Mimesis Capital: Inside The Event Horizon Report No. 17
Why Hash Strips Predict Local Bitcoin Bottoms So Accurately
Theory: When the bitcoin price reaches a certain level, the selling pressure begins to disappear dramatically.
Bitcoin mining is a tough industry. In the long run, only the most efficient mining companies will remain.
The tendency of the mining industry to attract large amounts of competition combined with the simplicity and beauty of the Bitcoin protocol can give us a way to predict the local “price floors” of Bitcoin.
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Blockware Solutions, a bitcoin mining company, released an in-depth report last year How does halving directly affect miners and the amount of selling pressure that is removed from the market after the halving.
Take a look at the entire report to get a good idea of how they came to their specific conclusions, but they estimated that the forced sale of US dollar-denominated miners would drop by 70% after the halving with no change in price.
This was likely a major catalyst for the current bullish trajectory.
How does this work?
Selling pressure drops due to miner capitulation.
Immediately after the halving of the miners occurs because the block support is halved, but the operating expenses of the miners do not change.
Revenue is roughly halved, while expenses remain unchanged, clearly disrupting any business.
This mode purges the most inefficient miners from the network. As a result, the difficulty decreases and the more efficient miners actually become more profitable. This free market operation removes miners who have to sell the most bitcoins to make ends meet and rewards the most efficient miners by giving them more bitcoins.
Miner capitulation occurs until selling pressure drops significantly. With a lower price, the selling pressure significantly disappears due to the exclusion of the most efficient miners (forced sellers) from the network.
When can miner surrender happen?
The most obvious form of miner surrender is post-halving. Apparently, a 70% drop in selling pressure, as estimated by Blockware Solutions, has had a significant impact on the market price of Bitcoin.
However, this ineffective purge by the miner naturally occurs over time and especially when prices drop.
New competent miners are constantly being brought online (better ASICs, lower electricity prices, fully funded public mining companies, etc.). Less efficient miners are eliminated when difficulty increases, electricity rates increase, or prices fall.
Simplified examples of miner surrender
The first model assumes a peak hash rate and bitcoin price at $60,000.
Looking at the model, the mining network is divided into five different layers.
The first layer is the most efficient and makes up about 20% of the total network. This would likely consist of publicly traded companies such as $RIOT, $MARA, and $HUTMF that have access to unlimited amounts of capital available in the public markets and that You don’t have to sell any Bitcoin.
Layer 5 is the most efficient and also makes up about 20% of the total network. At the current bitcoin price, their operating expenses are approximately 80% of their revenue (mined bitcoin). This means that their margins are very sensitive to drops in the price of bitcoin, an increase in electricity prices, an increase in rent, and an increase in network difficulty.
Now let’s look at the second model. In this model, the price went down from $60K to $35,000, and the hashrate also dropped by 20%.
The fifth inactive layer of the network has now been eliminated. Due to the sudden drop in the price of bitcoin, the expenditures to operate the fifth layer ($41.4 million) now exceed the amount of bitcoin they can mine ($37.8 million). This shuts down their operations and the remaining layers get a larger share of the hash.
The interesting idea here is that the selling pressure in US dollars has decreased by 40%.
Finally, let’s look at the third model. In this model, the price went down from $60K to $20K, and the hashrate also dropped by 40%.
The fourth and fifth layers of the network have now been eliminated. Due to the sudden drop in the price of bitcoin, the operating expenses of both layers now exceed the amount of bitcoin that can be mined. This shuts down their operations and the remaining layers get a larger share of the hash rate.
The interesting idea here is that the selling pressure in US dollars has decreased by 70%.
Hash bars are an indicator to help gauge miner surrender.
While the tick bar indicator isn’t perfect, it can illustrate points in Bitcoin’s history as selling pressure begins to dissipate dramatically.
When the selling pressure begins to dissipate significantly due to the dynamics of lower hash rate, we can be more confident that Bitcoin has bottomed.
Another interesting thing to note is that the indicator never goes down near the tops (2011, 2013, 2017). As the price starts declining after each local top, the hash rate continues to rise. Since the hash rate continues to rise as the price falls, it is likely that selling pressure will increase across the network until a miner capitulation occurs and points to a bottom during a bear market.
This is how bear markets happen. The price has become overheated for what the network, users, and miners can sustainably handle. When the price momentum changes, miners are still deployed because it is still very profitable to mine Bitcoin. Then you get a period where negative price action scares away new buyers, but there are still more sellers (miners surrender) due to more miners spreading and network difficulty.
As Bitcoin is the best cash commodity ever created and we watch the world begin to monetize it, it’s probably a great idea to pile more Swats as they start to become exponentially scarcer, as evidenced by the bottoms of the hash bar. This is about to happen again for the twelfth time in history.
TLDR: Use hash bars to time bitcoin buying when the price is down and selling pressure is likely to drop dramatically as well.
This is a guest post by Mimesis Capital. The opinions expressed are their own and do not necessarily reflect the opinions of BTC, Inc. or Bitcoin Magazine.