Not only is the investment front in the cryptocurrency market suffering a serious downturn, Bitcoin miners are also suffering from bad results, signaling that the future is not really positive for the recovery process of BTC.

Resilience of many months

First, at the beginning of 2022, when Bitcoin began to show weakness after a hot bull cycle towards the $43,000 range, the majority of investors might be feeling frustrated, but it doesn't seem to have a major impact on long-time market participants. Seasoned miners are no exception, they have significantly increased the amount of BTC held in their reserves.

According to data from Glassnode, the market is already seeing more than 5,000 BTC per day deposited into miners’ wallets, with actual accumulation going stronger even before Bitcoin hit its ATH at $69,000 on 11/2021.

Statistics on the change of accumulated and sold positions of Bitcoin miners as of January 2022. Source: Glassnode

The reason for the above action lies in two main factors: profit and trust. Although Bitcoin is nearly 27,000 USD below its peak during this period, the profit of miners is still over 20% compared to the cost of mining. Besides, the expectation of Bitcoin's recovery has been pushed up very high.

In addition, the enthusiastic action of the major Bitcoin miners listed on the stock exchange also shows the determination of miners to keep Bitcoin at the $43,000 mark. On November 10, Bitfarms made an announcement that they bought another 1,000 Bitcoins, bringing the total BTC holdings to 30%, more than 4,300 BTC. Although Bitfarms does not disclose the average price for the purchase, based on the total spend of $43.2 million, it can be inferred that the company averaged $43,2000 per BTC.

Next is Marathon Digital Holdings, a big player. According to a filing with the U.S. Securities and Exchange Commission (SEC), Marathon added 78,000 Antminer S-19 XP Miners from Chinese manufacturer Bitmain at a total cost of nearly $900 million.

Even Bitfarms, Marathon and GEM Mining and most of the rest of the miners have stated that they all expect the size of Bitcoin mining to grow dramatically in 2022 by at least doubling the number of machines at their facilities.

Specifically, Marathon Digital’s Corporate Communications Director, Charlie Schumacher, shared that the company is moving forward with a plan to deploy 199,000 new machines by 2023 to ensure future adaptation to the global monetary system. Meanwhile, GEM Mining CEO John Warren revealed that they have launched a campaign to expand to 32,000 online miners by the end of 2022.

Signs of miners’ burnout

With Bitcoin still having a hard time recovering and moving sideways around $40,000 in March and April, miners appear to have become exhausted. As a result, they immediately switched status to sellers after months of backing the bulls as they attempted to add a lot of BTC to their positions.

Statistics on the change of accumulated and sold positions of Bitcoin miners as of March 2022. Source: Glassnode

Barriers of mining equipment burden as well as electricity costs force miners to sell Bitcoin to cover expenses. At the end of March 2022, the MPI reached a one-year high - a sign that the miner's position is really unstable, ready to sell off at any time.

Essentially, MPI is on-chain data that shows how the current miner selling behavior compares to the past. As the value of this indicator increases, it means miners are selling more Bitcoins. On the other hand, a decreasing value of the index means that miners will be less active because they are performing cumulative behavior.

According to the Bitcoin reserve chart of miners, this situation correctly reflects the above situation. As of April 11, the number of Bitcoins held by miners continued to plummet, thereby putting downward pressure on Bitcoin.

Bitcoin miners’ reserves chart. Source: CryptoQuant

As for the macro developments, also in mid-April 2022, Kazakhstan increased taxes on domestic cryptocurrency mining organizations, based on the market value of the cryptos mined. Miners operating in Kazakhstan pay a surcharge for electricity consumed. Tariffs are increased at a fee of 1 Kazakh tenge (about $0.0022) per kilowatt-hour of electricity used.

Still, these are just the latest setbacks from Kazakhstan. Riots and protests have caused many mining companies in this country to be constantly interrupted by poor Internet connections, as well as lack of electricity to supply Bitcoin mining operations. Power shortages have forced some companies to leave the country and move to other locations such as the United States, thus fear has begun to pervade the Bitcoin mining industry.

However, the above event could seriously threaten the mining industry because it is highly likely that they will face another wave of migration after the collapse in China in 2021. It should be noted that Kazakhstan has the third largest hashrate market share in the world.

Domino effect has formed

The severe downturn of the world economy and a few unexpected variables in the crypto market like the Terra crash inadvertently triggered a wave of sell-offs from miners, which had always been subtly present throughout the first quarter of 2022. Shares of the market leading Bitcoin miners all dropped by double digits in May 2022.

Not only that, the mining revenue of Bitcoin miners recorded the heaviest loss in 2022 in May with only about $906.2 million, mainly coming from block mining rewards (890.01). million USD) and a small part of the profit from user transaction fees ($16.18 million).

Because of the relatively dismal profitability just mentioned, the signal that Bitcoin miners are preparing to sell massively to compensate for the cost of mining operations is becoming clearer. The amount of Bitcoin pushed to the exchange by miners has reached a four-month high.

Referring to the Bitcoin cost of production index from Charles Edwards - CEO of asset manager Capriole, the breakeven point of miners is at $34,000. At the moment, Bitcoin is trading at $30,000, which means that the miner is in fact facing a loss.

Miners' reaction to falling earnings has signaled many negative scenarios, for better understanding, investors can quantitatively observe market profitability from miners' point of view with the tool Puell Multiple - ratio of Bitcoin's daily production value (in USD) to a 365-day moving average.

Judging by the entire history of the Puell Multiple, during the early stages of the bear market that began in 2013-2014, the Puell Multiple typically fell in the range of 0.6 to 1.0, indicating an average current income of 40% lower than the previous year. Then, in the later stages of the subsequent hibernation cycle, the Puell Multiple drops to the region below 0.5.

The Puell Multiple graph calculated by the daily Bitcoin production rate (in USD) and the Bitcoin price. Source: Glassnode

This signals a clear change in the behavior of miners, as their balances have accumulated around 12,000 BTC since the beginning of 2022. However, for the reasons outlined throughout the article, the Mining companies distributed up to 10,000 BTC to the market in May and June alone, adding to the selling pressure overall.

Bitcoin balance fluctuations stored in miners’ wallets. Source: Glassnode

The index is currently at 0.66, about to enter a range-bound. Taking into account the high correlation between this index and price, a price drop of -10% or more for Bitcoin would indicate widespread strain on miners' income streams, causing the balance of miners to also be in a serious decline. Their Net Position Change Index has shown an overall drop of 5,000 to 8,000 Bitcoins per month.

Statistics on the change of accumulated and sold positions of Bitcoin miners as of June 2022. Source: Glassnode

The last stand has fallen

As soon as Bitcoin broke the $20,000 support, the majority of global miners shut down their mining rigs on a massive scale in order to minimize their losses as margins were reaching the bottom.

Furthermore, the price of Bitcoin is only moving in line with the average mining cost of miners, which could lead to an exponential drop in hashrate as many large mining farms will most likely decide to switch to the "hibernation" mode to avoid losses. In addition to the massive shutdown of miners, the activity of individual mining addresses also signals that miners are selling their holdings massively to offset some of the losses caused by the overly negative market.

Bitcoin hashrate refers to the amount of computing power dedicated to creating new coins, securing and verifying transactions on the BTC network. A higher hashrate usually signifies that there are more miners in the space looking to help secure the network, so some analysts are inclined to take this as a bullish sign for the industry. And a decline in the Hashrate Index would be a danger sign for Bitcoin.

It got even worse when mining giant Bitfarms denied his previous claim of holding Bitcoin, selling Bitcoin to pay off partner loans. Bitfarms CFO Jeff Lucas also said the company will sell all of its daily BTC mining, around 14 BTC, to increase liquidity, reduce leverage, and strengthen the company's balance sheet. Besides, Riot Blockchain has also revealed that the company has continuously sold half of the Bitcoins mined each month to maintain the cost of operations.

The worrying issue is that all of these miners amount to 20% of the world's Bitcoin hashrate and the amount of BTC they own is also among the crypto industry's largest publicly listed businesses.

What are the consequences?

Miners have always acted as the most solid stronghold in the blockchain space due to the nature of contributing to the protection of the Bitcoin network. If the wave of sell-offs continues to culminate in the coming months, the consequences they will have on BTC will be dire, and the worst scenarios for Bitcoin usually occur when miners panic.

The proof is that during the first quarter of 2020, when the COVID-19 pandemic was widespread, miners were forced to cut their Bitcoins to cope with the difficult real life before the epidemic, and Bitcoin quickly reacted violently, plunging from more than 10,000 USD to 3,000 USD in just 1 month.

This was followed by the biggest crackdown on miners in China's history in May 2021, once again forcing them to sell Bitcoin reluctantly under pressure from the government, and move operations to other countries. Since then, Bitcoin has plummeted from $64,000 to $30,000.

Final words

With all the analysis above, the BHO Network team hopes to help investors have a full overview of the current situation of Bitcoin miners, so they can be more cautious in the process of investing in the cryptocurrency market in the future.