior through negative feedback, which only moves the market toward the point of balance, rather than toward an extreme direction.

Hash rate is one of the indicators for Bitcoin market. When Bitcoin price rises, hash rate goes up; When Bitcoin price declines, hash rate ceases to increase or even plummet.

Although the change of hash rate does not affect Bitcoin price directly, the miner capitulation theory indicates that the actual movement of Bitcoin price can be deduced from the change of hash rate when Bitcoin price falls to the shutdown price.

3. Quantification and application of miner capitulation theory

Hash Ribbon is an instrument to measure miner capitulation. It consists of the 30-day and 60-day simple moving averages (SMA, Simple Moving Average) of the Bitcoin hash rate. When the 30-day SMA is lower than the 60-day SMA, miner capitulation begins and the market is bearish, which is marked with the color pink in the chart. When the 30-day SMA crosses again with the 60-day SMA, dark times are over, recovery begins, and the market is now bullish.

If we use this strategy to buy in Bitcoin in the recent past, max drawdowns and max gains are as follows:

At present (June 23, 2022), we are already in the period of miner capitulation. According to this theory, when hash ribbons cross again, it is time to buy-in.

Straightforward demonstration of the differences between two hash ribbons

Other metrics such as the Bitcoin Difficulty Ribbon also have a similar effect. Bitcoin difficulty is based on the average hash rate for about two weeks, essentially of the same principle as Hash Ribbon.

4. Past miner capitulation events

An introduction to some of the most well-known miners capitulation events in history:

1) The Year 2015

Bitcoin slumped due to the Mt. Gox failure in February 2014, from a peak of $951.39 to $309.87, down by 67%. In 2015, Bitcoin price tumbled all the way down and stayed at $200–300 for a long time.

At this price, miners who used old-fashioned mining machines or paid high electricity bills gradually withdrew from the market one after another, while Miners who used new ASIC mining machines and paid low electricity bills survived. The mining industry, in a certain sense, was upgraded after this miner capitulation event.

Bitcoin price and hash rate experienced a long period of stagnation and fluctuation. Starting from June 2015, hash rate recovered steadily, and Bitcoin price also picked up in September.

2) The End of 2018:

Bitcoin reached a peak value of nearly 20,000 USD at the end of 2017, and began to plummet after entering 2018. Bitcoin price after the initial plunge was still much higher than the shutdown price. During the plunge, hash rate raced ahead, and mining difficulty nearly quadrupled from 1.93T on January 1, 2018 to 7.45T on October 4, 2018. With the slump of Bitcoin price and soaring hash rate, Bitcoin price finally met with the shutdown price. Miner capitulation began, and Bitcoin price plummeted again to the low point of 3190 USD on December 15, 2018; mining difficulty also hit a low of 5.11T on December 18, 2018. It was estimated that nearly one-third of the mining machines were shut down from the high point.

Shutdown price on November 30, 2018, Source: f2pool

(Bitcoin price on this day was about 4,000 UDS or 26,400 RMB)

Then the miner capitulation came to an end. Hash rate began to recover, and Bitcoin price avoided further plunge and started to recover.

3) March 12, 2020

On March 12, 2020, Bitcoin price fell from a high point of 7966.17$ to a minimum of 4410$, and on March 13th. The price hit the lowest point of 3782.13$, with the biggest decline of more than 50% within two days. Although this drastic fall brought an unforgettable shadow to the Bitcoin community, it did not last long. After hitting the lowest point after two days, Bitcoin began to rebound and returned to its original price in early May.

This time’s miner capitulation also came along with the Bitcoin price plunge. Then Bitcoin price rebounded, and the mining difficulty began to recover after falling from 16.6T on March 9th to 13.9T on March 26th.

The indicator used here was a 4-day SMA. Mining difficulty had noticeable delay due to the sudden plunge.

(Another round of hash value bottom with static price in May on the chart was due to a Bitcoin halving.)

5. Have we reached a tipping point for miner capitulation yet?

Since membership is required to access the Glassnode’s Hash Ribbon tool, readers who are interested to look into miner capitulation status by hash ribbon can click Bitcoin Hash Ribbon | MacroMicro

The chart above shows the difference between the two SMA curves of the hash ribbon, a straightforward presentation of the indicators.

We can see that as of today (June 28), the indicator is obviously negative, and has stayed below zero for almost twenty days, which is a typical mid-term period of miner capitulation, but it has not reached the tipping point yet. If the indicator returns to zero again someday later, then miner capitulation reaches a tipping point.

Shutdown price of major miners; Date: 13, June; Electricity price at 0.075$/kWh

6. Key References:

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