Difficulty reaches ATH, decreases profitability

Glassnode’s latest report focuses on the topic of the day: bitcoin mining. While the bitcoin price has been suspiciously flat for a while, the difficulty adjustment came and hit an all-time high. Do the miners know something that we don’t? Or is there a transfer of power behind the scenes? Glassnode proposes a working theory about its latest The Week On-Chain. To start with, Glassnode puts the difficulty setting into perspective:

“Bitcoin hashrate has reached a new all-time high of 242 Exahash per second. To give an analogy of scale, this is equivalent to the 7.753 billion people on earth, each completing a SHA-256 hash calculation approximately 30 billion times per second.”

The thing is, we are in a bear market. The feeling is fear. Trouble is brewing around the world and Bitcoin has been boring for a while now. What could be the reason for an all-time high hashrate? Is it, as Glassnode theorizes, “a new dynamic as more of the hash power is in the hands of better capitalized publicly traded mining companies”? Or is it just the game theory behind bitcoin at work? Remember that mining revenues have also decreased and the cost of producing a bitcoin is increasing along with electricity prices.

Making the situation more volatile, miner income bitcoin is at a low point. This “should, in theory, create elevated revenue stress in the mining industry.” Add stable bitcoin prices to that equation and what do we have? “It is extremely rare for BTC prices to remain so stationary for very long, suggesting higher volatility odds on the horizon.”

Bitcoin Hashrate All-Time High | Source: The Week On-Chain

Bullish sign: Bitcoin hash tapes relax

According to Glassnode, “Bitcoin hash tapes began to relax in late August, indicating that mining conditions were improving and the hashrate was coming back online.” However, what does this mean and why is it bullish? “Nearly every historical hash tape unwinding has preceded greener pastures in the months that followed.”

According to Glassnode, since the bitcoin price is still stagnating, the “increased hash rate is due to more efficient mining hardware coming online and/or miners with higher balances having a higher share of the mining.” hashpower network. That is the basis of Glassnode’s takeover theory.

Glassnode Proposes “Mining Halving” Concept

Another of their wild theories, Glassnode posits that “a 66% increase in hash rate and difficulty since October 2020 corresponds to an approximate halving of hash revenue.” And to back that up, they provide these numbers: “Revenue earned by Exahash has been in a persistent and long-term downward trend, with the BTC-denominated reward currently at an all-time low of 4.06 BTC per EH per day.”

So if market conditions are destroying miners, why is hashrate hitting all-time highs? The answer could lie in the Puell Multiple, “which is a cyclical oscillator that compares current daily mining revenue to its annual average.” According to this indicator, the mining business is actually gaining ground against previous performance.

“The Puell multiple hit current lows of around 0.33 in June, indicating miners were earning just 33% of their average annual earnings. It has since recovered to around 0.63, implying some degree of stress relief and adjustment to this new pricing regime.” According to Glassnode, this relief could mean that “a true bear market bottom is established.”

BTCUSD Price Chart for 10/11/2022 - TradingView

BTC price chart for 10/11/2022 on Bitstamp | Source: BTC/USD on TradingView.com

Glassnode believes there is still a risk of capitulation

Let’s be clear, Bitcoin is walking a tightrope right now. The market is about to break down and the pendulum could swing in either direction. Although there are reasons to be optimistic, the intelligent investor must prepare for the worst. “Based on numerous models, we estimate that the average cost of production of BTC is just below current prices, such that any significant decline in prices could turn an implicit income stress into an acute and explicit stress.”

To assess risk, Glassnode determined “the aggregate size of miner balances” at 78.4K BTC. Owners of those reserves “may experience income stress,” but “it is extremely unlikely that this full amount will be distributed.”

And that’s where we’re standing right now.

Featured Image by Icons8_team from Pixabay | Charts by TradingView and The Week On-Chain

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