Kendrick is the CEO of midstream. The opinions he expresses herein (of which he has many) are not necessarily shared by the company.
You heard it here first, folks: #TheFloppening is coming. When Bitcoin price has outpaced difficulty in the past, miners eventually caught up. But now that institutional investors are buying up Bitcoin, institutional mining companies are ramping up faster than ever before. When this new capacity comes online, we'll see mining difficulty shoot up making it less profitable to mine Bitcoin. Only those with cheap electricity will be left in the black.
The historical correlation between Bitcoin price and network hashrate is fairly apparent, especially since the beginning of 2019 - the "modern" age. The price always front runs hashrate in bull markets taking Chinese hydro generation seasonality into account, and the latter simply goes sideways when the bears take over.
This seems counterintuitive from a miner's perspective. One would think that hashrate would increase during bear markets because ASICs can be purchased for a lot less than they can during bull markets. ASICs that have an MSRP of $3k are going for $10k right now. So why would anyone buy ASICs in a bull market?
Miners have three options with cash in the coffers:
- Purchase more miners to mine,
- Purchase miners to flip, or
- stack sats.
Last fall, at the beginning of the bull run, we purchased T17s for $400. Just six months later they're selling for $1800, even though we've probably made $2k each already. During this same period, Bitcoin went from ~$10k to ~$60k. So with an ending cash value of $2400, option 3 would have netted us far less than the roughly $3400 of new wealth we've attained.
Miners aren't momentum traders, it seems. They tend to acquire ASICs in bull markets. During a downtrend, I bet that they do what we do - horde coin. Why? Tight money policies (which tend to drive Bitcoin downward) make electricity from the grid more expensive - double whammy for miners plugging into the wall socket.