Your favorite trader is saying that Bitcoin (BTC) has bottomed out. At the same time, leading on-chain indicators and analysts are citing the current price range as a “generational buying” opportunity. Meanwhile, several cryptocurrency and finance media outlets recently reported that Bitcoin miners sending a mass of coins to exchanges is a sign that $17,600 was the capitulation move that sets the market floor.
There is so much assurance by various anon and doxed analysts on Crypto Twitter, however, Bitcoin price is still in a clear downward trend, and the metrics do not fully reflect that traders are buying every dip.
A critical component of the BTC price that is often overlooked by many investors is the condition and sentiment of Bitcoin miners, which is exactly why Cointelegraph had a chat with Rich Ferolo of Blockware Solutions and Will Szamosszegi of Sazmining. Inc. for clarity on what is happening in the mining industry and how this could impact market sentiment going forward.
Cointelegraph: Has Bitcoin bottomed out? The price touched $17,600 almost two weeks ago and it is starting to look like the fund-driven capitulation armageddon might be over. What do you think?
Will Szamosszegi: It is impossible to say whether Bitcoin has bottomed out or not. In general, I recommend people a dollar cost averaging strategy: Simply buy the amount of Bitcoin you feel comfortable with on a consistent schedule. We’ve seen even bigger drawdowns than this before – like 93.7% in its early days and 83.4% in 2018. Bitcoin has always made gains in any four-year period in its history.
CT: Currently, Bitcoin is trading below the realized price and below the miners cost of production. The price also fell below the previous all-time high and the hash rate is falling. Typically, on-chain analysts point to these extreme low metrics as a generational buying opportunity, but is it?
Rich Ferolo: Blockware has done a lot of research on this and we have calculated the break-even price for machines as old as the 2016 s9, at $0.07 per kilowatt, break-even is $38,000 for an s9. You’re going to see older machines going off the network eventually. For s17, at $0.07 per kilowatt, BTC has to be around $18,000.
Newer machines are more efficient, and while the difficulty and hash rate setting tend to go down for current generation machines, anything above 90 terahashes (TH/s) can do it. Anything below 34 Watts per Terahash is inefficient.
One factor to consider is that the value of the machines is going down. Even if the price of BTC starts to rise and there is a symbiotic relationship between the price and the macro factors that affect the price of Bitcoin and the prices of the entire cryptocurrency market.
Newer machines are more efficient, and while the difficulty and hash rate setting tend to go down on current generation machines, anything above 90 terahashes (TH/s) can do it. Anything below 34 watts per terahash is inefficient.
One factor to consider is that the value of the machines is going down. Even if the price of BTC starts to rise and there is a symbiotic relationship between the price and the macro factors that impact the price of Bitcoin and the prices in the entire cryptocurrency market.
Machines are hard assets and the great aspect of mining is the machine. Bitmain and MicroBT adjust prices when the price of BTC goes up. It is a hard asset that, in a way, makes a daily return, in the same way as BTC.
If you are in the bull game, you don’t care about the current price of BTC. That the price of BTC goes down does not mean that all miners will go down too. It’s more about survival of the fittest. You have to watch out for macros, but it’s not as bad as one might think. There are different perspectives and situations depending on the size of the company you run. Large public companies have to take into account many operational factors, but their operating costs (OPEX) inflate their overall cost even if they get USD 0.05 per kilowatt. His model is different from the analysis of the average miner outside of the public user.
CT: What is the state of the BTC mining industry right now? There are rumors that leveraged miners could go under, inefficient miners are shutting down, and equipment is selling for 50% to 65% below 2020 to 2021 prices.
What is happening behind the scenes and how do you think it will affect the industry in the next six months or a year?
RF: I agree with all your observations. We are currently at a point of price consolidation and the market is clearing out the amount of mining debt that exists. If you can hang in there and keep mining, maybe the hash rate and difficulty will stay in check. Blockworks believes that there is a serious lack of infrastructure in the space. To have infrastructure, you have to have an incredible amount of CAPEX to get going. There has been and continues to be a lack of infrastructure.
Regardless of how many machines there are, there isn’t much room for hosting. From the broader point of view, you’re going to see a lot of capitulation, insolvency, and glut of machines. I know a lot of the big players are putting a pause on miner funding. That’s a plus for people wanting to get into the space, but we predicted a 60% hash rate increase in 2022, when things were booming. And, as the s19XPs come out, the hashrate will go up.
W.S.: Many veterans in this space have gotten used to these cycles in the Bitcoin ecosystem. Historically, hashrate is seen to decrease following price doing the same. In drops like this, new miners often disappear, while the network gets stronger. In the next six months, mining will become more competitive as larger players are able to consolidate and buy miners at a discount.
CT: Why exactly is now a good or bad time to start mining? Are there particular on-chain metrics or profitability metrics that miners are looking at or is it just a no-brainer that the current price of Bitcoin makes mining attractive?
Let’s say I have $1 million in cash, is this a good time to set up a trade and start mining? What if I have between USD 300,000 and USD 100,000? In the $40,000 to $10,000 range, why wouldn’t this be a good time to set up at home or use a hosted mining service?
RF: Regardless of the size of the investment, I don’t think any of those values frankly justify wanting to build an infrastructure at scale. With a million dollars worth of machines, at $5,000 per machine, you get 200 machines, almost 0.6 megawatts worth. One megawatt of power is equivalent to 300 machines. Hosting 200 machines is very different from hosting 2-10 machines. To diversify $1 million to $300,000, or 60 machines, that’s where you want to start looking at hosting, assuming you’re all in mining.
I treat mining as a hedge so I would take 60% of the capital and buy machines and 40% buy BTC in cash, so 60% CAPEX for machines, 20% for OPEX and 20% for BTC cash. This is a broader place to think about hosting. $100,000 gets you 20 machines, so the same strategy could apply. Most homes cannot handle this much energy demand. There is a threshold of mining power capacity at home, so you would have to consider how much power you can bring into your house without shutting down the neighborhood.
The $10,000 to $40,000 range is more conducive to mining at home. If your energy rate is pegged at $0.10 or less, you could pull it off, depending on where the price is. With USD 40,000 you can get about eight machines. That’s more doable, to be honest. That’s about 24.4 kilowatt hours for eight machines, if you start with four or five machines and test the waters. It’s almost like dollar cost averaging on machines and buying them if prices keep going down.
CT: Does the fact that the price of BTC has fallen below its all-time high for the first time in history have any significant ramifications going forward on the fundamentals of the asset and the industry?
WS: The fundamentals of BTC have not changed, so I continue to expect BTC to become a global reserve asset. The industry, on the other hand, will learn from this downturn: Don’t over-leverage or offer returns that leave you vulnerable.
RF: Great question, I think from the point where we are now, it was expected based on where people had shopped (retail) in the previous cycle. The smart money expected a long bear market to come, but what has surprised everyone is the timing and speed of it. The mysterious and long-awaited peak never occurred.
Cryptocurrencies have a lot more exposure and a lot more bad press due to the recent implosions and we will see more because news loves bad press and it is easier to generate. For those who believe in BTC, they will ignore it and the time is right to buy and invest in the space, especially once all the bad energy clears.
A lot of people have probably sold through the bottom and won’t come back, but this is just the basic dynamics of the market.
CT: The next network reward halving is coming up in 676 days. In your opinion, how will this alter the landscape of industrialized mining and the amount of equipment required to solve an algorithm that becomes more difficult to calculate with each halving?
RF: Halving events tend to induce miner capitulation. I’m surprised the current hash rate hasn’t dropped more. We are not seeing the sharp decline that was expected before, like 20% or 25%. This happens because the older generation machines have to go offline and the rewards don’t match the cost, but the expected hash rate increase that comes with each halving means that the older generation machines benefit in the short term. term. Miners go offline when OPEX is unfavorable and go back online when the time is right.
WS: Miners will want to reduce their costs, as halving the reward in Bitcoin can make many mining operations unprofitable (assuming a constant Bitcoin price in US dollars). Mining equipment will continue to improve its efficiency and miners will continue to search for the most profitable energy sources. Halving is one of the many great features of the Bitcoin network because it removes inefficiencies.
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