Miner capitulation in Bitcoin refers to a period in which miners of cryptocurrency are failing to make ends meet because there’s been a marked decline in profitability. They then have to liquidate their reserves because fees and prices decline quickly. Whether you’re trying to work out exchange rates or simply wondering whether it’s worth hanging on to your investment, here’s the latest on why miners might be capitulating.
The Bitcoin capitulation story is big news
At the moment, many miners have been forced to liquidate their Bitcoin reserves due to declining prices and fees. The hashrate recently took a tumble to 552 EH/s. This was after it had reached its peak of 657 EH/s. What this shows is that a lot of miners are switching off their equipment. Some Crypto news outlets are noting that substantial hashrate drops like the ones experienced at the moment tend to mean that conditions are bottoming. The #1 ryptocurrency is currently (at time of writing) changing hands at BTC to USD, $59,064 after peaking at $59,322 earlier in the week, with the largest cryptocurrency plummeting below the $54,000 level.
What is miner capitulation?
One of the main functions of Bitcoin price is its profitability for miners. When prices drop, less efficient miners are then forced off networks, purely because the Bitcoins they earn are simply not worth the cost to mine anymore.
A great deal of miners keep some or all of their stock – and they’ll sell them in a bull market to gain maximum value. In a scenario involving miner capitulation, price drops, and miners are forced off the network. They then sell reserved bitcoins and this makes the price drop more.
Then in a worst-case scenario, it causes a death spiral, as there is continuous selling pressure on the price of bitcoin, combined with a cascade effect. The lower price takes our more efficient mining operations until none remain.
The death spiral didn’t happen in this case
Here, the death spiral never occurred, even with lots of examples of Bitcoin losing more than half its value in a few short weeks. The reason it hasn’t happened is easy to explain. There have been healthy mining operations, funding large sources – and this has allowed miners to get through the tougher times and continue unabated.
Longer-term contracts have also been negotiated with power companies to keep energy prices low and stable. These allow miners to keep Bitcoin in reserve, so they don’t have to go and sell in a bear market just to keep their operation going.
Miners who operate with less efficiency often go under when there are short-term price drops but it really doesn’t affect big players much.
When these less efficient miners go, there’s not as much selling pressure and hash rates stabilize. The hardware from inefficient miners went under if it was then purchased by more efficient miners, and put to good use, in order to bring hashrates back up. This provides the answer as to why historical difficulties generally trend up.
Does mining capitulation pose a threat to Bitcoin’s future?
The real answer is “No.” It does not. There have been previous halvings in the years 2012, 2016, and back in 2020. Mining costs rose then and block rewards were halved. With each halving, there were a number of miners who found the market unsustainable and at this time, there was a temporary decline in mining activity.
However, this isn’t a new phenomenon. When there were market downturns, for instance in 2018, miners shut down then, too and Bitcoin prices dropped below the threshold of profitability.
New miners are coming into the market all the time, and they’re investing in efficient and powerful mining equipment. The cycle means that there’s still a great deal of competitiveness in the industry.
From the time it was invented to the current moment, the dynamics of mining the world’s most popular cryptocurrency have always revolved around three main elements. Those are:
- hardware advancements
- economies of scale
- environmental considerations.
Mining costs and attrition are both familiar cycles in the history of Bitcoin. They almost always occur after market downturns and capitulations. The process is a way of filtering out those miners who are less efficient, allowing more capable traders to find their feet and thrive. It’s kind of like a natural selection process.
Technological advancements mean there’s a bigger shift towards sustainability and this bolsters the security of Bitcoin and assists with its decentralization process.
Of course, these shifts offer up challenges and opportunities. Financial pressure on miners means that market conditions end up disrupted, trading volumes are influenced and sometimes they may become more volatile. When less capable miners are replaced by better counterparts, the health and stability of the market improve, and the overall ecosystem repairs itself over time.
The situation requires close monitoring, as mining dynamics can change their strategies and alter their algorithms to take charge of any opportunities that suddenly arise.
So for now at least, it looks like the storm has been weathered – though there’s no denying the waters have been choppy. Times like these will come and go and it might not be long before another situation such as this one happens again. Miners may capitulate, but markets will move on.