Bitcoin is currently at $ 6,451, recovering slightly from the March 27 pullback that caused the price to drop nearly 9% in 4 hours. Despite some bullish signs, Bitcoin has been down nearly 30% since last Friday.
A price drop may occur due to the recent difficulty adjustment of Bitcoin mining near -16%. Difficulty adjustment is the method of Bitcoin network adapting to the changing mining power on the network, keeping the issuance rate at a fairly stable level.
The change in Bitcoin mining difficulty on March 26 was the biggest decline in the past 9 years and this adjustment makes Bitcoin production less expensive. The situation is quite consistent with the previous difficulty reduction and short-term loss of BTC price.
Accordingly, the recent situation reminiscent of past price action after mining difficulty down 7.1% on November 7, 2019. The price has fallen by 25.81% from $ 9,310 to $ 6,907 and this underlines the strong correlation between the network's hash power as well as Bitcoin price action.
Bitcoin mining industry surrenders: Death spiral
As explained in report Recently, Blockware Solutions, the Bitcoin miner is one of the key figures in the industry, securing the issuance of new coins and distributing them online by selling them to exchanges. They are encouraged to liquidate new money to pay for operating costs such as housing and electricity. Each month, 54,000 BTC are mined, equivalent to about 332 million at the current price.
Although mining difficulty seems to be a catalyst for the next price move, it is the result of stalled Bitcoin mining operations and increased selling pressure to sustain operations. The difficulty is calculated by the total hashrate of the network, meaning that if many miners leave, the difficulty will be significantly reduced.
This is exactly what happened after the March 12 crash that brought the price to a low of 2020 of $ 3,775. Mining operations with lower profit margins due to ineffective equipment or high electricity costs have forced miners to stop operations because of no profit. Therefore, miners tend to liquidate Bitcoin to cover costs, adding to selling pressure.
The lack of profits has led to a halt to mining operations, which in turn reduces the difficulty. The network hashrate has increased throughout 2020, leading to higher production costs and causing miners to fail to respond to BTC problems earlier this month.
Bitcoin network Hashrate (April 19, 2019 - March 30, 2020) | Source: blockchain.com
Survival of the strongest: Bitcoin's resilience
The surrender process does not end there. As reported by Blockware Solutions, companies that are better prepared, have additional capital, higher profit margins can stay online even if profits are reduced or losses are temporary.
Because miners with little experience or poor economic potential face bankruptcy and exit the network, adjusting the difficulty every 14 days will help them maintain lower production costs.
From there, the activity became profitable and reduced selling pressure. Matt D'SINOUZA explained via Twitter:
6) After shutting off, Bitcoin they were receiving is allocated to the more efficient, experienced miners with excellent margins who are positioned to accumulate a larger percentage of the newly minted Bitcoin rather than having having sell it - significantly reducing sell pressure
- Matt D'SINOUZA (@ mjdsouza2) March 26, 2020
“After the shutdown, the Bitcoin they received was allocated to more experienced miners with a great rate of return capable of accumulating more than the new Bitcoin instead of having to sell it - significantly reduced. selling pressure ”.
Thus, while the short-term effects of adjusting the difficulty of Bitcoin mining are negative, they can diminish the harm over time as shown in the chart below.
Correlation between Bitcoin price and the difficulty of declaration from 2011 to the present | Source: Blockware Solutions
Miner and trader in the market
The miner's selling pressure seems like a drop in the ocean when compared to mass on the exchanges. However, it must be remembered that fake volumes and wash trading are still popular in the industry. Moreover, the volume on the exchanges is not equivalent to the selling pressure due to the majority of exchanges going around instead of liquidating actual Bitcoin like miners selling for fiat.
One report Recent Chainalysis shows that nearly 90% of Bitcoin flows into exchanges coming from other exchanges as traders take advantage of the opportunity to spread prices and transfer money between markets.
Regardless of the exchange, the mining pool operator (mining 92% of new Bitcoin) has made 28% of on-chain transactions transferring funds to the exchange since 2017. Specifically:
“When miners send to exchanges, they are adding new liquidity to the market. This increases the available Bitcoin supply in the market, potentially reducing the price. In addition to Bitcoin received from other exchanges, mining pools are the most important source of Bitcoin entry, followed by storage wallets and trading services. ”
Origin of Bitcoin on exchanges, excluding transfers from other exchanges | Source: Chainalysis
The Bitcoin industry is always changing
Although the above information shows a good correlation of Bitcoin price and changes in mining difficulty, there are many factors that can break this correlation. For example, the selling pressure caused by holders during events like the Bitcoin crash earlier this month.
Moreover, the behavior of miners can also change over time as development activities and explore other cryptocurrency-based investment opportunities such as spreads, loans, staking, etc.
As the mining industry matures, many new players can be lured into, as in the case of Atlas Holding, the company that is hiring a New York-based power plant to mine Bitcoin on a large scale. When asked about the development of the industry that made a change in these dynamics, D TECHNOUZA said:
“If Bitcoin continues to be accepted after another 10 years, mining will likely be more commodity and institutionalized, reducing the volatility of Bitcoin prices. "Current items like gold, oil or soybeans have large institutional suppliers, the Bitcoin miner is the current supplier."
There is still hope for the miner
While the Bitcoin incident on March 12 marked the end of a number of mining and hashrate projects plummeting, the entire network seemed to be returning to normal when the difficulty was adjusted down, allowing miners to work. The effective operation is to gain more market share and thus make the network more flexible in the long run.
Miners, meanwhile, have managed to maintain miners with reduced difficulty and enjoy cheaper production costs, because the difficulty reduction after 9 days will help hashrate growth. This could be short-lived as the halving of upcoming Bitcoin will halve the rewards that change the mining landscape in the future.
You can see the price of BTC here.
Thuy Trang
According to Cointelegraph
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