Tunnels in an abandoned mine in Germany. Photo by Marcus Horstbrink via flickr.com . License: Creative Commons
Miners are one of the most affected by the decline in Bitcoin prices. This is now expressed in a kind of mini-capitulation: after other sources of funding dry up, they have to sell the accumulated bitcoins.
Mining is a kind of procedural conversion of fiat money like dollars into Bitcoin: the miners buy a hardware (an asic miner) with dollars, and they pay with dollars, euros and so on the electricity necessary to operate the hardware. As a result, you will receive bitcoins according to your hash power.
Now, when the Bitcoin price drops, profit margins become tighter, and many mining devices are no longer profitable. With electricity costs of 7.5 dollar cents and a pool fee of 3 percent, this applies to the Antminer T17 – built in 2019, for example. “The output is always below the electricity costs. Therefore, we advise the miners to turn off the devices to avoid losses,“ writes the cloud miner Bitdeer.
After calculating by 0.075/kWh electricity fee, 3% mining pool fee and service fee, we saw the need to remind you that T17 and T17+ have reached the shutdown price.
At any time the output is less than the electricity cost, we advise miners to stop mining to avoid running into loss. pic.twitter.com/S3KJfIhTSG
– Bitdeer (@BitdeerOfficial) June 17, 2022
Collin Wu adds in his weekly mining newsletter that according to statistics from F2Pool, the latest generation of antminers, the S19, will become unprofitable at a price of about $ 10,000. Since Bitmain’s miners are among the most efficient, this threshold should apply to all devices on the market. It would be interesting to find out what happens if you fall below $ 10,000.
Hashrate of the Bitcoin network according to Blockchain.com
The big question is how long the miners will last to work with losses, and from when they will begin to mine farms on a large scale. So far, there has been a kink in the development of the hashrate since the all-time high on May 21. But a real capitulation is in no way visible in the long-term course.
However, a change in the strategy to finance the operation is visible.
The HOLD strategy
Over the past few years, most miners have been using a “HODL strategy”: they have avoided selling the mined bitcoins at all costs.
This is somewhat consistent: because a miner would not be a miner if he did not bet on rising prices. Mining means converting the invested capital into Bitcoin gradually and at a discount over the course of several years. Unlike an investor who can sell at any time, a miner is dependent on the success of Bitcoin in the long term.
In the course of this “HODL strategy”, the miners have mainly tapped two sources to pay electricity and rent without selling bitcoins:
Many miners have issued shares, especially the miners of North America: such as Core Scientific (CORZ), Marathon Digital (MARA), Riot Blockchain (RIOT), Bitfarms, Hut 8, Hive and Argo Blockchain. The shares mainly bring two value propositions to the stock market: the operation of the farms and the accumulated Bitcoin holdings. This worked outstandingly well last year, when all mining stocks reached maximum values.
In some cases, the miners have also taken out loans in dollars and other fiat money, which were covered by the same bitcoins as collateral.
Thus, the miners managed to accumulate large amounts of bitcoins, and on their basis to finance the operation, without repelling them. Arcane Research determined in mid-May which Bitcoin treasures some of the listed miners were sitting on:
In the bear market, the strategy fails
In May and June, however, the miners had to learn the hard way, writes Compass Mining, “that this strategy only works until it no longer works.“
Miners’ share prices have been under pressure all year, and profitability is already on edge. After the collapse of prices in May and June, they completely collapsed. Most stocks have lost 80 percent, some more than 90 percent.
The loans that were covered by Bitcoin are also due in part because the value of the coins deposited as collateral has melted. Some platforms that lend dollars against Bitcoin collateral, such as Celsius or Babel Finance, are insolvent, others are acting increasingly conservatively.
There is a kind of liquidity shortage. The “HODL strategy” fails, and the miners are forced to finance their operations through other sources: by selling Bitcoins.
One can understand this as a kind of small capitulation: in May alone, Core Scientific sold 2,598 bitcoins, Riot Blockchain 250, and Argo Blockhain 427 BTC. Collin Wu adds that the publicly listed miners sold 4,411 Bitcoins in May, which is almost 90 million euros today.
This is about four times as much as in the first months of 2022, in which they rejected an average of 1,115 Bitcoins each. Nevertheless, these miners still held 46,594 bitcoins at the end of May; Marathon owns a good 9,000 of them, who have so far managed not to sell any coins.
Although full figures are not yet available for June, there is little hope that the trend has changed. The miner Bitfarms recently writes that he has “adjusted his HODL strategy” in order to “improve liquidity and strengthen the balance sheet.“ The company sold 3,000 Bitcoin for about $ 62 million, and with a part of it repaid loans that were covered by Bitcoins. Bitfarm still owns 3,349 bitcoins; unlike before, the miner will throw a part of the mined coins on the market to cover the costs.
Bitfarms is certainly not the only miner to do this, even if not everyone is hanging on to the big bell. We will probably only have reasonably complete information about the listed miners in July.
The dark figures
But how many bitcoins are still with the miners in total is a very difficult question. In the case of the publicly traded large miners, this will be announced. But what about the smaller ones? With the private ones? With those who are not listed on the stock exchange?
According to CompassMining, the three largest listed miners – Marathon, Core Scientific and Riot – account for a good 45 exahash, which is just under a quarter of the current hashrate of just over 200 exahash. So there should be a not insignificant proportion of miners who are not listed on the stock exchanges.
Onchain analyses give some clues to them. However, as the analyst Coinmetrics pointed out on June 22, these are not necessarily easy to interpret. When a pool finds a block, it distributes the mined bitcoins to the miners involved. Coinmetrics calls these the “1-jump miners”. For example, on June 1, 2022, the ViaBTC pool paid out a total of 223 Bitcoin to 60 individual addresses.
In total, there are 2.9 million Bitcoin addresses that received bitcoins from the pools via a jump and were therefore probably involved in mining. There are a total of 2.6 million Bitcoins on these addresses. That’s 13.6 percent of all bitcoins. So many coins have been mined and never moved since there have been mining pools (i.e. since 2010 or 2011).
If you narrow down the data to the year 2022, there are still 34,000 such addresses left that hold 125,000 Bitcoins. With a few more heuristics, Coinmetrics can limit the number to 28,000 addresses, which together hold 55,000 Bitcoins.
This figure has fallen significantly over the past few weeks, from about 75,000 to 55,000. So the miners are throwing their coins on the market, and to a much larger extent than the information about the listed miners shows. On the other hand, miners have been accumulating Bitcoins all year round, and their stocks only fell to the level of April in June.
The chart is still very fuzzy, for example, because it does not contain any data on how many miners still hold (or repel) coins that they mined in 2021. Despite this somewhat nebulous data length, two rough findings are not to be doubted:
Firstly, the “HODL strategy” of the miners no longer works, which is why they have been throwing a lot more coins on the market since May than in the months and years before. In part, they are forced to do so because loans covered with Bitcoin are due. Because the miners have accumulated large amounts of coins, sometimes excessively large sums end up on the exchanges. This liquidation may partly explain why prices fell so sharply in June.
Secondly, miners continue to hold Bitcoins in significant quantities. They continue to hope for rising prices and try to make it through the valley without selling more bitcoins than necessary. Keeping bitcoins is still an important basis of business for them. However, if the lull continues, it may be necessary for you to sell even more bitcoins. However, they will be happy to reactivate the “HODL strategy” at any time.
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