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With Bitcoin’s Difficulty Rising, Are Miners Going to Crash the Crypto Market?
If the cryptocurrency market is a signal of economic and political conditions, then these conditions are tough right now. Prices have been declining for three months, with the market’s total cap sinking from $3 trillion in early November to $1.76 trillion by late February. And as bad as things have been for investors and the industry as a whole, it looks as though they could become even worse.
Not only have Russian forces entered the Ukraine for “peacekeeping” reasons, but another threat to the market has emerged in recent days: miners. Yes, even though miners are usually the bedrock of the cryptocurrency market, they pose a threat to it right now, because the economic pressure for them to sell their substantial holdings is only growing.
While some mining companies are trying to overcome rising energy costs by selling stock rather than BTC (or other crypto), declines in their own stock prices are undercutting the viability of this strategy, which isn’t available to other miners. As such, it’s becoming increasingly likely that miners will drag the cryptocurrency market down further, particularly when Bitcoin’s difficulty has just reached an all-time high.
Rising Costs Pressure Miners to Sell Bitcoin
That’s right, Bitcoin’s difficulty level has just reached a record high, at precisely the time most miners would appreciate a reduction in difficulty. This means that miners have to expend more computational resources — and, by extension, energy — in order to find the next valid block in the Bitcoin blockchain, so that the production of new blocks remains constant even with rising computational power.
As revealed by data from cryptocurrency mining calculator CoinWarz, Bitcoin’s difficulty reached 27.97 trillion hashes on February 17, surpassing the previous record of 25 trillion set in May. In parallel, its hashrate reached an all-time high of 209.5 exahashes per second.
Needless to say, this means mining Bitcoin has become more expensive, a situation exacerbated by rising energy prices. Demand for electricity increased by 6% worldwide last year, while researchers suspect that gas prices are unlikely to fall this year. In fact, Russia’s aforementioned visit to parts of the Ukraine have sent gas prices rising, with the cost of Brent crude reaching a seven-year high.
This isn’t a pretty picture, and even before the developments of the past few days analysts had begun noting that mining profitability had declined significantly.
Source: Twitter
Not only have analysts noticed that mining profitability has fallen steeply, but they’ve also noticed that miners have become net sellers of BTC in the past couple of weeks.
Source: Twitter
It’s important to note that this shift to net-selling happened before Bitcoin’s difficulty reached a new record, and before Russia’s latest move in the ongoing Ukraine crisis. It’s therefore highly conceivable that miners may actually increase their bitcoin selling in the coming weeks.
Mining Companies Try to Sell Stock Rather than BTC
Some mining companies are doing everything they can to avoid such a situation. In recent weeks, two such firms — Marathon Digital Holdings and Hut 8 Mining — have separately made plans to sell their own respective stock, with Marathon planning a sale worth $750 million and Hut 8 one worth $65 million.
“We are believers in Bitcoin. Some miners sell Bitcoin or use it to pay expenses. We hold ours,” said Hut 8’s investor relations head Sue Enni, who was speaking to Business Insider.
However, as valiant as these efforts to hold onto bitcoin are, they’re being undermined by the very conditions they aim to overcome. That is, due to falling bitcoin prices and falling miner profitability, the stock prices of publicly listed mining companies are down.
Marathon’s share price has dropped by 15% in the past couple of days, while Hut 8’s has fallen by 23.8% since February 9. Similar falls are observable with Riot Blockchain and Bitfarms, while all of these companies have suffered even bigger falls since November, when the cryptocurrency market reached its last peak.
With falling stock prices, publicly traded mining companies are obviously less able to increase their cash reserves by selling stock. This makes it likelier that they will have to resort to selling bitcoin in order to make ends meet.
And make no mistake, miners are sitting on a very large trove of BTC. Back in December, their unspent supply was roughly 1.78 million bitcoins, worth $66.85 billion at current prices. With miners becoming net sellers in recent weeks for the first time in a while, it’s possible that this stock of BTC will reduce significantly.
And if it does, the market will have yet another source of selling pressure, resulting in further losses.
The Bigger Picture
At the moment, times are indeed tough for miners and the market in general. However, the longer term picture for miners is mostly favorable, with public policy in many parts of the world becoming more positive for the industry.
For example, the United States is quickly becoming the de facto center of Bitcoin mining, and it seems that numerous American states are busy trying to create a more hospitable environment for miners. This includes Georgia and Illinois, both of which saw their state legislatures introduce bills that would provide tax breaks for mining companies.
Even in Russia, which has a checkered history with cryptocurrency, the national finance ministry has submitted draft legislation that would legalize bitcoin mining, despite restricting the use of cryptocurrencies for payments.
What these moves suggest is that, once the current ‘crypto winter’ is over, mining companies and pools will be in a good position to continue profiting. Many will be established in jurisdictions with accommodating mining laws, enabling them to invest in their own growth and also to list publicly, further reducing their reliance on selling BTC.
That said, we still may have some way to go before the market exits its current slump. As of writing, there remains no obvious solution to the Russia-Ukraine crisis, while macroeconomic conditions — including high inflation and likely rate hikes — have reduced investor appetite for riskier assets.
This means that mining companies will have to continue weathering bad conditions for some time yet, which may also mean that they will drag the price of bitcoin and other cryptocurrencies down further, at least in the short-term.
