In the latest edition of its State of the Network reports on March 31, Coin Metrics argued that Bitcoin was in a spiral of miner capitulation. This, it said, would get worse before it got better.
Coin Metrics expects “pattern of capitulation”
Despite BTC/USD recovering over 70% in two weeks since hitting lows of $3,700, prices are still “almost certainly declined below the breakeven price” for less efficient miners.
This is supported by the recent drop in Bitcoin’s mining difficulty, which at nearly 16% was the largest negative move since 2011. Before the mining sector recovers, more pain is in store.
“We expect miners to follow a cycle of decreased profit margins, increased selling, capitulation, and a culling of the least efficient miners from the network,” the report summarizes.
“Once this cycle is complete, the miner industry should return to a healthier state that is supportive of future price increases.”
Bitcoin mining difficulty 6-month chart. Source: Blockchain
Bitcoin Cash and Bitcoin SV drop halving bomb
In the short term, however, turbulent times will continue to hit miners and impact Bitcoin. Next month, hard forks BCH and BSV will both undergo a block reward halving — reducing the number of coins awarded to miners each block by 50%.
Bitcoin’s own halving will only occur in mid-May and will halve the supply for miners from 12.5 BTC to 6.25 BTC.
This gives a one-month window during which miners will direct more hash power to BTC, as its block reward will be higher, despite the increased costs, says Coin Metrics.
“When Bitcoin Cash and Bitcoin SV halve their block rewards, this should force miners to direct even more hash power to Bitcoin as it will still have a 12.5 native unit block reward (instead of 6.25) for about a month longer,” the report adds.
“Therefore, we should expect difficulty increases for Bitcoin that should further squeeze profit margins for all miners.”
As Cointelegraph reported, analysts, particularly those who support the stock-to-flow price model for Bitcoin, are keenly awaiting the impact of the halving. At some point in 2021, and until 2024, stock-to-flow states, BTC/USD should trade at an average of $100,000.