Mimesis Capital: Inside The Event Horizon, Report #17
Why Hash Ribbons Predict Local Bitcoin Bottoms So Accurately
Theory: When the bitcoin price hits a certain level, selling pressure starts to exponentially disappear.
Bitcoin mining is a ruthless industry. Over the long run only the most efficient mining firms will survive.
The tendency for the mining industry to attract large amounts of competition combined with simplicity and beauty of the Bitcoin protocol could give us a method to predict local “price floors” for bitcoin.
Blockware Solutions, a bitcoin mining firm, released an in-depth report last year on how halvings directly affect miners and how much sell pressure is removed from the market post-halving.
Take a look at the entire report to get a good idea of how they reached their specific conclusions, but they estimated that USD-denominated forced miner selling would fall 70% after the halving with no change in price.
This was likely a major catalyst for the current bull run.
How Does This Work?
Sell pressure drops due to miner capitulation.
Directly after a halving miner capitulation occurs because the block subsidy is cut in half, but the operating expenses of mining firms do not change.
Revenue being sliced nearly in half, while expenses remain unchanged, is obviously disruptive for any business.
This situation purges the most inefficient miners from the network. As a result, difficulty falls and the most efficient miners actually become more profitable. This free market process removes the miners who are forced to sell the most bitcoin to cover their expenses and rewards the most efficient miners by giving them more bitcoin.
The miner capitulation process occurs until sell pressure has decreased significantly. As price falls, sell pressure exponentially disappears due to the most inefficient (high forced sellers) miners being eliminated from the network.
When Can Miner Capitulation Occur?
The most obvious form of miner capitulation is post-halvings. A 70% reduction in sell pressure, as estimated by Blockware Solutions, clearly had a massive effect on the market price of bitcoin.
However, this inefficient miner purge occurs naturally over time and especially around price drops.
New efficient miners are constantly being brought online (better ASICs, lower electricity rates, fully financed publicly-traded mining firms, etc.). The most inefficient miners get purged when difficulty increases, electricity rates increase or price drops.
Simplified Miner Capitulation Bottom Examples
The first model is assuming peak hash rate and a bitcoin price of $60,000.
Looking at the model, the mining network is divided into five different layers.
The first layer is the most efficient and is roughly 20% of the total network. This likely would consist of publicly-traded firms like $RIOT, $MARA and $HUTMF that have access to unlimited amounts of capital available in public markets and that do not have to sell any bitcoin.
The fifth layer is the most inefficient and is also roughly 20% of the total network. At the current bitcoin price, their operating expenses are roughly 80% of their revenue (mined bitcoin). This means their margins are very sensitive to drops in the price of bitcoin, electricity price increases, rent increases and network difficulty increases.
Now let’s look at the second model. In this model, the price has dropped from $60,000 to $35,000 and the hash rate has also fallen 20%.
The fifth most inefficient layer of the network has now been eliminated. Due to the sudden drop in the bitcoin price, layer five’s operating expenses ($41.4 million) now exceed the amount of bitcoin they can mine ($37.8 million). This causes them to shut down their operations and the remaining layers obtain a larger share of the hashrate.
The interesting idea here is that USD-denominated sell pressure decreased by 40%.
Last, let’s look at the third model. In this model the price has dropped from $60,000 to $20,000 and…